Trying to understand the logistics of a 403b in relation to bonds and selling

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HAWK23
Posts: 98
Joined: Sun Feb 25, 2018 3:59 pm

Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Thu Aug 09, 2018 9:12 am

I'll try to give a little background to help supplement my questions:

This site has been great as it educated me on the necessity to plan ahead and open up my Roth IRA and a 403b account. Both are less than a year old, however I've fully funded my Roth IRA for this year (and was able to make a full contribution in time for last year too). My Roth is through Vanguard and is comprised mostly of VTI/VXUS however I do have $2,000 invested in BND. This account is hovering around 12K. My 403b account is through a Lincoln Investments Self-Directed Participant Plan, which means I'm able to pick from any Vanguard funds I want. It was opened a couple of months later and I contribute $450 per month into this account ($225 per paycheck). Right now my 403b is hovering around $1,600. 90% of my 403b money contributions goes into VTIVX (2045 Target Date Vanguard Fund). I also have a second fund that I throw 10% of that money in VBTLX (Vanguard Total Bond Market). The reason for this second holding is to try and catch up on my bond allocation because between these two tax-advantaged accounts and my brokerage accounts I'm not yet where I want to be with bonds. I figured the additional holding of VBTLX would help me get to my ideal bond allocation quicker.


After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it. I understand this concept and I think I would like to ultimately phase out the $2,000 I currently have in the Roth after my bonds have caught up in the 403b.

My questions:

#1: If I were, to say, increase the amount of money I'm contributing in my 403b ($600 instead of $450 per month) and put this excess money into VBTLX, I figure I'll eventually catch up on my bond allocation to the point where I can sell the bonds in my Roth and achieve the goal of not having bonds in my Roth. However, does this limit my flexibility when/if it comes to some possible point where I want to sell some bonds to rebalance because they will only be in my 403b? I have a great understanding of how to utilize my Roth IRA (I wish I could contribute more to it than just the 5,500) because I have control to go in and buy/sell individually whenever I want with no paperwork involved. That flexibility seems to be lost when it comes to the 403b because everything always involves paperwork. I know I can change my contribution amount at anytime, but I don't know a lot of the other logistics. Does re-balancing with bonds become more difficult when they are all held in your 403b versus a Roth?

#2: How exactly does selling work in a 403b? Is this even possible? Do I just have to fill out paperwork that says to sell something? For example, another long-term goal I may have is to eventually stop contributing to the Target Date Fund in my 403b (VTIVX) and just break it down into VTSAX/VTIAX/VBTLX in the future. If I have $20,000 invested in the target date fund does it stay there forever and I just make new contributions moving forward? Or can that money in the target fund be sold and then divided up between whatever funds I would like to buy?

Thanks in advance for the clarity I know I'll get from all of you!

Rupert
Posts: 3815
Joined: Fri Aug 17, 2012 12:01 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Rupert » Thu Aug 09, 2018 9:37 am

Whether you have to fill out paperwork to exchange funds within your 403b plan will depend on the rules of your particular plan. Does your plan have a website? Most plans allow you to adjust your investments on-line now, without filling out any paperwork. It should be easy, and there are no tax consequences to moving money between funds within the plan. So, no, $20,000 invested in a target-date fund does not have to remain there forever.

As for the bond issue, there are actually differing opinions on whether it's a good idea to hold bonds in a Roth IRA. I believe one of the wikis here explains the schools of thought on the issue. Personally, I do prefer to hold funds with high growth potential in my Roth IRA and hold all my bonds in my 403b. I have never had to sell bonds in the 403b in order to maintain my asset allocation. It usually works the other way around -- you usually have to sell stocks to maintain your asset allocation because stocks typically out-perform bonds by so much.

IMHO, when you're using multiple types of accounts (e.g., 403b + Roth) to save for retirement, using target-date funds is not optimum unless you are investing in the same target-date fund in each account. Using a target-date fund in only one of the accounts makes re-balancing more complicated. But, honestly, your balances right now are still so low that I wouldn't worry too much about letting my bond allocation slip a little for a while. I would just sell the bonds in the Roth right now, if your goal is to hold all stocks there, and direct your future 403b contributions in the short term to either total bond or a more conservative target-date fund to get to your desired bond allocation.

Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Silk McCue » Thu Aug 09, 2018 9:49 am

The simplest answer regarding your 403b account is to change to a Target Date account that matches your desired asset allocation as your only holding in the 403b. Don't concern yourself with the date on the fund just the asset allocation. You will never have to concern yourself with re-balancing as it will happen automatically. In the future when it makes sense to do so you can buy individual components to achieve a slight decrease in expense (although not dramatic). The amount of bonds held here needs to take in consideration that you will not be holding any in your Roth. Don't worry if between your 403b holdings and your Roth holding the allocation isn't "perfect". A few percentage points either way will make very little difference over the long run. You can take a look at the asset allocation once a year and see if you can stay in the current Target Date fund or need to adjust as your Roth balance grows.


