Bonds in Roth IRA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Stormbringer
Posts: 508
Joined: Sun Jun 14, 2015 7:07 am

Bonds in Roth IRA

Post by Stormbringer » Sun Jun 03, 2018 5:55 am

My wife has a pretty decent selection of low-cost index funds in her 401(k), but lousy choices of bond funds. Most are actively managed with .75% fees or higher. The only low cost (.1% fee) bond fund is a short-term (~2 year duration) fund. On the other hand, her Roth IRA allows us to invest in anything.

Would it be better to:
  1. Buy low cost index funds in the 401(k) and a low-cost bond fund in the Roth IRA to minimize overall expenses; or
  2. Buys bonds in the 401(k) despite the poor choices in order to buy stocks in the Roth IRA and have more growth in that account, the expectation being that in the long run the stocks will perform better and the Roth will have a large balance at retirement than it would with bonds in it.
Thanks in advance.
"Compound interest is the most powerful force in the universe." - Albert Einstein

rkhusky
Posts: 5227
Joined: Thu Aug 18, 2011 8:09 pm

Re: Bonds in Roth IRA

Post by rkhusky » Sun Jun 03, 2018 5:59 am

If you are in a higher tax bracket, 22%+, you might also look at a muni bond fund in taxable (need to check return vs taxable bond and state tax rate also comes into play). You could also put a bit of money in the short bond in the 401k and the rest of bonds in the Roth IRA.

retiredjg
Posts: 32911
Joined: Thu Jan 10, 2008 12:56 pm

Re: Bonds in Roth IRA

Post by retiredjg » Sun Jun 03, 2018 6:22 am

Hard to know based on only the information presented. How large a bond portion are you looking for? Could you hold more "good" bonds in your 401k? How much of the Roth space would be used for bonds? Do you have a taxable account?

For example, if I wanted a 40% bond allocation, I probably would not want all the bonds in my portfolio in that one short term bond fund. But if I were young and only wanted a 20% bond allocation, the short term fund might be more tolerable for the entire allocation.

Or If my Roth IRA were 20% of the portfolio, I would not mind having a 5% slice dedicated to a broad bond index fund. Conversely, I would not want my entire Roth space filled with bonds year after year. A short term position like that would not bother me though.

Or the short term bond fund would be fine if my spouse had a better bond fund in his/her 401k.

If there is a taxable account, some bonds could be held there (not my favorite choice, except for I Bonds).


Of just the two choices given, I would probably do a combination - the short term bond, a little of a more expensive bond, and some in Roth IRA.

Stormbringer
Posts: 508
Joined: Sun Jun 14, 2015 7:07 am

Re: Bonds in Roth IRA

Post by Stormbringer » Sun Jun 03, 2018 8:01 am

retiredjg wrote:
Sun Jun 03, 2018 6:22 am
Hard to know based on only the information presented. How large a bond portion are you looking for? Could you hold more "good" bonds in your 401k? How much of the Roth space would be used for bonds? Do you have a taxable account?
Her Roth-IRA represents about 20% of the total. I'm thinking a 70/30 allocation overall. She also has another 2% of the total in I-Bonds. We do have a taxable account.

To minimize fees, we would need to either load up the Roth with bonds, or buy the short-term bond fund in her 401(k).
"Compound interest is the most powerful force in the universe." - Albert Einstein

mhalley
Posts: 5820
Joined: Tue Nov 20, 2007 6:02 am

Re: Bonds in Roth IRA

Post by mhalley » Sun Jun 03, 2018 8:28 am

I wouldn't make the roth all bonds, as you really want to get some good growth there. Remember that returns aren't the main reason to own bonds, it is to balance the portfolio against huge losses in your stocks. Having less yield on your bonds is not great due to the high er, but they will still be providing the diversification needed to keep those huge dips from causing sleepless nights. You might check into the wiki on how to campaign for a better 401k. Given that you do have a short term bond fund with low fees, I would use that for a good portion of the bond portfolio. If you made it half your bond portfolio, you are decreasing your bond er by about half, which makes the high er bond fund more palatable.
https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

cherijoh
Posts: 4781
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Bonds in Roth IRA

