Tax Efficiency vs. Slow-Growing Roth

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Tax Efficiency vs. Slow-Growing Roth

Postby captaino » Sun Dec 02, 2012 1:36 am

Greetings Bogleheads, I am new to this community which I recently discovered to be a powerful resource! :mrgreen:

I am currently struggling to resolve a trade-off I perceive between proper asset location and my desire to maintain the same expected return in both my taxable and Roth accounts. To illustrate the key issue here is an example:

I'm 29 (this is my true age). Lets say I have $25K with half in a Roth IRA and half in a regular taxable account. Assume I dont' have access to a 401K, and that my universe is only these two accounts. Let's say I invest as follows: 20% bonds and 80% stocks with 70/30 split between US and Int'l equity.

Boglehead asset allocation would dictate my investments to be as follows:
Roth IRA: $5K Total Bond Mkt (VBMFX) + $7.5K Total US Stock (VTSMX)
Taxable Account: $6K Total Int'l Stock (VGTSX) + 6.5K Total US Stock (VTSMX)

But here is my issue: The expected return of my taxable account (all equities in this case), is much higher than the expected return of my Roth account (some bonds). Thus, my taxable account would likely grow much faster than my Roth account, and this is the opposite of what I want to happen (for obvious reasons)!

In an effort to push my Roth account back up the risk/return spectrum (so that it will match the risk/return of my taxable account), would it be crazy to pair my bond holdings with small & mid-cap equities? Then large-cap equities would be concentrated in my taxable account. The portfolio might look something like this:
Roth IRA: $5K Total Bond Mkt (VBMFX) + $3.5K Vanguard S&P 500 (VFINX) + $4K Vanguard Extended Market (VEXMX)
Taxable Account: $6K Total Int'l Stock (VGTSX) + $6.5K Vanguard S&P 500 (VFINX)

Remember the goal is to choose investments so that my taxable account doesn't grow faster than my Roth account. Stated differently, I am trying to adhere to Boglehead asset location (tax efficiency) guidelines, while also keeping the expected risk and return of each account equal.

I think it's important that my Roth account keep pace with the growth of my taxable account because I have a long investment horizon in front of me. Would you ever do this in my shoes? If not, what am I missing? :confused

Thank you in advance for your thoughts!
Last edited by captaino on Sun Dec 02, 2012 3:50 am, edited 2 times in total.
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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby DSInvestor » Sun Dec 02, 2012 2:14 am

The annual contributions to Roth IRA are quite limited. What are you contributing to taxable accounts? If you're contributing 5k/yr to Roth IRA and 20K/yr to taxable, wouldn't the taxable account grow faster than the IRA even if you had exactly the same investments in both accounts?

When I was working I contributed more to taxable than to my 401k and IRAs. I don't mind that the taxable account grew faster than the tax advantaged accounts. If done properly, taxable investing can be very tax efficient. If you're maxing out all tax advantaged space, having a larger taxable account isn't a bad thing - it may allow you to retire early, or delay withdrawals from IRA/401k. While in the early years of retirement drawing down your taxable account, you may be in such a low tax bracket that you may be able to convert your pre-tax IRA and 401k assets to Roth tax free or nearly tax free.

Roth IRA space is limited and valuable. I'd rather see the Roth IRA space grow steadily than have wild swings.

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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby FNK » Sun Dec 02, 2012 2:18 am

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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby captaino » Sun Dec 02, 2012 2:29 am

DSInvestor wrote:If you're contributing 5k/yr to Roth IRA and 20K/yr to taxable, wouldn't the taxable account grow faster than the IRA even if you had exactly the same investments in both accounts?


I was actually referring to the percentage rate at which the money grows. For instance I don't want my taxable account growing at an 8% annualized return, while my Roth (because of the bonds) is growing at a 4% annualized return.

DSInvestor wrote:Roth IRA space is limited and valuable. I'd rather see the Roth IRA space grow steadily than have wild swings.


I agree, but remember I would be adding the small & mid cap investments (more volatile) to bonds (NOT volatile). So the blended result should be something reasonable. I don't want more volatility in my Roth because I like roller coaster rides; however I know that with volatility comes higher expected return.

