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Bonds won't fit in Tax Deferred Accounts
Old 03-06-2021, 12:11 PM   #1
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Bonds won't fit in Tax Deferred Accounts

Hi all.

This is a high class problem...but its still a problem....

I normally stash bonds and REITs in my IRAs...but I've hit the point where my allocations to those asset classes are greater than what I can keep in those accounts.

Suggestions on how to handle?

Seems like the options are:

1) Use muni bonds in a taxable account

2) Adjust my AA cap allocations to those assets at what will fit in the tax efficient accounts

3) Deal with the bigger tax hit from putting those assets in my taxable account

Other approaches?

Of the above options, your suggestions?

Thanks
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Old 03-06-2021, 12:18 PM   #2
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I have a similar issue in that most of my savings is in taxable accounts. I’ve relied on municipal bonds to carry the bulk of my fixed income allocation for many years. Yield are low now but that’s true across all fixed income investments so you probably won’t do much better with anything else right now.
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Old 03-06-2021, 12:21 PM   #3
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Do you have a Roth? You could use that. Or munis would work. Or you could substitute high quality preferreds that pay qualified dividends that wold not be taxes in taxable accounts as a substitute for bonds.
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Old 03-06-2021, 12:29 PM   #4
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Do you have a Roth? You could use that. Or munis would work. Or you could substitute high quality preferreds that pay qualified dividends that wold not be taxes in taxable accounts as a substitute for bonds.
We have a Roth but its full and I'm in the top bracket so can't put more in. I've never really understood back door Roth's, not sure if that helps here?

My core bond holding is SWAGX (Schwab's Aggregate Bond Index). I've got some PFFD in my asset allocation and I keep it my brokerage today. I could bump that up. Not sure how to think about the relative quality between the two.

I use VTEB for some current muni holdings. Looks like MLN has a bit higher yield because its longer term, but will be more sensitive to the rate swings.
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Old 03-06-2021, 12:30 PM   #5
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I have a similar issue in that most of my savings is in taxable accounts. Iíve relied on municipal bonds to carry the bulk of my fixed income allocation for many years. Yield are low now but thatís true across all fixed income investments so you probably wonít do much better with anything else right now.
Thanks. Exactly what I'm wrestling with.
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Old 03-06-2021, 12:39 PM   #6
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I use individual muni bonds or ishares Target Muni funds.
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Old 03-06-2021, 01:02 PM   #7
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I am using Vanguard TE bond funds.
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Old 03-06-2021, 01:08 PM   #8
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If you donít have any IRAís, then learning about backdoor Roth is worth the effort.

Unfortunately, it probably wonít help much with your bond situation since yearly contributions might be too small.
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Old 03-06-2021, 01:14 PM   #9
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Iíll also add that personally, I donít like putting any fixed income in Rothís. Since youíll never pay tax in a Roth, I prefer to invest in equities since theyíll have a higher long term gain.

My long-term goal is to have a high balance in a Roth and as little as possible in tax deferred/taxable accounts.
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Old 03-06-2021, 01:22 PM   #10
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1. There are taxable munis, which generally pay higher yields than comparable tax free munis of similar maturity/quality.

2. There are plenty of instances where tax free munis are better bargains than comparable maturity/quality taxable munis and could/should be considered for tax deferred accounts (in my view) even though the tax free benefit will get forfeited. Over the past 6 months or so, as taxable munis providing respectable yield/quality have dried up, I have accumulated a good number of tax free munis in my IRA - because they were paying better yields with better quality than the taxable munis available at the time.
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Old 03-06-2021, 01:40 PM   #11
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I’m in the same situation as the OP. Prior to Covid, I used Vanguard’s Intermediate Term Tax Exempt Admiral class fund (VWIUX) in my taxable account. I exchanged all of that for Vanguard’s Total Bond fund (VBTLX) when Covid hit out of fear that municipal finances might be devastated. I’m still in VBTLX and can live with the taxable income it is creating in my taxable account. For now, I’m holding steady with this decision.
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Old 03-06-2021, 02:06 PM   #12
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Quote:
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Iíll also add that personally, I donít like putting any fixed income in Rothís. Since youíll never pay tax in a Roth, I prefer to invest in equities since theyíll have a higher long term gain.