Post by cherijoh » Sun Jun 03, 2018 8:37 am

Stormbringer wrote:
Sun Jun 03, 2018 8:01 am
retiredjg wrote:
Sun Jun 03, 2018 6:22 am
Hard to know based on only the information presented. How large a bond portion are you looking for? Could you hold more "good" bonds in your 401k? How much of the Roth space would be used for bonds? Do you have a taxable account?
Her Roth-IRA represents about 20% of the total. I'm thinking a 70/30 allocation overall. She also has another 2% of the total in I-Bonds. We do have a taxable account.

To minimize fees, we would need to either load up the Roth with bonds, or buy the short-term bond fund in her 401(k).
Retiredjg is on the right track. A 100% bond allocation in your wife's Roth would only contribute 20% bonds to the overall portfolio based on your Roth assets (20% of total). I definitely wouldn't recommend allocating her entire Roth to bonds - that defeats the entire purpose of putting money into your Roth add reaping tax-free growth. I would personally go with 0% bonds in the Roth and use the 401k for all the bonds, but if you decide to split the difference I would look at a maximum allocation of 30% bonds in the Roth. You could take a barbell approach and buy longer-term bonds in the Roth and short-term bonds in the 401k. Since we are in a rising rate environment personally I would be okay with sticking entirely to ST bonds in the 401k - even if that was the entire bond allocation.

But I think you may be suffering from tunnel vision about "minimizing fees". You should instead focus on what will give you the biggest pot of retirement money at the end - after taxes. Stuffing your Roth IRA with bonds is NOT the solution IMO! Based on the size of her 401k and the allocation you would need to hit 30% bonds overall (37.5% in 401k), how much additional expense per year are you taking about if she invested in one of the more expensive bond funds? Or split her bond allocation 50/50 with the cheaper short-term bond fund?

Does the yield on the higher expense bond fund in the 401k exceed the yield on the short-term bond fund? Remember expense ratios are taken out before you see any returns on the fund. (There may be other fees charged by the 401k administrator, but I would expect those to be the same irrespective of the investment mix).

Edited to add: If you have better bond fund choices in your retirement plan, have you considered overweighting bonds in your plan and underweighting them in hers? Taking an entire portfolio view across all your accounts so to speak. (I'm single but realize this may not fly for reasons not having to strictly do with finances but I thought I'd through it out).

retiredjg
Posts: 32911
Joined: Thu Jan 10, 2008 12:56 pm

Re: Bonds in Roth IRA

Post by retiredjg » Sun Jun 03, 2018 9:08 am

Stormbringer wrote:
Sun Jun 03, 2018 8:01 am
retiredjg wrote:
Sun Jun 03, 2018 6:22 am
Hard to know based on only the information presented. How large a bond portion are you looking for? Could you hold more "good" bonds in your 401k? How much of the Roth space would be used for bonds? Do you have a taxable account?
Her Roth-IRA represents about 20% of the total. I'm thinking a 70/30 allocation overall. She also has another 2% of the total in I-Bonds. We do have a taxable account.

To minimize fees, we would need to either load up the Roth with bonds, or buy the short-term bond fund in her 401(k).
It appears you have no accounts or you don't want to change what is in your accounts.

I'd take a middle road. Put 5% in Roth IRA, 8% in the best expensive bond fund in her 401k, 2% in I Bonds and 15% in the short term bond fund.

Yes, that complicates things more than required, but it does address your desire to be low cost while still getting a little more earnings and not encumbering the entire Roth IRA.

In the long run, having a low overall cost for the portfolio is what is important. Having a small percentage of the portfolio in funds that are higher cost than your prefer is not a fatal flaw.