Regarding how to perform transactions in your 403b I recommend that you simply login to you account and see what options are available. One may be "exchange funds" and you can put in a request that should hopefully be executed at the end of the business day. But whatever it is called you will hopefully be able to do that without submitting any paperwork. If no online access is granted to do this, locate the proper documents and review the instructions or contact customer support if they can't be found.

You will be able to move monies around from fund to fund in the future with your 403b. Now is a good time to understand how that is done so that you aren't wondering how it will be done in the future.

Cheers

HAWK23
Posts: 98
Joined: Sun Feb 25, 2018 3:59 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Thu Aug 09, 2018 9:49 am

Rupert wrote:
Thu Aug 09, 2018 9:37 am
Whether you have to fill out paperwork to exchange funds within your 403b plan will depend on the rules of your particular plan. Does your plan have a website? Most plans allow you to adjust your investments on-line now, without filling out any paperwork. It should be easy, and there are no tax consequences to moving money between funds within the plan. So, no, $20,000 invested in a target-date fund does not have to remain there forever.

As for the bond issue, there are actually differing opinions on whether it's a good idea to hold bonds in a Roth IRA. I believe one of the wikis here explains the schools of thought on the issue. Personally, I do prefer to hold funds with high growth potential in my Roth IRA and hold all my bonds in my 403b. I have never had to sell bonds in the 403b in order to maintain my asset allocation. It usually works the other way around -- you usually have to sell stocks to maintain your asset allocation because stocks typically out-perform bonds by so much.

IMHO, when you're using multiple types of accounts (e.g., 403b + Roth) to save for retirement, using target-date funds is not optimum unless you are investing in the same target-date fund in each account. Using a target-date fund in only one of the accounts makes re-balancing more complicated. But, honestly, your balances right now are still so low that I wouldn't worry too much about letting my bond allocation slip a little for a while. I would just sell the bonds in the Roth right now, if your goal is to hold all stocks there, and direct your future 403b contributions in the short term to either total bond or a more conservative target-date fund to get to your desired bond allocation.
Thanks for the reply Rupert,

My first order of business before posting was I logged onto my 403 provider website. It's terrible. I have a Schwab Brokerage account, and the Roth through Vanguard and these 2 platforms blow the 403b provider website (Lincoln Investments) out of the water. It's frustrating because my 403b funds ARE Vanguard, however my school district doesn't have Vanguard as an option, but I found a loophole to get a self-directed plan through Lincoln Investment Planning that allows me to get INTO Vanguard funds. I did reach out to customer service a month ago to inquire about increasing my contributions and that was going to entail paperwork, so I just assume everything I want to do is going to entail paperwork.

I agree with you about 99% of the time needing to sell stocks to rebalance. The flexibility still becomes an issue if, instead of wanting to sell stocks, I just wanted to add more to bonds. The 403b just is a pain. Everything I've ever had to do with it has been difficult. Getting it set up, getting the correct funds, changing contribution amount etc. I wish I could just go online and adjust these things with clicks.

What you mentioned about target date funds is also the same advice I've read elsewhere. That's why I'm trying to get some of this 403b logistical stuff understood so I can move forward and make necessary changes when the time is right. I do like having the Target Fund as it shows about where I should be with bonds, but I could always just look at the Vanguard website to get that information as well without actually needing to own the fund.

Admiral
Posts: 1463
Joined: Mon Oct 27, 2014 12:35 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Admiral » Thu Aug 09, 2018 10:09 am

HAWK23 wrote:
Thu Aug 09, 2018 9:12 am


After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it. I understand this concept and I think I would like to ultimately phase out the $2,000 I currently have in the Roth after my bonds have caught up in the 403b.
I just want to address this part of your post. For MOST people (with various caveats) you should hold bonds in a tax-advantaged account instead of a taxable account. I think you are confusing a Roth with a taxable account. It is fine to hold a bond fund or bonds in a Roth: the growth is not taxable, provided one follows the Roth rules. The difference is that in a pre-tax account, the growth will be taxable when the money is withdrawn, at current income tax rates at that future time, while in a Roth it is taxed before it goes in, at current income tax rates.

