Bond fund in a ROTH

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jtelwood
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Bond fund in a ROTH

Post by jtelwood »

Are there situations when it makes sense to hold a bond fund in a ROTH IRA?
Appreciate any thoughts.

jte
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TomatoTomahto
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Re: Bond fund in a ROTH

Post by TomatoTomahto »

I guess if you’re 100% bonds, but other than that, I can’t imagine putting bonds in my very limited Roth space.
I get the FI part but not the RE part of FIRE.
Johm221122
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Re: Bond fund in a ROTH

Post by Johm221122 »

Yes,
If you hold stocks in taxable
If your 401 doesn't have good bond option
If your risk adverse
If your Roth is all your assets
If you use balanced funds
Many more that is just off the top of my head,I use too but use 401(stable value)and savings bonds for my fixed income

My ROTH is international and extended market index
trav867
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Re: Bond fund in a ROTH

Post by trav867 »

I believe the prevailing wisdom here is that it always makes sense to hold bonds and bond funds in tax advantaged accounts as they are by nature tax inefficient.
chevca
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Re: Bond fund in a ROTH

Post by chevca »

When I considered my Roth IRA as my emergency fund, I kept it all in the intermediate term index fund. That was all the risk I wanted to take with it at that time.

I now have my Roth IRA all in the balanced index fund, so still hold bonds in there.
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Re: Bond fund in a ROTH

Post by Mitchell777 »

I've done it temporarily. When equities are way up, and I do not want to sell equities from my non retirement account due to tax consequences (for that year), I've moved some ROTH money to bonds for a time period. I've done it this year due to wanting to keep my income down for tax and IRMAA purposes.
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Re: Bond fund in a ROTH

Post by TomatoTomahto »

trav867 wrote: Thu Nov 16, 2017 5:04 am I believe the prevailing wisdom here is that it always makes sense to hold bonds and bond funds in tax advantaged accounts as they are by nature tax inefficient.
Yes, but generally, I think, it’s bonds in tax-deferred (tIRA, 401k, etc.) and equities in tax-free Roth.

PRIMECAP goes into the Roth, TBM into 401k.
I get the FI part but not the RE part of FIRE.
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Re: Bond fund in a ROTH

Post by Johm221122 »

TomatoTomahto wrote: Thu Nov 16, 2017 6:48 am
trav867 wrote: Thu Nov 16, 2017 5:04 am I believe the prevailing wisdom here is that it always makes sense to hold bonds and bond funds in tax advantaged accounts as they are by nature tax inefficient.
Yes, but generally, I think, it’s bonds in tax-deferred (tIRA, 401k, etc.) and equities in tax-free Roth.

PRIMECAP goes into the Roth, TBM into 401k.
If you have a 401 or tira,not everyone does
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TomatoTomahto
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Re: Bond fund in a ROTH

Post by TomatoTomahto »

Johm221122 wrote: Thu Nov 16, 2017 7:22 am
TomatoTomahto wrote: Thu Nov 16, 2017 6:48 am
trav867 wrote: Thu Nov 16, 2017 5:04 am I believe the prevailing wisdom here is that it always makes sense to hold bonds and bond funds in tax advantaged accounts as they are by nature tax inefficient.
Yes, but generally, I think, it’s bonds in tax-deferred (tIRA, 401k, etc.) and equities in tax-free Roth.

PRIMECAP goes into the Roth, TBM into 401k.
If you have a 401 or tira,not everyone does
Everyone has a different situation, but if it were me, and I had a taxable account, then I’d put bonds in taxable. I want whatever can really compound (e.g., TSM, PRIMECAP) in Roth, so that I make full use of its tax free treatment.
I get the FI part but not the RE part of FIRE.
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retiredjg
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Re: Bond fund in a ROTH

Post by retiredjg »

jtelwood wrote: Thu Nov 16, 2017 4:20 am Are there situations when it makes sense to hold a bond fund in a ROTH IRA?
Appreciate any thoughts.

jte
Many people prefer to reserve their Roth space for stocks funds because of a higher expected rate of growth. That is no reason to avoid holding bonds in Roth IRA if that suits your needs. There several circumstances that could make holding bonds in Roth a good idea. Do what you feel comfortable with.
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Re: Bond fund in a ROTH

Post by UpsetRaptor »

Wait wait wait, so the general guideline is to put taxable bonds in a tax-advantaged account if it's a tIRA or 401K but not a Roth?