My long-term goal is to have a high balance in a Roth and as little as possible in tax deferred/taxable accounts.
I would typically agree but if tax-deferred accounts were filled with bonds and one still wanted some bonds then the only choices are taxable or Roth, then I'd consider it. Or munis in a taxable account.
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Old 03-06-2021, 04:40 PM   #13
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I wouldn't let taxes keep me from my asset allocation. I would put Bonds in taxable if that is what your investment plan asset allocation would require. Right now the taxes on even taxable Bond Funds is small.

Good enough...
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Old 03-06-2021, 05:23 PM   #14
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Another option is to reevaluate your AA and ensure that you really need as much allocated to bonds and/or REITs as you think you do.

I assume you've done that, though, and are confident in the answer (?)
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Old 03-06-2021, 06:09 PM   #15
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I wouldn't let taxes keep me from my asset allocation. I would put Bonds in taxable if that is what your investment plan asset allocation would require. Right now the taxes on even taxable Bond Funds is small.

Good enough...
+1 That's what I did; I just take the tax hit, following your third option,
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3) Deal with the bigger tax hit from putting those assets in my taxable account
I put as much as I can in tax sheltered accounts, and the rest of my bond funds go in taxable. Nobody likes paying taxes, but having bond funds in a taxable account is not the end of the world either. As some unknown sage once said, "Don't let the tax tail wag the investment dog".
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Bonds won't fit in Tax Deferred Accounts
Old 03-06-2021, 08:21 PM   #16
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Bonds won't fit in Tax Deferred Accounts

Quote:
Originally Posted by pb4uski View Post
I would typically agree but if tax-deferred accounts were filled with bonds and one still wanted some bonds then the only choices are taxable or Roth, then I'd consider it. Or munis in a taxable account.

Iíd go with munis in a taxable account. Run up the balance as much as possible in a Roth.

Edit to add: this is also a benefit to having lower growth investments in tax deferred accounts. The overall account values wonít grow as much and will help mitigate RMDs/rollovers.
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Old 03-07-2021, 02:44 AM   #17
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fear that municipal finances might be devastated
This is on my mind as well. Cities are so reliant on income taxes from commuters and the multiplier effect of workers who come and go each day to drive service...all of which are crushed by the telecommuting. Lots of them must be taking on water.

But I think that anything which results in mass defaults of municipalities would turn around and hit corporations just as hard. The contagion would hit the corporate market as well.

Plus, I think there is a federal government put standing behind any risk of mass municipal fault...moreso given the political air cover the Covid crisis create to bail things out.
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Old 03-07-2021, 02:49 AM   #18
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I wouldn't let taxes keep me from my asset allocation. I would put Bonds in taxable if that is what your investment plan asset allocation would require. Right now the taxes on even taxable Bond Funds is small.

Good enough...
Fair point...though to be transparent, I'm a top bracket earner right now.

Toss in the state/local income taxes and I'm close to a 50% marginal rate on income. So with after-tax SWAGX (my after-tax broad bond drug of choice) yielding 2.3%...that nets to 1.15%. Yuck. May as well go with CDs. But a guy my age racking-and-stacking CDs just seems looney.

(As I said at the start, its a very high class problem. I feel like a bit of a schmuck whining about a top bracket tax rate issue...but it is what it is.)
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Old 03-07-2021, 02:58 AM   #19
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Another option is to reevaluate your AA and ensure that you really need as much allocated to bonds and/or REITs as you think you do.

I assume you've done that, though, and are confident in the answer (?)
I try to review my AA every few years and I'm about due, though my instinct tells me I won't touch it much. I'm 49 years old and while I will punch out in the next few years, I won't touch any of this money for at least a decade after I leave due to the payout of a NQDC plan.

With that small preface, my AA on this front is:

15% fixed income (which include 5% in preferreds)
10% REIT (which I've stashed in the tax deferred)

I don't see my fixed income allocation going up --- though as I continue to save the absolute dollars in that bucket will create more pressure on the tax free/taxable account issue.

The REIT allocation is an open question. That may be high. My logic was to capture much nicer yields and keep them sheltered in the tax-free accounts. From an AA perspective, it may be incorrect however.

REITs are a beat down sector due to Covid...so my AA management has me putting new money into the sector right now. I won't flee from it just due to the near term pain. But I will reconsider it as part of my structured asset allocation review when the time comes.
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Old 03-07-2021, 02:59 AM   #20
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"Don't let the tax tail wag the investment dog".
I've always loved that quote. Great wisdom in a short sentence.
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