Thoughts?
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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby captaino » Sun Dec 02, 2012 2:40 am



This link covers a related topic, but (after reading it) I'm not sure it addresses what I am asking here. Thanks.
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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby DSInvestor » Sun Dec 02, 2012 2:46 am

captaino wrote:
DSInvestor wrote:If you're contributing 5k/yr to Roth IRA and 20K/yr to taxable, wouldn't the taxable account grow faster than the IRA even if you had exactly the same investments in both accounts?


I was actually referring to the percentage rate at which the money grows. For instance I don't want my taxable account growing at an 8% annualized return, while my Roth (because of the bonds) is growing at a 4% annualized return.


Will you be contributing both accounts? If contributing, how much will you be contributing each year? You're 29 with 25K portfolio. At this early stage of accumulation, your contributions is going to provide way more growth to your portfolio than the portfolio's returns.

A 15K contribution to your taxable account will grow the 12K to 27K representing over 100% increase.

A 5K contribution to your Roth IRA will grow the 12K to 17K representing a 41% increase. Contribute another 5.5K in 2013 and your 17K becomes 22.5K representing a 32% increase.

See EmergDoc's post called The Savings Rate:
viewtopic.php?t=6833

Your current situation has you holding your entire bond allocation in the Roth IRA and some stocks. This is perfect in that you can rebalance without any tax implications in the Roth IRA. If you placed your funds such that you had 80/20 in each account, you may have same expected return for each account but now there may be tax implications for rebalancing in the taxable account. The bond holding in taxable may need to be switched to a tax exempt bond fund if your tax situation calls for it. Bottom line, it is more complicated to duplicate the AA across all accounts.
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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby captaino » Sun Dec 02, 2012 3:00 am

DSInvestor wrote:Will you be contributing both accounts? If contributing, how much will you be contributing each year? You're 29 with 25K portfolio. At this early stage of accumulation, your contributions is going to provide way more growth to your portfolio than the portfolio's returns.

A 15K contribution to your taxable account will grow the 12K to 27K representing over 100% increase.

A 5K contribution to your Roth IRA will grow the 12K to 17K representing a 41% increase. Contribute another 5.5K in 2013 and your 17K becomes 22.5K representing a 32% increase.


So my actual situation is different from this simplified example. In reality I have $264K of inherited assets. Currently I am maxing out my tax-advantaged contributions (Roth, 401K, HSA, etc) in every way possible. My income is also very high ($100K salary + $60K income from a trust), so I am forced to make more taxable contributions than tax-advantaged contributions each year.

But my question has nothing to do with accounts increasing in value because of contributions made to them. I'm interested in mitigating the difference in how fast the money in the accounts will grow on its own. Sorry if I was unclear before. Thanks!
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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby FinancialDave » Sun Dec 02, 2012 3:21 am

I think you are going to find that if you want to maintain a significant bond exposure (which I don't know why at your age you need to do so) then you may just have to put some of them in the taxable account. This could be a plus in a few years when the bond market melts down, you could harvest a tax loss :(

Seriously, I don't see a way to keep the rates of growth the same when you have different asset allocations in the different accounts. All you can do is adjust your total asset allocation to keep it in line by where you make your contributions.

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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby DSInvestor » Sun Dec 02, 2012 3:27 am

If you want the same expected return across all accounts, you may need to hold the same AA in each account. Do you really want to duplicate the 80/20 AA in taxable, 401k, HSA and Roth IRA? Do you want this extra complexity? What if you get married and have twice as many accounts?

Even if you allocated funds such that each account has the same expected return as every other account, your taxable account will still grow at a higher rate simply because you contribute much more to it. Contributions matter. Why would you want to ignore the effect of your contributions?

You indicated that your taxable contributions are more than your tax advantaged contributions. Let's say that your taxable contributions equal your tax advantaged contributions (17K + 5K + 3K). 25K to taxable is 5X your Roth IRA contribution. IMO, the effect of this difference in contribution is so great that you should not ignore it. If your taxable contributions are even greater, say 2X tax advantaged, then taxable contributions may be 10X Roth IRA contributions.

