Should I put Fidelity US Bond Index in Roth IRA?

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Topic Author
hoaius7
Posts: 14
Joined: Wed Sep 11, 2019 9:27 am

Should I put Fidelity US Bond Index in Roth IRA?

Post by hoaius7 » Thu Oct 10, 2019 6:29 pm

Thank you in advance for your wisdom.

My portfolio is simple. I don't have 401k and I have around 80k in brokerage account and 20k in Roth IRA. My goal is 60% in Total Stock (FZROX zero-fee mutual fund, ITOT, VTI), 10% in Mid - Small Cap (FZIPX zero-fee mutual fund), 10% in International (FZILX zero-fee mutual fund), 20% in Total Bond (FXNAX Fidelity US Bond Index 0.025% fee).
My allocation:
- Roth IRA: FXNAX, FZIPX, the rest is FZROX.
- Brokerage account: FZILX, the rest is total stock (FZROX, ITOT).

I am working in Los Angeles, California, my salary is 82k/year with basic health insurance, nothing more. I will stay here for a year. After that, I plan to move to North California if I could find higher income job. If not, I will try to settle in Texas or Florida.

So my questions are:
- In Roth IRA: is it best to put Fidelity Total Bond FXNAX?
- In brokerage account: should I buy FZROX or ITOT/VTI? (considering their performance are the same, VTI/ITOT are more tax-efficient but FZROX is zero-fee)

Thank again,
H
Last edited by hoaius7 on Thu Oct 10, 2019 7:02 pm, edited 1 time in total.

HomeStretch
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Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by HomeStretch » Thu Oct 10, 2019 6:46 pm

hoaius7 wrote:
Thu Oct 10, 2019 6:29 pm
So my questions are:
- In Roth IRA: is it best to put Fidelity Total Bond FXNAX?
- In brokerage account: should I buy FZROX or ITOT/VTI? (considering their performance are the same, VTI/ITOT are more tax-efficient but FZROX is zero-fee)
Without knowing your tax situation:
1. It’s probably more efficient to hold bonds in your Roth IRA than a Taxable Brokerage account.
2. VTI/ITOT are more tax efficient. The tax savings probably outweigh the ETF ERs.

I found the savings from tax efficiency more significant at higher portfolio balances and higher tax rates.

retiredjg
Posts: 40864
Joined: Thu Jan 10, 2008 12:56 pm

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by retiredjg » Thu Oct 10, 2019 6:57 pm

Your tax bracket matters for this question. Also whether you are in a high income tax state.

If you are a high income earner and in CA or NJ (or maybe a few more), I'd probably put 15% bonds in taxable and 5% bonds in Roth IRA. Some of the bonds in taxable would be tax-exempt bonds specific to your state. Some would just be a national tax-exempt fund. This all assumes you are in a high enough tax bracket to need tax-exempt bonds.

If you are in a state with lower or no tax, I'd probably put half the bonds in taxable (intermediate term tax-exempt) and half in the Roth IRA.

This is probably a temporary situation in that you may later have a 401k to put bonds in. Another possibility is to use a traditional IRA now (your contributions should be deductible) and put the bonds in there.

Topic Author
hoaius7
Posts: 14
Joined: Wed Sep 11, 2019 9:27 am

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by hoaius7 » Thu Oct 10, 2019 7:03 pm

HomeStretch wrote:
Thu Oct 10, 2019 6:46 pm
hoaius7 wrote:
Thu Oct 10, 2019 6:29 pm
So my questions are:
- In Roth IRA: is it best to put Fidelity Total Bond FXNAX?
- In brokerage account: should I buy FZROX or ITOT/VTI? (considering their performance are the same, VTI/ITOT are more tax-efficient but FZROX is zero-fee)
Without knowing your tax situation:
1. It’s probably more efficient to hold bonds in your Roth IRA than a Taxable Brokerage account.
2. VTI/ITOT are more tax efficient. The tax savings probably outweigh the ETF ERs.

