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Advantage of stocks vs bonds in a taxable account?

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  • Advantage of stocks vs bonds in a taxable account?

    I'm 2nd year attending trying to straighten out my retirement accounts. I want to keep it simple and ideally would like to have a 70:30 stock to bond ratio and a 70:30 domestic to international stock ratio.

    One issue I have is that I'm an employed physician and the only passive index fund available in through my employer is the Vanguard 500 index fund so that's the only fund I've been contributing to for my 401k and 457b.

     

    I do have a backdoor roth (currently Vanguard 500 index fund) and taxable vanguard account (currently Vanguard 2045 target retirement fund) set up.

     

    I would like to switch the Roth and my taxable account to the Vanguard Total International Fund and Vanguard Total bond Index to achieve my desired asset allocation.

     

    Is there a tax advantage or rebalancing advantage to placing the international stock or total bond fund in the backdoor roth vs the taxable account?

     

    Thanks!

     

     

    Is there

  • #2
    There is an advantage to putting the international in a taxable account.  See the following:

    https://www.bogleheads.org/wiki/Foreign_tax_credit

    It's hard to say exactly where you should put your bonds.  There are advantages to having them in the 401k and also advantages to keeping high (expected) growth funds in the 401k.  WCI has posted on this - look up "bonds in taxable" in his search.

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    • #3
      I wouldn't use total bond market as a doc in taxable. If you decide bonds in taxable are right for you, then use a muni fund. But figuring out whether stocks or bonds in taxable is right is complicated, doesn't make a huge difference, and might change with future tax or personal changes.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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      • #4
        Really big if high state tax.  --

        Taxable -- muni bond.   thats what we do and get a good stable yield return.  leave the rest in deferred accounts.  we really minimize the taxable exposure since have the 457 for FIRE option and a dcp for roth rollovers.  we pour 86k into those leaving not much left for taxable savings since we lime our lifestyle living ?

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        • #5
          Why do you have so much in bonds? I'm not saying you're wrong; it's just curious to see someone so early on with so much in bonds.

          The only bonds that should be in a taxable brokerage account are municipal "tax-exempt" bonds. Otherwise, they're a tax-inefficient asset class since they earn almost completely on dividends...so you're taxed on dividends you receive, then you're taxed on higher dividends you'd get if you reinvested them, and then are taxed again whenever you sell the bonds for a capital gain (though reinvested dividends do step up the basis, so the capital gain is significantly less than the overall yield). See how much of a chunk you'd lose from the usual bond index fund, in this instance VBTLX, if it were in taxable: https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0584#tab=1

          Non-municipal bonds are best held in a tax-deferred account like a 401(k) or 403(b), in which you don't pay tax on dividends or capital gains while holding them (just taxed as income upon sale) and can reinvest dividends without tax. You *could* put them in a tax-free Roth account, but since they're not as high-earning as equities, you'd get greater tax benefit paying no tax on higher-gaining stock and REIT holdings.

          So, do one or more of the following:
          - hold munis in taxable
          - hold usual bond funds in tax-deferred, or Roth if no good tax-deferred options for now, then trade once you have some
          - use all accounts as one big portfolio; you don't need X amount of bonds in each account, just percent of total
          - maybe consider holding a bit less in bonds?

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          • #6
            Does your 401k have a brokerage acct option?

            If you want, you could list all of your 401k/457b options by giving the name, ticker, and expense ratio and we could see if there are reasonable alternatives for you.

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            • #7
              Thanks for all the responses! Very helpful!

              I will avoid using a total index bond fund in my taxable account. I was getting my asset allocation from Bernstein's "The Investor's Manifesto" for a conservative allocation for someone my age.

              I don't know if I have the option for a brokerage account but thanks for the info, I will look into it.

              These are my options for retirement funds:

              ______________________________________

              Balanced Fund, DODBX, 0.53%

              Emerging Markets Fund, DFEMX, 0.67%

              Energy Fund, MLPPX, 1%

              Inflation Protected Fund, PAAIX, 1.08%

              International Fund, IHBIF, 0.99%

              Large Company Growth Fund, CISGX, 0.79%

              Large Company Value Fund, REIPX, 0.64%

              Small Company Growth Fund, 0.94%

              Stock Index Fund VIIIX, 0.02% (THE ONLY FUND I AM CURRENTLY USING FOR MY 401K AND 457B)

              Bond Fund, PTTRX, 0.47%

              Money Market Fund, VMFXX, 0.11%

              Principal Stability Fund, PRIMC, 0.35%

              _______________________________________

              Thanks again for all your responses!!!

               

               

               

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              • #8
                I work for the same employer.  You do have a brokerage option through your 401k but not your 457b.  It is called Tradelink.  I would use it!  I invest in bond ETFs (SCHZ, but BND is just as good) there.  The trades for ETFs cost $9.95.  Otherwise I agree that VIIIX is the only good core option, and it is the only one I use.

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                • #9
                  I see why you have only invested in the stock index fund!  Nachos was asking about the brokerage window because if your plan has one you use it to buy other stuff on your own.. In your case vanguard etfs.

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                  • #10
                    PIMCO Total Return (PTTRX) is very popular among managers, it seems. It does return better than your "typical" bond fund, but it behaves rather differently (can correlate with equities) and given its higher-yield (read: riskier) holdings, likely won't behave the way indexers want their bonds to do. I do not think it's the worst bond fund in the world - 47 bp is better than nearly any active fund except funds like Fido's FTBFX - but you can get "bondier" bonds for cheaper and let your equity holdings do the heavy lifting.

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                    • #11
                      Be sure to check for a "self directed" account option in your 401k if you haven't already.  My 401k options are slim as well, but they let us transfer everything to a TD Ameritrade account and do self directed investments and I can pick any fund I want there.

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                      • #12
                        Dodge and Cox Balanced is an excellent fund, and I have held it for many years, 15+. The DFA Emerging Markets fund is also outstanding, with a smaller/value tilt, and I have held a version of it for about 10 years.

                        Actually, DODBX has outpaced the corresponding Vanguard allocation fund (Life Strategy Moderate Growth) in the last 1,3,5,10, and 15 years. There are modest differences, but I bet if the Vanguard allocation fund were an option, you would be using it. You could do 90% in DODBX and 10% in the DFA Emerging Markets fund and cinch up the allocation to 70:30/70:30 with index funds in your IRAs.

                         

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