Advice Needed: Best Fixed Income Investments in Taxed Account

[Shabber2]

Where would you put the $400K portion of your fixed income portfolio if it was in a in a taxable account?

These Vanguard bond funds: VFITX, VFISX, VIPSX seem like a nice mix but the taxes will shred me!

 

[statsman]

Where would you put the $400K portion of your fixed income portfolio if it was in a in a taxable account?

These Vanguard bond funds: VFITX, VFISX, VIPSX seem like a nice mix but the taxes will shred me!

Similar situation for us. The usual suggestion is to go with tax-exempt municipal bond funds, but some state that the risk is greater than with most of the taxable bond funds. I look forward to the responses you get. Good luck!

 

[haha]

Similar situation for us. The usual suggestion is to go with tax-exempt municipal bond funds, but some state that the risk is greater than with most of the taxable bond funds. I look forward to the responses you get. Good luck!

Historically municipals default 1/100 as often as corporates of the same credit rating.

Next question- have conditions changed.?

In general, I think you really don't need to spend much time worrying about credit quality in a high grade municipal bond fund, at least relative to a corporate fund.

Ha

 

[brewer12345]

I agree with ha. I'll add that munis are a historically good deal right now, although no telling if they will become an even better deal in the future.

 

[Rambler]

I vote to go for munis in your state, especially if you are in CA. Long munis can get you about 5% yields (as of a week or so ago). I am accumulating AAs and AAAs. 5% yield (tax-free, incl AMT) is equivalent to about 8.9% corporate bond yield at the highest marginal rates (35% fed and 9.6% or so to uncle arnold)...check your own marginal rates. No need to go for a fund, you can do it yourself, particularly if you are seeking bonds for the cash throw-off. If you are seeking principal protection, an actively traded fund may be the way to go, but there are those pesky fees, and it can still drop. I'm accumulating munis for the income.

R

 

[TN_INVEST]

I'd go with something that pays a nice fat dividend or perhaps a structured investment product such as a third party trust preferred. Some of these things have nice payouts.

 

[statsman]

No need to go for a fund, you can do it yourself, particularly if you are seeking bonds for the cash throw-off.

Our situation is that we are still in the accumulation phase with 6 years to go before retirement. We are also quite conservative, having chosen an AA of 20/80. We live in California, and we are in the 28% tax bracket and 9.3% tax bracket for the state.

A little over half of our invested portfolio is in taxable. Our 401(k)s are 100% in taxable bonds, and our taxable is roughly 40/60, with the 60% of the taxable in tax-exempt muni bond funds (don't understand enough to purchase the muni bonds separately).

Being the paranoid person, I went with a 50/50 split of the munis in Vanguard's CA intermediate-term muni bond fund and 50% in Vanguard's limited-term muni bond fund (which will result in state taxes). I would love to choose something else for the taxable other than the limited-term fund (and no, adding equities is not an option).

The only other obvious option is Vanguard's CA long-term muni bond fund, but I keep reading posts indicating that now is not a good time to go with long-term bonds.

Am I overlooking a possible option for us in the taxable?

 

[ats5g]

Our situation is that we are still in the accumulation phase with 6 years to go before retirement. We are also quite conservative, having chosen an AA of 20/80. We live in California, and we are in the 28% tax bracket and 9.3% tax bracket for the state.

A little over half of our invested portfolio is in taxable. Our 401(k)s are 100% in taxable bonds, and our taxable is roughly 40/60, with the 60% of the taxable in tax-exempt muni bond funds (don't understand enough to purchase the muni bonds separately).

Being the paranoid person, I went with a 50/50 split of the munis in Vanguard's CA intermediate-term muni bond fund and 50% in Vanguard's limited-term muni bond fund (which will result in state taxes). I would love to choose something else for the taxable other than the limited-term fund (and no, adding equities is not an option).

The only other obvious option is Vanguard's CA long-term muni bond fund, but I keep reading posts indicating that now is not a good time to go with long-term bonds.

Am I overlooking a possible option for us in the taxable?

Here's an article by Vanguard, Municipal Bond funds and Individual bonds. Personally, I'm way to lazy to manage my own portfolio of ind muni bonds.

Vanguard's LT muni bond funds are actively managed in that the maturity of the bonds they hold [and the resulting duration of the funds] can move around. For example, in the 1990's the duration were much higher, like 9-10 years, like the taxable LT bond funds. Where as the Intermediate muni funds always stayed within the int term durations, 4-7 years.

I wouldn't over analyze anything too much, but whether you go with the IT or LT CA muni fund isn't going to cause your retirement downfall. Either one should be just fine. The income from longer term bonds, and bond funds, tends to be more stable [i.e. changes more slowly] than the income from the shorter term bonds/bond funds. The bonds just take longer to mature. So if you want stability of income, go with the IT and LT bond funds.

- Alec

 

[LOL!]

Shabber2, if you have ANY stocks in your tax-advantaged accounts, then you should replace them with bonds funds. If you like the stocks, you can always buy them in a taxable account. That way, you don't change your asset allocation, you get to do tax-loss harvesting, you get a higher tax-free interest rate than muni bonds, etc, etc.

As I recall, you have stocks in your tax-advantaged accounts. Now is the time to get off on the right-footing and get that fixed income into tax-advantaged accounts.

 

[walkinwood]

If you want to escape taxes, you don't have a choice but to put the funds in a fund that invests in your state's municipal bonds.