What about the following situation:
1) 401K only decent fund option is an index 500 fund ER .21%, all bond options are 70+bp
2) Roth space available at Vanguard
3) Taxable space available at Vanguard

^ Where should bonds theoretically go?
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Re: Bond fund in a ROTH

Post by TomatoTomahto »

johne417 wrote: Thu Nov 16, 2017 10:40 am Wait wait wait, so the general guideline is to put taxable bonds in a tax-advantaged account if it's a tIRA or 401K but not a Roth?

What about the following situation:
1) 401K only decent fund option is an index 500 fund ER .21%, all bond options are 70+bp
2) Roth space available at Vanguard
3) Taxable space available at Vanguard

^ Where should bonds theoretically go?
I would, and do, put bonds in taxable (option 3). However, I use intermediate tax free.
I get the FI part but not the RE part of FIRE.
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Re: Bond fund in a ROTH

Post by livesoft »

johne417 wrote: Thu Nov 16, 2017 10:40 am ^ Where should bonds theoretically go?
Bonds might theoretically go in taxable, especially if they are muni bonds and one is in a high tax bracket. OTOH, a craptacular bond fund in the 401(k) might be the place to go. If you pay 0.5% extra in a 401(k) due to an expense ratio, then that's almost like paying 0.5% extra in a taxable account. Also consider that equities in a Roth might net more than that 0.5% extra you save by putting bonds in a Roth.

Or do like my spouse: Borrow money from 401(k) (holding bonds only) and put the borrowed money in a 529 plan bond fund.
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Re: Bond fund in a ROTH

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jtelwood wrote: Thu Nov 16, 2017 4:20 am Are there situations when it makes sense to hold a bond fund in a ROTH IRA?
Appreciate any thoughts.

jte
Sure. You can always think of situations where this might be totally reasonable.

The theory is that you'd like to grow your Roth as much as possible and tap it last. This would generally mean that you'd want to put your assets with the highest growth potential in your Roth. If you're in the accumulation mode, it would make perfect sense to hold only equities in your Roth since the potential to grow the balance is highest with those risky assets.

When you're close to retirement or especially in retirement, you're going to want to maximize your abilitly to be flexible with how you're going to tap your money. One of the most powerful tools a retiree has is to (hopefully) be able to adjust spending. Taxes are inevitably part of that process so you're going to want to have as many choices as possible during those draw-down years, and this is going to hopefully include your ability to take money from your taxable account(s), your tax-deferred account(s), your health savings account(s), and your Roth account(s)--whichever is the best for you at the time. You never want to be in a situation where you're going to be selling assets at much of a loss; you're going to want to have access to Roth money even during brutal bear markets. Unless you're using the Roth(s) strictly for legacy planning, you're going to be spending it eventually, so you're going to have fixed income money in the Roth at some point (but probably not at 30).
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Re: Bond fund in a ROTH

Post by Snowjob »

I've always been a stock in the Roth person, but if you take market timing and valuations aside, many of the experts here will tell you to put bonds in a Roth. One part of the theory is that if equities fall, your tax liability to the government also does but in a Roth you already paid your taxes so the government is no longer sharing that risk. The counter argument which I've always held is that that space s more valuable on the equity upside etc etc. but the reality is, if you adjust your asset allocation to account for taxes owed, instead of counting Roth space the same as 401k pretax space, the experts end up being right. Again, very early on doesn't matter, I say go head on into equities, but at the end of the day when your closer to needing the money, bonds in a Roth make sense.
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Re: Bond fund in a ROTH

Post by retiredjg »

johne417 wrote: Thu Nov 16, 2017 10:40 am Wait wait wait, so the general guideline is to put taxable bonds in a tax-advantaged account if it's a tIRA or 401K but not a Roth?

What about the following situation:
1) 401K only decent fund option is an index 500 fund ER .21%, all bond options are 70+bp
2) Roth space available at Vanguard
3) Taxable space available at Vanguard

^ Where should bonds theoretically go?
First, I'd look for a stable value fund in the 401k. This is sometimes called a guaranteed income fund and is often listed separately from the mutual funds available. It there is a stable value fund and it pays a fair amount, I would probably split the bonds - half stable value and half of the best bond fund.

Baring that, if the bond allocation is small, I might just use the best bond fund in the 401k.

If the bond allocation is larger, I might split it between the 401k and/or Roth and/or taxable. However, I would not put any money in taxable unless the 401k and the Roth IRA are completely maxed out.

