I have only one bond fund available in my 401k. Its Pimco Total Return. Its been a very good fund long term but the past year its been pretty awful. I'm considering switching to Vanguard Intermediate-Term Bond fund (VBIIX), but I would have to move the bond portion of my AA to a taxable account and pay tax each year on the dividends. The 5 and 10 year returns of the funds are nearly identical but Pimco has stuck recently. Would you make this switch or not?
Bond fund in taxable account?
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yakers
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Pico is the fund I would have liked to own. Like you, not sure going forward. IMHO the VG is ok going forward. I would own it in a taxable account if retired but not sure if I were working.
I guess the real question is not regarding any specific funds, but if you knew in advance what a given funds returns would be, how much of a higher return would you require to hold a bond fund in a taxable account instead of a 401k.
IOW..how much affect does it have on your bottom line to have to pay taxes yearly as oppossed to paying them only when you withdraw? Is there some formula that can be used assuming a given tax rate?
IOW..how much affect does it have on your bottom line to have to pay taxes yearly as oppossed to paying them only when you withdraw? Is there some formula that can be used assuming a given tax rate?
Texas Proud
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To me it would matter how much income we are talking about.... without that info I could not comment...
IOW, I have bond funds in my taxable account but the income is not so much that it worries me paying taxes... and I can still adjust how much I put into the 401 if it did.....
IOW, I have bond funds in my taxable account but the income is not so much that it worries me paying taxes... and I can still adjust how much I put into the 401 if it did.....
ronin
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Have you looked at the taxable equivalent rates on municipal bond funds?
Based on the 3.61% yield, it would be a little over $8000 per year.
justplainbll
Recycles dryer sheets
On an investment of $10,000 for 20 years:
Tax deferred, earning 4% would be worth $10,000 x (1.04) ** 20 = $21,911 or $11,911 in interest
To accumulate $11,911 of interest on which a 28% tax has been paid would require earning $16,543 of before tax interest or about 5% per year.
Tax deferred, earning 4% would be worth $10,000 x (1.04) ** 20 = $21,911 or $11,911 in interest
To accumulate $11,911 of interest on which a 28% tax has been paid would require earning $16,543 of before tax interest or about 5% per year.
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That doesnt account for taxes having to be paid on the tax deferred money as it is withdrawn, does it?
timeasterday
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I too only have PIMCO as a choice in my 401k. I am staying put. Compare PTTRX to VBIIX on the Morningstar 10-year chart. The latest hiccup by PIMCO is just a slight bump in the road, IMO.
justplainbll
Recycles dryer sheets
Deferring taxes on the earned income contributed to an IRA makes the deferred tax investment more attractive than my example indicates.
If the IRA contributions were made with after-tax earnings, only the portion of the distribution attributable to interest income would be taxable.
RunningBum
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I don't understand the logic here. What you do with the proceeds is irrelevant. Reinvesting in the same fund is no different tax-wise than taking the distribution in cash, seeing that your AA is out of balance, and buying the fund. Or buying any other taxable investment. Or spending the money, and using other money to invest in the same or some other fund.
Aren't we talking about taking money out of something tax-sheltered at potentially a high marginal tax bracket and then putting it in the same thing that will be taxable going forward? Bond income is taxed at ordinary income tax rates, unlike qualified dividend income so if a person is in a lower tax bracket, then maybe it's not a bad idea otherwise I don't see it. My point about the proceeds- if it's needed for expenses and it makes sense from an income tax planning standpoint to take it from a source that is growing tax-deferred then that makes sense but if the purpose is to move an investment from tax-deferred to taxable, not so much IMO. If rebalancing is in order, wouldn't it be done within the same account to avoid taxes?
No money would actually be coming out of the tax sheltered account. I was only talking about redistributing my AA and ending up with my bond allocation outside of the 401k. So I would be selling the bond fund inside the 401k to buy a stock fund and selling a stock fund in the taxable account to buy a bond fund.
The only difference would be that the bond dividends would be taxable as they are earned instead of whenever I take a 401k withdrawal sometime down the road.
The only difference would be that the bond dividends would be taxable as they are earned instead of whenever I take a 401k withdrawal sometime down the road.
Have you taken into account the capital gain (or capital loss) if you sold the stock fund?
Pimco total return is the only bond option in DW's 401K. Right now, 100% of her 401K money is invested in that fund. I don't plan on making any changes.
The only bonds we have in taxable are munis because we are in a high tax bracket.
The only bonds we have in taxable are munis because we are in a high tax bracket.
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I have a fund that I bought several months ago that has a loss.
