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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35392  
Subject: Re: Help, please! with bond problem. Date: 2/16/2007 8:37 AM
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Tess,

I suggest you start by reading Part 1 of the FAQs for the board (now available), which will give you an overview.

You don't have to have a bond fund in your portfolio, whatever the asset allocation gurus tell you. You need to have an adequate allocation in what we loosely call bonds/fixed-income. CDs qualify and, under most circumstances, probably superior to a bond fund. They do get taxed heavily in taxable accounts, but such is life.

The only reason you would want a tax free bond fund, or individual municipal bonds, is if you are in a high tax bracket. I don't know what Virginia taxes are, but Vanguard doesn't bother with a Virginia tax exempt fund, so I assume they aren't that high. Paying a load to get a state tax exempt fund isn't worth it, even if you have a high enough income to want federally tax exempt bonds. Remember, the point is to maximize your return on bonds/fixed-income allocation, not to minimize your taxes, and tax-exempt bonds pay lower yields. Also, you may be in a lower tax bracket when you retire in 10 years.

Also, remember with a 403(b) you can roll it into a Traditional IRA when you retire. That will give you plenty of options, including CDs, and it may be worth holding your nose and living with the stinky 403 (b) for now, with the plan of getting out when you can.

It does sound like you are one of those who got sold on "slice and dice." I keep trying to warn people that those pre-fab allocation plans with their claims of rebalancing bonuses don't take into account the reality of fees and taxes or the complexities of working across different taxable and tax advantaged accounts. You need to examine your own situation carefully and if owning multiple funds generates more expenses than owning a single broad fund, even in a tax-advantaged account, the added costs may be more than the theoretical rebalancing bonus.

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