Taxes are deferred for up to 30 years and they are a handy emergency fund. I’m too lazy for ladders.
ETA: we don’t qualify, but there are circumstances where paying for educational expenses makes them tax free.
@AttorneyMother; I’m not buying new I bonds at 0% fixed rate. Most of ours were purchased in 2000/2001 when the fixed rate was around 3%, so even with the negative inflation rate they are still earning close to 2%, and have earned much more during inflation spikes. Here is the equation, calculated every 6 months: Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]. So they are still a good hedge against inflation. And as IxnayBob pointed out they are at least as good as cash since they don’t lose principal value.
Thanks for the info. Where else do / would you go if I Bonds are insufficient to contain your safe stash?
It hasn’t been too important in the past 10 or so years for us, but during retirement it might be.
Is your plan that you hold the your I Bonds indefinitely or cash in for annual spending, which would seem counter-productive given the annual limit – bond funds? Or would you take another look at CDs. I’m not crazy about CDs either, but it seems that once the ladder is set up, one just has to replace one per year. Thoughts?
I was diligent about maintaining a CD ladder when rates were above 4% and there was a significant “slope” to the rate vs time curve. But for years now there just doesn’t seem to be much advantage to locking the cash up in longer term fixed income investments. The I Bonds will be a resource of last resort but will be sold when they stop earning interest.
I don’t plan on using the I Bonds for anything other than an emergency fund. Annual spending, beyond SS, pensions, and dividends, will probably come from bond or equity funds, whichever happens to be up. Maybe we’ll buy an annuity or two as we get older, and interest rates probably go up.
Tbh, I’ve not looked deeply into CDs. I think my 50/50 AA should probably do at least as well as a CD, and unless the stuff really hits the fan, I expect our basic cash flow will suffice for everyday living. RMDs will be a problem, but we are increasing the percent of assets in taxable, so the problem has a natural bound.
I opened up Roth’s for both kids. I just had a conversation with ShawD about saving 10% of her income automatically. I have a few accounts and my company has its major accounts at a brokerage firm (and they’d like to get a lot more of my personal business). As a consequence, we have a private banker. I suggested my D move her accounts there as it is really easy to get things done.
We all (presumably) know that it’s not advisable to hold too much employer stock in our portfolios because of the dual risk, but in case anyone here does (and I do not have this issue, for the reason that I do not work for a single corp), be aware of the advantages of the Net Unrealized Appreciation rule for in-kind distributions of company stock from a 401(k) Plan. This article explains the NUA rule very well:
Something to know if you are in this situation.
@AttorneyMother, I try to learn something every day, and I just did, although at almost 7 PM, I was cutting it close. Thanks 
I think it may partially explain (assuming they know about it and understand the NUA rule), why the high-tech capital-appreciation types may be induced to overweigh their 401(k) accounts with employer stock. Though it’s not a good enough reason.
It’s not a bad strategy if you’re looking for a home run. And, if you’re young enough, you get a few tries at it. It’s rational. But not for me.
My H’s employer (he’s now retired) required all senior executives to hold a certain amount of employer stock. Not sure how widespread that policy is. With this employer, it wasn’t much, if any, risk.
Talking about taxes, I found the cover story of Forbes (May 25, 2015 Special Edition) interesting on master tax dodgery - Bill Ackman (Chairman of Howard Hughes Corp) and article talking about ‘The Howard Hughes Tax Dodge’. HHughes “was particularly skilled in the art of avoiding taxes. In his memoir, Hughes’ accountant Noah Dietrich claims Hughes paid only about $20,000 in income taxes a year.” It went into how instead of a penalty tax of 37.5% on unnecessary accumulated surpluses (in the 1930’s that the IRS levied), instead of paying dividends, they plowed the money into undeveloped land. Hughes Aircraft then owned 25,000 acres of land adjacent to the Las Vegas Strip, now called Summerlin in honor of Hughes’ grandmother Jean Amelia Summerlin. Summerlin was developed in the 1990’s and sold to mall developer in 1996. Howard Hughes Corp. still retains about $250 million in crises-related tax-loss carryforwards today, so it currently pays no taxes. It says Ackman may turn HHughes into a REIT, dodging still more taxes.
