Hold regular bond in 401k or muni in taxable?

[soupcxan]

I'm 23, in the 25% bracket now and that will probably rise over the future. Let's say I have an extra $500 per month to buy bonds with. I can put the money into my company's 401k which has a good intermediate bond fund, duration of about 4.3 years, ER of 0.15%, holds a mix of government and high quality corporate (AAA). Currently yielding 4%.

Or, I can reduce my 401k contribution by $500 (I'd still get the full match) and put it in my taxable account, where I could buy Vanguard's intermediate muni fund VWITX which has duration 4.8, ER 0.15% and yields 4% (after tax). Also very high quality bonds and I think they may be insured.

If I use the 401k, I may be in a much lower tax bracket when it is time to withdraw. But who knows what the income tax system will look like +20 years from now? Plowing all that money into the account builds up a large deferred tax liability with an unknown rate.

If I use the muni fund in a taxable account, I will effectively be contributing less than $500 each month because of taxes. But then the growth is tax free. I also get more flexibility if I want to access the money before retirement for whateve reason.

Is there a dominant strategy here? Seems like a toss-up. Should I split the difference and hedge by bets?

Roth is already fully funded.

[Berkshire_Bull]

You might as well just do the 401K if you like the funds. I've been thinking along those lines as well. Tax-wise, it would be smart to hold fixed income in tax-advantaged accounts and equities and dividend paying investments in taxable accounts. Does anyone actually practice this?

[Martha]

You might as well just do the 401K if you like the funds. I've been thinking along those lines as well. Tax-wise, it would be smart to hold fixed income in tax-advantaged accounts and equities and dividend paying investments in taxable accounts. Does anyone actually practice this?

We try. Partly because when the bubble burst I loss a bunch on money in my 401(k) and there was no way to use the losses. We now primarily have TIPS and dividend payers in the 401(k).

[charlie]

Soup, have you considered I-bonds? You get the
benefit of tax deferral and an inflation hedge
with a great put option if real rates go up.

I think you may be wise to hedge your bet against
higher future tax rates. Read "The Coming Generational
Storm" to get the dark side view on this.

Cheers,

Charlie

[soupcxan]

Yes, I already hold a substantial portion of I-bonds (half purchased when the fixed rate was 3%, sweet!) but with only 1% fixed now they're less attractive. Looking to get some other bond funds that pay current income...also concerned that I may be cashing in my bonds in 30 years when I'm at my peak earning (and taxing) potential, but maybe I'll have already ER'ed by then.

And yes, I skimmed the coming generational storm...agree that porfolios need a hedge against inflation like TIPS or i-bonds.

[charlie]

Soup, why at age 23 do you want current income
from bonds?

Charlie

[laurence]

A follow up to Charlie, how at 23 did you get your sh** together so quickly? When I was 23, I was proud to have a 401(k) and otherwise spent my free time chasing skirts and drinking beer!

[MRGALT2U]

I was chasing skirts and drinking beer at 53
(second time around). Both activities are overrated.

JG

[haha]

I was chasing skirts and drinking beer at 53
(second time around). *Both activities are overrated.
JG

Unless you catch them; then it all makes sense.

Mikey

[MRGALT2U]

I managed to "catch" quite a few. Doesn't seem worth the effort
now. However, I would agree that it may be mostly age talking.

JG