In 10 years, your taxable account will have received 250K in contributions compared to 50K in Roth IRA. You could have put the taxable assets in a checking account earning 0% and still have more there than your Roth IRA holding stocks.
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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby FinancialDave » Sun Dec 02, 2012 3:33 am

I'm not really quite sure why you are super concerned about the taxable account growing more, as probably 98% of the tax from this account will come a long way down the road when you sell the assets and won't affect you currently.

They will also of course be booked as long term gains, whereas the IRA type money will be taxed as ordinary income. For this reason alone (depending on where our tax structure goes) I personally like more growth in the taxable account.

One other thing to consider in your taxable account would be to use the tax managed small cap fund VTMSX instead of VTSMX.

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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Bob's not my name » Sun Dec 02, 2012 5:31 am

These articles address asset placement: http://thefinancebuff.com/tax-efficienc ... olute.html and http://thefinancebuff.com/stocks-or-bonds-in-roth.html

tfb's argument for placing bonds in taxable is debated in this recent thread: viewtopic.php?f=10&t=106053
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby The Wizard » Sun Dec 02, 2012 8:04 am

Your concern is totally misplaced.
Take a down year in the stock market where your taxable account declines 20%, aside from new contributions. But your Roth IRA (mostly bonds) goes up 5% for the same year.
Will you be upset that the Roth didn't decline 20% as well?
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Taylor Larimore » Sun Dec 02, 2012 8:37 am

I think it's important that my Roth account keep pace with the growth of my taxable account because I have a long investment horizon in front of me. Would you ever do this in my shoes? If not, what am I missing?


I think that you are "missing" the fact that it is usually better to consider all your accounts as one portfolio. It doesn't matter if you have more money in one pocket than another.

Even if you initially divide your portfolio evenly for "expected" return, it is almost certain that your "actual" return will be significantly different. You would be constantly rebalancing.

Keep investing simple and efficient with one overall portfolio for these benefits:

* Proper fund location results in lower taxes
* Fewer funds (less rebalancing)
* Larger funds (often cheaper)
* Less stock and bond overlap
* Less paperwork
* Easier tax preparation
* More free time

Best wishes.
Taylor
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby justus » Sun Dec 02, 2012 2:02 pm

[But here is my issue: The expected return of my taxable account (all equities in this case), is much higher than the expected return of my Roth account (some bonds). Thus, my taxable account would likely grow much faster than my Roth account, and this is the opposite of what I want to happen (for obvious reasons)! [/quote]

Forgive my ignorance as I'm new to Bogleheads, but why is this the opposite of what you want to happen?
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Hub » Sun Dec 02, 2012 2:29 pm

I could be off base, but it sounds to me like you're wanting to hold bonds in your roth, but also a set of risky enough equities to keep the expected rate of return high. Small Cap value, emerging markets, and international small cap are things that could help you here. Larry Swedroe advocates things like this to allow an investor to hold more bonds and have less volatility than they would holding total market funds. Maybe look into some of his books.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby baw703916 » Sun Dec 02, 2012 2:55 pm

My advice to the OP is to put some of the bond holdings in the taxable account (say VWITX--currently there's essentially no yield penalty for tax-exempt bonds relative to taxable bonds), and dedicate the equity portion of the Roth to more aggessive equity asset classes (small caps, emerging markets, etc).
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby captaino » Sun Dec 02, 2012 4:44 pm

Forgive my ignorance as I'm new to Bogleheads, but why is this the opposite of what you want to happen?


Ideally you want more of your assets to be in a Roth account, since Roth money grows tax free. If your taxable account is growing faster than your Roth account, then it will make up a smaller portion of your total assets over time.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby captaino » Sun Dec 02, 2012 4:53 pm

Hub wrote:I could be off base, but it sounds to me like you're wanting to hold bonds in your roth, but also a set of risky enough equities to keep the expected rate of return high.


Yes! This is exactly what I am trying to accomplish. Very well stated!