For general discussion, after some companies had problems with employee pensions compromised due to high holdings in company stock/holdings, IRS limited employees from investing more than 25% in company stock with their 401(k) portfolio. People do tend to ‘buy what they know’. At the executive level, often know what is going on. However one thing at H’s company, they are so concerned about quarterly numbers, that they push stuff through manufacturing at quarter end, then have plant shut downs with employees using their vacation days to cover, or take the days w/o pay. They also have some plant shut downs when things are ‘slow’ - and around certain holidays. For example this month the 4 days after Memorial Day. At least we had enough notice for H to arrange to fly to elderly parents and got a decent airfare rate; they also let him ‘borrow’ time since he ran short of leave hours. Oh, and the executive team at H’s company have a lot of company stock as a senior executive perk. I see it on the publicly held info. Kind of bittersweet - when the executive team was at the local plant, walking by H’s cubicle area, seniors waved and talked to H. IMHO (and from what his peers make at other companies) H is a ‘bargain’; 6 years away from retirement, he isn’t going anywhere.
I’ve been reading that ETFs are more tax efficient than mutual funds, but can anyone give me an idea of how big of a deal that might be? For example, I’m definitely drawn to the simplicity of Vanguard’s Target Retirement 2020 Mutual Fund (currently 40.2% Total Stock Mkt Index, 30% Total Bond Mkt Index, 20% Total International Stock Index, and 9.8% Total International Bond Index). However, if the tax efficiency of ETFs is significant, I can set up the same allocation using Vanguard ETFs (but would have to monitor and reallocate going forward.) Assuming no transaction costs, in an after-tax account, how do I evaluate the potential tax differences?
In my understanding, the tax efficiency advantage of ETFs generally lies in the fact that holders receive smaller periodic (taxable) distributions of dividends and capital gains because they are not subject to the same mandatory distribution requirements as MFs. So capital gains from ETFs are realized only when they are sold. But, I’ve also read that ETFs are not completely free of distributions.
Have you reviewed this Vanguard publication for a start?
https://advisors.vanguard.com/iam/pdf/Efficiency_transcript2.pdf
As for comparing apples-to-apples between the tax efficiency of Index funds and Index ETFs, I’d start by contacting Vanguard or digging through Morningstar info to see if either can help you dig up some 5-year historical distribution data to compare between the two options. Index funds are supposed to be fairly tax efficient already because they incur sales only when the underlying index changes but they do throw off dividends. I just did a quick check of my Vanguard Index MFs (from 2009-2014) and they threw off quarterly dividends but no CGs. My managed funds threw off far more CGs by comparison.
I hope others will chime in with their experience.
I’m an old stick-in-the-mud with ETFs. I have a theory that they’re favored by people who secretly enjoy trading, and pimped by companies who want to encourage trading – I have no proof of this. Their ERs are on par, perhaps lower, than MFs. Offsetting that is that there is a bid/ask spread.
My MFs (mostly Total Stock Market) are very tax efficient; all dividends are qualified and there is almost zero turnover (which would generate CGs).
Thanks. I’m going with the theory that, while ETFs may be significantly more tax efficient than some actively traded MFs, Vanguards Index funds are already so tax efficient as to make it a non-issue.
It’s always nice to get the answer you were hoping for!
Speaking of low fees, tax efficiencies and ETFs, have any of you guys used wealthfront? It looks pretty interesting.
@shawbridge, to me, 25 basis points to re-balance and tax-loss harvest is too high.
@IxnayBob, are you saying the fees are too high because you are doing it yourself and have the time to do that? In my case, I’m so busy working, doing pro bono stuff, helping my family and keeping myself healthy and amused that I really don’t have time to manage my money. So, for a part of my portfolio, 25 basis points is probably not high. The question is “Would my portfolio be worth more if I do nothing or if I pay 25 bp to rebalance and harvest tax losses (daily?) ?”
I am unclear how much benefit there is in daily tax harvesting. Obviously that’s only of use in a taxable account anyway.
Daily rebalancing is, IMO, unnecessary. If desired, it can be had for less than an additional 25 bps in a balanced fund.
I spend perhaps an hour a year rebalancing; I do it when I add money to taxable accounts, and it happens automatically in our 401ks, for no fee. TLH is something I do only when selling shares in taxable (a very rare event), and Quicken makes that a dawdle.
My family life does not suffer to save 25 bps. My aggregate ER is less than 10 bps. I would not increase my investing costs by 250% for the (IMO) minimal benefit on offer. YMMV. just my 2 cents.