HAWK23
Posts: 98
Joined: Sun Feb 25, 2018 3:59 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Thu Aug 09, 2018 11:01 am

Admiral wrote:
Thu Aug 09, 2018 10:09 am
HAWK23 wrote:
Thu Aug 09, 2018 9:12 am


After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it. I understand this concept and I think I would like to ultimately phase out the $2,000 I currently have in the Roth after my bonds have caught up in the 403b.
I just want to address this part of your post. For MOST people (with various caveats) you should hold bonds in a tax-advantaged account instead of a taxable account. I think you are confusing a Roth with a taxable account. It is fine to hold a bond fund or bonds in a Roth: the growth is not taxable, provided one follows the Roth rules. The difference is that in a pre-tax account, the growth will be taxable when the money is withdrawn, at current income tax rates at that future time, while in a Roth it is taxed before it goes in, at current income tax rates.
Thanks for your reply. I want to reassure you I do understand that both the 403b and Roth are tax advantaged. However, I've still read further that ideally you want bonds in pretax and stocks in Roth if possible because the Roth account will grow quicker that way that growth won't be taxed at all when you take the money out for retirement since you've already paid taxes on the money before you put it in. I do know that bonds should rarely be in a brokerage unless they are municipal.

Does anyone out there have a 403b through Lincoln Investment Planning?

Admiral
Posts: 1463
Joined: Mon Oct 27, 2014 12:35 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Admiral » Thu Aug 09, 2018 11:06 am

HAWK23 wrote:
Thu Aug 09, 2018 11:01 am
Admiral wrote:
Thu Aug 09, 2018 10:09 am
HAWK23 wrote:
Thu Aug 09, 2018 9:12 am


After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it. I understand this concept and I think I would like to ultimately phase out the $2,000 I currently have in the Roth after my bonds have caught up in the 403b.
I just want to address this part of your post. For MOST people (with various caveats) you should hold bonds in a tax-advantaged account instead of a taxable account. I think you are confusing a Roth with a taxable account. It is fine to hold a bond fund or bonds in a Roth: the growth is not taxable, provided one follows the Roth rules. The difference is that in a pre-tax account, the growth will be taxable when the money is withdrawn, at current income tax rates at that future time, while in a Roth it is taxed before it goes in, at current income tax rates.
However, I've still read further that ideally you want bonds in pretax and stocks in Roth if possible because the Roth account will grow quicker that way that growth won't be taxed at all when you take the money out for retirement since you've already paid taxes on the money before you put it in. I do know that bonds should rarely be in a brokerage unless they are municipal.
This is incorrect.

HAWK23
Posts: 98
Joined: Sun Feb 25, 2018 3:59 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Thu Aug 09, 2018 11:10 am

Admiral wrote:
Thu Aug 09, 2018 11:06 am
HAWK23 wrote:
Thu Aug 09, 2018 11:01 am
Admiral wrote:
Thu Aug 09, 2018 10:09 am
HAWK23 wrote:
Thu Aug 09, 2018 9:12 am


After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it. I understand this concept and I think I would like to ultimately phase out the $2,000 I currently have in the Roth after my bonds have caught up in the 403b.
I just want to address this part of your post. For MOST people (with various caveats) you should hold bonds in a tax-advantaged account instead of a taxable account. I think you are confusing a Roth with a taxable account. It is fine to hold a bond fund or bonds in a Roth: the growth is not taxable, provided one follows the Roth rules. The difference is that in a pre-tax account, the growth will be taxable when the money is withdrawn, at current income tax rates at that future time, while in a Roth it is taxed before it goes in, at current income tax rates.
However, I've still read further that ideally you want bonds in pretax and stocks in Roth if possible because the Roth account will grow quicker that way that growth won't be taxed at all when you take the money out for retirement since you've already paid taxes on the money before you put it in. I do know that bonds should rarely be in a brokerage unless they are municipal.
This is incorrect.
Interesting. I've read this numerous times by reputable posters. Duckie mentions this everytime he helps people. It makes sense to me too. Stocks have a higher growth potential therefore you would want those (such as VTI/VXUS) in the account that won't be taxed after the growth (the IRA). I know it's not "bad" to hold bonds in an IRA but I still think the ideal is to have them in a pretax account (403b or 401k) based on what I've read. What am I incorrect about? I have never seen this line of thinking challenged on this forum.
Last edited by HAWK23 on Thu Aug 09, 2018 11:26 am, edited 2 times in total.

