The Bond ETF Tax Mistake Costing Retirees With a $1 Million 60/40 Portfolio ~$6,600 a Year

The tax location of bond ETFs like BND can greatly impact after-tax returns for retirees. A $400,000 bond allocation in BND may result in roughly $6,600 less wealth annually compared to pre-tax return assumptions. Municipal bonds like VTEB offer tax-exempt income, making them a more tax-efficient bond allocation for many retirees outside tax-advantaged accounts.

Despite BND's drawbacks during years like 2022, the traditional 60/40 portfolio remains a solid framework for retirement investing, albeit with a focus on the tax implications. BND, commonly held by many retirees, charges a low expense ratio but generates income taxed as ordinary income, adding up to significant tax drag. The difference can be around $6,600 in one year for a $1 million, 60/40 portfolio.

Municipal bonds like VTEB provide tax-exempt income, often resulting in a more competitive after-tax yield despite lower headline yields.