User avatar
Epsilon Delta
Posts: 7423
Joined: Thu Apr 28, 2011 7:00 pm

Re: Bonds in Roth IRA

Post by Epsilon Delta » Sun Jun 03, 2018 9:26 am

Stormbringer wrote:
Sun Jun 03, 2018 5:55 am
My wife has a pretty decent selection of low-cost index funds in her 401(k), but lousy choices of bond funds. Most are actively managed with .75% fees or higher. The only low cost (.1% fee) bond fund is a short-term (~2 year duration) fund. On the other hand, her Roth IRA allows us to invest in anything.

Would it be better to:
  1. Buy low cost index funds in the 401(k) and a low-cost bond fund in the Roth IRA to minimize overall expenses; or
  2. Buys bonds in the 401(k) despite the poor choices in order to buy stocks in the Roth IRA and have more growth in that account, the expectation being that in the long run the stocks will perform better and the Roth will have a large balance at retirement than it would with bonds in it.
Thanks in advance.
It's not clear if you have ruled out holding the expensive bond funds but I think you can do that. That simplifies the problem.

Compare the yields, net of expenses, of the good short term bond fund with the other choices in the 401(k). You'll probably find that the short term fund has the highest net yield. In that case the only reasons to own any of the other bond funds are either different credit risks (e.g. treasuries v. corporate) or because rates might fall. You'll have to address credit risk yourself, but if you expect, or want to be prepared for, interest rates to fall I'd consider a barbell of the short term bonds with 30 year zeros (or as close as you can get) in the Roth.

Dandy
Posts: 5187
Joined: Sun Apr 25, 2010 7:42 pm

Re: Bonds in Roth IRA

Post by Dandy » Sun Jun 03, 2018 9:28 am

I favor a mix of equities and fixed income in almost all type of accounts even Roth. In an TIRA only a modest allocation to equities, in a Roth and taxable only a modest allocation to fixed income. (mostly muni's in taxable if that makes sense tax wise).
In your case I wonder why a short term bond fund is a concern. For most the idea of your fixed income is stability, safety and perhaps the ability to rebalance. A decent short term bond fund fits that bill nicely, especially in the current rising rate environment. If you don't have it in your 401k type account then rebalancing will have to occur in taxable account - with possible tax implications or your Roth which may not be large enough.

Last year at age 69 was the first year I sold taxable assets to rebalance and incurred long term cap gains tax. I didn't want to reduce my low equity allocation (@21%) in my large TIRA any further. Keep in mind that after investing for decades your taxable account funds may have large gains so there is likely little chance for selling equities without cap gain taxes. Not the worst thing but at age 70 plus you may not want to have cap gains due to rebalancing and RMD income added to other income.

aristotelian
Posts: 4221
Joined: Wed Jan 11, 2017 8:05 pm

Re: Bonds in Roth IRA

Post by aristotelian » Sun Jun 03, 2018 9:33 am

Are you eligible for Traditional IRA deduction? Does she have a Roth 401k option?

rbaldini
Posts: 900
Joined: Mon Mar 23, 2015 3:20 pm

Re: Bonds in Roth IRA

Post by rbaldini » Sun Jun 03, 2018 9:47 am

Go with choice A.

If you do the accounting right*, then there is actually no difference between the two, before accounting for expense ratio. So it makes sense to choose the route that minimizes expenses, which is choice A.

*That is, account for the fact that you don't own some proportion of your 401k (it will be taxed at your retirement income rate), and use that you adjust your asset allocation accordingly. If you do this, then it doesn't actually matter if bonds are in Roth, 401k, or both - contrary to the common belief that putting bonds in roth is a bad idea.
Last edited by rbaldini on Sun Jun 03, 2018 9:48 am, edited 1 time in total.