If I made enough money to max out both a 401k and IRA and still had money to save for retirement in a taxable account, I'd put some bonds in each account, using a tax-exempt bond in taxable (state specific if available).
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jtelwood
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Re: Bond fund in a ROTH

Post by jtelwood »

Thanks to everyone who took time to respond.

I retired about 10 years ago. My wife retired in May of this year but concluded it was too early for her and accepted employment in Daegu, Korea. We arrived here 3 weeks ago. Now that she has reentered the work force, she will be able to contribute to an IRA and I to a spousal IRA. During the entire accumulation phase, we only contributed equity funds (Total Stock Market Index and Total International Stock Index) to our ROTH IRAs. Now in retirement (or soon to be for a 2nd time) I wanted to have the flexibility to withdraw from a ROTH account when the market was down and thought that having a bond fund in our ROTH would give us that flexibility. Much along the same thought process as the post from 'artsdoctor'. A plus for her going back to work for a year or 2 is she now have access to the TSP, giving her a chance to put G fund contributions in a ROTH account. A couple of years contributing to a bond fund in our ROTH IRAs and maxing out her TSP ROTH contributions will provide the flexibility I believe we need.

Like many of you, I have been a DIY investor with help from you good folks from time to time. Thanks again for that assistance and counsel over the years.

Last question. What VG bond fund would you recommend for our ROTH IRA's - I was thinking about either an intermediate corporate or intermediate Treasury. Looking forward to your recommendations.

Thanks again.

jte
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Re: Bond fund in a ROTH

Post by Johm221122 »

jtelwood wrote: Fri Nov 17, 2017 12:51 am

Last question. What VG bond fund would you recommend for our ROTH IRA's - I was thinking about either an intermediate corporate or intermediate Treasury. Looking forward to your recommendations.

Thanks again.

jte
I would use Total Bond index
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Re: Bond fund in a ROTH

Post by retiredjg »

jtelwood wrote: Fri Nov 17, 2017 12:51 am Last question. What VG bond fund would you recommend for our ROTH IRA's - I was thinking about either an intermediate corporate or intermediate Treasury. Looking forward to your recommendations.
I think any quality intermediate term bond fund would be fine. If you already have a lot of total bond, an intermediate corporate might be a nice complement.
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Re: Bond fund in a ROTH

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jtelwood wrote: Fri Nov 17, 2017 12:51 am Now in retirement (or soon to be for a 2nd time) I wanted to have the flexibility to withdraw from a ROTH account when the market was down and thought that having a bond fund in our ROTH would give us that flexibility.
similarly, if you have to take RMDs from an inherited Roth and one holds all equities in it, then the market swings south and you have to take your RMD one would be selling equities at a low point to satisfy the RMD.
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Re: Bond fund in a ROTH

Post by grabiner »

F150HD wrote: Fri Nov 17, 2017 6:23 am
jtelwood wrote: Fri Nov 17, 2017 12:51 am Now in retirement (or soon to be for a 2nd time) I wanted to have the flexibility to withdraw from a ROTH account when the market was down and thought that having a bond fund in our ROTH would give us that flexibility.
similarly, if you have to take RMDs from an inherited Roth and one holds all equities in it, then the market swings south and you have to take your RMD one would be selling equities at a low point to satisfy the RMD.
You don't actually need to sell equities low, because you are required to take the RMDs, but not required to spend them. If you have an RMD you don't need to spend, you can take the RMD from a stock fund, and invest it into a stock index fund in your taxable account. And if you have an RMD from an all-stock account, and do need the money, but want to spend bonds, then you can spend the RMD money, and move money in some other account from bonds to stock, keeping your stock exposure.
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Re: Bond fund in a ROTH

Post by bertilak »

jtelwood wrote: Thu Nov 16, 2017 4:20 am Are there situations when it makes sense to hold a bond fund in a ROTH IRA?
Appreciate any thoughts.
If you have a Roth IRA, a traditional IRA and a taxable account, which one, in the long run, would you like to see have the most money in it?

I would go for the Roth, but I don't think that means you want to take the most risk in the Roth either. Yes, you want it to have the biggest balance but you also want to be able to put some reliance on that. To me that means bonds. Also, there are indications that an account with some bonds has a higher expected return than a 100% equity account.

