bond funds bad in IRA?

[GrayHare]

Happened upon part of Suze's show yesterday long enough to see her remark that one should never invest in bond funds within an IRA. I assume this is just her standard dislike of bond funds, or did I miss some justification specific to IRAs?

 

[retirementguy1]

Suze has been pushing individual municipal bonds lately. Due to the interest rate environment she doesn't recommend bond funds. Seems like market timing.

 

[pb4uski]

Happened upon part of Suze's show yesterday long enough to see her remark that one should never invest in bond funds within an IRA. I assume this is just her standard dislike of bond funds, or did I miss some justification specific to IRAs?

Did she explain why? Sounds stupid not to put funds the generate a lot of taxable income in a tax deferred account.

 

[karluk]

I sometimes watch Suze, but didn't catch yesterday's show. Without knowing exactly what she said, it's hard to guess what her reasons were. My guess is that she expects bond funds to lose money in the future. If that happens, you would probably be better off holding bond funds in a taxable account, where you could sell your shares and establish a capital loss for tax purposes. You would miss out on the tax deduction by holding bond funds in an IRA.

She may also have meant this advice to apply to Roth IRAs only. In general, you want Roth IRAs to hold your fastest growing assets in order to take maximum advantage of tax free compounding.

If she meant don't hold bond funds in a traditional IRA, then I think her advice was poor. If she meant Roth IRAs instead, then she makes a valid point.

 

[Mulligan]

Did she explain why? Sounds stupid not to put funds the generate a lot of taxable income in a tax deferred account.

I watched the show last night, and no she didn't explain why. My guess is Suzy knows how dumb her clientele is and explaining her reasons would only confuse them. Forum members here who watch this show probably do it more for entertainment value than to acquire any knowledge. I may be the village idiot, but I do have bond and CD money in Roths. I am a very conservative investor and I am permanently locked into the 25% tax bracket (butting up to the edge of 28%) due to a nice pension. So it seems logical to pay any capital gains from 15% (though I will never sell) and shelter higher taxable income that I am going to have because CDs and lesser degree bonds will always be the majority of my stash.


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[Animorph]

I did a quick spreadsheet and initiated a thread with it, though I'm not going to look it up.

What I found was that the advisability of using bonds in retirement accounts depends on two things: interest income and total return. Nowadays, and perhaps for the future, the total return part may be kind of low. So even though you are saving taxes by sheltering the income, you may be losing out on tax-free growth within the retirement accounts if your investment has a sub-par total return. The tolerable difference in total return is probably close to the difference in taxes that would be paid between bonds in a taxable account or equities or your normal AA in a taxable account.

 

[David1961]

The only advantages I can think of off the top of my head is that the income generated by the bond funds would be tax-free inside an IRA. And if you are close to the age where you will be taking distributions from the IRA, the bond funds will not be as volatile as stock funds.

 

[grasshopper]

I use Wellesley for all our taxfree/deferred accounts, I would never keep anything but a short-term bond fund in taxable.

 

[mathjak107]

Suze has been pushing individual municipal bonds lately. Due to the interest rate environment she doesn't recommend bond funds. Seems like market timing.

does suzi not realize that muni bonds are a very poor choice if rates rise?

many longer term muni bonds are callable in 10 years. when rates are falling they are priced as 10 year bonds as most are called.

but when rates rise the markets reprice them like 25 year bonds and you can really take a beating. a 30 year drop in rates has prevented most folks from realizing this.

 

[ziggy29]

Bond funds (at least taxable ones) are *best* held in IRAs and 401Ks. These are the least tax-efficient investments in a typical portfolio. Yeah, munis in an IRA would be a disaster, but not taxable bond funds. For the same reason it's sometimes best to hold more tax-efficient stocks, dividend stocks and stock funds in taxable accounts, because dividends and long term capital gains will be taxed at lower rates, not the marginal income tax rate like they would be if withdrawn from an IRA.

 

[marko]

I like watching Suzi but my take is that she addresses a less sophisticated investor.

IIRC, she has all her own money in very safe, low interest vehicles...That's easy to do when you've got $10M earning 3% interest, but it doesn't work for most people.

 

[imoldernu]

Just a thought on the subject.

Since the market stability depends in large part on bonds, the FED has considered placing an exit fee on bond funds.

No idea if this is just musings, or a possible worry about cushioning the market volatility.

That it has reached the discussion stage, may be something to consider.

http://blogs.barrons.com/focusonfunds/2014/06/16/fed-mulls-exit-fees-on-bond-funds-ft/

 

[pb4uski]

Interesting but I'm not sure if the Fed or the SEC would have the statutory authority to impose such a fee even if they wanted to - not that statutory limitations seem to stop the current administration from doing anything if they want to.

Usually a run on the bank type scenario that they seem to be afraid of is the result of credit risk rather than interest rate risk. Stock funds can withdraw their money on demand too even though the assets held by the fund are long-term and hard to sell in a crisis so if they are concerned with a run depressing prices why not include stock funds too?

Actually, most mutual funds would have that attribute.