Admiral
Posts: 1463
Joined: Mon Oct 27, 2014 12:35 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Admiral » Thu Aug 09, 2018 11:24 am

HAWK23 wrote:
Thu Aug 09, 2018 11:10 am
Admiral wrote:
Thu Aug 09, 2018 11:06 am
HAWK23 wrote:
Thu Aug 09, 2018 11:01 am
Admiral wrote:
Thu Aug 09, 2018 10:09 am
HAWK23 wrote:
Thu Aug 09, 2018 9:12 am


After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it. I understand this concept and I think I would like to ultimately phase out the $2,000 I currently have in the Roth after my bonds have caught up in the 403b.
I just want to address this part of your post. For MOST people (with various caveats) you should hold bonds in a tax-advantaged account instead of a taxable account. I think you are confusing a Roth with a taxable account. It is fine to hold a bond fund or bonds in a Roth: the growth is not taxable, provided one follows the Roth rules. The difference is that in a pre-tax account, the growth will be taxable when the money is withdrawn, at current income tax rates at that future time, while in a Roth it is taxed before it goes in, at current income tax rates.
However, I've still read further that ideally you want bonds in pretax and stocks in Roth if possible because the Roth account will grow quicker that way that growth won't be taxed at all when you take the money out for retirement since you've already paid taxes on the money before you put it in. I do know that bonds should rarely be in a brokerage unless they are municipal.
This is incorrect.
Interesting. I've read this numerous times by reputable posters. Duckie mentions this everytime he helps people. It makes sense to me too. Stocks have a higher growth potential therefore you would want those (such as VTI/VXUS) in the account that won't be taxed after the growth (the IRA). I know it's not "bad" to hold bonds in an IRA but I still think the ideal is to have them in a pretax account based on what I've read. What am I incorrect about?
Equity performance (or any other investment for that matter) has nothing to do with where it is held. The issue is how the growth is treated. If I am in a 35% tax bracket now, I can buy stocks in my T-IRA now and save 35% on that money, because taxes are deferred. When I retire, if I am in a low tax bracket, I might pay less. Or I might pay zero.

If I buy stocks using Roth, I pay 35% tax on the income, and then buy, and then hold until I retire. If I am in a lower or zero tax bracket at that time, I paid 35% tax for no good reason. Worse, since the money I used was after tax, it will cost me more to buy the same amount of stock as it would with pre-tax dollars.

The value of the underlying investment has not changed. What has changed is how much I have paid in taxes.

HAWK23
Posts: 98
Joined: Sun Feb 25, 2018 3:59 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Thu Aug 09, 2018 11:31 am

Okay well this is all blowing my mind. I was under the impression that whatever I put into my Roth IRA could be taken out tax free after I followed whatever the requirements were at age 59 1/2 or whatever it is.

Admiral
Posts: 1463
Joined: Mon Oct 27, 2014 12:35 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Admiral » Thu Aug 09, 2018 11:34 am

HAWK23 wrote:
Thu Aug 09, 2018 11:31 am
Okay well this is all blowing my mind. I was under the impression that whatever I put into my Roth IRA could be taken out tax free after I followed whatever the requirements were at age 59 1/2 or whatever it is.
That is correct. But you are paying the tax now, not later. I have to run to a meeting, someone else will explain it better I'm sure! :sharebeer

HAWK23
Posts: 98
Joined: Sun Feb 25, 2018 3:59 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Thu Aug 09, 2018 11:36 am

Admiral wrote:
Thu Aug 09, 2018 11:34 am
HAWK23 wrote:
Thu Aug 09, 2018 11:31 am
Okay well this is all blowing my mind. I was under the impression that whatever I put into my Roth IRA could be taken out tax free after I followed whatever the requirements were at age 59 1/2 or whatever it is.
That is correct. But you are paying the tax now, not later. I have to run to a meeting, someone else will explain it better I'm sure! :sharebeer
Okay thanks for trying to explain. I'll be in a higher tax bracket later in life, so I think this is still the way to go. I'm paying less now for more time for the stocks to grow in an account that won't be taxed when I take it out. You have my world all flipped upside down so I do hope some others chime in. Good luck with your meeting.

Rupert
Posts: 3815
Joined: Fri Aug 17, 2012 12:01 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Rupert » Thu Aug 09, 2018 11:55 am

HAWK23 wrote:
Thu Aug 09, 2018 11:36 am
Admiral wrote:
Thu Aug 09, 2018 11:34 am
HAWK23 wrote:
Thu Aug 09, 2018 11:31 am
Okay well this is all blowing my mind. I was under the impression that whatever I put into my Roth IRA could be taken out tax free after I followed whatever the requirements were at age 59 1/2 or whatever it is.
That is correct. But you are paying the tax now, not later. I have to run to a meeting, someone else will explain it better I'm sure! :sharebeer
Okay thanks for trying to explain. I'll be in a higher tax bracket later in life, so I think this is still the way to go. I'm paying less now for more time for the stocks to grow in an account that won't be taxed when I take it out. You have my world all flipped upside down so I do hope some others chime in. Good luck with your meeting.
Take a look at this old thread, which I found helpful in understanding this issue: viewtopic.php?t=71387

There's nothing wrong with your present strategy. I wouldn't change it, although I do understand the argument that the conventional wisdom against holding bonds in a Roth is not as wise as it might appear at first blush.

