Why this fund in my ROTH?

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fishdrzig
Posts: 232
Joined: Sun Jan 16, 2011 1:40 pm

Why this fund in my ROTH?

Post by fishdrzig »

Ok, both my wife and myself have one fund in our
Roth IRA accounts.

VBISX Vanguard short term bond index fund investor shares
VMLTX Vanguard limited term tax exempt fund investor shares

I know it was suggested here on this forum these are good funds for a ROTH if one needs some more bond exposure, but can't remember why it was recommended. Can someone just remind me why? Thanks
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Why this fund in my ROTH?

Post by rkhusky »

fishdrzig wrote:Ok, both my wife and myself have one fund in our
Roth IRA accounts.

VBISX Vanguard short term bond index fund investor shares
VMLTX Vanguard limited term tax exempt fund investor shares

I know it was suggested here on this forum these are good funds for a ROTH if one needs some more bond exposure, but can't remember why it was recommended. Can someone just remind me why? Thanks
Bond funds are considered tax inefficient, due to the dividends being taxed as ordinary income. Tax exempt funds are not recommended for a Roth - taxable bond funds with similar risk pay more.

See: http://www.bogleheads.org/wiki/Principl ... _Placement
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grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Why this fund in my ROTH?

Post by grabiner »

fishdrzig wrote:Ok, both my wife and myself have one fund in our
Roth IRA accounts.

VBISX Vanguard short term bond index fund investor shares
VMLTX Vanguard limited term tax exempt fund investor shares

I know it was suggested here on this forum these are good funds for a ROTH if one needs some more bond exposure, but can't remember why it was recommended. Can someone just remind me why? Thanks
Limited-Term Tax-Exempt makes no sense in a Roth, and Vanguard shouldn't have even allowed you to hold it there.

Both of your funds are very good for low-risk investments; they are among Vanguard's lowest-risk funds, so they might be used for an emergency fund. You would use the short-term bond fund in a Roth if you hold your emergency fund there, and the muni fund in a taxable account. They are also good for short-term needs, such as money you expect to spend in three years.

In general, it's better to hold bonds in your Roth when possible. but it doesn't need to be specifically these funds. A more common choice to complement a stock-heavy portfolio is Total Bond Market Index in a tax-deferred account, or Intermediate-Term Tax-Exempt (or a fund for your own state) if you hold bonds in a taxable account. These funds have a bit more risk than the short-term funds but significantly higher returns.
Wiki David Grabiner
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