Pay off boat with taxable account?

[jessikaur]

I have

BND VANGUARD TOTAL BOND MARKET ETF
First in, first out (FIFO) 268.7210 — $22,618.74 $21,997.50 $2.08 – $623.32 – $621.24

this is held in a taxable account... been there since about 2016. Has not made any money, in fact, lost about 600$, this loss will offset the dividend income I have earned for this year 2017 (of about 2300) from other etfs.. of note this year I am in the 39.5 tax bracket...

I am considering selling this (at a loss) to pay off a new boat I bought

the new boat has 34K left on it @ 4.3%

then, I plan on using whatever extra income I have to pay off the rest of the boat and then after that we'll discuss where my excess income should go...
of note I am 36, , so I'm hesitating to sell because I'd like to believe I am a "buy and hold" investor and I have plenty of time to recover this 600$ loss, and I can still use excess income to pay off the boat as opposed to selling this investment, I'm just trying to sort through what makes the most financial sense, and where I come out ahead.. (if anywhere??)

The other thing to consider is I currently have BND in taxable account, there is a lot of controversy whether this should be in taxable or tax deferred.. and I've gone back and forth on it, once I'm done paying off the boat, I could reallocate bonds to tax deferred... but then there was another wci post about being as aggressive as you possibly can until you reach your goals, so I'm torn..

Thanks!

Jessi

[Donnie]

If you are in the highest tax bracket, you should be able to easily pay this off from cash flow from earnings.  If you can't you are not saving enough.  Anyway, BND yielding ~2.4% is a negative arb against a loan charging 4.3%, so you should liquidate BND to pay off the loan.

[Lithium]

Agree with above.  It shouldn't take you that much time to save $22k regardless, so in the long run it won't make that much difference.  Debt is often considered a "negative bond," and the more debt you get rid of, the more risk you can take in your portfolio, so I'd just kill the high interest debt.

Also, it isn't at all controversial to say that someone in the 39.6% bracket should not have something as tax-inefficient as BND in a taxable account.  Even if you didn't take it out to pay off debt, you should either sell it and buy a tax-free bond in the taxable account or buy a taxable bond in tax-deferred (that is what's considered controversial.  I do the latter).

Also, bonds recently have lost NAV, because compared to stocks, they pay far more out in dividends.  BND is up about 1% this year with dividends reinvested.  I know that's chump change, but it just means that it's not unusual for the value of your bond portfolio to go down if you're taking out all the dividends or investing them elsewhere even if their value has risen slightly.

[Dreamgiver]

I agree with selling the bonds to pay the boat off. Even better, sell the bonds, buy a low cost tax efficient total stock market index (VTSAX or such) and quickly cash flow the boat (after all, it is recommended you pay cash for luxury items). In a more general way, not knowing the rest of your financial situation, I highly question a 36 year old person owning bonds. Not the there is no role for bonds, but you need to know why and how much.

[jessikaur]

Ok. So I was embarrassed to say. These are the only bonds I own. Otherwise, I'll be 100% stocks.

Domestic.
Vtsax
Vti
Tsp. -50/50 large/ small cap.
Vinix
Vimax dead center mid cap.
So 33% split large/ mid small.
65% total portfolio.


Dividends
Vdaix in hsa
Vig in taxable
Makes about 10% of whole portfolio

Foreign in taxable
Veu
Emerging markets 5% vwo
20% of whole portfolio.


Reits
In Roth IRAs
Aiming for a 5% of whole portfolio but can't contribute enough to get it there.


Also have a target date fund that I compare returns from that to my breakdown of above. ... It probably has 5k total of bonds ....

So portfolio would be risky but not planning on pulling much out. Have been thinking about getting rid of bnd for awhile.

If I were to do bonds it would be in the tsp bond fund .... But I wasn't planning on converting until I reached FI ...

[Lithium]

"Dividends" are an investing style rather than an investing class.  VDAIX/VIG is basically just more of large-cap stocks.  They're not terrible funds, but I'd replace them with TSM or some kind of cheaper passive index fund, at least in the HSA.  In the taxable account you may be stuck with VIG for the time being due to capital gains.

So the TSP is currently 50% C fund and 50% S fund?  If it were me, I'd sell the 22k in BND now.  Once you have more money to add back in taxable, I would: 1) Change the equivalent amount in the TSP over to whichever bond fund you want, and then 2) Purchase what you just sold in the TSP in the taxable account (VOO + VXF).

Or if you have the convenience of frontloading contributions to a 401k or TSP you could contribute 18.5k to bonds there at the start of the year.  Regardless of where you add the money, you can shift the puzzle pieces around to make it work; the exact strategy just depends on which account you're adding to.