I found the savings from tax efficiency more significant at higher portfolio balances and higher tax rates.
retiredjg wrote:
Thu Oct 10, 2019 6:57 pm
Your tax bracket matters for this question. Also whether you are in a high income tax state.

If you are a high income earner and in CA or NJ (or maybe a few more), I'd probably put 15% bonds in taxable and 5% bonds in Roth IRA. Some of the bonds in taxable would be tax-exempt bonds specific to your state. Some would just be a national tax-exempt fund. This all assumes you are in a high enough tax bracket to need tax-exempt bonds.

If you are in a state with lower or no tax, I'd probably put half the bonds in taxable (intermediate term tax-exempt) and half in the Roth IRA.

This is probably a temporary situation in that you may later have a 401k to put bonds in. Another possibility is to use a traditional IRA now (your contributions should be deductible) and put the bonds in there.


Thank you for your respond.
I am working in Los Angeles, California, my salary is 82k/year with basic health insurance, nothing more. I will stay here for a year. After that, I plan to move to North California if I could find higher income job. If not, I will try to settle in Texas or Florida.

retiredjg
Posts: 40864
Joined: Thu Jan 10, 2008 12:56 pm

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by retiredjg » Thu Oct 10, 2019 7:09 pm

Are you single? If married, what is the joint income?

Topic Author
hoaius7
Posts: 14
Joined: Wed Sep 11, 2019 9:27 am

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by hoaius7 » Thu Oct 10, 2019 8:03 pm

retiredjg wrote:
Thu Oct 10, 2019 7:09 pm
Are you single? If married, what is the joint income?
I'm single. 30 years old. Thanks

CppCoder
Posts: 917
Joined: Sat Jan 23, 2016 9:16 pm

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by CppCoder » Thu Oct 10, 2019 8:25 pm

hoaius7 wrote:
Thu Oct 10, 2019 6:29 pm
So my questions are:
- In Roth IRA: is it best to put Fidelity Total Bond FXNAX?
- In brokerage account: should I buy FZROX or ITOT/VTI? (considering their performance are the same, VTI/ITOT are more tax-efficient but FZROX is zero-fee)

Thank again,
H
First question: Is it best to put Total Bond in your Roth IRA? I don't know about best. It may not be globally optimal, but there's certainly nothing grossly wrong with it in your situation. Your proposed asset distribution is fine.

Second question: Should you buy the zero index fund or an equivalent ETF in taxable? I just did a calculation on last year's FZROX capital gain distribution. If their gains were long term (not sure) and you were in the 15% capital gains bracket, then the tax drag on this fund was equivalent to 1.6 basis points. That is to say, the tax inefficiency is irrelevant. All three are good funds (VTI will cost you a $4.95 commission per trade at Fidelity). Between FZROX and ITOT, pick either depending on if you like mutual funds or ETFs better, factoring in your likelihood to stick with Fidelity (ITOT is more portable across brokerages).

retiredjg
Posts: 40864
Joined: Thu Jan 10, 2008 12:56 pm

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by retiredjg » Thu Oct 10, 2019 8:26 pm

It appears you are in the 22% tax bracket, not really high enough to need to use tax-exempt bonds in your taxable account. On the other hand you are in California which is a high tax state.

Your best choice is not clear to me. Well, your best choice may be I bonds. Are you familiar with I bonds?

https://www.bogleheads.org/wiki/I_savings_bonds

Topic Author
hoaius7
Posts: 14
Joined: Wed Sep 11, 2019 9:27 am

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by hoaius7 » Thu Oct 10, 2019 8:34 pm

CppCoder wrote:
Thu Oct 10, 2019 8:25 pm
hoaius7 wrote:
Thu Oct 10, 2019 6:29 pm
So my questions are:
- In Roth IRA: is it best to put Fidelity Total Bond FXNAX?
- In brokerage account: should I buy FZROX or ITOT/VTI? (considering their performance are the same, VTI/ITOT are more tax-efficient but FZROX is zero-fee)

Thank again,
H
First question: Is it best to put Total Bond in your Roth IRA? I don't know about best. It may not be globally optimal, but there's certainly nothing grossly wrong with it in your situation. Your proposed asset distribution is fine.

