Bonds bad in ROTH? Infographic:

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MikeT
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Bonds bad in ROTH? Infographic:

Post by MikeT » Tue Feb 21, 2017 4:23 pm

I’ve always heard that bonds and REIT should be held in retirement accounts because of tax inefficiency.

The big red box below represents my retirement.
As you can see, bonds fills up 2/3rds of my ROTH.

Image

QUESTION:
Since the whole point of ROTH is that the gains are never taxed, wouldn’t it make more sense move the bonds to my taxable account and move my global stocks into my Roth?

Thanks,
Mike

PS: My workplace 401k selections are limited and terrible so I have S&P500 and smallcap value there. My taxable account is all global stock. My roth is 2/3rds bonds and 1/3rd international.

centrifuge41
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Re: Bonds bad in ROTH? Infographic:

Post by centrifuge41 » Tue Feb 21, 2017 4:27 pm

Yes, the nature/behavior of bonds (the interest is all short term, rather than long-term dividend/capital gain) makes bonds quite tax inefficient by nature.

But interest rates are low now, and in an absolute sense, bonds don't spit out very much interest, so there's not much tax anyhow. If you want to have bonds in taxable, and intl equities (which have somewhat high dividend yields now) in Roth, go for it. Just understand that you may have to swap again if bond rates go up.

KlangFool
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Re: Bonds bad in ROTH? Infographic:

Post by KlangFool » Tue Feb 21, 2017 4:33 pm

MikeT wrote:I’ve always heard that bonds and REIT should be held in retirement accounts because of tax inefficiency.

The big red box below represents my retirement.
As you can see, bonds fills up 2/3rds of my ROTH.

Image

QUESTION:
Since the whole point of ROTH is that the gains are never taxed, wouldn’t it make more sense move the bonds to my taxable account and move my global stocks into my Roth?

Thanks,
Mike

PS: My workplace 401k selections are limited and terrible so I have S&P500 and smallcap value there. My taxable account is all global stock. My roth is 2/3rds bonds and 1/3rd international.


MikeT,

No. You should move bond to your 401K. Please show us the list of funds available in your 401K. It might be terrible but it could be cheaper and better than the bond in the taxable account.

For example, you might use a target retirement fund, stable value fund and so on in your 401K as the alternative.

KlangFool

bigred77
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Re: Bonds bad in ROTH? Infographic:

Post by bigred77 » Tue Feb 21, 2017 4:37 pm

My preference would be to hold bonds in tax deffered (traditional) and equities in tax exempt (Roth) if you can swing it. Do you have any sort of fixed income option (or stable value) in your workplace 401k?

If not, you can either continue doing what your doing or explore using Muni's in a taxable account.

Or you could "tax adjust" your asset allocation across all accounts. You can google William Reichenstein's work for more information on this.

lack_ey
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Re: Bonds bad in ROTH? Infographic:

Post by lack_ey » Tue Feb 21, 2017 4:38 pm

With interest rates relatively low, the tax on dividends for a stock fund plus the capital gains tax on eventual sale may be a bigger deal than the tax on bond fund dividends (which is at the marginal rate), even though long-term capital gains and qualified stock dividends have preferential treatment at the lower rate. Depends on current and future tax rates for you, though.

Okay, with muni bonds you don't pay actual tax (federal tax on interest, or state tax if you use same-state munis), but the rates are discounted to reflect that so same concept/idea.

Also, for what it's worth if you have international stocks in tax-advantaged you lose out on the foreign tax credit. But the dividend rates are higher in ex-US and less of it is qualified dividends...

This applies to the 401k as well, though the calculations are a little more involved and you need to tax-adjust more carefully.

Note that if interest rates go up or things change, you can always switch back. It's not like you'll have massive embedded capital gains on bond funds (especially not if rates went up, where you should have capital losses).

toto238
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Re: Bonds bad in ROTH? Infographic:

Post by toto238 » Tue Feb 21, 2017 4:49 pm

One thing to note is that if you choose to hold bonds in your taxable account, bond funds don't typically build up particularly large capital gains.

So if you choose to change things up and move your bond allocation into your retirement accounts later, you likely won't be incurring much a capital gain to do so.

retiredjg
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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Tue Feb 21, 2017 4:56 pm

The best place for your bonds would be a bond fund or stable value fund in your 401k. If you have a decent SCV fund there, it seems likely you have a usable bond fund. But maybe you don't.

I would not be too concerned if you need to hold some bonds in Roth IRA for awhile. Yes, it might be nice to have all stocks or mostly stocks there, but perhaps this is a temporary situation.