Do others agree with baw703916 & Hub's comments above? I want to be sure there is reasonable consensus because shooting myself in the foot is never fun. :oops:

Hub, thank you for the book recommendation. :happy
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby DSInvestor » Sun Dec 02, 2012 7:18 pm

captaino wrote:In an effort to push my Roth account back up the risk/return spectrum (so that it will match the risk/return of my taxable account)

captaino wrote:I am trying to adhere to Boglehead asset location (tax efficiency) guidelines, while also keeping the expected risk and return of each account equal.

captaino wrote:Currently I am maxing out my tax-advantaged contributions (Roth, 401K, HSA, etc) in every way possible.


Given that OP maxes out 401k every year, the 401k is probably the largest tax advantaged account in the portfolio and may be the best place to rebalance the portfolio. Assuming that there is a decent bond fund option in the 401k, the simplest solution may be to hold all bonds and some stocks in the 401k. The Roth IRA and taxable accounts can hold only stocks. This would:

1. Match the expected returns for the investments held in taxable and Roth IRA.
2. Adhere to Bogleheads asset location (tax efficiency) guidelines.
2. Portfolio is easy to manage. All the rebalancing can be done in 401k.

401k: <- Holds most or all major asset classes to allow all rebalancing to be done in this account
Bonds <-Entire bond allocation
Stocks

Roth IRA:
Stocks <- same expected return as the taxable account

Taxable:
Stocks <-Tax efficient and FTC for international holdings.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Cash » Sun Dec 02, 2012 9:09 pm

DSInvestor wrote:
captaino wrote:In an effort to push my Roth account back up the risk/return spectrum (so that it will match the risk/return of my taxable account)

captaino wrote:I am trying to adhere to Boglehead asset location (tax efficiency) guidelines, while also keeping the expected risk and return of each account equal.

captaino wrote:Currently I am maxing out my tax-advantaged contributions (Roth, 401K, HSA, etc) in every way possible.


Given that OP maxes out 401k every year, the 401k is probably the largest tax advantaged account in the portfolio and may be the best place to rebalance the portfolio. Assuming that there is a decent bond fund option in the 401k, the simplest solution may be to hold all bonds and some stocks in the 401k. The Roth IRA and taxable accounts can hold only stocks. This would:

1. Match the expected returns for the investments held in taxable and Roth IRA.
2. Adhere to Bogleheads asset location (tax efficiency) guidelines.
2. Portfolio is easy to manage. All the rebalancing can be done in 401k.

401k: <- Holds most or all major asset classes to allow all rebalancing to be done in this account
Bonds <-Entire bond allocation
Stocks

Roth IRA:
Stocks <- same expected return as the taxable account

Taxable:
Stocks <-Tax efficient and FTC for international holdings.


This is exactly what I currently do, except I am now 95% sure that I will exchange the bonds in my 401(k) for equities and hold my fixed-income allocation as munis in my taxable account (prompted by the thread linked to by Bob's not my name).
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Gauntlet » Mon Dec 03, 2012 10:58 am

I have a hard time looking at all my accounts as truly one portfolio even though I think I understand the logic. My biggest issue is that if I have all of my bonds in my tax-deferred account, I feel like it throws off my AA because after taxes that account is likely to be smaller. I do keep an overall AA but I do it my maintaing my desired AA in each account (tax-deferred, tax-free, taxable). Probably not ideal but my portfolio is pretty simple (I don't tilt etc.) and my taxable is by far the smallest. I guess if the taxable account gets large enough where it has a major impact on my overall AA I'll rethink my approach.
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Solution to "biggest issue."

Postby Taylor Larimore » Mon Dec 03, 2012 2:47 pm

Gauntlet:

My biggest issue is that if I have all of my bonds in my tax-deferred account, I feel like it throws off my AA because after taxes that account is likely to be smaller.


The solution (if you think you know the perfect asset-allocation :wink: ) is to change your stock/bond allocation accordingly.

Best wishes
Taylor
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby hillman » Mon Dec 03, 2012 4:48 pm

Edited to delete because I'm an idiot who don't be reading good.

Sorry guys.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Gauntlet » Mon Dec 03, 2012 4:59 pm

Taylor Larimore wrote:Gauntlet:

My biggest issue is that if I have all of my bonds in my tax-deferred account, I feel like it throws off my AA because after taxes that account is likely to be smaller.


