Bonds in Roth not making sense

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SpartanBull
Posts: 131
Joined: Fri Jun 06, 2014 12:31 am

Bonds in Roth not making sense

Post by SpartanBull »

Hi guys,
I'm a 24 year old investor with a 150k, 100% Stock Portfolio. 15k in Roth, 135k in Taxable. Here is my situation
1) My portfolio is 100% Stocks, however I would prefer 90% stocks, 10% bonds
2) I'm concerned about tax efficient bond placement, therefore most responses will tell me to simply put 15k in mr Roth Problem Solved
3) Part of the Value of the 10% bonds, to me, is that if I ever needed to "access" funds for some unforeseen reason (beyond the emergency fund), I would not want to be tapping stocks (no idea where stocks are at at the time, risk of selling low, etc etc). Heres the issue, if I "accessed" one of my accounts, it would certainly be taxable before Roth IRA, (Roth IRA I'm definitely holding till I'm in my 60's). Why would I put bonds into an account that I know has 40 years of untouchable accumulation ahead of it?
I'm someone could advise as to what I'm not seeing here, I would appreciate it. Thanks.
mcraepat9
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Joined: Thu Jul 16, 2015 11:46 am

Re: Bonds in Roth not making sense

Post by mcraepat9 »

Investors who have small tax advantaged accounts relative to their taxable investments are often advised to invest their entire Roth IRA in equities (to maximize the tax benefits of the Roth) and hold tax exempt bonds in taxable. I think that solves your problem.

Most investors do not hold their emergency fund in a Roth IRA for the reasons you outlined.
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BitDude
Posts: 74
Joined: Tue Jan 13, 2015 12:59 am

Re: Bonds in Roth not making sense

Post by BitDude »

I would just leave stocks in your roth IRA for the reason that stocks will potentially grow your IRA the quickest, and also high potential growth means high potential taxes if it's not inside a tax-free IRA account.

Most of my bonds are in my taxable account, however I chose tax-exempt ones (such as VCAIX)
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Bonds in Roth not making sense

Post by DSInvestor »

You asked about Solo 401k in another thread. If you open a Solo 401k, use some of that space to hold your entire bond allocation.
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red5
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Re: Bonds in Roth not making sense

Post by red5 »

Well some of it depends on your tax bracket. If you are in a low tax bracket than bonds in a taxable account is fine.

Also, if you want 10% to be bonds then that is $15,000. If you have a regular bond fund throwing off 2% then that amounts to $300 per year in dividends. That could become problematic in the future though as your bond money increases.

Of course you could always do an analysis to see if a tax exempt bond fund is a better choice.

Lastly, if you do decide to put your bonds in your Roth then there is a work around to raising some cash for an emergency. It could involve capital gains though. Say you have $135,000 in stocks in your taxable account and $15,000 of bonds in your Roth IRA. If you need to raise, say, $10,000, then sell that amount in stocks in your taxable account (while being as careful as possible about capital gains) while simultaneously exchanging some of your Roth bonds into stocks in order to maintain your 90/10 allocation. Thus you are indirectly tapping your bonds...
livesoft
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Re: Bonds in Roth not making sense

Post by livesoft »

^And if one has done tax-loss harvesting at any time in the past, present, or future and banked some carryover losses, then one will really not have any net capital gains if they sell to raise cash.

I put some bonds in my Roth in order to not lose so much money in my Roth when equities tank. Then I can buy equities when they are low with the money coming from my bond funds.

Otherwise, my fixed income assets go into my 401(k).

It is OK to have some bonds in taxable if they do not create a tax problem for you.
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wassabi
Posts: 532
Joined: Sun Feb 02, 2014 7:06 am

Re: Bonds in Roth not making sense

Post by wassabi »

SpartanBull wrote:Hi guys,
I'm a 24 year old investor with a 150k, 100% Stock Portfolio. 15k in Roth, 135k in Taxable. Here is my situation
1) My portfolio is 100% Stocks, however I would prefer 90% stocks, 10% bonds
2) I'm concerned about tax efficient bond placement, therefore most responses will tell me to simply put 15k in mr Roth Problem Solved
3) Part of the Value of the 10% bonds, to me, is that if I ever needed to "access" funds for some unforeseen reason (beyond the emergency fund), I would not want to be tapping stocks (no idea where stocks are at at the time, risk of selling low, etc etc). Heres the issue, if I "accessed" one of my accounts, it would certainly be taxable before Roth IRA, (Roth IRA I'm definitely holding till I'm in my 60's). Why would I put bonds into an account that I know has 40 years of untouchable accumulation ahead of it?
I'm someone could advise as to what I'm not seeing here, I would appreciate it. Thanks.

I keep some bonds/fixed income assets in taxable precisely for the reasons you state. When I buy the Total Stock index, I don't ever want to sell. Plus, like you mention, you never know where the index will be (up or down from purchases price). For these reasons, I don't mind having bonds in my taxable, even though the decision goes against the broader wisdom of this forum. I think most here will tell you to do what benefits you in your specific situation.

As an aside, EmergDoc has a good post on his blog that argues it can be more beneficial to keep stocks in taxable. You can search his blog for the post: http://whitecoatinvestor.com
stlutz
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Re: Bonds in Roth not making sense

Post by stlutz »

2) I'm concerned about tax efficient bond placement, therefore most responses will tell me to simply put 15k in mr Roth Problem Solved
And most responses would be wrong. The wiki article on tax efficient asset placement indicates that "low yielding" bonds should be in taxable. Since 2008, bonds in general have been low yielding. These people would then tell you that rates are sure to go to 8% any day now at the same time that the rest of the developed world is moving toward negative rates.

Your plan makes sense. Don't get sidetracked by advice more suited for a situation that doesn't resemble the world we live in.
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WolfpackFan
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Re: Bonds in Roth not making sense

Post by WolfpackFan »

If you're using bond funds to be your emergency fund then you should keep that in taxable. Just be aware that you are still putting your emergency fund at some risk in bond funds. A savings account to house an emergency fund is a little less risky although inflation risk would still persist.

Make no mistake, bond funds as part of your long term investable assets need to be in tax advantage space.

Bond distributions are taxed as regular income and subject to your income tax rate. Most stock distributions (dividends) are qualified and you would only pay 0% or 15% depending on your income levels.
Theoretical
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Joined: Tue Aug 19, 2014 10:09 pm

Re: Bonds in Roth not making sense

Post by Theoretical »

Other than as a rebalancing/keep the Roth from declining all they, keep the bonds in taxable. Go for tax-exempt or treasuries.

I'm in exactly the same situation.

The other option to consider is getting some 5-7 year CDs, which provide a liquidity premium over treasuries.
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