If all choices seem bad, maybe holding some bonds in the 401k and some in Roth and some in taxable is a good middle way.

rebellovw
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Re: Bonds bad in ROTH? Infographic:

Post by rebellovw » Tue Feb 21, 2017 5:06 pm

I'm not an expert - but I do have some bonds (very small percentage) in roth so that the monthly dividends can auto re-invest in FSTVX. The rest 90% is in FSTVX which only gives out dividends in Dec. I like the idea of auto-buying stocks each month in all my accounts.

Thanks,

User avatar
serbeer
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Re: Bonds bad in ROTH? Infographic:

Post by serbeer » Tue Feb 21, 2017 5:08 pm

No, bonds are NOT bad in Roth. It is not easy to explain or to undestand but has to do with the fact that placement of assets in Roth vs tIRA impacts Risk in addition to after-tax return. By moving any assets from Roth to tIRA you unknowlingly impact your Risk, and therefore AA the primary purpose of which is to control Risk. As long as you keep Risk constant before and after the move, it makes absolutely no difference whether your Bonds are in Roth or tIRA account because to do so you'd have to change the amount of bonds while moving them. Welcome to the topic of Tax Adjusted Asset Allocation--probably one of the most advanced and least intuitive topics discussed in this forum.

If you are brave enough and interested, you can start with this Wiki article
https://www.bogleheads.org/wiki/Tax-adj ... allocation
paying particular attention to "Why to make these adjustments" section example, and then you can move on to several advanced discussions of the subject, eg
viewtopic.php?t=66706
and then
viewtopic.php?f=10&t=66960
and keyword search would find a dozen more.

Have fun!

MikeT
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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Tue Feb 28, 2017 6:11 pm

KlangFool wrote:
MikeT wrote:MikeT,

No. You should move bond to your 401K. Please show us the list of funds available in your 401K. It might be terrible but it could be cheaper and better than the bond in the taxable account.

For example, you might use a target retirement fund, stable value fund and so on in your 401K as the alternative.

KlangFool


OMG @KlangFool: THANK YOU for not answering my question but rather suggesting the best solution.

As you can see, the first two rows are my very expensive 401k selections. Paying 1.11% for small cap is VERY expensive.

Image

So, here's my plan: exchange my 401k small cap value for one of these two bond funds:

Image

Then, I'll pick a low cost small cap value over at vanguard.

This move has THREE advantages:
1. Gets bonds out of my Roth so it can grow as huge as possible.
2. Lowers the expense ratio in my 401k.
3. Simpler: I'll have one bond fund in my 401k instead of 4 bond funds over at vanguard.

I believe this move will be really important, enabling my ROTH to grow much more than it will with a 40% bond drag. And after all, of the 3 account types, isn't it best to have the most money in the roth? (I'm assuming that taxes will be higher in the future - I could be wrong of course).

Anyway, I'm sooo appreciative to everyone who contributes here and helps total strangers make better decisions.

THANK YOU!

Mike

aristotelian
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Re: Bonds bad in ROTH? Infographic:

Post by aristotelian » Tue Feb 28, 2017 6:29 pm

Please post all options for your 401k. The expense ratios for those bond funds are not good even if they are better than what you have. I would consider anything over .5% to be pretty bad and prefer under .2%.

MikeT
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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Tue Feb 28, 2017 6:37 pm

Bond fund expense ratios: .79% and .88%

Lifestyle funds: .82% - 1.29%

The large cap (other than the S&P500 which is .62%) is .96% - 1.28%

Most others are .87% +

So as you can see, my choices are terrible but I'm delighted that this route seems to be a triple-win !!!

-Mike

MIpreRetirey
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Re: Bonds bad in ROTH? Infographic:

Post by MIpreRetirey » Tue Feb 28, 2017 6:39 pm

serbeer wrote:No, bonds are NOT bad in Roth. It is not easy to explain or to undestand but has to do with the fact that placement of assets in Roth vs tIRA impacts Risk in addition to after-tax return. By moving any assets from Roth to tIRA you unknowlingly impact your Risk, and therefore AA the primary purpose of which is to control Risk. As long as you keep Risk constant before and after the move, it makes absolutely no difference whether your Bonds are in Roth or tIRA account because to do so you'd have to change the amount of bonds while moving them. Welcome to the topic of Tax Adjusted Asset Allocation--probably one of the most advanced and least intuitive topics discussed in this forum.

If you are brave enough and interested, you can start with this Wiki article
https://www.bogleheads.org/wiki/Tax-adj ... allocation
paying particular attention to "Why to make these adjustments" section example, and then you can move on to several advanced discussions of the subject, eg
viewtopic.php?t=66706
and then
viewtopic.php?f=10&t=66960
and keyword search would find a dozen more.

Have fun!


