Idea. The traditional vs Roth contribution decision was recently discussed for a new college grad in 22% fed tax bracket: https://bogleheads.org/forum/viewtopic.php?t=450027
A simplistic decision. Which does your retired self prefer: a small tax benefit today, or a larger Roth balance in retirement?
Idea. You could put some bonds in taxable to be used as retirement bonds. Or to be used as an extended tier of your 1st tier EFs (checking, savings, CDs,...) in an emergency. Why?
Bonds are safer than stocks. Why? During a crash bonds are expected to lose 5-15%, whereas stocks are expected to lose 50-90%.
You can hedge against a bond crash by increasing your bond allocation to ~120% (=1/(1 -.15)) of intended need. Why? The money should be there if needed, but maybe with a tax-loss on the sale*. (* At loss on a sale is not a terrible thing as it lowers your taxable income so fed+state taxes.)
Which bonds? I prefer municipal bonds. Why? (Disclosure: I owned munis in 15% fed tax bracket. Why? Kept me in 15% a while longer, so QDI taxed at 0%.)
--Everyone needs some bonds.
--Putting bonds in taxable frees space in TA accounts for stocks for more expected growth, and creates an extended-tier EF in taxable.
--Munis don't add to fed taxable income so prevent tax bracket creep. Single-state munis are triple tax-exempt: fed/state/city.
--Munis can return ~same after-tax income as TBM. How? Compare muni TEY (taxable-equivalent yield) to taxable bond SEC yield and bank APY.
--Muni after-tax income improves as you advance tax brackets (or if tax code sunsets in ~2026).
Muni TEY = muni SEC yield / (1 -fed tax bracket -NIIT* -state/city/other tax bracket*). * If applicable.
NIIT MFJ tax bracket: https://www.google.com/search?q=niit+mfj+tax+brackets
MFJ salary: ~163K (=72K+91K-deductions); tax bracket: 22%; search: https://www.google.com/search?q=2025+mfj+tax+rate+table
Bond examples. (Assume you're in 22% fed tax bracket and have a Fidelity taxable account. Can do similar at Schwab, Vanguard,...).
--FXNAX (TBM fund) SEC yield: 4.45%; see: https://fundresearch.fidelity.com/mutua ... /316146356
--FMBIX (IT national muni fund) SEC yield: 3.46%; 3.46/(1 -.22)=4.44% TEY; see: https://fundresearch.fidelity.com/mutua ... /31635T765
--VTEB (IT national muni ETF) SEC yield: 3.51%; 3.51/(.78)=4.50% TEY; see: https://investor.vanguard.com/investmen ... ofile/vteb
--MUB (IT national muni ETF) SEC yield: 3.40%; 3.40/(.78)=4.36% TEY; see: https://www.ishares.com/us/products/239 ... i-bond-etf
Student exercise. Are there recommended single-state munis for your state?
Your choice.
A simplistic decision. Which does your retired self prefer: a small tax benefit today, or a larger Roth balance in retirement?
Idea. You could put some bonds in taxable to be used as retirement bonds. Or to be used as an extended tier of your 1st tier EFs (checking, savings, CDs,...) in an emergency. Why?
Bonds are safer than stocks. Why? During a crash bonds are expected to lose 5-15%, whereas stocks are expected to lose 50-90%.
You can hedge against a bond crash by increasing your bond allocation to ~120% (=1/(1 -.15)) of intended need. Why? The money should be there if needed, but maybe with a tax-loss on the sale*. (* At loss on a sale is not a terrible thing as it lowers your taxable income so fed+state taxes.)
Which bonds? I prefer municipal bonds. Why? (Disclosure: I owned munis in 15% fed tax bracket. Why? Kept me in 15% a while longer, so QDI taxed at 0%.)
--Everyone needs some bonds.
--Putting bonds in taxable frees space in TA accounts for stocks for more expected growth, and creates an extended-tier EF in taxable.
--Munis don't add to fed taxable income so prevent tax bracket creep. Single-state munis are triple tax-exempt: fed/state/city.
--Munis can return ~same after-tax income as TBM. How? Compare muni TEY (taxable-equivalent yield) to taxable bond SEC yield and bank APY.
--Muni after-tax income improves as you advance tax brackets (or if tax code sunsets in ~2026).
Muni TEY = muni SEC yield / (1 -fed tax bracket -NIIT* -state/city/other tax bracket*). * If applicable.
NIIT MFJ tax bracket: https://www.google.com/search?q=niit+mfj+tax+brackets
MFJ salary: ~163K (=72K+91K-deductions); tax bracket: 22%; search: https://www.google.com/search?q=2025+mfj+tax+rate+table
Bond examples. (Assume you're in 22% fed tax bracket and have a Fidelity taxable account. Can do similar at Schwab, Vanguard,...).
--FXNAX (TBM fund) SEC yield: 4.45%; see: https://fundresearch.fidelity.com/mutua ... /316146356
--FMBIX (IT national muni fund) SEC yield: 3.46%; 3.46/(1 -.22)=4.44% TEY; see: https://fundresearch.fidelity.com/mutua ... /31635T765
--VTEB (IT national muni ETF) SEC yield: 3.51%; 3.51/(.78)=4.50% TEY; see: https://investor.vanguard.com/investmen ... ofile/vteb
--MUB (IT national muni ETF) SEC yield: 3.40%; 3.40/(.78)=4.36% TEY; see: https://www.ishares.com/us/products/239 ... i-bond-etf
Student exercise. Are there recommended single-state munis for your state?
Your choice.
Statistics: Posted by dratkinson — Wed Feb 26, 2025 2:27 am — Replies 17 — Views 1112