Hi all,
I want to invest more in bonds. I’m hoping to get some input from the wise folks here on how to best increase my bond allocation in a tax-efficient manner, given limited investment choices in my limited pre-tax retirement account space.
My current situation:
Current allocation: 55% US index funds, 25% international index funds, 19% bond index fund
Account types: 20.7% Roth (all stocks), 1.6% HSA (all stocks), 49% Taxable (all stocks), 29% pre-tax retirement accounts (401K, 403B, 457B) (a mix of stocks and bonds).
Annual contribution: I max out all tax-deferred/Roth space, and the amount I put in the taxable space always exceeds the tax deferred space, often by a significant margin.
In the pre-tax retirement accounts (split between Fidelity and Schwab), I have a finite number of choices. A small chunk of the pre-tax space is in a Fidelity account from a prior employer, and I put everything FXNAX (Fidelity US bond index fund), and no new contribution here. In the Schwab pretax accounts, which is the bigger chunk of the pre-tax retirement space with ongoing contribution, I have the following 5 investment choices for bonds:
-Vanguard Target Date Funds - not technically a bond fund, but a percentage of this is in bond
-A bond trust specifically designed for “My-Company-Name-Here," run by BNY investments. In the description, it states: Invests in high-grade and medium-grade fixed income securities, such as US Treasuries, agencies, corporate bonds, mortgage-backed, asset-backed, and high yield. Seeks to outperform Barclays Aggregate Bond Index. On the description, it doesn’t disclose expense ratio, but does state the return over the years (net of fees), and the return outperforms the Barclays Index.
Through Schwab PCRA (Personal Choice Retirement Account), I could invest the following:
-SWAGX – Schwab US Bond index (no transaction fee). Total Assets $5B
-SWRSX – Schwab TIPS Index (no transaction fee)
-VBTLX – Vanguard Total Bond Index ($75 transaction fee!!!) Total Assets $345B
-there are more bond index fund choices, but others all have transaction fee and if I need to pay fee I might as well get Vanguard.
My problem is that my pretax space is currently only 29% of my total assets. I’m currently 19% bonds for my whole portfolio. I’m investing in bonds only in the pretax space for tax efficiency. If I want to increase my bond allocation to 25% or even higher, I will then start running out of room in my pretax space. I’m currently invested in the Vanguard Target date fund. Over time, as I try to increase my bond allocation, I’ve changed from Target Date 2040 -> 2035 ->2030 (which increases the percentage of bond components in the target date fund). However, I’ve hit the limit of that strategy. Don’t want to invest in target fund 2025.
Also, because stock grows faster than bonds, and annually I contribute more to the taxable/Roth accounts (all invested in stocks) than the pretax accounts, my asset allocation tends to drift to higher stock allocation.
So now I have to start consider selling my position in the Target Fund and buy a purely bond fund, and I don’t particularly like my choices in my Schwab pretax accounts. Which of the following bond fund/trust would you buy in the pre-tax accounts?
On the bond trust, what are your thoughts on this type of investment? I see it as an actively managed, high fee, higher-risk bond fund (compared to a bond index fund). However, it does state the return is higher than Barclay Bond index even net of fees. Would you invest in this? My concern is the part about investing medium-grade fixed income securities, in corporate bonds, mortgage-backed, asset-backed, and high yield. Doesn't seem safe enough when stuff hits the fan.
VBTLX would be ideal, but I don’t want to pay $75 every time I buy another tranche.
SWAGX or SWRSX – this fits the bill for a passive index low-cost bond fund. However, the total asset is small at $5B, when compared to VBTLX. Would this lead to some kind of liquidity risk or large bid-ask spread?
Also, if I run out of space in the pre-tax accounts as I increase my bond allocation, what should I do? Put bond in taxable space, and choose municipal bond funds? Or some other tax-efficient bond funds? If you had to invest in bonds in taxable account, what’s the optimal strategy?
Lastly, this a different question. What is the optimal bond investment choice? I didn’t give it too much thought before and would generally choose US total bond index, which generally have a duration of around 7-8 years. I’ve seen some who prefers a TIPS index fund. Some split half and half TIPS index and US Total Bond Index. Any merit to invest in international infex?