+1

aristotelian
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Re: Bonds bad in ROTH? Infographic:

Post by aristotelian » Tue Feb 28, 2017 7:01 pm

MikeT wrote:Bond fund expense ratios: .79% and .88%

Lifestyle funds: .82% - 1.29%

The large cap (other than the S&P500 which is .62%) is .96% - 1.28%

Most others are .87% +

So as you can see, my choices are terrible but I'm delighted that this route seems to be a triple-win !!!

-Mike


Others might disagree, but I don't see a problem with bonds in Roth. I would go with the S&P fund in your 401k, and then a good, low expense bond fund in your Roth up to your desired bond allocation, with the rest of your stock in Roth. Folks tend to prefer bonds in tax deferred, but there isn't a great reason for that, as others have said.

MikeT
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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Tue Feb 28, 2017 7:10 pm

For the sake of argument, let's say I have $250,000 in a ROTH IRA and $250,000 in a traditional IRA.
Let's assume I will make no more contributions over the next 15 years but simply allow each to grow.

Since the ROTH gains are tax free whereas I'll lose 25% in taxes on the traditional IRA, isn't is better to have the ROTH grow as large as possible?

If so, that's not going to happen with 60% of the containing bonds.

Right?

I will go back and re-read:
https://www.bogleheads.org/wiki/Tax-adj ... allocation
When I read it last week, I still felt that bonds dragging down gains in ROTH was bad.

Thanks,
Mike

MN Finance
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Re: Bonds bad in ROTH? Infographic:

Post by MN Finance » Tue Feb 28, 2017 7:31 pm

MikeT wrote:For the sake of argument, let's say I have $250,000 in a ROTH IRA and $250,000 in a traditional IRA.
Let's assume I will make no more contributions over the next 15 years but simply allow each to grow.

Since the ROTH gains are tax free whereas I'll lose 25% in taxes on the traditional IRA, isn't is better to have the ROTH grow as large as possible?

If so, that's not going to happen with 60% of the containing bonds.

Right?

I will go back and re-read:
https://www.bogleheads.org/wiki/Tax-adj ... allocation
When I read it last week, I still felt that bonds dragging down gains in ROTH was bad.

Thanks,
Mike

250k in a Trad and Roth do not actually have the same value. If your Roth is in stocks you have a higher net exposure to equities than if they were in a Trad IRA. So, you're taking greater or less risk just by location. Most people don't actually account for this when implementing a portfolio because of the complexity, but the concept holds. It's also true that it's better to hold bonds in tax deferred but at the end of the day it doesn't matter nearly as much as you think. It's also a terrible idea to have the whole non qualified money in stocks because a large cash need will kill the tax plan.

TropikThunder
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Re: Bonds bad in ROTH? Infographic:

Post by TropikThunder » Tue Feb 28, 2017 7:40 pm

aristotelian wrote:
MikeT wrote:Bond fund expense ratios: .79% and .88%

Lifestyle funds: .82% - 1.29%

The large cap (other than the S&P500 which is .62%) is .96% - 1.28%

Most others are .87% +

So as you can see, my choices are terrible but I'm delighted that this route seems to be a triple-win !!!

-Mike


Others might disagree, but I don't see a problem with bonds in Roth. I would go with the S&P fund in your 401k, and then a good, low expense bond fund in your Roth up to your desired bond allocation, with the rest of your stock in Roth. Folks tend to prefer bonds in tax deferred, but there isn't a great reason for that, as others have said.


He's paying 1.11% for his SCV fund in the 401k. Merely switching SCV to Roth (VISVX at 0.20%, eventually VSIAX Admiral at 0.08%) will more then save enough in ER to fund the mediocre 401k bond fund ER's.

aristotelian
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Re: Bonds bad in ROTH? Infographic:

Post by aristotelian » Tue Feb 28, 2017 7:51 pm

MikeT wrote:For the sake of argument, let's say I have $250,000 in a ROTH IRA and $250,000 in a traditional IRA.
Let's assume I will make no more contributions over the next 15 years but simply allow each to grow.

Since the ROTH gains are tax free whereas I'll lose 25% in taxes on the traditional IRA, isn't is better to have the ROTH grow as large as possible?

If so, that's not going to happen with 60% of the containing bonds.

Right?


Not exactly. It is not apples to apples. $250K in Roth is worth $300K in Traditional because Roth dollars are post-tax. If we assume your stocks are going to double in 10 years and bonds will go up 50%, your choice would be $500k Stock + $400k bonds ($450k - 20% to taxes) vs $375 k bonds + $480K stock ($600k - 20%). It is very close but stock in traditional actually wins. If you also add higher expense ratios to the bond option in the 401k, it gets worse.
Last edited by aristotelian on Tue Feb 28, 2017 8:40 pm, edited 1 time in total.

