Portfolio construction

Taxable bonds can have a role in tax-aware portfolios

December 01, 2022

Allocations driven by tax brackets
Taxes on bond interest, qualified dividends, and portfolio rebalancing
A bar chart shows maximum IRS federal tax rates as of 2022: 37% for bond interest on taxable bonds, 20% on qualified stock dividends, and 20% for long-term capital gains due to annual rebalancing. Municipal bond interest is not taxed.
Finding an optimal allocation
Municipal bond percentage of total bond allocation for various tax rate combinations
A table shows the percentage that municipal bonds would represent of an investor’s total bond allocation as determined by the Vanguard Asset Allocation Model. For example, 88% for an investor in the 37% tax bracket, and 79% for an investor in the 12% tax bracket, based on 10-year asset class forecasts as of June 30, 2022.
A better reflection of trade-offs

Contributors:

Yan Zilbering
Victor Zhu
Vanguard Information and Insights

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