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Bonds and taxes???
Old 03-26-2018, 12:15 PM   #1
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Bonds and taxes???

Do you have to pay taxes on bond funds such as vanguard total bond admiral fund if you don't withdraw any money or sell?

This questions is for a taxable account not 401K or roth etc.
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Old 03-26-2018, 12:29 PM   #2
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Yes - unless it’s a municipal bond fund, the interest or dividends paid are taxable, as are any capital gains distributions.

A muni bond fund - cap gains dists are federal income taxable, but not the dividends.
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Old 03-26-2018, 12:56 PM   #3
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Yes, you'll receive a 1099-DIV with the amounts either by mail or you can access under the Tax Center on Vanguard's (or your broker's) website.
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Old 03-26-2018, 01:00 PM   #4
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Yes - It doesn't matter if you use the income to automatically reinvest in more shares, or take the distribution in cash. The 1099-DIV should tell the whole story (well most of the story)

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Old 03-26-2018, 02:05 PM   #5
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Would it be better to invest in a muni fund if I'm still working? Making about 200K while working.
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Old 03-26-2018, 02:51 PM   #6
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Probably, or invest in equities and accept the 15% tax on qualified dividends and LTCG.

A lot depends on your AA, what you have placed elsewhere, etc.

See https://www.bogleheads.org/wiki/Tax-...fund_placement
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Old 03-26-2018, 05:05 PM   #7
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Originally Posted by slv1 View Post
Would it be better to invest in a muni fund if I'm still working? Making about 200K while working.
I treat municipal bonds as a separate asset class and part of my fixed income is invested there, although the tax free dividends are nice. Sometimes they even yield higher than the equivalent treasury. Not lately though.

But don't let the tax tail wag the dog. You could have your bond fund investment in your IRA or 401K and hold equities in your taxable investments that generally have lower tax treatment.
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Old 03-27-2018, 03:47 AM   #8
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Would it be better to invest in a muni fund if I'm still working? Making about 200K while working.
To know for sure, you need to actually go through the math and compare after-tax returns. Unless the muni-bond fund contains only bonds from the state you live in, you will have to pay state income taxes on the out-of-state interest.
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Old 03-27-2018, 05:18 AM   #9
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Originally Posted by pb4uski View Post
Probably, or invest in equities and accept the 15% tax on qualified dividends and LTCG.

A lot depends on your AA, what you have placed elsewhere, etc.

See https://www.bogleheads.org/wiki/Tax-...fund_placement
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Old 03-27-2018, 06:31 AM   #10
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Or keep bonds in IRAs/401Ks and only equities in taxable.
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Old 03-27-2018, 06:30 PM   #11
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If you are making $200k then yes, you need to avoid paying the marginal tax rate on investments. At that amount of income you need to pay very close attention to tax efficiency. Below are some notes on bonds and bond equivalents.

For tax efficiency:

municipal bonds are federal tax exempt

municipal bonds for your state may be state tax exempt as well

treasury bonds are state tax exempt

cds are often state tax exempt but it will vary

you can buy preferred stocks that have qualified dividends


Here are some specific recommendations on what to buy:

Go here for Vanguard funds and see if they have one for your state:

https://investor.vanguard.com/mutual...th-end-returns

I would not go crazy on a single state even if it is both federal and state tax exempt though. I would also put a lot into a national muni fund for diversification.

Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX)

You also might want some growth assets.

Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX) -- this is 50/50 US stocks and muni bonds

Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX) -- use this to get your small/mid cap tilt

Vanguard Global Minimum Volatility Fund Investor Shares (VMVFX) -- this fund will tilt towards lower volatility stocks which means that even though it is 100% stocks it may act more like a balanced fund that has 40%-50% bonds in it when it comes to the volatility, but you will not be paying any taxes on bond interest to get this reduced volatility. so its a neat way to reduce taxes.

Vanguard Total World Stock Index Fund Investor Shares (VTWSX) -- this is simply an index for the entire world with no factor weighting. i like to dump extra money into this when i don't have any better ideas at the time.

I personally would also add some CEFs (closed end funds).

John Hancock Tax-Advantaged Dividend Inc (HTD) -- this is a CEF that is 50/50 utility stocks and preferred stocks. it pays qualified dividends.

VanEck Vectors CEF Municipal Income ETF (XMPT) -- this is an ETF made up of municipal bond CEFs.

Nuveen Nasdaq 100 Dynamic Overwrite Fund (QQQX) -- this is a CEF that uses options on the Nasdaq. this is my preferred option income CEF as I think the Nasdaq is one of the best places to use options. like most option income CEFs you will receive mostly ROC (return of capital) which is tax free until your cost basis is reduced to zero at which point it is 15% tax rate.

You might also want to add some individual MLPs (master limited partnerships) as they also throw off mostly ROC. MLPs have been in the dog house for quite a while, the prices are cheap.
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