Theoretical
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Re: Bonds bad in ROTH? Infographic:

Post by Theoretical » Tue Feb 28, 2017 8:18 pm

I'm a big slicer and dicer, and given your options, I think the S&P in the 401 is best. It would still help to have the full list of investments so we could evaluate them. Some options may be better than others. The other thing is to consider Taxable beyond your match if these aren't the only fees and everything else is maxed. US Small Value indexes are awesome in taxable, because they have an even lower yield than TSM. IJS/VIOV are popular and cheap options that track the S&P 600 Value.

My 401k is very high fee (<100 person company) but all fees are incorporated into the ER so there's no hidden ones. The ERs come out to a 1% AUM fee plus the fund ER. In that light, it's borderline reckless to put low yielding bonds in that high of an expense ratio. At least with equities (in my case DFA Emerging Value and International Value), I'm taking the high risk return with a haircut approach rather than the low risk no/negative return with a guillotine-style haircut.

David Scubadiver
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Re: Bonds bad in ROTH? Infographic:

Post by David Scubadiver » Tue Feb 28, 2017 9:29 pm

All other things being equal, if you have the space and a good bond fund in the 491(k), isn't it better to use the Roth for the equity portion of the portfolio? I look at it like, I want the Roth to be as big as possible and while it will never overtake the 401(k) there is no reason to handicap that account.

Of course, 100% equities may mean the account winds up smaller than it would have been at 80/20 if you have a short time horizon. But if you have 20+ years to ride out the volatility, shouldn't you?

MikeT
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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Wed Mar 01, 2017 9:41 am

Here's the big reveal:

This is a PDF of my HORRIBLE 401k selections . . . .

https://www.dropbox.com/s/vzx9eu2vgcr6ido/401k%20choices%202017.pdf?dl=0

Thanks for taking a look and confirming my opinion that there are indeed terrible . . .

-Mike

MikeT
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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Wed Mar 01, 2017 9:54 am

Sorry for being slow on this point (it's really hurting my head).

Simply put: Since the ROTH gains are tax free, why not put the asset class in the ROTH that gains the most (e.g. more gains that are tax free).

It really seems that putting low yielding bonds in a ROTH is a missed opportunity.

Thanks again for everyone's input into this,

Mike

KlangFool
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Re: Bonds bad in ROTH? Infographic:

Post by KlangFool » Wed Mar 01, 2017 10:08 am

Theoretical wrote:I'm a big slicer and dicer, and given your options, I think the S&P in the 401 is best. It would still help to have the full list of investments so we could evaluate them. Some options may be better than others. The other thing is to consider Taxable beyond your match if these aren't the only fees and everything else is maxed. US Small Value indexes are awesome in taxable, because they have an even lower yield than TSM. IJS/VIOV are popular and cheap options that track the S&P 600 Value.

My 401k is very high fee (<100 person company) but all fees are incorporated into the ER so there's no hidden ones. The ERs come out to a 1% AUM fee plus the fund ER. In that light, it's borderline reckless to put low yielding bonds in that high of an expense ratio. At least with equities (in my case DFA Emerging Value and International Value), I'm taking the high risk return with a haircut approach rather than the low risk no/negative return with a guillotine-style haircut.


Theoretical,

<< In that light, it's borderline reckless to put low yielding bonds in that high of an expense ratio.>>

You may be looking at the tree and miss the forest.

A) You will be paying a lot of expense regardless of whether you put bond or stock into the 401K.

B) So, why are you punishing yourself more by putting stock into the 401K and putting bond elsewhere?

In the end, it may still make sense in your case. But, we need to look at the overall impact of our portfolio in term of tax and return.

Look at both options:

1) Bond in 401K and Stock in Roth. Same expense ratio but pay less tax in the end.

2) Stock in 401K and bond in Roth. Same expense ratio and pay more tax in the end.

KlangFool

KlangFool
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Re: Bonds bad in ROTH? Infographic:

Post by KlangFool » Wed Mar 01, 2017 10:18 am

OP,

Your situation is a lot more complicated than can be answered with the information that you provided.

1) I would definitely avoid the small cap value fund in your 401K.

2) Investing in your existing S&P 500 fund might be the best way to go at this moment.

3) How long do you think you will stay at this employer? It may not make sense to move Bond out of Roth at this moment if you are not staying at this employer for long.

4) In any case, I am not sure why you have 4 bond funds at Vanguard? For most people, 2 is more than enough.