I want to invest more in bonds. I’m hoping to get some input from the wise folks here on how to best increase my bond allocation in a tax-efficient manner, given limited investment choices in my limited pre-tax retirement account space.
My current situation:
Current allocation: 55% US index funds, 25% international index funds, 19% bond index fund
Account types: 20.7% Roth (all stocks), 1.6% HSA (all stocks), 49% Taxable (all stocks), 29% pre-tax retirement accounts (401K, 403B, 457B) (a mix of stocks and bonds).
Annual contribution: I max out all tax-deferred/Roth space, and the amount I put in the taxable space always exceeds the tax deferred space, often by a significant margin.
In the pre-tax retirement accounts (split between Fidelity and Schwab), I have a finite number of choices. A small chunk of the pre-tax space is in a Fidelity account from a prior employer, and I put everything FXNAX (Fidelity US bond index fund), and no new contribution here. In the Schwab pretax accounts, which is the bigger chunk of the pre-tax retirement space with ongoing contribution, I have the following 5 investment choices for bonds:
-Vanguard Target Date Funds - not technically a bond fund, but a percentage of this is in bond
-A bond trust specifically designed for “My-Company-Name-Here," run by BNY investments. In the description, it states: Invests in high-grade and medium-grade fixed income securities, such as US Treasuries, agencies, corporate bonds, mortgage-backed, asset-backed, and high yield. Seeks to outperform Barclays Aggregate Bond Index. On the description, it doesn’t disclose expense ratio, but does state the return over the years (net of fees), and the return outperforms the Barclays Index.
Through Schwab PCRA (Personal Choice Retirement Account), I could invest the following:
-SWAGX – Schwab US Bond index (no transaction fee). Total Assets $5B
-SWRSX – Schwab TIPS Index (no transaction fee)
-VBTLX – Vanguard Total Bond Index ($75 transaction fee!!!) Total Assets $345B
-there are more bond index fund choices, but others all have transaction fee and if I need to pay fee I might as well get Vanguard.
My problem is that my pretax space is currently only 29% of my total assets. I’m currently 19% bonds for my whole portfolio. I’m investing in bonds only in the pretax space for tax efficiency. If I want to increase my bond allocation to 25% or even higher, I will then start running out of room in my pretax space. I’m currently invested in the Vanguard Target date fund. Over time, as I try to increase my bond allocation, I’ve changed from Target Date 2040 -> 2035 ->2030 (which increases the percentage of bond components in the target date fund). However, I’ve hit the limit of that strategy. Don’t want to invest in target fund 2025.
Also, because stock grows faster than bonds, and annually I contribute more to the taxable/Roth accounts (all invested in stocks) than the pretax accounts, my asset allocation tends to drift to higher stock allocation.
So now I have to start consider selling my position in the Target Fund and buy a purely bond fund, and I don’t particularly like my choices in my Schwab pretax accounts. Which of the following bond fund/trust would you buy in the pre-tax accounts?
On the bond trust, what are your thoughts on this type of investment? I see it as an actively managed, high fee, higher-risk bond fund (compared to a bond index fund). However, it does state the return is higher than Barclay Bond index even net of fees. Would you invest in this? My concern is the part about investing medium-grade fixed income securities, in corporate bonds, mortgage-backed, asset-backed, and high yield. Doesn't seem safe enough when stuff hits the fan.
VBTLX would be ideal, but I don’t want to pay $75 every time I buy another tranche.
SWAGX or SWRSX – this fits the bill for a passive index low-cost bond fund. However, the total asset is small at $5B, when compared to VBTLX. Would this lead to some kind of liquidity risk or large bid-ask spread?
Also, if I run out of space in the pre-tax accounts as I increase my bond allocation, what should I do? Put bond in taxable space, and choose municipal bond funds? Or some other tax-efficient bond funds? If you had to invest in bonds in taxable account, what’s the optimal strategy?
Lastly, this a different question. What is the optimal bond investment choice? I didn’t give it too much thought before and would generally choose US total bond index, which generally have a duration of around 7-8 years. I’ve seen some who prefers a TIPS index fund. Some split half and half TIPS index and US Total Bond Index. Any merit to invest in international infex?
Statistics: Posted by moi — Sat Dec 21, 2024 11:43 am — Replies 3 — Views 98