Second question: Should you buy the zero index fund or an equivalent ETF in taxable? I just did a calculation on last year's FZROX capital gain distribution. If their gains were long term (not sure) and you were in the 15% capital gains bracket, then the tax drag on this fund was equivalent to 1.6 basis points. That is to say, the tax inefficiency is irrelevant. All three are good funds (VTI will cost you a $4.95 commission per trade at Fidelity). Between FZROX and ITOT, pick either depending on if you like mutual funds or ETFs better, factoring in your likelihood to stick with Fidelity (ITOT is more portable across brokerages).
Thanks for your advice. BTW Fidelity is $0 commission now.
Last edited by hoaius7 on Thu Oct 10, 2019 8:36 pm, edited 1 time in total.

Topic Author
hoaius7
Posts: 14
Joined: Wed Sep 11, 2019 9:27 am

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by hoaius7 » Thu Oct 10, 2019 8:35 pm

retiredjg wrote:
Thu Oct 10, 2019 8:26 pm
It appears you are in the 22% tax bracket, not really high enough to need to use tax-exempt bonds in your taxable account. On the other hand you are in California which is a high tax state.

Your best choice is not clear to me. Well, your best choice may be I bonds. Are you familiar with I bonds?

https://www.bogleheads.org/wiki/I_savings_bonds
Thank you. I don't know about I bonds. I think I should buy bond in ETF or Mutual Fund for simplicity.

Topic Author
hoaius7
Posts: 14
Joined: Wed Sep 11, 2019 9:27 am

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by hoaius7 » Thu Oct 10, 2019 8:47 pm

CppCoder wrote:
Thu Oct 10, 2019 8:25 pm
Second question: Should you buy the zero index fund or an equivalent ETF in taxable? I just did a calculation on last year's FZROX capital gain distribution. If their gains were long term (not sure) and you were in the 15% capital gains bracket, then the tax drag on this fund was equivalent to 1.6 basis points. That is to say, the tax inefficiency is irrelevant. All three are good funds (VTI will cost you a $4.95 commission per trade at Fidelity). Between FZROX and ITOT, pick either depending on if you like mutual funds or ETFs better, factoring in your likelihood to stick with Fidelity (ITOT is more portable across brokerages).
Capital gain for FZROX published on Fidelity website is just for 3-4 months because Fidelity run the $0 fee fund from around September last year. It costs around 1.5 basis points with 15% capital gain but I tried to calculate based on the FSKAX, another total market fund from Fidelity, it costs around 8-9 basis points. So I think I will buy VTI for my taxable account.

retiredjg
Posts: 40864
Joined: Thu Jan 10, 2008 12:56 pm

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by retiredjg » Fri Oct 11, 2019 7:09 am

hoaius7 wrote:
Thu Oct 10, 2019 8:35 pm
retiredjg wrote:
Thu Oct 10, 2019 8:26 pm
It appears you are in the 22% tax bracket, not really high enough to need to use tax-exempt bonds in your taxable account. On the other hand you are in California which is a high tax state.

Your best choice is not clear to me. Well, your best choice may be I bonds. Are you familiar with I bonds?

https://www.bogleheads.org/wiki/I_savings_bonds
Thank you. I don't know about I bonds. I think I should buy bond in ETF or Mutual Fund for simplicity.
I'm not sure one solution is better or worse than the other. I think if I were in this situation, I'd use 10% CA tax exempt bonds in taxable and 10% total bond index in Roth IRA.

CppCoder
Posts: 917
Joined: Sat Jan 23, 2016 9:16 pm

Re: Should I put Fidelity US Bond Index in Roth IRA?

Post by CppCoder » Fri Oct 11, 2019 3:10 pm

hoaius7 wrote:
Thu Oct 10, 2019 8:34 pm
Thanks for your advice. BTW Fidelity is $0 commission now.
Great! I hadn't seen yet that Fidelity matched Schwab. Now I can save $4.95/yr on my one annual trade when my RSUs vest :).

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