Bond duration and tax efficiency question

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Bond duration and tax efficiency question

Postby dianna » Fri May 03, 2013 10:32 am

I haven't found the answer to this question on the Wiki, forum or in the Boglebooks. I'm hoping this is a basic question for all of you who understand bonds significantly more than myself.

Thanks to backdoor Rothing, I finally have some decent space in our Roth accounts such that I could hold our bond funds there versus in our tax-deferred accounts. The transaction would entail selling the bond funds in the 401k and IRA accounts, and then purchasing those same bond funds in the Roth accounts to maintain the desired AA. Other than the frequent trading rules, is there a disadvantage to making this transaction given that I haven't held the bond funds long enough yet to reach the desired bond duration? Or does bond duration matter a little less here because it's a bond fund?
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Re: Bond duration and tax efficiency question

Postby Epsilon Delta » Fri May 03, 2013 10:46 am

If your selling bonds and buying back essentially the same bonds duration matters not at all, because you're in the same position before and after the trades, just in different accounts. This is the same as selling individual stocks to buy a stock index fund in a tax deferred account. The price does not matter as long as what you buy and what you sell is the same.
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Re: Bond duration and tax efficiency question

Postby dianna » Fri May 03, 2013 10:50 am

Thank you, Epsilon Delta! I was hoping that the strategy was sound.
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Re: Bond duration and tax efficiency question

Postby livesoft » Fri May 03, 2013 6:58 pm

Given a choice, I would prefer to have bond funds mostly in a tax-deferred 401(k) or traditional IRA and not in a Roth IRA (except for a little bit). The reason is that I can use the Roth IRA for higher expected tax-free growth in equities.
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Re: Bond duration and tax efficiency question

Postby dianna » Fri May 03, 2013 11:35 pm

livesoft wrote:Given a choice, I would prefer to have bond funds mostly in a tax-deferred 401(k) or traditional IRA and not in a Roth IRA (except for a little bit). The reason is that I can use the Roth IRA for higher expected tax-free growth in equities.


Very true, livesoft, and given new yearly Roth space with back door and after tax 401k inservice rollovers, we should be set to have enough Roth space for bonds and higher equities. Your point is excellent, thank you for noting it.
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Re: Bond duration and tax efficiency question

Postby Default User BR » Sat May 04, 2013 12:47 am

livesoft wrote:Given a choice, I would prefer to have bond funds mostly in a tax-deferred 401(k) or traditional IRA and not in a Roth IRA (except for a little bit). The reason is that I can use the Roth IRA for higher expected tax-free growth in equities.

That's kind of been my philosophy. Also, my 401(k) has a cheap aggregate bond fund and a stable-value fund, but no REIT or value funds. So I use the Roth to hold those.


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