KlangFool

rkhusky
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Re: Bonds bad in ROTH? Infographic:

Post by rkhusky » Wed Mar 01, 2017 11:00 am

Keep in mind that if one has losses, the order of preference would be that they occur in taxable, Traditional, Roth. And if one has gains, the order of preference would be that they occur in Roth, then Traditional or taxable depending on the type of gain and whether it is realized or not.

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greg24
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Re: Bonds bad in ROTH? Infographic:

Post by greg24 » Wed Mar 01, 2017 11:06 am

Mike, I agree with your suggested changes.

I would like to point out that your choices are not HORRIBLE. In the Bogleheads world, they are certainly poor. But the industry average expense ratio is somewhere around 1.50%.

Your choices are subpar, but just do the best with what you're offered. :sharebeer

retiredjg
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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Wed Mar 01, 2017 12:32 pm

Your plan is not good, poor in fact. But we've seem some that are really horrible and yours isn't one of them. :happy

I'd use one of the bond funds in the 401k for most of the bond allocation. Maybe hold some in Roth too. It is only a little higher cost than the 500 index so you are not losing a great deal.

retiredjg
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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Wed Mar 01, 2017 12:41 pm

MikeT wrote:Sorry for being slow on this point (it's really hurting my head).

Simply put: Since the ROTH gains are tax free, why not put the asset class in the ROTH that gains the most (e.g. more gains that are tax free).

It really seems that putting low yielding bonds in a ROTH is a missed opportunity.

You are not being unusually slow. This is a concept that is very difficult to wrap your head around.

Your point is how many people see things - put the growers in Roth. Their point is that if your portfolio is tax-adjusted, there is no difference between holding bonds in tax-deferred and Roth.

With a tax-adjusted portfolio, you make your calculations assuming you don't own all of the tax-deferred account in the first place. This is probably only half the story but maybe it will get you past the block you have in understanding it. I do not tax-adjust my portfolio at all. Most people don't. Obviously you don't either and there is no need to do so until/if it ever makes good sense to you to do so.

As for your original question, it is NOT BAD to put bonds in Roth IRA but it is not the first choice of many people for just the reasons you suggest. You need to do what makes sense to you. However, bonds in Roth - even when you would prefer something else - might be necessary to do sometimes in order to accomplish your higher goal.

I think you can hit a middle ground by using one of the bond funds in the 401k for a portion of your allocation.

Da5id
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Re: Bonds bad in ROTH? Infographic:

Post by Da5id » Wed Mar 01, 2017 12:43 pm

MikeT wrote:Sorry for being slow on this point (it's really hurting my head).

Simply put: Since the ROTH gains are tax free, why not put the asset class in the ROTH that gains the most (e.g. more gains that are tax free).

It really seems that putting low yielding bonds in a ROTH is a missed opportunity.

Thanks again for everyone's input into this,

Mike


There are links above about this. But consider. Say your target stock/bond allocation is 50% each, and that all your money (say $500,000) is in 401k and Roth of equal value.

Lets say you do:
401k:
$250000 bond fund

Roth Ira:
$250000 stock fund.

There are a few issues:
1) Your asset allocation isn't really 50% each. The value of the two isn't the same. The Roth is $250000. The 401k is $250000 less whatever taxes would be extracted when you pull the money. Assume your marginal rate will be 15%. That means that the 401k is really "worth" $212500. And that means you really only have 46% in bonds and 54% in stocks. So not at your target asset allocation, though the dollar amounts in the accounts are the same.
2) you will also have trouble rebalancing to your target if all your bonds are in the 401k and all your stocks are in the Roth, even if you ignore point 1 above. So assuming the stock market rises, you'll need to sell stocks in the Roth and buy bonds there anyway quite likely.

If you want to take on the additional risk, you can do so, just should be aware that you are in fact taking on additional risk.

missingdonut
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Re: Bonds bad in ROTH? Infographic:

Post by missingdonut » Wed Mar 01, 2017 1:00 pm

aristotelian wrote:$250K in Roth is worth $300K in Traditional because Roth dollars are post-tax. If we assume your stocks are going to double in 10 years and bonds will go up 50%, your choice would be $500k Stock + $400k bonds ($450k - 20% to taxes) vs $375 k bonds + $480K stock ($600k - 20%). It is very close but stock in traditional actually wins. If you also add higher expense ratios to the bond option in the 401k, it gets worse.