Being in CA, treasury bonds will save you the 9.3% state tax, but not the federal tax.

If you're in the market for a long time, then interest rates will rise and fall - so maybe it will come out even in the long term.

 

[statsman]

I wouldn't over analyze anything too much, but whether you go with the IT or LT CA muni fund isn't going to cause your retirement downfall. Either one should be just fine. The income from longer term bonds, and bond funds, tends to be more stable [i.e. changes more slowly] than the income from the shorter term bonds/bond funds. The bonds just take longer to mature. So if you want stability of income, go with the IT and LT bond funds.

If you want to escape taxes, you don't have a choice but to put the funds in a fund that invests in your state's municipal bonds.

Being in CA, treasury bonds will save you the 9.3% state tax, but not the federal tax.

If you're in the market for a long time, then interest rates will rise and fall - so maybe it will come out even in the long term.

Thanks for the information. We plan on an early retirement at the end of 2014 (almost 6 1/2 years), so it will be some time before we even think about needing any part of the bond investments and maybe only the dividends for awhile after retiring.

It sounds like we would be better off moving the limited-term muni fund into either the CA IT or CA LT muni fund. We have enough invested to have Admiral shares in the CA IT muni fund, and there is enough that would be transferred from the limited-term muni fund to purchase Admiral shares for the CA LT muni fund.

 

[cute fuzzy bunny]

If theres a place I'd like the diversification of a mutual fund, its probably in munis.

Like Alec said, I dont think theres much difference between the IT and LT offerings, although I dont think the LT bonds offer a substantially higher yield, I doubt the yields will go down significantly from here, and the IT bonds would reflect higher interest rates/payments a little faster.

And of course, scuttling your bonds into your tax advantaged accounts makes perfect sense if you're an accumulator, are over 59.5 and can tap the IRA without penalties or doing a 72t. May not make any sense at all if you're an early retiree with a low tax profile that wants to actually have access to that bond income, or especially for someone doing a "buckets" strategy where the first bucket contains largely cash and fixed income products.

The "conventional wisdom" applied to people who accumulate until they're in their 60's and then withdraw from there doesnt always match the unconventional needs of the early retiree...

 

[ats5g]

Thanks for the information. We plan on an early retirement at the end of 2014 (almost 6 1/2 years), so it will be some time before we even think about needing any part of the bond investments and maybe only the dividends for awhile after retiring.

It sounds like we would be better off moving the limited-term muni fund into either the CA IT or CA LT muni fund. We have enough invested to have Admiral shares in the CA IT muni fund, and there is enough that would be transferred from the limited-term muni fund to purchase Admiral shares for the CA LT muni fund.

For simplicity it's probably better to stick with just one fund, especially with the admiral shares. Either the CA Int Term fund or the CA LT fund will do just fine. However, remember that the maturities of the bonds the LT fund holds can increase a lot more than the IT term fund. If you're scared about having so much in CA munis, then having a seperate national muni fund [like Vanguard's int term or limited term muni funds] is fine as well. IIRC, this is a strategy Bernstein recommended in his 4 Pillars book. Of course, he also mentioned using treasuries in the taxable account as well, but since you've got space in the tax deferred account for treasuries, if you want to increase the credit quality of your bonds, just use individual treasuries or Vanguard's Int term treasury or TIPS fund in the tax deferred accounts. Though, with CA state states being so high, I think everything in CA munis is probably worth it. If I were in a low tax state, like PA, then I'd probably go with the national muni fund.

Whatever you choose will likely turn out to be less than optimal when you look back 1,3,5,10, or 15 years from now. As long as you're aware of that now, and keep costs low, you'll do fine. Remember the enemy of good plan is the dream of a perfect plan [paraphrased].

- Alec

 

[Art G]

If I had $400k, I'd just diversify my own bond portfolio. Why buy a mutual fund that will bounce around in price forever when you can ladder your own bonds and know when they will mature? Plus you can control any realized capital tax gains.

 

[ats5g]

If I had $400k, I'd just diversify my own bond portfolio. Why buy a mutual fund that will bounce around in price forever when you can ladder your own bonds and know when they will mature? Plus you can control any realized capital tax gains.

Besides the reasons in the above referenced article, b/c I'm freakin' lazy.

 

[ats5g]

forgot to mention that if you work for the state of CA, and perhaps have a pension from the state, that might warrant going for the national muni fund over the CA state specific fund. Don't want all your eggs in the same basket.

 

[statsman]

forgot to mention that if you work for the state of CA, and perhaps have a pension from the state, that might warrant going for the national muni fund over the CA state specific fund. Don't want all your eggs in the same basket.

Nope, don't work for the state of CA. Neither does my wife.

The discussion of LT bonds vs. LT bond funds is a common one I encounter a lot. I lack the knowledge at this time to purchase the individual bonds, which is why I am going with the bond funds. And knowing myself, I would likely screw it up far worse than what Vanguard would do. I also need to make this simple enough for my wife to maintain should something unexpected happen to me.

Since we are still accumulating and won't be retiring for over 6 years and probably won't have any need for this money for several years after that, I figure that the CA IT and CA LT bond funds work for us.

 

[Art G]

Besides the reasons in the above referenced article, b/c I'm freakin' lazy.

I've lost waaaaaay more money in bond funds, than I've ever lost in any single stock mutual fund, and that includes a beating I once took in an internet fund.
If you're too lazy, then take that money to an advisor and let him put together a laddered portfolio for you. JMO