I'm 23, in the 25% bracket now and that will probably rise over the future. Let's say I have an extra $500 per month to buy bonds with. I can put the money into my company's 401k which has a good intermediate bond fund, duration of about 4.3 years, ER of 0.15%, holds a mix of government and high quality corporate (AAA). Currently yielding 4%.
Or, I can reduce my 401k contribution by $500 (I'd still get the full match) and put it in my taxable account, where I could buy Vanguard's intermediate muni fund VWITX which has duration 4.8, ER 0.15% and yields 4% (after tax). Also very high quality bonds and I think they may be insured.
If I use the 401k, I may be in a much lower tax bracket when it is time to withdraw. But who knows what the income tax system will look like +20 years from now? Plowing all that money into the account builds up a large deferred tax liability with an unknown rate.
If I use the muni fund in a taxable account, I will effectively be contributing less than $500 each month because of taxes. But then the growth is tax free. I also get more flexibility if I want to access the money before retirement for whateve reason.
Is there a dominant strategy here? Seems like a toss-up. Should I split the difference and hedge by bets?
Roth is already fully funded.
Or, I can reduce my 401k contribution by $500 (I'd still get the full match) and put it in my taxable account, where I could buy Vanguard's intermediate muni fund VWITX which has duration 4.8, ER 0.15% and yields 4% (after tax). Also very high quality bonds and I think they may be insured.
If I use the 401k, I may be in a much lower tax bracket when it is time to withdraw. But who knows what the income tax system will look like +20 years from now? Plowing all that money into the account builds up a large deferred tax liability with an unknown rate.
If I use the muni fund in a taxable account, I will effectively be contributing less than $500 each month because of taxes. But then the growth is tax free. I also get more flexibility if I want to access the money before retirement for whateve reason.
Is there a dominant strategy here? Seems like a toss-up. Should I split the difference and hedge by bets?
Roth is already fully funded.