Stormbringer
Posts: 508
Joined: Sun Jun 14, 2015 7:07 am

Re: Bonds in Roth IRA

Post by Stormbringer » Sun Jun 03, 2018 9:48 am

aristotelian wrote:
Sun Jun 03, 2018 9:33 am
Are you eligible for Traditional IRA deduction? Does she have a Roth 401k option?
We each contribute the maximum every year to a traditional IRA and roll it over into the Roth (i.e. backdoor). She does not have a Roth 401k option.
"Compound interest is the most powerful force in the universe." - Albert Einstein

aristotelian
Posts: 4221
Joined: Wed Jan 11, 2017 8:05 pm

Re: Bonds in Roth IRA

Post by aristotelian » Sun Jun 03, 2018 11:22 am

rbaldini wrote:
Sun Jun 03, 2018 9:47 am
Go with choice A.

If you do the accounting right*, then there is actually no difference between the two, before accounting for expense ratio. So it makes sense to choose the route that minimizes expenses, which is choice A.

*That is, account for the fact that you don't own some proportion of your 401k (it will be taxed at your retirement income rate), and use that you adjust your asset allocation accordingly. If you do this, then it doesn't actually matter if bonds are in Roth, 401k, or both - contrary to the common belief that putting bonds in roth is a bad idea.
Disagree. It only "doesn't matter" if you plan to be in the same tax bracket now and in retirement. If you end up with most of your funds in 401k because you invested conservative in Roth, that could make it much harder to optimize your taxes in retirement. We really need more info from OP about the whole portfolio and long term plans to make the best choice.

rbaldini
Posts: 900
Joined: Mon Mar 23, 2015 3:20 pm

Re: Bonds in Roth IRA

Post by rbaldini » Sun Jun 03, 2018 12:16 pm

aristotelian wrote:
Sun Jun 03, 2018 11:22 am
Disagree. It only "doesn't matter" if you plan to be in the same tax bracket now and in retirement. If you end up with most of your funds in 401k because you invested conservative in Roth, that could make it much harder to optimize your taxes in retirement. We really need more info from OP about the whole portfolio and long term plans to make the best choice.
I'm suggesting you discount the 401k amount by your best estimate of your tax rate in retirement. Sorry if that wasn't clear.

https://www.bogleheads.org/wiki/Tax-adj ... allocation
"Once you adjust for the after-tax value, it does not matter which assets you put in a traditional IRA or 401(k) and which you put in a Roth."

aristotelian
Posts: 4221
Joined: Wed Jan 11, 2017 8:05 pm

Re: Bonds in Roth IRA

Post by aristotelian » Sun Jun 03, 2018 4:18 pm

rbaldini wrote:
Sun Jun 03, 2018 12:16 pm
aristotelian wrote:
Sun Jun 03, 2018 11:22 am
Disagree. It only "doesn't matter" if you plan to be in the same tax bracket now and in retirement. If you end up with most of your funds in 401k because you invested conservative in Roth, that could make it much harder to optimize your taxes in retirement. We really need more info from OP about the whole portfolio and long term plans to make the best choice.
I'm suggesting you discount the 401k amount by your best estimate of your tax rate in retirement. Sorry if that wasn't clear.

https://www.bogleheads.org/wiki/Tax-adj ... allocation
"Once you adjust for the after-tax value, it does not matter which assets you put in a traditional IRA or 401(k) and which you put in a Roth."
Ok, but thats kind of like saying Roth and Traditional are same except for their differences. Allocating between them is all about taking advantage of each one to get the optimal allocation overall.

rbaldini
Posts: 900
Joined: Mon Mar 23, 2015 3:20 pm

Re: Bonds in Roth IRA

Post by rbaldini » Sun Jun 03, 2018 5:24 pm

aristotelian wrote:
Sun Jun 03, 2018 4:18 pm
Ok, but thats kind of like saying Roth and Traditional are same except for their differences. Allocating between them is all about taking advantage of each one to get the optimal allocation overall.
It's not. If you account properly, there is no optimization to be done, with regard to "where to put your bonds". There is no difference if you account for the effect of tax.