Admiral
Posts: 1463
Joined: Mon Oct 27, 2014 12:35 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Admiral » Thu Aug 09, 2018 12:36 pm

HAWK23 wrote:
Thu Aug 09, 2018 11:36 am
Admiral wrote:
Thu Aug 09, 2018 11:34 am
HAWK23 wrote:
Thu Aug 09, 2018 11:31 am
Okay well this is all blowing my mind. I was under the impression that whatever I put into my Roth IRA could be taken out tax free after I followed whatever the requirements were at age 59 1/2 or whatever it is.
That is correct. But you are paying the tax now, not later. I have to run to a meeting, someone else will explain it better I'm sure! :sharebeer
Okay thanks for trying to explain. I'll be in a higher tax bracket later in life, so I think this is still the way to go. I'm paying less now for more time for the stocks to grow in an account that won't be taxed when I take it out. You have my world all flipped upside down so I do hope some others chime in. Good luck with your meeting.
When you say "I'll be in a higher tax bracket later in life" do you mean that when you retire (or otherwise can begin drawing from retirement accounts without penalty) you will have higher earned income (not dividend income, income like pensions or social security, or from a retirement job) than you do now? So, when you are not working, you will be in a higher tax bracket than at present? If that is the case, then a Roth may be appropriate. Note, however, that there may be many lower tax brackets to fill before you reach your current marginal tax rate.

Keep in mind, also, that under current law you can always CONVERT to Roth from a traditional IRA account when you are retired and in a low tax bracket. Thus, pay no tax now, pay little or no tax later. This is a complicated topic but there are countless threads on it if you want to investigate the benefits of Roth vs T-IRA investing.

HAWK23
Posts: 98
Joined: Sun Feb 25, 2018 3:59 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Thu Aug 09, 2018 12:44 pm

Admiral wrote:
Thu Aug 09, 2018 12:36 pm
HAWK23 wrote:
Thu Aug 09, 2018 11:36 am
Admiral wrote:
Thu Aug 09, 2018 11:34 am
HAWK23 wrote:
Thu Aug 09, 2018 11:31 am
Okay well this is all blowing my mind. I was under the impression that whatever I put into my Roth IRA could be taken out tax free after I followed whatever the requirements were at age 59 1/2 or whatever it is.
That is correct. But you are paying the tax now, not later. I have to run to a meeting, someone else will explain it better I'm sure! :sharebeer
Okay thanks for trying to explain. I'll be in a higher tax bracket later in life, so I think this is still the way to go. I'm paying less now for more time for the stocks to grow in an account that won't be taxed when I take it out. You have my world all flipped upside down so I do hope some others chime in. Good luck with your meeting.
When you say "I'll be in a higher tax bracket later in life" do you mean that when you retire (or otherwise can begin drawing from retirement accounts without penalty) you will have higher earned income (not dividend income, income like pensions or social security, or from a retirement job) than you do now? So, when you are not working, you will be in a higher tax bracket than at present? If that is the case, then a Roth may be appropriate. Note, however, that there may be many lower tax brackets to fill before you reach your current marginal tax rate.

Keep in mind, also, that under current law you can always CONVERT to Roth from a traditional IRA account when you are retired and in a low tax bracket. Thus, pay no tax now, pay little or no tax later. This is a complicated topic but there are countless threads on it if you want to investigate the benefits of Roth vs T-IRA investing.
My pension should be higher than the amount I currently make right now. Pensions is a whole another issue/topic though. Before I found boglheads I had an advisor who told me Roth IRA was the way to go after giving them all my pertinent personal info and data.

Operon
Posts: 29
Joined: Mon May 28, 2018 4:33 pm

Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Operon » Thu Aug 09, 2018 2:06 pm

Admiral wrote:
Thu Aug 09, 2018 11:24 am
HAWK23 wrote:
Thu Aug 09, 2018 11:10 am
Admiral wrote:
Thu Aug 09, 2018 11:06 am
HAWK23 wrote:
Thu Aug 09, 2018 11:01 am
Admiral wrote:
Thu Aug 09, 2018 10:09 am


I just want to address this part of your post. For MOST people (with various caveats) you should hold bonds in a tax-advantaged account instead of a taxable account. I think you are confusing a Roth with a taxable account. It is fine to hold a bond fund or bonds in a Roth: the growth is not taxable, provided one follows the Roth rules. The difference is that in a pre-tax account, the growth will be taxable when the money is withdrawn, at current income tax rates at that future time, while in a Roth it is taxed before it goes in, at current income tax rates.
However, I've still read further that ideally you want bonds in pretax and stocks in Roth if possible because the Roth account will grow quicker that way that growth won't be taxed at all when you take the money out for retirement since you've already paid taxes on the money before you put it in. I do know that bonds should rarely be in a brokerage unless they are municipal.
This is incorrect.
Interesting. I've read this numerous times by reputable posters. Duckie mentions this everytime he helps people. It makes sense to me too. Stocks have a higher growth potential therefore you would want those (such as VTI/VXUS) in the account that won't be taxed after the growth (the IRA). I know it's not "bad" to hold bonds in an IRA but I still think the ideal is to have them in a pretax account based on what I've read. What am I incorrect about?
Equity performance (or any other investment for that matter) has nothing to do with where it is held. The issue is how the growth is treated. If I am in a 35% tax bracket now, I can buy stocks in my T-IRA now and save 35% on that money, because taxes are deferred. When I retire, if I am in a low tax bracket, I might pay less. Or I might pay zero.

