Bond Placement Roth vs Traditional IRA

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SpartanBull
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Bond Placement Roth vs Traditional IRA

Post by SpartanBull »

Ok, so I have three tax deferred accounts.
Roth IRA ($5500 per year limit)
SOLO 401k Employee portion ($18k per year limit--I went with the ROTH option on this)
SOLO 401k Employer portion--25% of income, and this is in traditional IRA Format
Wouldn't bonds be better placed in the account that is more of a traditional IRA? Because thats the one that will get the biggest tax bill, so putting bonds in it will make the growth less than the growth of the equities in the Roth portions? Let me know if my thinking is correct on that. Thanks.
DSInvestor
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Re: Bond Placement Roth vs Traditional IRA

Post by DSInvestor »

Given the huge difference in contribution space between Solo 401k and Roth IRA, I'd try to hold all asset classes in the largest account (Solo 401k) and use the Roth IRA space as overflow of one asset class say US stocks. This would allow you to rebalance the entire portfolio by taking action in the Solo 401k. This would be a good approach if you're using separate funds for each asset class and makes the portfolio very easy to manage.

Assuming you're NOT investing in taxable accounts as well, It would also be reasonable to hold balanced funds or asset allocation funds in your Solo 401k and Roth IRA. If your solo 401k is at Vanguard, you may actually get lower expense ratios by using a LifeStrategy or Target Retirement fund rather than investor share class of index funds. If your Vanguard assets do not exceed 50K (Voyager), you may be assessed a $20/yr fee for each fund held in the Vanguard I401k. Holding a single LS or Tr fund would minimize that fee.

nit pick here: do not refer to the Traditional solo 401k portion as Traditional IRA. It is Traditional 401k. IRA and 401k are have different rules. For example, if you need to use backdoor into Roth IRA, it would be bad to have assets in Traditional IRA but perfectly OK to have assets in the Traditional 401k. This is because form 8606 counts assets in all Traditional IRA, Rollover IRA, SEP-IRA, SIMPLE-IRA to calculate the taxable amount of the Roth conversion when there is IRA basis. Assets in Traditional 401k are not counted.
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Kevin M
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Re: Bond Placement Roth vs Traditional IRA

Post by Kevin M »

SpartanBull wrote: Wouldn't bonds be better placed in the account that is more of a traditional IRA? Because thats the one that will get the biggest tax bill, so putting bonds in it will make the growth less than the growth of the equities in the Roth portions? Let me know if my thinking is correct on that. Thanks.
If you know that the growth will be less for bonds than for equities, then why are you investing in bonds at all?

Have you read this: Tax-adjusted asset allocation - Bogleheads?

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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patrick013
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Re: Bond Placement Roth vs Traditional IRA

Post by patrick013 »

SpartanBull wrote:Ok, so I have three tax deferred accounts..............Wouldn't bonds be better placed in the account that is more of a traditional IRA?
When I calc IRR estimates for the various tax advantaged AA's I find that
25% bonds in a t401k or a tIRA gives the better long term % return. This
is for higher or lower tax rates in retirement and is primarily due to the
tax deduction for these types of accounts. The wiki also supports this
however they did their calc's. A not disproven rule of thumb IMO.

Tax-efficient Fund Placement
age in bonds, buy-and-hold, 10 year business cycle
MrDrinkingWater
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Re: Bond Placement Roth vs Traditional IRA

Post by MrDrinkingWater »

Does your overall asset allocation strategy allow you to put all of your bond allocation in the traditional IRA account? If not, I don't see a problem with putting some of your bond allocation in your Roth IRA as well. You might even sleep better at night with less volatility in your Roth IRA account, even at the cost of perhaps limiting the growth of the Roth IRA.
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patrick013
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Re: Bond Placement Roth vs Traditional IRA

Post by patrick013 »

MrDrinkingWater wrote:Does your overall asset allocation strategy allow you to put all of your bond allocation in the traditional IRA account? If not, I don't see a problem with putting some of your bond allocation in your Roth IRA as well. You might even sleep better at night with less volatility in your Roth IRA account, even at the cost of perhaps limiting the growth of the Roth IRA.
Yes, and according to the wiki tax-free is the alternative location for taxable bonds.
I'm just using 25% bonds because I'm using a 75% stock/25% bond portfolio for
the highest return without going below 25% bonds for diversification and safety.
Also, expecting the 25% bond AA to fit in the t401k or tIRA. :)

Thanks for the response.
age in bonds, buy-and-hold, 10 year business cycle
MrDrinkingWater
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Re: Bond Placement Roth vs Traditional IRA

Post by MrDrinkingWater »

patrick013 wrote:
MrDrinkingWater wrote:Does your overall asset allocation strategy allow you to put all of your bond allocation in the traditional IRA account? If not, I don't see a problem with putting some of your bond allocation in your Roth IRA as well. You might even sleep better at night with less volatility in your Roth IRA account, even at the cost of perhaps limiting the growth of the Roth IRA.
Yes, and according to the wiki tax-free is the alternative location for taxable bonds.
I'm just using 25% bonds because I'm using a 75% stock/25% bond portfolio for
the highest return without going below 25% bonds for diversification and safety.
Also, expecting the 25% bond AA to fit in the t401k or tIRA. :)

Thanks for the response.
I understand what you are saying, patrick013. I liked your first post and what you wrote above. My post was written more to address the OP's question. Didn't have a lot of details about the OP's situation, other than his tax-deferred accounts. He could be someone whose AA is 50/50, perhaps nearing retirement, etc. Thanks for further clarifying what you are thinking.
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patrick013
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Re: Bond Placement Roth vs Traditional IRA

Post by patrick013 »

MrDrinkingWater wrote:He could be someone whose AA is 50/50, perhaps nearing retirement, etc. Thanks for further clarifying what you are thinking.
When I use 50% bonds I get a lower overall portfolio return, but, then
you just have to go by the wiki.
age in bonds, buy-and-hold, 10 year business cycle
DSInvestor
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Re: Bond Placement Roth vs Traditional IRA

Post by DSInvestor »

MrDrinkingWater wrote: I understand what you are saying, patrick013. I liked your first post and what you wrote above. My post was written more to address the OP's question. Didn't have a lot of details about the OP's situation, other than his tax-deferred accounts. He could be someone whose AA is 50/50, perhaps nearing retirement, etc. Thanks for further clarifying what you are thinking.
While the OP's title refers to Traditional IRA, the post refers to Solo 401k. Depending on OP's income, the employer profit share could be much larger than the 18K employee deferral and 5.5K Roth IRA. If OP maxes out the Solo 401k for 53K/yr and has made 18K employee deferral, that's potentially 35K of additional pre-tax space which may provide sufficient space to hold the entire 50% bond allocation in an 50/50 portfolio.

However if OP's income is sufficient to max to a solo 401k for 53K, I think it may be better to change the employee salary deferral contribution to Traditional to get additional tax savings, Max out Roth IRA and invest in taxable. It is unlikely that a self employed person will receive a defined benefit pension so this may allow one to live of the taxable account (very tax efficient) in the early years of retirement and convert to Roth IRA for little or no tax before Social security benefits kick in.
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