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-   -   Hold regular bond in 401k or muni in taxable? (http://www.early-retirement.org/forums/f28/hold-regular-bond-in-401k-or-muni-in-taxable-16355.html)

soupcxan 04-06-2005 05:25 PM

Hold regular bond in 401k or muni in taxable?
 
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 04-07-2005 01:11 PM

Re: Hold regular bond in 401k or muni in taxable?
 
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 04-07-2005 01:17 PM

Re: Hold regular bond in 401k or muni in taxable?
 
Quote:

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 04-07-2005 02:40 PM

Re: Hold regular bond in 401k or muni in taxable?
 
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 04-07-2005 04:45 PM

Re: Hold regular bond in 401k or muni in taxable?
 
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 04-07-2005 05:03 PM

Re: Hold regular bond in 401k or muni in taxable?
 
Soup, why at age 23 do you want current income
from bonds?

Charlie

laurence 04-07-2005 05:29 PM

Re: Hold regular bond in 401k or muni in taxable?
 
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 04-07-2005 05:39 PM

Re: Hold regular bond in 401k or muni in taxable?
 
I was chasing skirts and drinking beer at 53
(second time around). Both activities are overrated.

JG

haha 04-07-2005 05:43 PM

Re: Hold regular bond in 401k or muni in taxable?
 
Quote:

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 04-07-2005 05:54 PM

Re: Hold regular bond in 401k or muni in taxable?
 
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


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