If I buy stocks using Roth, I pay 35% tax on the income, and then buy, and then hold until I retire. If I am in a lower or zero tax bracket at that time, I paid 35% tax for no good reason. Worse, since the money I used was after tax, it will cost me more to buy the same amount of stock as it would with pre-tax dollars.

The value of the underlying investment has not changed. What has changed is how much I have paid in taxes.
I don't think the poster is arguing that his or her equity share will perform differently depending upon whether they're held in a Roth or a tax-deferred account, and having a Roth rather than a TIRA probably makes the most sense for them. This sounds like a public school teacher early in his or her career. Unless they've got a heck of a side business or a spouse that's making it rain, they're almost certainly nowhere near being taxed at a 35% rate, and are indeed fairly likely to be in a higher tax bracket upon retirement than they are now. Although it's possible that some states do it differently, in every state system I'm familiar with, pension contributions are pre-tax and retirement distributions are taxable. The tax treatment offered by a Roth makes sense to complement their pension and 403b, contributions to which are already substantially decreasing their income now, and since their Roth space is more limited than their 403b space, they're just discussing where they'll put the bulk of their equities versus their bonds.

OP, as other posters have said, holding bonds in your Roth is indeed perfectly fine, and after you retire, money taken from your Roth vs. a TIRA or 403b will be treated the same regardless of whether you liquidated bond shares or stock shares. But I do side with those on the board that prefer to put the bond allocation in my 403b rather than my Roth, all else being equal. I'm onboard with the argument that you mention having seen as well, that putting bonds - which are expected to be lower-growth - into tax-deferred spaces and stocks into tax-free (Roth) spaces makes sense. If I'm going to be sitting on one big retirement account and one smaller one, and I only have to pay taxes on one of them, I'd rather pay taxes on the smaller pile of money. And there's another component here, which is that you might well be paying an unfortunate annual fee on your 403b. Even though you're on a "self-managed plan," Lincoln (as with virtually all 403b providers) usually charges you a percentage of your assets annually. In my district, Lincoln's annual "sales charge" for self-service plans was .9%. This wasn't in their literature, I had to call and demand they list every single fee and charge in order to figure that out, and I'd be amazed if the salesperson in charge of your district's account offers their services for nothing. If you've got your stock funds or stock-heavy funds, which are likely to be your best performers, in your 403b, that .9% (or whatever the figure is in your district) is going to bring the pain a bit harder than if you've got your likely lower-growth bonds in there.

That's not to say I think you should bend over backwards to somehow get a bond-free Roth, and I definitely wouldn't change the amount I was planning to save every month just to move a few bonds around. That $2000 BND in your Roth is going to be a drop in the bucket; it probably won't matter much whether those bonds are held tax-deferred vs. tax-free, and indeed, they're always nice to have around for easier rebalancing. If it were me, I'd leave that $2k there, and in the future, put my annual bond allocation in the 403b. Since you're less than a year into this, it very easy to arrive at the allocation you want by adjusting future contributions rather than going through the fuss of exchanging shares you now hold.

Admiral
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Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by Admiral » Thu Aug 09, 2018 4:32 pm

Operon wrote:
Thu Aug 09, 2018 2:06 pm


I don't think the poster is arguing that his or her equity share will perform differently depending upon whether they're held in a Roth or a tax-deferred account, and having a Roth rather than a TIRA probably makes the most sense for them. This sounds like a public school teacher early in his or her career.
This is what OP posted:
After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it.
That is what I was responding to. OP did not add the pension information until later in the thread. The 35% was an example only, I was not suggesting that was OP's tax bracket. I was trying to explain that the underlying investments perform the same; the resultant difference is in how they are treated with regard to taxes. The OP did not appear to understand the taxation difference between Roth and a Traditional, pre-tax IRA. A Roth is not "tax free." It is tax free growth. The taxes must be paid. I was attempting to explain, perhaps poorly, that there are many ways to skin this cat. In an ideal world we would all have a mixture of taxable, tax free, and tax deferred on retirements. However, only tax deferred offers conversion that may, in the future, eliminate taxes altogether.