The solution (if you think you know the perfect asset-allocation :wink: ) is to change your stock/bond allocation accordingly.

Best wishes
Taylor


Thanks Taylor. I see your point and for sure you will find no perfect AA here :happy However, I do think there is something to the tax-adjusted total but since I have no idea what my tax will be in retirement... I'm also fortunate to have good options in all of my accounts.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby fishnskiguy » Mon Dec 03, 2012 5:23 pm

OP, you have the wrong goal. Your goal should not be to "have the Roth grow faster than the taxable account". The goal should be to have the largest nest egg possible going into retirement. Putting the most tax INefficient instruments (bonds) in the Roth will generally max out the nest egg.

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Re: Tax Efficiency vs. Slow-Growing Roth

Postby FinancialDave » Mon Dec 03, 2012 6:03 pm

fishnskiguy wrote:The goal should be to have the largest nest egg possible going into retirement. Putting the most tax INefficient instruments (bonds) in the Roth will generally max out the nest egg.

Chris


Chris,
I think what you mean to say is that you want to have the largest after-tax income in retirement. Nobody can really predict what this is going to look like for this OP, however it would not seem logicial to put an investment, only in a Roth account, that will most likely have a very low, maybe even negative growth rate (compared to inflation) at least over the next 5-10 years as interest rates pick up.

I agree that tax efficiency is important, but not at the expense of returns.

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Re: Tax Efficiency vs. Slow-Growing Roth

Postby grabiner » Mon Dec 03, 2012 9:30 pm

FinancialDave wrote:
fishnskiguy wrote:The goal should be to have the largest nest egg possible going into retirement. Putting the most tax INefficient instruments (bonds) in the Roth will generally max out the nest egg.

Chris


Chris,
I think what you mean to say is that you want to have the largest after-tax income in retirement. Nobody can really predict what this is going to look like for this OP, however it would not seem logicial to put an investment, only in a Roth account, that will most likely have a very low, maybe even negative growth rate (compared to inflation) at least over the next 5-10 years as interest rates pick up.


And that is how tax-adjusted asset allocation works. If you will lose 30% of your 401(k) to taxes, then $1000 in your 401(k) will only provide as much money in retirement as $700 in your Roth IRA. Thus you can think of this $1000 as $700 growing tax-free and $300 owned by the IRS; now $700 in bonds in the Roth IRA and $1000 in the 401(k) are equivalent and there is no advantage of putting bonds in one or the other.

You can make the same type of adjustment for a taxable account which will lose 30% of its gains to taxes. Again, if you say that the IRS owns 30% of any gains on your taxable account, there is no advantage in putting bonds in the taxable account or the IRA unless the tax loss will change.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby englishgirl » Mon Dec 03, 2012 9:45 pm

I agree with the statements that you have the wrong goal!

If you buy into the idea of holding bonds to reduce volatility (and I hope you do), then you have to hold them somewhere. Whichever "bucket" you put them in will have a lower expected rate of return than the buckets that just hold stocks. Because you have bonds in there. But, we've already figured out that holding bonds in taxable accounts is not the most efficient solution. So, put them in your tax advantaged accounts - either the 401k or the Roth IRA. Using the 401k for bonds might be better, because you want your Roth to grow as much as possible, as it'll be tax free on withdrawal. But trying to make the bond "bucket" keep up with the other buckets is probably going to be impossible, though.

So, I think it is slightly crazy to try to put riskier small stocks in the same bucket as the bonds just to try to keep bucket sizes in the same proportions. And I don't think 500 Index is more tax efficient than TSM (I believe it is actually less tax efficient), so splitting your stocks in the way you propose isn't optimal either. For example, some stocks have to be bought/sold from 500 Index when they don't qualify for the index any more. That's less likely to happen with TSM. See here: viewtopic.php?t=4644

