Where to hold bond allocation

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FireSekr
Posts: 1388
Joined: Tue Apr 02, 2013 9:54 am

Where to hold bond allocation

Post by FireSekr »

Just switched employers and having some trouble figuring out how to allocate my bond holdings. I used to keep all my bonds in 401k and filled the remaining space with equities and my Roth IRA was entirely equities. On my new employers plan, the expense ratio for the bond funds is much higher than I can get in my Roth IRA. (i.e. .45% vs .08%)

I'm thinking that its better to put equities with higher growth prospects into the Roth for tax purposes, but considering the big difference in expense ratio, I'm not really sure how to figure out which is the better solution. Heres a summary of options, not going to list details as I'm okay figuring that aspect out

401k - 60% of entire portfolio
Bond ER .45%
Equity ER .07%

Roth - 40% of entire portfolio
Bond ER .08%
Equity ER .05%

Hopefully this provides enough context, but happy to clarify and add more detail if needed.
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Where to hold bond allocation

Post by randomguy »

ssquared87 wrote:Just switched employers and having some trouble figuring out how to allocate my bond holdings. I used to keep all my bonds in 401k and filled the remaining space with equities and my Roth IRA was entirely equities. On my new employers plan, the expense ratio for the bond funds is much higher than I can get in my Roth IRA. (i.e. .45% vs .08%)

I'm thinking that its better to put equities with higher growth prospects into the Roth for tax purposes, but considering the big difference in expense ratio, I'm not really sure how to figure out which is the better solution. Heres a summary of options, not going to list details as I'm okay figuring that aspect out

401k - 60% of entire portfolio
Bond ER .45%
Equity ER .07%

Roth - 40% of entire portfolio
Bond ER .08%
Equity ER .05%

Hopefully this provides enough context, but happy to clarify and add more detail if needed.
Run the math projecting out 20 years (or whenever your retirement is). I think you will find that the difference in ER doesn't matter compared to the expected taxes and investment returns. .45% isn't the level where I would let it drive my investment decisions.
kmok
Posts: 224
Joined: Thu Apr 25, 2013 10:17 pm

Re: Where to hold bond allocation

Post by kmok »

ssquared87 wrote:Just switched employers and having some trouble figuring out how to allocate my bond holdings. I used to keep all my bonds in 401k and filled the remaining space with equities and my Roth IRA was entirely equities. On my new employers plan, the expense ratio for the bond funds is much higher than I can get in my Roth IRA. (i.e. .45% vs .08%)

I'm thinking that its better to put equities with higher growth prospects into the Roth for tax purposes, but considering the big difference in expense ratio, I'm not really sure how to figure out which is the better solution. Heres a summary of options, not going to list details as I'm okay figuring that aspect out

401k - 60% of entire portfolio
Bond ER .45%
Equity ER .07%

Roth - 40% of entire portfolio
Bond ER .08%
Equity ER .05%

Hopefully this provides enough context, but happy to clarify and add more detail if needed.
If you properly tax adjust the 401k then it really doesn't matter where you put the equities if investment choices are not limited. With the limited choices in 401k and proper tax adjustment, you should put all of your bonds in Roth based on the info provided.
trueblueky
Posts: 2365
Joined: Tue May 27, 2014 3:50 pm

Re: Where to hold bond allocation

Post by trueblueky »

I would not pay .45 for a bond fund.
In your situation, I'd put the bond fund in the Roth.
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