HAWK23
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Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Fri Aug 10, 2018 7:29 am

Admiral wrote:
Thu Aug 09, 2018 4:32 pm
Operon wrote:
Thu Aug 09, 2018 2:06 pm


I don't think the poster is arguing that his or her equity share will perform differently depending upon whether they're held in a Roth or a tax-deferred account, and having a Roth rather than a TIRA probably makes the most sense for them. This sounds like a public school teacher early in his or her career.
This is what OP posted:
After reading more posts on Bogleheads I've learned that, in an ideal world, you hold your bonds in your pre-tax account (such as the 403b) while having stocks, such as VTI/VXUS, in a Roth because of the growth that won't be taxed on it.
That is what I was responding to. OP did not add the pension information until later in the thread. The 35% was an example only, I was not suggesting that was OP's tax bracket. I was trying to explain that the underlying investments perform the same; the resultant difference is in how they are treated with regard to taxes. The OP did not appear to understand the taxation difference between Roth and a Traditional, pre-tax IRA. A Roth is not "tax free." It is tax free growth. The taxes must be paid. I was attempting to explain, perhaps poorly, that there are many ways to skin this cat. In an ideal world we would all have a mixture of taxable, tax free, and tax deferred on retirements. However, only tax deferred offers conversion that may, in the future, eliminate taxes altogether.
For what it's worth, I fully understood that the difference between the 403b and the Roth was when it came to taxes. I knew that the money was already taxed when I put the money into a Roth and the money in the 403b doesn't get taxed until I take it out. Sorry if I made it sound like the Roth money never gets taxed (I knew it did before I got access to the money to put it in).

HAWK23
Posts: 98
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Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by HAWK23 » Fri Aug 10, 2018 7:37 am

Operon wrote:
Thu Aug 09, 2018 2:06 pm
Admiral wrote:
Thu Aug 09, 2018 11:24 am
HAWK23 wrote:
Thu Aug 09, 2018 11:10 am
Admiral wrote:
Thu Aug 09, 2018 11:06 am
HAWK23 wrote:
Thu Aug 09, 2018 11:01 am


However, I've still read further that ideally you want bonds in pretax and stocks in Roth if possible because the Roth account will grow quicker that way that growth won't be taxed at all when you take the money out for retirement since you've already paid taxes on the money before you put it in. I do know that bonds should rarely be in a brokerage unless they are municipal.
This is incorrect.
Interesting. I've read this numerous times by reputable posters. Duckie mentions this everytime he helps people. It makes sense to me too. Stocks have a higher growth potential therefore you would want those (such as VTI/VXUS) in the account that won't be taxed after the growth (the IRA). I know it's not "bad" to hold bonds in an IRA but I still think the ideal is to have them in a pretax account based on what I've read. What am I incorrect about?
Equity performance (or any other investment for that matter) has nothing to do with where it is held. The issue is how the growth is treated. If I am in a 35% tax bracket now, I can buy stocks in my T-IRA now and save 35% on that money, because taxes are deferred. When I retire, if I am in a low tax bracket, I might pay less. Or I might pay zero.

If I buy stocks using Roth, I pay 35% tax on the income, and then buy, and then hold until I retire. If I am in a lower or zero tax bracket at that time, I paid 35% tax for no good reason. Worse, since the money I used was after tax, it will cost me more to buy the same amount of stock as it would with pre-tax dollars.

The value of the underlying investment has not changed. What has changed is how much I have paid in taxes.
I don't think the poster is arguing that his or her equity share will perform differently depending upon whether they're held in a Roth or a tax-deferred account, and having a Roth rather than a TIRA probably makes the most sense for them. This sounds like a public school teacher early in his or her career. Unless they've got a heck of a side business or a spouse that's making it rain, they're almost certainly nowhere near being taxed at a 35% rate, and are indeed fairly likely to be in a higher tax bracket upon retirement than they are now. Although it's possible that some states do it differently, in every state system I'm familiar with, pension contributions are pre-tax and retirement distributions are taxable. The tax treatment offered by a Roth makes sense to complement their pension and 403b, contributions to which are already substantially decreasing their income now, and since their Roth space is more limited than their 403b space, they're just discussing where they'll put the bulk of their equities versus their bonds.