Having said that, I don't think it would be terribly crazy to split your tax deferred accounts between bonds and international. In your $25k example, you'd have $5k TBM, and $7.5k TISM in the Roth, and $12.5k TSM in taxable. You'd be slightly off on your desired 70:30 US:International split, but a) you'd get your riskier stocks into your Roth, as you want, to see if that helps the Roth "keep up", b) if the Roth doesn't keep up, it'll make you happy because your US:International split will drift closer to what you wanted in the first place, c) your taxable account only includes one fund, and your tax deferred accounts only include two funds, leading to more simplicity. Win, win, win.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Bob's not my name » Mon Dec 03, 2012 10:40 pm

englishgirl wrote:we've already figured out that holding bonds in taxable accounts is not the most efficient solution. So, put them in your tax advantaged accounts - either the 401k or the Roth IRA. Using the 401k for bonds might be better, because you want your Roth to grow as much as possible, as it'll be tax free on withdrawal.
We've already figured out that holding bonds in taxable accounts may be the most efficient solution. And we've figured out that there's no benefit to holding bonds in 401k vs. Roth.
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Re: Proper Asset Allocation Versus a Slow-Growing Roth

Postby FNK » Mon Dec 03, 2012 11:03 pm

captaino wrote:


This link covers a related topic, but (after reading it) I'm not sure it addresses what I am asking here. Thanks.

Hey captaino,

Yes, it does address what you're asking here. Here's how.

You're correctly observing that a Roth balance is more valuable than other accounts. Instead of making complicated dances about which asset class is better in there, you can account for this value precisely. Basically, the effective value of an account is the after-tax value. If you adjust everything to after-tax, you will find the Roth to be a bigger portion of your portfolio. That's capturing the advantage of Roth over other accounts precisely, and it will lead you to a correct AA across accounts. You will be able to position asset classes based on availability and convenience, not account superiority.

Blew my mind when I realized this.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby FinancialDave » Tue Dec 04, 2012 12:30 am

Let me just propose a few ideas that I have learned up to retirement and beyond.

Neglecting the income from SS for the moment. There is no need to be taxed at a 30% level on 401k income. In fact if you are married and both over the age of 65, in 2012 you could take $21,800 from your 401k with absolutely no tax at all, PROVIDED you took the rest of your income from your Roth account. OR, you could take a total $39,200 and only be taxed 4.44% ($1740) on the total, PROVIDED you take the rest of your income from the Roth.

So you see it is about having money in a Roth account AND a tax-deferred account and using them properly in retirement - so you really need the Roth account to grow as much as possible, as this can be valuable to you later, AND the tax on your 401k may just be lower than you think -- depending of course on your lifestyle.

In the above scenario, I hope you can see that the money you put in the 401k tax free, can also come out tax free, making it even more valuable than the Roth money. This is why I recommend balancing Roth / non-Roth money as any simple calculator and a look at the tax tables would tell you could easily pull $40k from a 401k and $40k from a Roth for an $80k of almost tax free income (at least at current tax rates for 2012) Literally pay about 2% tax on the $80k.

Bonds are not the end all be all investment (IMO). I am not using any for my retirement income. I am supplementing my fixed pension, with $1000 a month from a stock dividend stream from a $200,000 stock portfolio of dividend payers most of which have increased their dividend every year from 8 years in a row to 55 years in a row. This is of course not my whole retirement fund as this is only 1 of 3 equal buckets, the other two are just on standby growth mode, should I need to replace any of the 18 income producers in the next 20 years or so.

If and when interest rates ever go up I may decide to add some bonds, but right now I see them as a losing proposition compared to other income streams. No one wants a 2% growth rate for the next 10 years in a bond portfolio.

P.S. Also to your added credit is all your after-tax money that you put into your taxable account, to the extent that you are only taxed on the gains. This is a reason in retirement to be able to pick the "specific Id" or use LIFO to avoid the higher tax cost funds. As I pointed out earlier once you start an average tax cost on a block of funds you can not really "unwind it," at least on that block of funds.

fd
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby Gauntlet » Tue Dec 04, 2012 10:17 am

Captaino, another data point to think about is that sometimes the "higher expected" returning asset gets beat by the "lower expected" returning asset. And this can happen for many years in a row. For example, the 30-year bond bull market we just had.
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Re: Tax Efficiency vs. Slow-Growing Roth

Postby FinancialDave » Tue Dec 04, 2012 12:36 pm

And that "reversion to the mean" from the above, might be painful, at least for a time.
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