The reason people think "bonds are more efficient in 401k" or whatever is because they don't take account of the tax effect, and therefore don't realize that their stock allocation is actually higher than they think (because they don't really get to keep all the 401k, unlike the Roth). Unsurprisingly, they find that when they do the calculations, the expected return is higher than putting bonds in a Roth. This confusion goes away once you account for the tax effect.

rbaldini
Posts: 900
Joined: Mon Mar 23, 2015 3:20 pm

Re: Bonds in Roth IRA

Post by rbaldini » Sun Jun 03, 2018 5:53 pm

Consider this example.

You have $50k in a 401k, $50k in a Roth. You want a 80/20 stock/bond allocation. To make things easy, let's assume you're going to withdraw all the money next year, and you believe (or know) that you'll have a 25% tax rate. You predict a 9% growth to stocks and 4% growth to bonds.

Consider a naive view of asset location that does not account for taxes.
1. Bonds in 401k. You have $20k in bonds and $30k in stock in the 401k, and $50k in the Roth. So you estimate that you'll have ($20000*1.04 + $30000*1.09)*(1-.25) + $50000*1.09 = $94,625 next year.
2. Bonds in Roth. You have $50k in stock in the 401k, and $30k in bonds and $20k in stock in the Roth. So you estimate that you'll have ($50000*1.09)*(1-.25) + $30000*1.09 + $20000*1.04 = $94,375 next year.
$94,625 > $94,375, so you conclude that it is better to put bonds in 401k. This is because it allowed the Roth to grow to a larger amount, and Roth is untaxed.

Now see what happens when we account for the effect of tax. What we will do is realize that we do not really own all of the money in the 401k, so we will discount our ownership of it by the taxed amount. Specifically, our bond allocation is
total bond allocation = ((1-.25)*bonds_in_401k + bonds_in_roth)/((1-.25)*total_in_401k + total_in_roth)
We can use this equation to solve for the proper bond amount.

Let's redo the above scenarios.
1. Bonds in 401k. The amount of bonds to put in 401k is found by solving the following for x:
0.2 = (1-.25)*x/((1-.25)*50000 + 50000)
The solution is $23,333.33. So our total return is now ($23333.33*1.04 + $26666.67*1.09)*(1-.25) + $50000*1.09 = $94,500
2. Bonds in Roth. Solve this equation to get desired about of bonds in Roth:
0.2 = x/((1-.25)*50000 + 50000)
The solution is $17,500. So our total return is now ($50000*1.09)*(1-.25) + $32500*1.09 + $17500*1.04 = $94,500
The result is now the same, so we find that it doesn't matter where you put your bonds.

The reason we were misled before was that our bonds were in the 401k, but we don't own all the 401k. That means our allocation was actually tipped toward stock, which tends to return more than bonds. It's as if we really had an allocation of 85% stock and 15% bonds, or something like that. The opposite was the case when we put bonds in Roth. Notice that both the solutions differ from the "correct" solutions by the same dollar amount, just in opposite directions.

megabad
Posts: 287
Joined: Fri Jun 01, 2018 4:00 pm

Re: Bonds in Roth IRA

Post by megabad » Sun Jun 03, 2018 6:07 pm

Stormbringer wrote:
Sun Jun 03, 2018 5:55 am
Would it be better to:
  1. Buy low cost index funds in the 401(k) and a low-cost bond fund in the Roth IRA to minimize overall expenses; or
  2. Buys bonds in the 401(k) despite the poor choices in order to buy stocks in the Roth IRA and have more growth in that account, the expectation being that in the long run the stocks will perform better and the Roth will have a large balance at retirement than it would with bonds in it.
Seems like you are already on the same track but my suggestion without knowing any more info is:
1) Max out I-bonds for you and wife (TD and tax refund)
2) If you need more bonds buy a small portion of the short term bonds in the 401k (0.1% ER)
3) Balance these out with a fewer longer duration bonds in Roth IRA (I would think this would be small number since your AA target is 70/30).

aristotelian
Posts: 4221
Joined: Wed Jan 11, 2017 8:05 pm

Re: Bonds in Roth IRA

Post by aristotelian » Sun Jun 03, 2018 6:39 pm

rbaldini wrote:
Sun Jun 03, 2018 5:53 pm
Consider this example.

