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Need advice on increasing bond allocation
Old 01-05-2016, 01:46 PM   #1
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Need advice on increasing bond allocation

Hi everyone. I wanted to get some advice on how best to increase bond allocation. I am 58 years old, no longer working and will need to rely on my portfolio. No pension and about $12k in SS if I claim at 62. Presently have about $900,000 saved and allocation is 53% stocks, 34% bonds and 13% cash.

Both my IRA and Roth have bond funds. I am in the 10-15% tax bracket. My question is if I want to increase my bond allocation, my ONLY choice is bonds in the taxable account, correct? Due to my tax bracket, municipal bonds would make no sense. So I would have to pay all interest, right?

I wanted to know if I have any choices so as not to generate taxable interest or what my best options would be.

Any advice would be greatly appreciated.

Thank you
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Old 01-05-2016, 02:03 PM   #2
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If your IRA and Roth are not invested 100% in bond funds, then you can buy more shares in your IRA and/or Roth.

If you bought shares of a bond fund in your taxable account, then the dividends paid by the shares would go on your tax return as income. If they were not tax-exempt, then you might pay taxes on them. It depends on your exemptions and deductions that you put on Form 1040.

Is there a reason you do not want to generate taxable dividends or taxable interest? Most of the time you can make more money after taxes than if you invested in a tax-exempt muni bond fund, so it is to your advantage to pay taxes.

If you live in a state with an income tax, then Treasury bond dividends are exempt from state income taxes.

Finally, there is something called an I-bond where taxes are deferred while you own the bonds. Buy them at treasurydirect.gov
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Old 01-05-2016, 03:28 PM   #3
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Quote:
Originally Posted by joecan5785 View Post
......Both my IRA and Roth have bond funds. I am in the 10-15% tax bracket. My question is if I want to increase my bond allocation, my ONLY choice is bonds in the taxable account, correct? Due to my tax bracket, municipal bonds would make no sense. So I would have to pay all interest, right?...
Are you saying that your IRA and Roth are 100% bond funds right now? If so, then yes, your only choice is in your taxable account. If not, then within your IRA or Roth you could sell stock funds and buy bond funds.

That said, be cognizant of interest rate risk associated with bond funds.

I don't think munis make a lot of sense in your tax bracket.
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Old 01-05-2016, 04:11 PM   #4
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There is a good chance that you would not owe fed taxes after your standard deductible and personal exemptions, and the favorable treatment of qualified dividends and cap gains. The bond dividends may not generate a tax bill. You could, if you're eligible, get an HSA to reduce your taxable income further.

The only way to be sure is to model your next year's income in a tax program. I would do that before you make any portfolio changes.
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Old 01-05-2016, 04:20 PM   #5
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I would be more concerned about your current 13% in cash that is generating no return. Having a positive return and the problem of paying taxes on that is better than zero returns (or nearly zero interest rates) and no tax liability.
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