Stocks in Roth would be 500k stock + 360k bonds = 860k
Bonds in Roth would be 375k bonds + 480k stock = 855k

I am very confused by your math. But retiredjg correctly pointed out that when you properly adjust for taxes (at a 20% tax rate, $250k in Roth equals $312,500 in traditional, not $300k) there is no difference in where you place the funds.

aristotelian
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Re: Bonds bad in ROTH? Infographic:

Post by aristotelian » Wed Mar 01, 2017 1:21 pm

missingdonut wrote:
aristotelian wrote:$250K in Roth is worth $300K in Traditional because Roth dollars are post-tax. If we assume your stocks are going to double in 10 years and bonds will go up 50%, your choice would be $500k Stock + $400k bonds ($450k - 20% to taxes) vs $375 k bonds + $480K stock ($600k - 20%). It is very close but stock in traditional actually wins. If you also add higher expense ratios to the bond option in the 401k, it gets worse.


Stocks in Roth would be 500k stock + 360k bonds = 860k
Bonds in Roth would be 375k bonds + 480k stock = 855k

I am very confused by your math. But retiredjg correctly pointed out that when you properly adjust for taxes (at a 20% tax rate, $250k in Roth equals $312,500 in traditional, not $300k) there is no difference in where you place the funds.


Yes, you got it right on the math as well as the larger point. Sorry to confuse.

MikeT
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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Wed Mar 01, 2017 5:28 pm

After moving my bonds into my 401k, here's a screen shot of the proposed allocation:
https://monosnap.com/file/BBENBWye5XXWtCPSF1Y5mWaP9ilfoN

The rows in yellow are in my 401k at work (the more expensive funds).

This is based on the Paul Merriman Allocation (adjusted for 20% bond ownership).

Of note:
The ROTH contains only USA Small-Cap and REITS.

I put some international and USA in both the taxable account and ROTH so I can balance within each account.

My work 401k has 18% USA stock and 10% international so that should be easy for balancing as well.

I just edited the screen shot link above to correct the ticker symbols for my 401k funds, and I calculated my overall expense ratio.

I guess my next task is to enter this portfolio into the free morning star xray too and see what the distribution looks like.

All comments very much appreciated,
Thanks!
Mike
Last edited by MikeT on Wed Mar 01, 2017 10:41 pm, edited 2 times in total.

MikeT
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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Wed Mar 01, 2017 5:53 pm

I guess I need some more tweaking. This was supposed to tilt to small-cap-value :-(

Image

Image

-Mike

retiredjg
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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Wed Mar 01, 2017 5:55 pm

MikeT, check your private message inbox please. :happy

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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Thu Mar 02, 2017 8:54 am

Ah. Now we see the problem. The Merriman portfolio. :happy

You are making something simple into something hard by using 12 funds. I think you will find that funneling money into 12 funds while maintaining a certain AA is difficult, maybe impossible.

Let me suggest you read this thread and see if you think the 4 fund idea (for stocks) makes more sense to you. I'll warn you, it's a long thread but this approach is easier to implement and I think you should consider it.

viewtopic.php?f=10&t=38374

I think you can accomplish what you want in a simpler and lower cost manner.

One thing that definitely needs improvement - you do not need to put a tax-managed fund into Roth IRA. A tax-managed fund is only needed in a taxable account. And there are ways to avoid using tax-managed funds at all.

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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Thu Mar 02, 2017 6:31 pm

Thanks @retiredjg

I got that tax-managed small-cap directly from Paul Merriman's site:
Image

Maybe it's the best small-cap, despite its tax-managed-ness?

Mike

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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Thu Mar 02, 2017 6:38 pm

I have no idea why it says that. It is so out of the norm, he should explain it somewhere (unless it was a typo or a brain blink).

Nevertheless, if you consider how your contributions are going to flow into those 12 funds, I think your portfolio will probably not work. Have you tried to see how your annual contributions will sustain this portfolio idea?

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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Thu Mar 02, 2017 6:41 pm

Are you removing all your pictures and graphs? Or is there a problem we need to bring to the attention of a moderator?

Or is is me? :shock:

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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Thu Mar 02, 2017 6:43 pm

And Thanks @retiredjg

As I look at my proposed allocation, although it is certainly complicated, it seems to offer many rebalancing opportunities:
My 401k has 4 asset classes, as does my roth and taxable:

Screen shot:
https://monosnap.com/file/3xVLtm3Yzu54WebQ1auG1Cx4hhyOc4

If I only had 4 funds across 3 account types, wouldn't I have a harder time rebalancing?

As for that very long thread, I'm about 40% through reading it - it does have lots of great info.

As to how will contributions affect this: I expect I will change into what funds I contribute quarterly to assist in rebalancing. Because this has so many moving parts, there's no way I could setup a particular contribution breakdown and have it on auto-pilot.

Thanks,
Mike

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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Thu Mar 02, 2017 7:02 pm

MikeT wrote:As to how will contributions affect this: I expect I will change into what funds I contribute quarterly to assist in rebalancing. Because this has so many moving parts, there's no way I could setup a particular contribution breakdown and have it on auto-pilot.

