100% bond in Roth?

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Topic Author
igghy
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Joined: Sun May 20, 2012 7:13 am

100% bond in Roth?

Post by igghy »

I read Wiki on Tax Efficient Asset Allocations. If I understood correctly, it recommends filling tax free accounts with bonds/REITs first. I don't have REIts and filled my Roth account with bond funds. Since the interest rate is so low over the few months after I bought bonds in my Roth, the value of Roth has gone down. It got me wondering. While the interest income in Roth is tax free, with low interest rates it helps up to a point and not enough to compensate the lost value. Wouldn't it be better to put some equity in Roth? With a portion in equity, I could freely rebalance.
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archbish99
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Re: 100% bond in Roth?

Post by archbish99 »

Let's clarify: bonds should (in general) go in tax-advantaged accounts first, yes. Is the Roth your only tax-advantaged account? If not, it's usually better to put bonds in Traditional accounts and equities in the Roth.

It's true that in the current interest rate environment there's less problem with bonds in taxable, and you'll find a few people here who advocate that. However, at "normal" interest rates, you don't want bonds in taxable if you can avoid it, and as with market timing, what would be your trigger to put the portfolio back to a normal balance if you choose to change because the environment is a bit different now?
I'm not a financial advisor, I just play one on the Internet.
Topic Author
igghy
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Re: 100% bond in Roth?

Post by igghy »

We also have tax-deferred retirement 401k accounts. We are holding bonds there as much as we can. We need more bonds either in taxable accounts or in Roth or both.

I was thinking more in terms of lost oppotunity to rebalance if we hold only bonds in Roth, not trying to beat the market. Should we consider Roth separately from taxable accounts since we can't add funds freely into Roth in deciding AA? If our AA is 50/50, should we maintain 50/50 in Roth and 50/50 in taxable separately? Right now, we have 50/50 all accounts combined. We contribute maximum allowed ammounts.
Last edited by igghy on Sat Sep 15, 2012 7:30 am, edited 4 times in total.
dickenjb
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Location: Philadelphia PA

Re: 100% bond in Roth?

Post by dickenjb »

You haven't told us enough. Do you have a TIRA or 401(k)? I prefer to load up my tax deferred accounts with bonds, then taxable with International, and put domestic equity in left over space. That way my Roth space is equity and will grow more, rather than growing tax deferred more which drives higher RMD's.

PS what happens over "a few months" is irrelevant.
Xanadu
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Re: 100% bond in Roth?

Post by Xanadu »

Wait a few more years. The value of your bonds will go up.
Topic Author
igghy
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Joined: Sun May 20, 2012 7:13 am

Re: 100% bond in Roth?

Post by igghy »

I edited my reply above. We have 401k. At the moment, both our 401k and Roth are 100% in bonds. We have more bonds in taxable.
Johm221122
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Re: 100% bond in Roth?

Post by Johm221122 »

I bonds (maybe even EE)and municipal bond funds may be an option to free up some space for your Roth (or401)
John
This may also help
http://www.bogleheads.org/wiki/Asset_Al ... e_Accounts
Topic Author
igghy
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Joined: Sun May 20, 2012 7:13 am

Re: 100% bond in Roth?

Post by igghy »

Isn't the Ibond rate painfully low at the moment? 0% or close to it? We do hold muni bonds in taxable. My question comes down to how to assign AA; separately for each account or all accounts combined? Is applying AA across all accounts beneficial or should one consider isolating some accounts and applying maybe even a different AA?
livesoft
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Re: 100% bond in Roth?

Post by livesoft »

I-bonds pay two rates simultaneously, the 0% rate PLUS the other rate. We have to know the other rate in order to know the total rate.

Rick Ferri and his company have been known to apply AA to all accounts individually. I imagine that is really "all major accounts" and not all accounts.

On the forum, it is advocated that one apply AA to the entire portfolio in a tax efficient way. That usually means bonds in tax-advantaged and tax-efficient stock index funds in taxable. It also implies at least one tax-advantaged account where all major rebalancing can be done.

Clearly, there are ways to mix the two strategies that will depend on one's individual situation. For our personal portfolio, we can fit all bonds in tax-advantaged. So we do not have any bonds in taxable. We can do all rebalancing in a large tax-advantaged account. That means we can do no transactions in all the smaller accounts and leave them in set-and-forget mode.

Folks who have large taxable account values relative to tax-advantaged account values have a tax-efficiency problem, don't they? They may incur a tax cost to rebalance which folks like me do not have to mess with. They need to judiciously practice tax-loss harvesting, so they bank some carryover losses to help with future rebalancing. What they end up doing will be different than what other people do.

