Bond or Stock in Roth for our Situation

[chr]

Hi,

I know the general advice is to put Stocks in Roth IRA and all the Bonds in tax deferred accounts. I wonder how this applies if one wants to hold more bonds than fit into tax deferred accounts.

Our situation right now is as follows.
- 401k is all bonds
- We have about 6% of our portfolio in a taxable account in Vanguard Tax-Exempt Bond ETF (VTEB)
- Overall our portfolio is domestic and international stock funds (~75% Stock / 25% Bonds)
- We are in California and expect to be in the top tax brackets for both federal and state tax this year
- We recently started to make mega backdoor Roth contributions

The question I have is what should we put in the newly acquired Roth space. Total Bond Market or Total Stock Market?

Thanks in advance for your help.

Edit:
As it was unclear here the full portfolio composition:
19% Bonds (401k)
6% Vanguard Tax-Exempt Bond ETF (VTEB) (Taxable)
74% Total Stock Market / Total International at Market Cap weight (combination of VT, VXUS, VTI) (Taxable)
1% Currently temporarily in Target Date Fund (Roth 401k via Mega Backdoor)

Question is: Putting Bond in Roth to minimize amount of Bonds in taxable or putting Stock in Roth, which one is more tax efficient?

[retiredjg]

Achieving your desired stock to bond ratio is considerably more important than avoiding bonds in Roth IRA. You have used all your tax-deferred space for bonds and you have used all your taxable space for bonds.

The only place left to hold bonds is in Roth IRA.

In taxable, consider using one of Vanguard's California tax-exempt bond funds instead of VTEB. If your taxable space growing, consider splitting CA and national muni bunds. But since you are using mega-backdoor, I suspect your taxable space is not growing.

[chr]

Achieving your desired stock to bond ratio is considerably more important than avoiding bonds in Roth IRA. You have used all your tax-deferred space for bonds and you have used all your taxable space for bonds.

The only place left to hold bonds is in Roth IRA.

In taxable, consider using one of Vanguard's California tax-exempt bond funds instead of VTEB. If your taxable space growing, consider splitting CA and national muni bunds. But since you are using mega-backdoor, I suspect your taxable space is not growing.

I think the wording was not clear in the post. I edited it a bit to clarify that currently our allocations are the way we would like them, it is overall about 75% stock / 25% bond. The 25% bonds are comprised of the 6% VTEB and the the bonds in the 401ks. So no matter what we do with the Roth unless we put both stock and bonds in it, it can skew the allocation. However, given currently what we have in Roth is only about 1% of our portfolio, changes in market value of the stock funds will probably make a bigger difference than what we put in the Roth.

Taxable we are currently not contributing as we are saving all remaining money for a house purchase. Once we stop doing that we expect contributions to taxable investments on top of 401k and mega backdoor Roth.

[retiredjg]

I don't understand. Sorry.

Are you saying that your taxable account is the largest account? It sounded to me like your taxable account was 6% of the portfolio. What percentage of your portfolio is in the 401ks?

[Duckie]

I think the wording was not clear in the post. I edited it a bit to clarify that currently our allocations are the way we would like them, it is overall about 75% stock / 25% bond. The 25% bonds are comprised of the 6% VTEB and the the bonds in the 401ks. So no matter what we do with the Roth unless we put both stock and bonds in it, it can skew the allocation. However, given currently what we have in Roth is only about 1% of our portfolio, changes in market value of the stock funds will probably make a bigger difference than what we put in the Roth.

So you have roughly 80% in taxable (74% stocks, 6% bonds), 19% in pre-tax 401k plans (all bonds), and 1% in new Roth 401k plans. To answer your original question, given your space issues put both stocks and bonds in the Roth 401k plans. It is not optimal but you work with what you have, and since you live in California I would avoid putting more bonds in taxable.

[chr]

I think the wording was not clear in the post. I edited it a bit to clarify that currently our allocations are the way we would like them, it is overall about 75% stock / 25% bond. The 25% bonds are comprised of the 6% VTEB and the the bonds in the 401ks. So no matter what we do with the Roth unless we put both stock and bonds in it, it can skew the allocation. However, given currently what we have in Roth is only about 1% of our portfolio, changes in market value of the stock funds will probably make a bigger difference than what we put in the Roth.

So you have roughly 80% in taxable (74% stocks, 6% bonds), 19% in pre-tax 401k plans (all bonds), and 1% in new Roth 401k plans. To answer your original question, given your space issues put both stocks and bonds in the Roth 401k plans. It is not optimal but you work with what you have, and since you live in California I would avoid putting more bonds in taxable.

Thanks for your suggestion. Yes, that is correct regarding my portfolio. To clarify my question. What is more tax efficient in my situation putting bonds or Stock in Roth. If I have no other choice than putting both stock and bond in Roth to balance the portfolio I will do so. But I would like to avoid putting both asset classes in Roth by choice to avoid some complexity as for now I have always been able to rebalance with new taxable contributions. Sounds like you would just put bonds in Roth, did I understand this correctly?

[chr]

I don't understand. Sorry.

Are you saying that your taxable account is the largest account? It sounded to me like your taxable account was 6% of the portfolio. What percentage of your portfolio is in the 401ks?

Apologies for the unclear post and thanks for your help. I edited to clarify it more. Yes, taxable is our largest chunk. Only 19% is in 401k and 1% is now in Roth 401k the rest is taxable.

The question is what is more tax efficient in our situation having bond or stock in Roth? If we have stock in Roth than more bonds will need to be in taxable than if we have bonds in Roth. It is not clear to me what is the better choice, what we should try to optimize for.

[retiredjg]

When it comes to choosing between putting bonds in Roth IRA or into taxable, I don't know that there is a clear answer. I'd probably pick taxable and use a combination of several types of fixed income assets. Some tax-exempt bonds, maybe some treasuries, some I Bonds, maybe a bit in CDs.

In your case, in CA, I would use long term CA tax exempt bonds (Vanguard has one) and a short term national muni like Vanguard's Limited Term tax exempt.

However, since you are using the mega-backdoor...your Roth accounts may grow rather quickly. In a case like that, I would probably put some bonds into Roth IRA, but I don't think I would fill the Roth IRA with bonds.

I don't think of this as being a tax-efficiency question.