 

[jessikaur]

Here are the options in the hsa. Can't find their cost right now,
b]Vanguard Total Bond Market Index Fund (VBLTX)[/b]
Vanguard LifeStrategy Conservative Growth Investor (VSCGX)
Vanguard LifeStrategy Moderate Growth Investor (VSMGX)
Vanguard Dividend Appreciation Index Investor (VDAIX)
Vanguard Developed Markets Index Fund (VTMGX)
Vanguard Emerging Markets Stock Index Fund (VEMAX)
Vanguard Small Cap Index Fund (VSMAX)

[ITEngineer]

jessikaur wrote:

Ok. So I was embarrassed to say. These are the only bonds I own. Otherwise, I’ll be 100% stocks.

Click to expand...

I'm in 100% stocks too (intentionally) and am not embarrassed that I don't own any bonds.

Sell the bonds. You took out a boat loan to own some bonds 

If you want to repurchase bonds in your taxable account, that's fine, but do it when you don't have a boat payment.

[The White Coat Investor]

I think you should buy things like boats with cash. So yes, I'd pay off the boat and do so quickly. Not sure why you own a taxable bond fund in taxable (are you in a low tax bracket) but this seems like a great time to rectify that mistake. You can switch to muni bonds, take the $600 tax loss, and pay off the boat all in one fell swoop.

Sounds like you also need a written investment plan.

[The White Coat Investor]

and post a picture of the boat. Come on. New WCI forum rule- if you mention a boat, you've got to show us the boat!

[Donnie]

It’s the same boat as in the other thread.

[jessikaur]

Model Portfolio for Younger Investors With a 50 Year Horizon
		Alloc %	Total By Asset Class
Fixed Income - US			5%
	Aggregate Bond:  BND, SCHZ, AGG	5%
Equities - US			55%
	Total U.S Stock Market:  VTI, SCHB, IWV	45%
	U.S. Dividends:  VIG, SCHD	10%
Equities - Non-U.S.			40%
	Developed World ex-U.S. and Emerging Markets:  VEU, or SCHF & SCHE	30%
	Emerging Market:	10%
Total			100%
	Model Portfolios
		Vanguard	Schwab	TD Ameritrade
	Aggregate Bond:  BND, SCHZ, AGG	BND	SCHZ	AGG
	Total U.S Stock Market:  VTI, SCHB, IWV	VTI	SCHB	IWV
	U.S. Dividends:  VIG, SCHD	VIG	SCHD	VIG
	Developed World ex-U.S.	VEU	SCHF	VEU
	Emerging Market:	-	SCHE	-
	Weighted Annual Cost	0.110%	0.079%	0.190%
	Annual Cost on $50,000	$          55.00	$          39.50	$          95.00
"The Young Investors Model Portfolio: Getting Started With ETFs", Abby Woodham, 2/14/13, Morningstar
New Investors theme: keep it cheap, keep it simple, have appropriate asset allocation
ETF's mentioned here all have expense rates <= 20bp
Fund selections are from Vanguard, Schwab and iShares

[jessikaur]

OK, so the above is what I was aiming for..

and I was trying to get to it by using all of my available accounts...

 

Now, I know I don't necessarily have a 50 year horizon... but I'd still like to think of myself as a *young* investor.

I was doing all vanguard funds.....

 

Ok.. so bonds for high income earners do NOT go in taxable. Got it.. I read some threads on this site about making the arguments that they should. hence my mistake.

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

[Lithium]

It's important to realize that asset location is a relatively advanced topic.  Before putting bonds in taxable, you have to understand what kinds of bonds go in taxable.  It's the kind of bonds that aren't taxed at the federal level - municipal bonds.  That article is written for someone who already has a basic understanding of different bonds and asset classes.

I think that's not a bad allocation, but I wouldn't make a very complex slice and dice portfolio until I read deeper sources (Rick Ferri would be my first choice) and felt comfortable with my own skill, risk level, and style and made a written plan.  Until then, a simple two or three fund plan is probably the way to go.

[The White Coat Investor]

jessikaur wrote:

OK, so the above is what I was aiming for..

and I was trying to get to it by using all of my available accounts…

 

Now, I know I don’t necessarily have a 50 year horizon… but I’d still like to think of myself as a *young* investor.

I was doing all vanguard funds…..

 

Ok.. so bonds for high income earners do NOT go in taxable. Got it.. I read some threads on this site about making the arguments that they should. hence my mistake.

https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

Click to expand...

Bonds in taxable may very well be the right choice for you. But if you're in a high bracket, you'll want to use muni bonds and i-bonds not treasuries, TIPS, and corporate bonds.