 

[BBQ-Nut]

So, over at Bogleheads - the primary view on bonds seems to be not for generating income, but providing some base stability to a portfolio in the event of market pull-backs.

What do folks here think? Do you keep bonds primarily to generate interest and expect 'decent' returns in the expectation of getting modest growth, or are you into bonds more for stability with short/int term?

 

[REWahoo]

Both.

 

[Animorph]

So, over at Bogleheads - the primary view on bonds seems to be not for generating income, but providing some base stability to a portfolio in the event of market pull-backs.

What do folks here think? Do you keep bonds primarily to generate interest and expect 'decent' returns in the expectation of getting modest growth, or are you into bonds more for stability with short/int term?

I don't keep bonds and try to keep cash levels low. I'm trying to avoid the drag, and I'll put up with the volatility.

 

[nash031]

So, over at Bogleheads - the primary view on bonds seems to be not for generating income, but providing some base stability to a portfolio in the event of market pull-backs.

What do folks here think? Do you keep bonds primarily to generate interest and expect 'decent' returns in the expectation of getting modest growth, or are you into bonds more for stability with short/int term?

I use bonds for stability, hence most of my bond allocation is in the G Fund in TSP. IMO, bonds aren't the place to go chasing return. Nice part about the G fund is in addition to stability, I *shouldn't* lose money to inflation (that's what the fund is designed around). Coupled with a ridiculously low ER, it's pretty much a free lunch.

 

[nash031]

She may also have meant this advice to apply to Roth IRAs only. In general, you want Roth IRAs to hold your fastest growing assets in order to take maximum advantage of tax free compounding.

If she meant don't hold bond funds in a traditional IRA, then I think her advice was poor. If she meant Roth IRAs instead, then she makes a valid point.

This is what I would guess... Bonds make a lot of sense in tax-deferred accounts since the income reinvested grows tax-free. They make less sense in tax-free growth accounts because of the opportunity cost of not having stocks growing tax-free. They make less sense in taxable accounts for what should be obvious reasons.

But if your AA has you bond-heavy, or you want bonds for income before you can access your retirement accounts... maybe... that's why it's so hard to make blanket allocation statements. There's a right answer for each of us, but there's no ONE right answer for everyone.

 

[FIREd]

I think that cash is for stability and bonds are for income.

I don't think Suze is against bond funds in IRA specifically, I think she is against bond funds period. It has been her battle cry for years. As for us, our IRAs and 401Ks are 100% invested in bond funds. Sorry Suze.

 

[scrabbler1]

The bond funds in my portfolio serve 3 purposes:

(1) They provide the income I need in ER to cover my expenses. I am not old enough (51 now) to have access to my other potential income sources, what I have often described as my "reinforcements" which are (a) unfettered access to my IRA, (b) my frozen company pension, and (c) Social Security.

(2) One bond fund which has a modest amount in it serves as my "emergency fund" or slush fund I use to pay the rare, large expenses my monthly bond fund dividends cannot cover. This bond fund, an intermediate-term muni bond fund, has checkwriting privileges and its NAV doesn't bounce around a lot compared to my other bond funds.

(3) The corporate bond fund in my IRA serves as a counterweight to the more volatile stock mutual fund. Right now, I have a 50-50 AA but I have taken it down from 55/45 last year and have done some rebalancing to capture some of the market's gains in the last few years. Even with this moderately conservative AA my IRA's value has doubled to nearly $500k since its early 2009 low.

 

[robertf57]

I have no idea what prompted Suzie's comments; but, the major drawback to bond funds in my eyes is the absence of a real maturity. I hold no bond funds and currently no bonds. I do have some cash producing REITs and real estate accounts in my retirement plans

 

[ziggy29]

I have no idea what prompted Suzie's comments; but, the major drawback to bond funds in my eyes is the absence of a real maturity. I hold no bond funds and currently no bonds. I do have some cash producing REITs and real estate accounts in my retirement plans

Yes, there are pros and cons to that as well. If you have enough money to invest in enough individual bonds to cover default risk, stagger their maturity dates and hold to maturity, I think holding individual bonds is probably better if you can do due diligence on the bonds.

But yes, with bond funds there is no final maturity where you are guaranteed to get your entire principal back (assuming no default). So you are at the mercy of Mister Market and the current trend of interest rates.

 

[pb4uski]

But there are target maturity bond funds available that act like a pro rata participation in a diversified bond portfolio and return principal in the target maturity year. These products are a middle road between bond funds and individual bonds. You pay a fee for investment selection and management (generally 10 - 24 bps, and 42 bps for high yield).

 

[TimSF]

Bond funds (at least taxable ones) are *best* held in IRAs and 401Ks. These are the least tax-efficient investments in a typical portfolio. Yeah, munis in an IRA would be a disaster, but not taxable bond funds. For the same reason it's sometimes best to hold more tax-efficient stocks, dividend stocks and stock funds in taxable accounts, because dividends and long term capital gains will be taxed at lower rates, not the marginal income tax rate like they would be if withdrawn from an IRA.

Exactly. Information and rationality strike again!