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Re: Bond fund in a ROTH

Post by nbseer »

I split my Roth funds between Wellseley fund and money market... use it as a potential emergency fund for things like a car, new roof, to replenish my normal living expenses. It's nice to be able to have access to cash tax-free whenever I need it. Already in retirement, took SS at 65, doing Roth conversions until age 70 from my tIRA. Lucky to eventually have a pension in a few years that will cover most of our expenses.
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Re: Bond fund in a ROTH

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grabiner wrote: Sat Nov 18, 2017 8:44 pm You don't actually need to sell equities low, because you are required to take the RMDs, but not required to spend them. If you have an RMD you don't need to spend, you can take the RMD from a stock fund, and invest it into a stock index fund in your taxable account. And if you have an RMD from an all-stock account, and do need the money, but want to spend bonds, then you can spend the RMD money, and move money in some other account from bonds to stock, keeping your stock exposure.
Thanks, though one loses tax-free growth by repurchasing in taxable (?)
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Re: Bond fund in a ROTH

Post by grabiner »

F150HD wrote: Sun Nov 19, 2017 8:44 am
grabiner wrote: Sat Nov 18, 2017 8:44 pm You don't actually need to sell equities low, because you are required to take the RMDs, but not required to spend them. If you have an RMD you don't need to spend, you can take the RMD from a stock fund, and invest it into a stock index fund in your taxable account. And if you have an RMD from an all-stock account, and do need the money, but want to spend bonds, then you can spend the RMD money, and move money in some other account from bonds to stock, keeping your stock exposure.
Thanks, though one loses tax-free growth by repurchasing in taxable (?)
Yes, and that is a slight disadvantage of having a large traditional account, which is a minor reason to prefer equities in your Roth. If you have RMDs you don't need to spend, you will pay tax on the RMDs, and then a small amount of tax on future growth. Putting equities in a traditional account makes it more likely that this will happen, as a stock market boom will give you a very large traditional account.
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Re: Bond fund in a ROTH

Post by spdoublebass »

This might be a stupid question, but I'll ask anyway.

After reading this thread....it's opened my eyes on a few things. However, the question I have is this: If you do not hold bonds in your ROTH, how do you rebalance?

If I hold bonds in my ROTH, I could sell them to buy TSM. If my Bonds are in my 403b instead and I sell them, I'd have to buy the stock in my 403b.

I guess what you all are saying is that this would be fine, as long as your 403b (or 401K) is large enough to hold your FI amount.
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Re: Bond fund in a ROTH

Post by grabiner »

spdoublebass wrote: Sun Nov 19, 2017 9:37 am This might be a stupid question, but I'll ask anyway.

After reading this thread....it's opened my eyes on a few things. However, the question I have is this: If you do not hold bonds in your ROTH, how do you rebalance?

If I hold bonds in my ROTH, I could sell them to buy TSM. If my Bonds are in my 403b instead and I sell them, I'd have to buy the stock in my 403b.

I guess what you all are saying is that this would be fine, as long as your 403b (or 401K) is large enough to hold your FI amount.
View everything as one portfolio. You rebalance so that your portfolio risk level matches your risk tolerance. But if the market crashes, it only matters how much you lose after tax. It doesn't matter whether all the losses are in your Roth, or all in your 403(b), or half in each, since any of those will have the same effect on the amount you will be able to spend in retirement.

This is how I do things. My Roth IRA and taxable account are all stock, and I set the bond holding in my employer plan according to my own risk tolerance. I can rebalance in my employer plan at no cost. And when my risk tolerance changes (as it does every year when I am one year closer to retirement), I change my allocation, selling stock to buy more bonds in my employer plan.
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Re: Bond fund in a ROTH

Post by retiredjg »

spdoublebass wrote: Sun Nov 19, 2017 9:37 am This might be a stupid question, but I'll ask anyway.

After reading this thread....it's opened my eyes on a few things. However, the question I have is this: If you do not hold bonds in your ROTH, how do you rebalance?

If I hold bonds in my ROTH, I could sell them to buy TSM. If my Bonds are in my 403b instead and I sell them, I'd have to buy the stock in my 403b.

I guess what you all are saying is that this would be fine, as long as your 403b (or 401K) is large enough to hold your FI amount.
It's not a stupid question, but it appears to be based on a common misconception that one should hold only bonds in the 403b/401k plans.

I don't know where people are getting this idea, but it comes up a lot and is completely incorrect.

Most people should completely fill their 403b/401k every year they can. For almost everyone that means both stocks and bonds. The people who have a huge taxable account might be an exception - their 403b/401k might hold only bonds because of limited space.
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Re: Bond fund in a ROTH

Post by spdoublebass »

grabiner wrote: Sun Nov 19, 2017 9:55 am
spdoublebass wrote: Sun Nov 19, 2017 9:37 am This might be a stupid question, but I'll ask anyway.

