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Looking to increase bond exposure, need suggestions.
Old 06-11-2012, 01:56 PM   #1
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Looking to increase bond exposure, need suggestions.

Presently, my portfolio is 55% stock, 30% bonds and 15% cash, and I am looking to increase bond holdings to 35-38%. I am 54 yrs old. The bond portion is broken down as follows:
Roth: Vanguard Total Bond Market Index Admiral shares, along with a small cap growth fund
IRA: Loomis Sayles Bond, Vanguard Intermediate Term, along with a real estate fund.
Taxable: I Bonds purchased 10 years ago, Vanguard Massachusetts Tax Exempt.
I have already made my Roth contribution this year and am in the 15% federal tax bracket and state tax (MA), is 6.25%
My overall portfolio is 56% taxable and 44% tax deferred.
I always thought that bonds belong in tax deferred accounts and since I am looking to increase my holdings but have maxed out my ROTH, I wanted advice on what options I have since I am looking to reduce taxes as much as possible, but looking for funds that have somewhat decent returns. Not sure if munis are a good choice given my tax bracket, although I own the MA muni fund or what would be good taxable options.
I just started a new job and do not have access to a 401k yet.
Appreciate any opinions.
Thanks,
Joe
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Old 06-11-2012, 02:21 PM   #2
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If your overall portfolio is 44% tax deferred and your target bond holdings are 35-38%, just reshuffle your holdings so all your bonds are in your tax deferred accounts. The idea is that the investments that generate regular taxable income are in tax deferred so you don't get the pleasure of paying ~20% of any income they generate to Uncle Sam and Aunt Mass.

Since your bonds will all be tax deferred there is no need for munis.
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Old 06-11-2012, 02:41 PM   #3
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Originally Posted by joecaf53 View Post
state tax (MA), is 6.25%
Joe
Do you mean that Dukakis' one year 5.95% temporary tax (In 1989, Dukakis signed off on what was supposed to be a temporary 15 percent state income tax hike what was meant to pay off debt and address a budget deficit) has lasted 23 years and increased a bit ?
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Old 06-11-2012, 02:58 PM   #4
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Richard, you got that right.
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Old 06-11-2012, 03:58 PM   #5
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Do you mean that Dukakis' one year 5.95% temporary tax (In 1989, Dukakis signed off on what was supposed to be a temporary 15 percent state income tax hike what was meant to pay off debt and address a budget deficit) has lasted 23 years and increased a bit ?
It's worse than that. If I remember correctly, in 2000, the citizens of Mass voted to reduce the income tax from 5.95% to 5.0%.

Voted for it overwhelmingly.

The legislature IGNORED the vote! They said we 'didn't know what we were voting for' and ignored the mandate.

They eventually capitulated to 5.3% but the 5.0% that the people voted for never happened.

NOTE: the Mass income tax is 5.3%...the SALES tax is 6.25%, so it's cheaper to withdraw your IRA money than it is to buy something with it. <grin>

HOWEVER: in 2010, they tried to pass a bill where DIVIDEND income would be taxed at 12% vs the flat 5.3% (only evil rich people get dividends). It didn't pass but is promised for a re-look at the next session.
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Old 06-11-2012, 04:35 PM   #6
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It's worse than that. If I remember correctly, in 2000, the citizens of Mass voted to reduce the income tax from 5.95% to 5.0%.

Voted for it overwhelmingly.
I just pulled out my 1985 Taxachussetts return. (Last one I could easily find). State income tax was a flat 5% ; I recall Dukakis raising it for 'one year' to 5.95%. I guess the citizens eventually demanded the temporary tax repealed.
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Old 06-12-2012, 05:36 AM   #7
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I just pulled out my 1985 Taxachussetts return. (Last one I could easily find). State income tax was a flat 5% ; I recall Dukakis raising it for 'one year' to 5.95%. I guess the citizens eventually demanded the temporary tax repealed.
They demanded it be repealed but the legislature ignored and said they wouldn't agree to the vote, until it got so hot they reduced it to 5.3%.
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Old 06-21-2012, 12:39 PM   #8
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How about the new Pimco Total Return ETF, ticker bond? I figured since this is Bill Gross' first ETF, he would have to really put all his best ideas into it and so far that is working out. I am normally an index guy but I put a small portion and luckily is doing really well. But make sure you don't go crazy by putting too much money with active managers.
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Old 06-21-2012, 12:57 PM   #9
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Joe - be careful: after a 30 year run up in prices, bond funds are now very risky. With interest rates so low, bonds have little room left to move up. You might research to find the types that better hold their value in such situations.
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Old 07-04-2012, 12:29 PM   #10
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I like muni bonds. Of course there's risks and challenges to picking the right ones, like everything else. But I think the risk-rewards is in a nice place. I'm getting 4.96 yield, tax free, after fees. Plus a 5% cap appreciation as well. I currently have about 50% allocation there. And guess what, when the fiscal cliff hits, or the tax rates go up, or the 3.8% medicate tax kicks in, well, 50% of my portfolio will not be affected by any of that nonsense. In fact, it will probably increase in value because as investors in high tax brackets look for low tax investments.

Of course interest rates will eventually go up. But not drastically overnight. So you can sell your longer term holdings as the need arises, or just clip the coupons and let them mature. The fed plans to keep rates low into 2014, maybe later, so there's plenty of time for that.
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