I've reviewed triceratops's great post on tax efficiency and used the provided spreadsheet to crunch the numbers. It seems clear that for me in a taxable account, bond funds will be twice as tax inefficient as the next most inefficient fund in my portfolio (VFSVX).
However, many other posts here and elsewhere seem to indicate it might be better to put equities in my Roth IRA instead of bonds. The posters' situations aren't quite the same as mine, but still food for thought.
Therefore, it seems like I have the following main options:
- Fill my 401k and Roth IRA with bonds right now and for future contributions. When my AA is out of balance, I will buy TIPS, tax-managed bond funds in my taxable account, or other fixed-income options.
- Fill my 401k with bonds, but use my Roth IRA for the next-least inefficient fund in my portfolio (VFSVX). Buy other tax-managed fixed-income options in my taxable account to maintain my desired AA.
Thanks!
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Basic Facts and AA
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Emergency funds: 9 months in Ally (1.2% interest)
Debt: None
Tax Filing Status: Single
Tax Rate: 28% Federal, 0% State
State of Residence: Washington State
Age: 31
Target Retirement Age: 50
Desired Asset Allocation:
- 80% Stocks, 20% Bonds
- 75% Domestic Stock, 25% International Stock
- Domestic Stock: 70% Large Cap Blend, 30% Small Cap Value
- International Stock: 70% Large Cap Blend, 30% Small Cap Value
- Domestic Large Blend: 42% of total
- Domestic Small Value: 18% of total
- Domestic Bonds: 20% of total
- International Large Blend: 14% of total
- International Small Value: 6% of total
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Current Investments -- ~$730,000
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Vanguard Taxable -- ~$555,000 -- 76%
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39.9% (VTSAX) Vanguard Total Stock Market Index Admiral Shares -- 0.05% ER
17.1% (VSIAX) Vanguard Small-Cap Value Index Fund Admiral Shares -- 0.09% ER
13.3% (VTIAX) Vanguard Total International Stock Market Index Admiral Shares -- 0.11% ER
5.7% (VFSVX) Vanguard FTSE All-World ex-US Small-Cap Index Fund Investor Shares -- 0.27% ER
Vanguard Traditional 401k -- ~$119,000 -- 16.3%
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16.3% (VBMPX) Vanguard Total Bond Market Index Fund Institutional Plus Shares -- 0.03% ER
Vanguard Roth IRA -- ~$56,000 -- 7.7%
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7.7% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares -- 0.05% ER