OP, as other posters have said, holding bonds in your Roth is indeed perfectly fine, and after you retire, money taken from your Roth vs. a TIRA or 403b will be treated the same regardless of whether you liquidated bond shares or stock shares. But I do side with those on the board that prefer to put the bond allocation in my 403b rather than my Roth, all else being equal. I'm onboard with the argument that you mention having seen as well, that putting bonds - which are expected to be lower-growth - into tax-deferred spaces and stocks into tax-free (Roth) spaces makes sense. If I'm going to be sitting on one big retirement account and one smaller one, and I only have to pay taxes on one of them, I'd rather pay taxes on the smaller pile of money. And there's another component here, which is that you might well be paying an unfortunate annual fee on your 403b. Even though you're on a "self-managed plan," Lincoln (as with virtually all 403b providers) usually charges you a percentage of your assets annually. In my district, Lincoln's annual "sales charge" for self-service plans was .9%. This wasn't in their literature, I had to call and demand they list every single fee and charge in order to figure that out, and I'd be amazed if the salesperson in charge of your district's account offers their services for nothing. If you've got your stock funds or stock-heavy funds, which are likely to be your best performers, in your 403b, that .9% (or whatever the figure is in your district) is going to bring the pain a bit harder than if you've got your likely lower-growth bonds in there.

That's not to say I think you should bend over backwards to somehow get a bond-free Roth, and I definitely wouldn't change the amount I was planning to save every month just to move a few bonds around. That $2000 BND in your Roth is going to be a drop in the bucket; it probably won't matter much whether those bonds are held tax-deferred vs. tax-free, and indeed, they're always nice to have around for easier rebalancing. If it were me, I'd leave that $2k there, and in the future, put my annual bond allocation in the 403b. Since you're less than a year into this, it very easy to arrive at the allocation you want by adjusting future contributions rather than going through the fuss of exchanging shares you now hold.
Thanks for your reply Operon.

You are correct in that I'm still in the beginning stages of my teaching career (hence where the pension comes from). Right now I pay into TRS (Teacher Retirement System), fully fund my Roth IRA, and have an additional $225 per paycheck contributed to the 403b (so I think I'm pretty well rounded in terms of having retirement vehicles set up now).

I did recently finish a second Master's that gives me the ability to become a school administrator that would bump my pay up significantly (which then might result into needing to look at a Traditional IRA over a Roth IRA (but I'd still be getting a pension). I'll cross that bridge when I get to it though. I've been hesitant to make a full blown "My Portfolio" advice thread yet with my personal situation for this reason (and because I'm still tinkering to get my allocations and accounts set up to my liking).

As for your comment about the Lincoln Investment Planning "hidden" fees that may be tied into my 403b, I did ask a bunch about this when setting it up. It sounds like the only fee is a $8.75 fee per quarter for Lincoln Financial housing the self-directed plan (or phrased in some other way). I figure the $35 per year fee is worth being able to hold Vanguard funds than some other crap funds with high expense ratios. Once the account grows the 35$ per year will seem like nothing. I don't go through any district personnel for the plan I'm on. I deal directly with Lincoln Investment Planning customer service - I just had to fill out some Omni paperwork and some paperwork for Lincoln Investments. No district communication. This plan isn't even advertised as an option on our district literature (pretty obvious why as you point out). There is a difference between Lincoln Investment Planning and Lincoln Financial Group (perhaps you have the latter?). Here's the thread where I learned about the plan I'm currently using: viewtopic.php?f=1&t=175295

I agree with your recommendation on just leaving the 2K of bonds in the Roth. In a few years, when I continue to max it out, that 2K will account for less than 10% of the account anyway. Just wanted to get into best practices now. The only short-term hindrance of leaving the bonds in the Roth for now would be prolonging being able to get into the admiral shares of both Total Stock ad Total International. It ultimately doesn't matter though because all I'd have to do is wait another year to get into the admiral shares class of the other one. The exchanging funds part of my topic is more about getting out of the Target Fund and investing in VTSAX/VTIAX/VBTLX. Even though the account is small right now, there is no minimum through this plan, that prevents me from contributing directly to those admiral funds (as I mentioned earlier, a small percentage is already being allocated into VBTLX).

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Re: Trying to understand the logistics of a 403b in relation to bonds and selling

Post by grabiner » Fri Aug 10, 2018 8:38 pm

HAWK23 wrote:
Thu Aug 09, 2018 9:12 am
#1: If I were, to say, increase the amount of money I'm contributing in my 403b ($600 instead of $450 per month) and put this excess money into VBTLX, I figure I'll eventually catch up on my bond allocation to the point where I can sell the bonds in my Roth and achieve the goal of not having bonds in my Roth. However, does this limit my flexibility when/if it comes to some possible point where I want to sell some bonds to rebalance because they will only be in my 403b?
No, because you can always reallocate. If you sell bonds and buy stocks, that increases the risk and expected return of your portfolio no matter which account you do it in.

The most important reason to hold bonds in the 403(b) rather than the Roth (or vice versa) is the options in the accounts. If your 403(b) has better bond than stock options (for example, TIAA Traditional Annuity as a bond alternative), you should hold bonds there. If it has better stock than bond options, you should hold stock in the 403(b) and bonds in an IRA.
Wiki David Grabiner

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