What bond to buy in a taxable account?

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captain3d
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What bond to buy in a taxable account?

Post by captain3d » Sat May 15, 2010 6:16 pm

I have maxed out all my IRA's withy TLT but still need to buy more LT's for balance. I am forced in to taxable accounts now.

I read a few threads mentioning zero coupon bonds or funds (EDV?) is that the best answer? Or do I just do TLT or actual bonds and suffer the tax hit?

cheers...phil
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MediumTex
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Re: What bond to buy in a taxable account?

Post by MediumTex » Sat May 15, 2010 6:58 pm

No, zeroes would be the worst for a taxable account because you're paying tax on interest payments you are not actually receiving.

It is a bit better with a fund like EDV that pays out dividends quarterly (even though the underling bonds are not actually paying dividends).

In a taxable account I would just go with individual bonds or something like TLT.
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captain3d
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Re: What bond to buy in a taxable account?

Post by captain3d » Sun May 16, 2010 2:26 am

Thanks Tex. TLT it is then.

phil
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Re: What bond to buy in a taxable account?

Post by captain3d » Sun May 16, 2010 9:59 pm

I have been trying to make sense of it all day. From my naive point of view I thought a bond that does not pay out interest would be great for a taxable account. What am I missing?

Is it that it is paid, but reinvested internally so it is still a taxable income?

Is a 'treasury strip' the same as a zero coupon bond?

phil
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craigr
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Re: What bond to buy in a taxable account?

Post by craigr » Sun May 16, 2010 10:02 pm

The zeroes are taxed as imputed income (aka. phantom income). So although you are not receiving periodic payments, you are taxed as if you are.

Here is an article on the various zero coupon bonds and associated issues (usual cautions about Wikipedia apply):

http://en.wikipedia.org/wiki/Zero-coupon_bond
Last edited by craigr on Sun May 16, 2010 10:05 pm, edited 1 time in total.
captain3d
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Re: What bond to buy in a taxable account?

Post by captain3d » Mon May 17, 2010 12:36 am

hmm thats not so attractive then ;-)

So which of these are zeros then. I think...

tlt  - no
ZROZ - yes
EDV - ?
VUSTX - ?
FLBIX - ?
BTTRX - ?

And so the advantage of a zero coupon bond is what exactly? Why would you buy them? And why does that not fit PP?

thanks...phil
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craigr
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Re: What bond to buy in a taxable account?

Post by craigr » Mon May 17, 2010 12:53 am

Zeros provide a lot more volatility to the bond allocation (maybe too much for 25% allocation???). But for a taxable investor I think they are not a good idea. I'm largely a taxable investor and I hold nominal bonds directly in a taxable account due to my situation. TLT is my second choice if I couldn't buy bonds directly.

TLT, FLBIX and VUSTX are not zero bond funds (double check the prospectuses to be sure). EDV is a zero bond ETF. I don't know the other funds to say without reading their own prospectuses.
Last edited by craigr on Mon May 17, 2010 12:55 am, edited 1 time in total.
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Re: What bond to buy in a taxable account?

Post by captain3d » Mon May 17, 2010 5:10 pm

thanks craigr. I will stick with TLT for now and look into buying some actual bonds at vanguard.

phil
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