You have $50k in a 401k, $50k in a Roth. You want a 80/20 stock/bond allocation. To make things easy, let's assume you're going to withdraw all the money next year, and you believe (or know) that you'll have a 25% tax rate. You predict a 9% growth to stocks and 4% growth to bonds.

Consider a naive view of asset location that does not account for taxes.
1. Bonds in 401k. You have $20k in bonds and $30k in stock in the 401k, and $50k in the Roth. So you estimate that you'll have ($20000*1.04 + $30000*1.09)*(1-.25) + $50000*1.09 = $94,625 next year.
2. Bonds in Roth. You have $50k in stock in the 401k, and $30k in bonds and $20k in stock in the Roth. So you estimate that you'll have ($50000*1.09)*(1-.25) + $30000*1.09 + $20000*1.04 = $94,375 next year.
$94,625 > $94,375, so you conclude that it is better to put bonds in 401k. This is because it allowed the Roth to grow to a larger amount, and Roth is untaxed.

Now see what happens when we account for the effect of tax. What we will do is realize that we do not really own all of the money in the 401k, so we will discount our ownership of it by the taxed amount. Specifically, our bond allocation is
total bond allocation = ((1-.25)*bonds_in_401k + bonds_in_roth)/((1-.25)*total_in_401k + total_in_roth)
We can use this equation to solve for the proper bond amount.

Let's redo the above scenarios.
1. Bonds in 401k. The amount of bonds to put in 401k is found by solving the following for x:
0.2 = (1-.25)*x/((1-.25)*50000 + 50000)
The solution is $23,333.33. So our total return is now ($23333.33*1.04 + $26666.67*1.09)*(1-.25) + $50000*1.09 = $94,500
2. Bonds in Roth. Solve this equation to get desired about of bonds in Roth:
0.2 = x/((1-.25)*50000 + 50000)
The solution is $17,500. So our total return is now ($50000*1.09)*(1-.25) + $32500*1.09 + $17500*1.04 = $94,500
The result is now the same, so we find that it doesn't matter where you put your bonds.

The reason we were misled before was that our bonds were in the 401k, but we don't own all the 401k. That means our allocation was actually tipped toward stock, which tends to return more than bonds. It's as if we really had an allocation of 85% stock and 15% bonds, or something like that. The opposite was the case when we put bonds in Roth. Notice that both the solutions differ from the "correct" solutions by the same dollar amount, just in opposite directions.
I think you are assuming a 25% tax rate. My point is that many of us are hoping for close to 0% on the 401k. Holding stocks in Roth can help you achieve that. Holding stocks in 401k more than necessary can cause you to increase the tax rate on your 401k. I have no doubt that if the tax rate is constant they come out the same, but it's not. You can to some extent control your tax rate.

rbaldini
Posts: 900
Joined: Mon Mar 23, 2015 3:20 pm

Re: Bonds in Roth IRA

Post by rbaldini » Sun Jun 03, 2018 7:32 pm

aristotelian wrote:
Sun Jun 03, 2018 6:39 pm
I think you are assuming a 25% tax rate. My point is that many of us are hoping for close to 0% on the 401k. Holding stocks in Roth can help you achieve that. Holding stocks in 401k more than necessary can cause you to increase the tax rate on your 401k. I have no doubt that if the tax rate is constant they come out the same, but it's not. You can to some extent control your tax rate.
Replace 0.25 with whatever is your best estimate. If it's 0, then the math becomes very easy - in that case, no need to adjust for tax at all. Any asset location strategy would have the same outcome.