Not if you know how to do it. :D

But, kidding aside, I don't think it will work because the percentages you want are not percentages you can contribute.

For example (forgive me if I get this wrong because I'm flipping back and forth to your link)....it appears that about 25% of your portfolio is only held in Roth IRA - the 2 small cap funds, a developed market fund, and one other thing I don't remember. However, what you can put into Roth IRA is limited to $5,500 a year. Is that at least 25% of your annual contributions? If not, some adjustments must be made.

I've done (literally) hundreds of these things and yours does not "feel" like it will work to me. However, I don't know anything about what your contributions will be so maybe it will work out. I guess I'm skeptical at this point because I've seen this issue many times before.

This "fit" problem is not unusual when trying to fit Merriman into a several accounts, one of which has very little of what you want (the 401k). In fact it is what usually happens because most of your money is going into the 401k (as it should). If you had a 401k that offered several of these asset classes, it would be pretty easy to implement Merriman's idea. But your 401k only offers 2 and one of them is not that great.....

Play with it for awhile and see if it works year after year. If you get stuck, we can still come up with a portfolio that is tilted to small and value, but is easier to implement.

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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Thu Mar 02, 2017 7:18 pm

You're exactly right: @retiredjg: I have no idea how this will actually pan out over time as 12 things go in 12 different directions: it could be like herding cats!

I'm contributing $18k to my 401k + employer matches $6k.
I'm contributing $5,500 to my Roth.

I think my first preference would be to spin up another fun in my roth or taxable to offset whatever happens in my 401k: I really don't want to add more expensive funds in my 401k.

BTW, I have the impression that my employer is going to revamp the 401k and offer much better and less expensive funds next year so I hope to get my expense ratios down.

And, I did send an email to Paul Merriman to ask if that tax managed fund was a typo.

In the meantime, as tweaked, I optimistic that this allocation is better and more thought out than anything I've done previously.

This has been a really helpful thread for me. I read everything twice and want to go back again one more time!
Mike

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Re: Bonds bad in ROTH? Infographic:

Post by celia » Thu Mar 02, 2017 7:47 pm

I'm surprised that no-one has yet pointed you to our wiki on Tax-efficient fund placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Bonds in tax-deferred (since they don't have any tax advantage to them)
International in taxable (so you can take advantage of any foreign tax credits)
I always try to put the asset that grows the fastest in Roth since I want to be able to withdraw A LOT without any tax consequences. As long as the Roth growth is a lot more than the ER in tax-deferred, that's ok with me. (Actually I don't want much growth in my tax-deferred since I will have to pay tax on it when I convert it.)

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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Thu Mar 02, 2017 7:50 pm

No contributions to taxable? That will add to the problem.... Adding another fund is Roth will not help, in fact, it will make the problem worse. Adding another fund to taxable won't work unless you are adding money to taxable each year (maybe a lot of money).

I'd be interested in hearing about the tax managed small cap in Roth IRA. It could be he thinks it is the best choice, but since tax-managed funds don't usually go into Roth IRA, in my opinion that should probably be noted or discussed somewhere. Or footnoted. Perhaps you have overlooked it.

Many people learn best by doing. If you are one of them, go ahead and give your idea a try. It may very well be like herding cats, but you will learn a lot about portfolio management. Then you will have a better idea of where to go after that.

Note - I have no problem with the concept behind Merriman's idea. I think it is just fine. However, it can be very difficult to implement with a 401k plan like yours - with most of your contributions going into an account that doesn't offer most of the funds you want.

Since using your 401k to the max is important, making adjustments to your 'ideal" portfolio is what usually has to happen.

Any idea what is happening to the charts? Oh dear, they just came back. :?

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Re: Bonds bad in ROTH? Infographic:

Post by retiredjg » Thu Mar 02, 2017 7:56 pm

And now they are gone again.... :shock:

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Re: Bonds bad in ROTH? Infographic:

Post by grabiner » Thu Mar 02, 2017 9:01 pm

MikeT wrote:Sorry for being slow on this point (it's really hurting my head).

Simply put: Since the ROTH gains are tax free, why not put the asset class in the ROTH that gains the most (e.g. more gains that are tax free).

It really seems that putting low yielding bonds in a ROTH is a missed opportunity.


Here's one way I like to explain it.

You own 75% of an account, and your uncle owns the other 25%. Your uncle lets you manage the account. You don't particularly care for your uncle, so you manage this account with your needs in mind.

You have another account which is 100% yours.

If you hold $4000 in stocks in the joint account and $3000 in bonds in the solo account, or vice versa, you own the same 50% stock allocation, and will get the same returns and risk. Therefore, it doesn't matter which account holds the bonds, but $4000 in the joint account is needed to get the same risk reduction as $3000 in the solo account.

