Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Bonds in taxable account
Old 07-11-2014, 04:01 PM   #1
Recycles dryer sheets
 
Join Date: Mar 2014
Location: Islands
Posts: 363
Bonds in taxable account

I have high-yield, int-term and limited-term tax-exempt bonds in taxable account now because of current tax bracket. No brainer better after tax return now.

However, once retired, my income will drop significantly...just interest, dividends, distributions. It will stay below 250k, but be above 74k, putting us in the 25% income/15%ltcg/qual dividend brackets.

At that point it seems the tax-exempt funds are no longer the better after tax return assuming apples-apples bond funds.

Am I seeing this correctly? And if so, at that point does one bail on those and convert to taxable bonds?

Thanks.
Travelwanted is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-11-2014, 04:36 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 10,252
It is hard to give good advice without knowing the rest of your portfolio and its location.

In the past year, there have been a few bloggers who say that bonds in taxable are good. This is because
(1) bond yields are very low so income is lower and taxes may be lower
(2) bond funds are expected to lose money, so there is the opportunity for tax loss harvesting and getting out of bond funds if yields go up
(3) they like equities in Roth IRAs and don't want lower performing assets there.

For myself, I don't want any bonds in taxable and have no bonds in taxable. All my fixed income is in tax-advantaged accounts. I don't want my 401(k) and IRAs to grow fast because I don't want my RMDs to get large. Instead I want my taxable account to grow fast and my Roth IRAs to grow fast, so I have equities in both of them. Equities in taxable will be taxed much less than equities in my 401(k) and traditional IRAs.

So this doesn't answer your question.
LOL! is offline   Reply With Quote
Old 07-11-2014, 04:37 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2009
Posts: 6,681
If you can, might you be able to create hypothetical (federal and state, you did not mention which state you live in or if the bond funds are national or home-state) income tax returns, one with projected dividends from each type of bond funds (munis versus corporate) and see which one gives you a better after-tax income. You should be able to find recent monthly dividends per share so you can estimate your annual dividends for each type of bonds.

FWIW, I faced this same question when I ERed in 2008. I had a lot in munis and was in the 25% marginal (federal) tax bracket, going down to the 15% bracket after I ERed. I did not liquidate my muni bond fund holdings (for other reasons) but have greatly reduced my holdings in favor of corporate bonds.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is offline   Reply With Quote
Old 07-11-2014, 04:45 PM   #4
Recycles dryer sheets
 
Join Date: Mar 2014
Location: Islands
Posts: 363
Quote:
Originally Posted by LOL! View Post
It is hard to give good advice without knowing the rest of your portfolio and its location.

In the past year, there have been a few bloggers who say that bonds in taxable are good. This is because
(1) bond yields are very low so income is lower and taxes may be lower
(2) bond funds are expected to lose money, so there is the opportunity for tax loss harvesting and getting out of bond funds if yields go up
(3) they like equities in Roth IRAs and don't want lower performing assets there.

For myself, I don't want any bonds in taxable and have no bonds in taxable. All my fixed income is in tax-advantaged accounts. I don't want my 401(k) and IRAs to grow fast because I don't want my RMDs to get large. Instead I want my taxable account to grow fast and my Roth IRAs to grow fast, so I have equities in both of them. Equities in taxable will be taxed much less than equities in my 401(k) and traditional IRAs.

So this doesn't answer your question.
I'm not exactly looking for AA or asset location advice specifically. More, best after-tax return. Due to high income, most of my investments are post-tax non-sheltered. If I only kept bonds in tax-deferred, my AA would be 90% equities.

I also believe in the total return approach for retirement. I want to live off mutual fund dividends/distributions and bonds income as much as I can and allow to principle to grow. But the best-after tax scenario is what I am trying to achieve. Thanks!
Travelwanted is offline   Reply With Quote
Old 07-11-2014, 04:48 PM   #5
Recycles dryer sheets
 
Join Date: Mar 2014
Location: Islands
Posts: 363
Quote:
Originally Posted by scrabbler1 View Post
If you can, might you be able to create hypothetical (federal and state, you did not mention which state you live in or if the bond funds are national or home-state) income tax returns, one with projected dividends from each type of bond funds (munis versus corporate) and see which one gives you a better after-tax income. You should be able to find recent monthly dividends per share so you can estimate your annual dividends for each type of bonds.

FWIW, I faced this same question when I ERed in 2008. I had a lot in munis and was in the 25% marginal (federal) tax bracket, going down to the 15% bracket after I ERed. I did not liquidate my muni bond fund holdings (for other reasons) but have greatly reduced my holdings in favor of corporate bonds.
So you have somewhat answered my question. The fact that in ER you moved to corporates while reducing munis sounds like the answer. I assume you did this because of the higher yield and better after-tax return once in the lower tax bracket?

May I ask what "big bond fund" you bought? How is your bond allocation now?
Thanks!
Travelwanted is offline   Reply With Quote
Old 07-11-2014, 05:01 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 10,252
Why not actually do as scrabbler1 suggests and run some "What if?" tax returns?

I will guess you will find that a mix of taxable and tax-exempt bond funds may be the answer. Where the cut-off will be …?
LOL! is offline   Reply With Quote
Old 07-11-2014, 05:06 PM   #7
Recycles dryer sheets
 
Join Date: Mar 2014
Location: Islands
Posts: 363
Quote:
Originally Posted by LOL! View Post
Why not actually do as scrabbler1 suggests and run some "What if?" tax returns?
Yep, I sort of did. But I always feel I am missing something or forgetting to account for something. I guess I am just so new to this I am not always confident in the results I get. Thanks for your suggestion.
Travelwanted is offline   Reply With Quote
Old 07-11-2014, 07:12 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2009
Posts: 6,681
Quote:
Originally Posted by Travelwanted View Post
So you have somewhat answered my question. The fact that in ER you moved to corporates while reducing munis sounds like the answer. I assume you did this because of the higher yield and better after-tax return once in the lower tax bracket?

May I ask what "big bond fund" you bought? How is your bond allocation now?
Thanks!
I moved from munis to corporates indirectly but for the reason you stated - I netted more money after taxes by earning the higher return on corporates and paying the taxes on it than paying little or no taxes on munis with their lower return. I used my munis to pay the income taxes when I cashed out the company stock upon leaving the company. I also moved some more money from the munis to the corporates in 2009. And any other time I needed some large blob of money in the last 5 years I tapped into the munis, my general plan being to drain them slowly.

As for the "big bond fund" I bought to begin my ER, it is the Fidelity Focused High Income Fund (FHIFX). It might technically be a "junk bond" fund but unlike the typical junk bond funds this fund attempts to find a certain layer funds barely at (BBB) or slightly below investment grade (BB, B rated) to boost returns without adding a lot of risk.

As for my bond allocation, most of it in the taxable account is in FHIFX. In my IRA, however, I have Fidelity's Intermediate-term corporate bond fund (investment grade). That's nearly half of my IRA.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Bonds in Taxable Account or tIRA - Spreadsheet Answer Animorph FIRE and Money 4 04-14-2014 10:25 AM
Bonds in taxable account? harley FIRE and Money 11 11-18-2008 03:58 PM
AA & withdrawals between taxable and non taxable accounts. ron244 FIRE and Money 14 05-18-2007 05:59 PM
How to allocate taxable and non-taxable money? Olav23 FIRE and Money 6 01-10-2007 12:28 PM
Taxable or Non Taxable Seeker FIRE and Money 3 05-07-2005 11:23 AM

» Quick Links

 
All times are GMT -6. The time now is 06:12 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.