aristotelian
Posts: 4221
Joined: Wed Jan 11, 2017 8:05 pm

Re: Bonds in Roth IRA

Post by aristotelian » Sun Jun 03, 2018 7:45 pm

rbaldini wrote:
Sun Jun 03, 2018 7:32 pm
aristotelian wrote:
Sun Jun 03, 2018 6:39 pm
I think you are assuming a 25% tax rate. My point is that many of us are hoping for close to 0% on the 401k. Holding stocks in Roth can help you achieve that. Holding stocks in 401k more than necessary can cause you to increase the tax rate on your 401k. I have no doubt that if the tax rate is constant they come out the same, but it's not. You can to some extent control your tax rate.
Replace 0.25 with whatever is your best estimate. If it's 0, then the math becomes very easy - in that case, no need to adjust for tax at all. Any asset location strategy would have the same outcome.
You are not understanding. If I hold bonds in 401k, I expect 0. If I hold stocks, the expected return is higher, my RMDs end up being twice as big, and my tax rate may be 22%. You want gains to occur in Roth tax free or taxable at 15% instead of 401k at your marginal rate.

rbaldini
Posts: 900
Joined: Mon Mar 23, 2015 3:20 pm

Re: Bonds in Roth IRA

Post by rbaldini » Sun Jun 03, 2018 8:09 pm

aristotelian wrote:
Sun Jun 03, 2018 7:45 pm
You are not understanding. If I hold bonds in 401k, I expect 0. If I hold stocks, the expected return is higher, my RMDs end up being twice as big, and my tax rate may be 22%. You want gains to occur in Roth tax free or taxable at 15% instead of 401k at your marginal rate.
Ok, I think I follow now. Larger 401k -> larger distributions because of larger RMD (assuming you don't do more than the RMD) -> higher tax rate. As such, the tax rate is not in general independent of the asset location decision, which I assumed. By keeping only stocks in 401k (by putting bonds in Roth), you grow your 401k larger than otherwise, and therefore face a larger tax burden. Is that it?

aristotelian
Posts: 4221
Joined: Wed Jan 11, 2017 8:05 pm

Re: Bonds in Roth IRA

Post by aristotelian » Sun Jun 03, 2018 8:12 pm

rbaldini wrote:
Sun Jun 03, 2018 8:09 pm
aristotelian wrote:
Sun Jun 03, 2018 7:45 pm
You are not understanding. If I hold bonds in 401k, I expect 0. If I hold stocks, the expected return is higher, my RMDs end up being twice as big, and my tax rate may be 22%. You want gains to occur in Roth tax free or taxable at 15% instead of 401k at your marginal rate.
Ok, I think I follow now. Larger 401k -> larger distributions because of larger RMD (assuming you don't do more than the RMD) -> higher tax rate. As such, the tax rate is not in general independent of the asset location decision, which I assumed. By keeping only stocks in 401k (by putting bonds in Roth), you grow your 401k larger than otherwise, and therefore face a larger tax burden. Is that it?
Now you got it. :)

User avatar
patrick013
Posts: 2253
Joined: Mon Jul 13, 2015 7:49 pm

Re: Bonds in Roth IRA

Post by patrick013 » Sun Jun 03, 2018 8:14 pm

Stormbringer wrote:
Sun Jun 03, 2018 5:55 am
My wife has a pretty decent selection of low-cost index funds in her 401(k), but lousy choices of bond funds. Most are actively managed with .75% fees or higher. The only low cost (.1% fee) bond fund is a short-term (~2 year duration) fund. On the other hand, her Roth IRA allows us to invest in anything.
Why don't you put a muni fund in a taxable account at VG.
Your savings of that giant expense ratio every year should
be bigger than any overall reduction in overall portfolio
return. They have limited term and intermediate term as
well as some state specific funds.
age in bonds, buy-and-hold, 10 year business cycle

rkhusky
Posts: 5227
Joined: Thu Aug 18, 2011 8:09 pm

Re: Bonds in Roth IRA

Post by rkhusky » Sun Jun 03, 2018 9:42 pm

Another option is to put corporate bonds, which are riskier and higher yielding, in the Roth and use the short term bond in the 401k.

Post Reply