Now, consider that the joint account is a traditional IRA. You own 75% of your traditional IRA tax-free, and your uncle Sam owns the other 25%. Holding a traditional IRA with $4000 in stocks and a Roth IRA with $3000 in bonds is equivalent to holding stocks and bonds the other way around.
David Grabiner

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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Thu Mar 02, 2017 9:48 pm

Good anaology @grabiner.

This uncle character reminds me of my uncle sam !!!

:-)

Mike

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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Thu Mar 02, 2017 10:06 pm

THANK YOU @celia !!!

I was getting so focused on the trees, I forgot about the forest:

I was paying so much attention to the perfect asset allocation across the 3 accounts, I forgot about the tax consequences of transacting in my taxable account.

I need to stop, take a deep breath and figure out if re-balancing now will trigger a tax issue for me since I have some purchases < 1 year.

I'm kind of upset at myself for losing sight of the tax issue.

Ratz.

-Mike

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Re: Bonds bad in ROTH? Infographic:

Post by MikeT » Thu Mar 02, 2017 10:31 pm

For my taxable account, "unrealized gains & losses" shows a short term capital gain of $8,000.

Does that mean:
1) if I sold my Vanguard Total International Stock Index Fund NOW (in my taxable account) to buy a different fund, I'd owe about 25% of $8,000?
2) if I waited until the short-term gain became a long-term gain, and I sold it to buy a different fund, I'd owe 15% of $8,000?
3) if I waited 10 years and then sold it, I would owe NO tax until it's sold in 10 years? (just taxes on dividends)

If #3 is true, isn't that a huge dis-incentive to sell in a taxable account for the purpose of re-balancing?

YIKES: I need to go carefully read: https://www.bogleheads.org/wiki/Tax-eff ... _placement (thanks @celia !)

_Mike

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Re: Bonds bad in ROTH? Infographic:

Post by jmk » Thu Mar 02, 2017 11:16 pm

Theoretical wrote:My 401k is very high fee (<100 person company) but all fees are incorporated into the ER so there's no hidden ones. The ERs come out to a 1% AUM fee plus the fund ER. In that light, it's borderline reckless to put low yielding bonds in that high of an expense ratio. At least with equities (in my case DFA Emerging Value and International Value), I'm taking the high risk return with a haircut approach rather than the low risk no/negative return with a guillotine-style haircut.


I'm in the same situation with my 401k, with a 1.04% AUM plus fund ER. But emotion aside, isn't the 1.04 a sunk cost either way once you go the 401k route? If it's rational to use the 401k for Intl value in spite of the fee then it's rational to use it for Bonds in spite of the fee. I'm in the 15% bracket, but need the 401k to get there. So I have my bonds earning 2.5% in a vanguard fund costing me 1.1% and my stocks in taxable. I've thought about adding some DFA intl value to the 401k just enough to overcome the fee (~17%) but decided that was just playing games since it was also increasing the risk.

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Re: Bonds bad in ROTH? Infographic:

Post by Nekrotok » Thu Mar 02, 2017 11:36 pm

jmk wrote:
Theoretical wrote:My 401k is very high fee (<100 person company) but all fees are incorporated into the ER so there's no hidden ones. The ERs come out to a 1% AUM fee plus the fund ER. In that light, it's borderline reckless to put low yielding bonds in that high of an expense ratio. At least with equities (in my case DFA Emerging Value and International Value), I'm taking the high risk return with a haircut approach rather than the low risk no/negative return with a guillotine-style haircut.


I'm in the same situation with my 401k, with a 1.04% AUM plus fund ER. But emotion aside, isn't the 1.04 a sunk cost either way once you go the 401k route? If it's rational to use the 401k for Intl value in spite of the fee then it's rational to use it for Bonds in spite of the fee. I'm in the 15% bracket, but need the 401k to get there. So I have my bonds earning 2.5% in a vanguard fund costing me 1.1% and my stocks in taxable. I've thought about adding some DFA intl value to the 401k just enough to overcome the fee (~17%) but decided that was just playing games since it was also increasing the risk.


IMO, you should put bonds in high-cost 401k accounts precisely because they are low-growth. You want your growth in your low-cost accounts, and less growth in your high-cost to have lower total cost. Imagine you have $100k in a 401k with 1% AUM and $100k in a rollover tIRA with 0% AUM. You are paying $1k/year in fees. If your 401k holds stocks and double to $200k while your tIRA holds bonds that grow to $150k, now you are paying $2k/year in fees instead of $1.5k/year if you did it the other way around.

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