PP Holdings for a Taxable Account?

[hrux]

Hi,
I apologize if this is in a thread someplace else however am interested in starting a PP portfolio in a taxable account and am slightly concerned about the tax inefficiency of short (SHY) and long term treasuries (TLT).  Would it ever make sense to substitute SHY for a short term tax exempt muni fund?

Also, is there a more tax efficient substitute for TLT or perhaps other considerations?  Please advise.  Thanks Heather

[craigr]

Don't use muni bonds. The tax savings is mostly an illusion because you get typically much lower yield over nominal bonds. Plus you are taking on credit and call risk with muni bonds. So when you need the bond protection the most you may find it's not there.

The taxes on nominal treasuries is not as bad as many may think. For one they are not subject to state or local income taxes. Secondly you can use the interest payments for living expenses and rebalancing so you are generating less turnover in the portfolio saving taxes there.

I'm about 100% taxable investor and the income tax impact of the portfolio is no worse than other strategies I've used. I attribute this to the fact that you touch the portfolio very little. Many other strategies buy and sell too much and that's very expensive in transaction costs and taxes.

[hrux]

Thanks Craig.  Another quick question for you.  Is purchasing nominal long term bonds direct from Vanguard more tax efficient than TLT?  I have never owned nominal bonds directly and am not sure how the interest/dividends are paid?
Thanks

[craigr]

Owning the bonds directly is always best. You avoid manager risk and can better control whether you will or won't take capital gains each year (by selling or not selling bonds to rebalance for instance). With a fund there is always a chance that large redemptions could cause big tax bills for fund holders. This is less of a risk for an ETF because of how they work, but it's so easy to just buy bonds directly and hold them that I think it's always the best choice if you can do it.

Also, as MediumTex stated in the past, for the cash you could consider buying i-bonds which are safe and offer tax deferral.