Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

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crossbow
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Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by crossbow » Tue Apr 09, 2019 1:48 pm

As a general rule of thumb from reading various threads, I've gathered that when applying a 3-fund portfolio theory, it's best to place

Taxable - VTSAX & VTIAX (Total Market and Total International Market)
Traditional 401K - VBTLX (Total Bond Market)
Roth IRA - VTSAX & VTIAX (Total Market and Total International Market)

Is that correct? Assuming I am still able to maintain my desired 80/20 equity/bond allocation (meaning my Traditional 401K balance makes up 20% of my total portfolio).

Also, my wife has the same accounts as me, but a Roth 401K. Should the Roth 401K hold bonds or equity?
Last edited by crossbow on Tue May 07, 2019 1:08 pm, edited 1 time in total.

livesoft
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Re: Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by livesoft » Tue Apr 09, 2019 1:53 pm

If one has all those accounts and the money in each account is enough to hold all those funds in the allocation that you desire, then yes, that's a fine general rule of thumb.

So what do you do with the extra money for bonds when your 401(k) is not large enough to hold all the bonds you need/want?
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Topic Author
crossbow
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Re: Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by crossbow » Tue Apr 09, 2019 10:53 pm

livesoft wrote:
Tue Apr 09, 2019 1:53 pm
If one has all those accounts and the money in each account is enough to hold all those funds in the allocation that you desire, then yes, that's a fine general rule of thumb.

So what do you do with the extra money for bonds when your 401(k) is not large enough to hold all the bonds you need/want?
Thank you! Right now, my 401k has enough to hold slightly more than 20%. But when the time comes, I don't know. Is there a right answer? :D

Topic Author
crossbow
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Re: Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by crossbow » Mon May 06, 2019 6:42 pm

If a Roth 401k was thrown into the mix, how would the allocation change? Should the Roth 401K hold equity as well?

MotoTrojan
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Re: Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by MotoTrojan » Mon May 06, 2019 6:46 pm

Looks about right. It is ideal to have a tax-advantaged place with enough of all 3 to rebalance, so that would normally be your 401k. If you fill the 401k with bonds you'll have to decide whether to use your Roth space (I would) or taxable. If taxable you can use muni/tax-exempt bonds or taxable ones, but you should include tax equivalent yield as an aid to making that decision; a tax-exempt bond paying 2% with the same risk as a taxable bond paying 2.2% is worth more if you'll pay >10% tax.

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crossbow
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Re: Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by crossbow » Tue May 07, 2019 1:10 pm

Just uncovered a Roth 401K account belonging to my wife this weekend, in addition to the above accounts... :oops: Should the Roth 401K hold bonds or equity (in general)?

erictiger
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Re: Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by erictiger » Tue May 07, 2019 1:25 pm

If there is no index bond fund in 401K, is it a good idea to have Tax-Exempt Intermediate-Term bond fund in taxable account for a person with 32% federal tax rate?

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grabiner
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Re: Bond/equity balances in taxable/tax-advantaged accounts for tax purposes

Post by grabiner » Tue May 07, 2019 9:16 pm

erictiger wrote:
Tue May 07, 2019 1:25 pm
If there is no index bond fund in 401K, is it a good idea to have Tax-Exempt Intermediate-Term bond fund in taxable account for a person with 32% federal tax rate?
It doesn't matter whether the 401(k) bond fund is active or index; it matters whether the fund you would use is low-cost, compared to the other alternatives. If your 401(k) has a low-cost stock fund but only high-cost bond funds, then you should hold your bonds somewhere else, in an IRA or taxable account. In the 32% tax bracket, you definitely want a muni fund if you hold bonds in a taxable account. At current rates, I would prefer bonds in an IRA if you are not subject to the Net Investment Income tax (so that you pay 15% tax on qualified dividends), or in a taxable account if you are subject to the tax (so that you pay 18.8% tax on qualified dividends) or can use a fund for your high-tax state (so that you pay 24.3% tax on qualified dividends but zero on CA munis).
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