After reading this thread....it's opened my eyes on a few things. However, the question I have is this: If you do not hold bonds in your ROTH, how do you rebalance?

If I hold bonds in my ROTH, I could sell them to buy TSM. If my Bonds are in my 403b instead and I sell them, I'd have to buy the stock in my 403b.

I guess what you all are saying is that this would be fine, as long as your 403b (or 401K) is large enough to hold your FI amount.
View everything as one portfolio. You rebalance so that your portfolio risk level matches your risk tolerance. But if the market crashes, it only matters how much you lose after tax. It doesn't matter whether all the losses are in your Roth, or all in your 403(b), or half in each, since any of those will have the same effect on the amount you will be able to spend in retirement.

This is how I do things. My Roth IRA and taxable account are all stock, and I set the bond holding in my employer plan according to my own risk tolerance. I can rebalance in my employer plan at no cost. And when my risk tolerance changes (as it does every year when I am one year closer to retirement), I change my allocation, selling stock to buy more bonds in my employer plan.
Thank you for this info.

I'm a little different from most people as that my largest account is my ROTH Ira. I do have a Solo 401K and a 403B...but the 403b is from where I teach part time, so I do not have a large amount of money going in there. After reading this thread, I think I'll put my bonds here and keep the Roth IRA mostly stock.

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Re: Bond fund in a ROTH

Post by JohnnyM »

Here is my situation along these lines that I am hoping to get some comments about from you guys. I have a IRA & a Roth IRA. I have always held the bonds & socks in the IRA, and all stocks in the Roth. But for the reasons mentioned above I feel it is time for me to include bonds in the Roth.

The total portfolio value is divided right in half, half IRA & half Roth.
My desired total portfolio stock to bond ratio is close to 60s:40b.
At age 56 I am on a glide path towards 50:50 as I near retirement age of let's just say 60 but I plan on working much longer but one needs to be careful.

My IRA is now a 50s:50b , and my Roth IRA is now going to the 80s:20b to achieve my desired total portfolio ratio of roughly 60b:40b (I know it looks like 65s: 35b but I also have an HSA heavy in bonds, and, I have been pre-paying debt quite heavily which I consider almost like a bond making the total portfolio really closer to 60:40 today.

I have not yet pulled the trigger on putting the bonds in the Roth to achieve this, and was hoping to see if anyone had comments before I do so; I always learn something here.
Thank you
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Re: Bond fund in a ROTH

Post by jtelwood »

I would like some clarification on a point made in an earlier post/reply. A paragraph from that post is below.

' View everything as one portfolio. You rebalance so that your portfolio risk level matches your risk tolerance. But if the market crashes, it only matters how much you lose after tax. It doesn't matter whether all the losses are in your Roth, or all in your 403(b), or half in each, since any of those will have the same effect on the amount you will be able to spend in retirement.'


My question - it seems to me that the effect would not be the same, specifically, wouldn't the one with the ROTH actually be able to spend more in retirement since his/her withdrawal would be tax free?

jte
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Re: Bond fund in a ROTH

Post by grabiner »

jtelwood wrote: Tue Feb 20, 2018 11:39 pm I would like some clarification on a point made in an earlier post/reply. A paragraph from that post is below.

' View everything as one portfolio. You rebalance so that your portfolio risk level matches your risk tolerance. But if the market crashes, it only matters how much you lose after tax. It doesn't matter whether all the losses are in your Roth, or all in your 403(b), or half in each, since any of those will have the same effect on the amount you will be able to spend in retirement.'


My question - it seems to me that the effect would not be the same, specifically, wouldn't the one with the ROTH actually be able to spend more in retirement since his/her withdrawal would be tax free?
This is correct, and is the reason to do tax adjustment, and why I wrote, "how much you lose after tax." If you expect to retire in a 25% tax bracket, and your portfolio is $40K in a 403(b) and $30K in a Roth, you effectively have half your portfolio in either account. Your accounts are worth $60K after tax. If the Roth is all in stock, and gains or loses 50%, your after-tax value rises or falls to $75K or $45K. If the 403(b) is all in stock, and gains or loses 50%, your after-tax value rises or falls to $75K or $45K since there is a $5K change in tax on the $20K change in value. Both portfolios are equivalent.

The two portfolios are not equivalent if the 403(b) has better stock than bond options, or vice versa; this could be a reason to hold stocks or bonds in the 403(b).
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Re: Bond fund in a ROTH

Post by jtelwood »

Thanks for the clarification.
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