I ask that as you mentioned length of time is a factor in that isssue. But you have the right idea. However, if you’re like myself, who didn’t get out of debt and start saving for retirement financial freedom until age 34, then you need to step it up. Again, munis are paying 2.16% now, but were yielding perhaps 4% 6 years ago. This is a nice overview from Passive Income MD: https://passiveincomemd.com/16-different-ways-invest-real-estate/, Great article…. Which is better: dollar cost averaging or lump sum (e.g. I’ve read conflicting info on auto reinvesting on a taxable account with muni bond fund. Uncle Sam will absorb 15-40% of the losses in your taxable account and also claim 15-25% of your gains (depending on your tax situation, and ignoring state taxes here.). When I modify the comparison to keep my asset allocation on day one constant across scenarios, the difference in results disappears. Can municipal bond funds be considered equivalent? Many investing authorities over the years have recommended that if you have to use a taxable account, that you preferentially put very tax-efficient asset classes, such as stock index funds into it, while preferentially putting tax-inefficient asset classes, particularly bonds, into your tax-protected accounts, like 401Ks and Roth IRAs. stocks) inside the retirement account. Ah, great post. Saying that bonds go in taxable may lead some of your followers to put bonds in their taxable accounts when they have traditional IRA or 401ks. So it’s back to the spreadsheets for me! My second scenario reversed the asset locations. It also has an expense ratio of 0.11%. The 2.69% is the current yields on intermediate term bond index fund. I still see the old dogma being mentioned just about every day on the Bogleheads forum. That is, under a surprisingly wide variety of return scenarios, folks in high tax brackets are better off locating equities in a Roth and bonds in a taxable account. Just Like POF examples, your’s was easy to follow. Claiming losses today in return for potentially paying more gains far in the future is just a win. Others (such as the White Coat Investor in this post) argue forcefully that you should hold bonds in taxable, because you want to maximize the tax benefits of your retirement investment accounts by maximizing the return of the assets in those accounts. Financial Wellness and Burnout Prevention for Medical Professionals, Refinance Medical School Loans & Consolidation Guide, Bonds in a Rising Interest Rate Environment - Podcast #84, Adding New Asset Classes To Your Portfolio, The Proper Ratio for Retirement Tax Diversification, Rules For Asset Allocation Implementation, Bond Investors Should Not Fear Rising Interest Rates, Quantifying the 401K Vs Student Loans Decision, Four Reasons to Avoid Individual Municipal Bonds, Six Reasons I Don't Care That 3% Is The New 4%, Answering Listener Questions - Podcast #80. The tax-managed funds essentially utilize the concepts presented in this post. Daryanani and Cordaro noted that the opposite asset location is optimal if any one of the following change, everything else held constant: (1) the capital gain tax rate is 20 percent; (2) stocks earn 10 percent a year; (3) horizon is 40 years; or (4) the ordinary income tax rate is 25 percent. Can you please explain how you calculated with Excel “the $183,177 in dividends received”? Thank you for the encouragement. Vanguard Intermediate-Term Tax-Exempt Fund : The income-generating nature of bond funds can produce unwanted taxes in a taxable account but bond funds like VWITX can be a smart move for investors with taxable accounts. 4) You have to run the numbers yourself to make a decision. I just use a total stock market index fund in my taxable account (dividend yield around 2%). In conclusion, you are correct that the calculation was slightly flawed, but under these assumptions and current interest rates, it only affects the magnitude rather than the direction of the conclusion. I definitely want the tax-free portion of that tax-deferred account to be larger. Personal experience is the best way to learn this stuff! Let’s take this a step further. Total Bond Fund: A mutual fund or exchange-traded fund that seeks to replicate a broad bond index by owning many securities across a range of … You can also use that trick to trick yourself into tolerating a riskier asset allocation by putting riskier assets into a Roth IRA. When entering the 1099-INT, I cannot adjust the tax-exempt interest. Either way probably not a big deal because we have such little money in retirement accounts at this point. However, the optimal asset location in this framework depends upon the specific assumptions. 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