So what's your individual situation? Your situation will require a unique portfolio solution for you.
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Topic Author
igghy
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Re: 100% bond in Roth?

Post by igghy »

Thank you for the link. That was the exact question I had. It seems to recommend to consider AA across all accounts. That's what we are doing now.
Last edited by igghy on Sat Sep 15, 2012 8:30 am, edited 2 times in total.
Johm221122
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Re: 100% bond in Roth?

Post by Johm221122 »

You do know if you hold EE bonds 20 years guaranteed to double (4% )
John
From treasury
" June 2003 and thereafter are guaranteed to reach face value at 20 years. If the interest rates have been too low for your bond to accrue enough interest to be worth face value at the guaranteed date, Treasury will make a one-time adjustment to increase the redemption value to face value at that time"
Topic Author
igghy
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Joined: Sun May 20, 2012 7:13 am

Re: 100% bond in Roth?

Post by igghy »

i didn't know. I imagine we can hold for 20 years. Is there any good time to buy EE?
Johm221122
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Re: 100% bond in Roth?

Post by Johm221122 »

igghy wrote:i didn't know. I imagine we can hold for 20 years. Is there any good time to buy EE?
Buy towards end of month,so you can get current interest on them.All bonds are like you bought them on first of month,regardless of day. If you go to Treasury DIRECT they have all information
john
harikaried
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Re: 100% bond in Roth?

Post by harikaried »

igghy wrote:We also have tax-deferred retirement 401k accounts. We are holding bonds there as much as we can. We need more bonds either in taxable accounts or in Roth or both... should we maintain 50/50 in Roth and 50/50 in taxable separately?
It seems like you might be introducing more overhead than necessary by trying to put bonds in each of your taxable, 401k, Roth. You should take a look at your overall investment profile, figure out how much you want in bonds in total, and put as much as you can in 401k then Roth then taxable.

Assuming all the bonds fit in the 401k, when you get more money to invest in taxable, you would buy stocks in taxable then exchange stocks for bonds in the 401k. This will maintain your desired bond/stock asset allocation while avoiding taxes on capital gains because you sold in the 401k.

If your 401k isn't enough to cover your desired bonds allocation, you would then want to put remaining bonds amount in the Roth. And then you can do as above what you would have done with the 401k when buying stocks in taxable.
Johm221122
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Re: 100% bond in Roth?

Post by Johm221122 »

Found this other link mentioned by other poster,wanted to make sure you seen it
http://www.bogleheads.org/forum/viewtop ... =1&t=95141 (EE bond topic)
John
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og15F1
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Re: 100% bond in Roth?

Post by og15F1 »

The poster Bob's not my name changed my line of thinking on this in some of his posts discussing tax adjustments of a portfolio. I believe the argument is that if you adjust your different accounts based on anticipated taxes during retirement then you can treat them all equally. I now try to hold all of our bonds in our Roth IRAs. Formally the Roths were split 50/50 US/International equities with no bonds.

After reading the posts and convincing myself that I wouldn't be penalizing myself by adding bonds to the accounts I liked the idea of them being another layer of an emergency fund / money that can be withdrawn reliably. We're a bit ahead of some savings guidelines, although we do not own a home, and I'd be glad to have a better shot at getting money out of our Roths if someone put a gun to my head and said "buy a house now".

So I think, as other posters said, it depends on what else you have going on. All of our rebalancing happens in a rollover IRA with both bonds and equities
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Dogfather
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Re: 100% bond in Roth?

Post by Dogfather »

I am retired with a defined benefit pension. My wife and I also both draw Social Security. In addition we use bond dividends for part of our income stream. Our asset allocation is about 60% bond funds/40% stock index funds.

I have my Roth IRA 100% in bond funds, Trad. IRA is TSM and Reit, and our taxable Investment account is TSM, FTSE all world ex US, and PMM fund.

Since I am not at withdrawal age yet, I reinvest the Traditional IRA dividends and cap gains to delay taxable income.

I move the Roth dividends to PMM fund in the taxable account for additional income without tax liability.

I also move Taxable Investment Account dividends to the PMM fund for additional income since I already have a tax liability for them. I reinvest the cap gains in this account.

Having the three different retirement accounts allows us the flexibility to create the best tax situation. Having the bond funds in the Roth has been instrumental in providing significant additional income while maintaining our taxable income within the 15% bracket to take advantage of the 0% tax rates on dividends and cap gains.
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