New Trend: Bonds in Roth IRA

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PFInterest
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New Trend: Bonds in Roth IRA

Post by PFInterest » Tue May 22, 2018 9:35 am

A handful of past portfolios this week all have some allocation of fixed income in their Roth IRA.
They all had plenty of space in 401k/403b/457 to hold their desired fixed income.
Is there some new FI post or blog touting this?

I dont know why I keep seeing this, maybe I'm reading too much into it.

Good (new) people at Bogleheads....you don't need to put bonds in your Roth IRA.

cjg
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Re: New Trend: Bonds in Roth IRA

Post by cjg » Tue May 22, 2018 4:02 pm

Aren't there risk advantages to doing this even after you adjust the balance for your expected tax rate in retirement?

If stocks do really well, you end up with a higher tax rate than expected in retirement - no big deal, you have plenty of money. If they do poorly, you end up with a lower tax rate than expected - great because your safe withdrawal rate is lower as well.

ThrustVectoring
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Re: New Trend: Bonds in Roth IRA

Post by ThrustVectoring » Wed May 23, 2018 12:56 pm

IMHO you don't need to hold bonds anywhere, at least if you're over a decade away from retirement.

As far as risk goes, extra stocks in a tax-deferred account makes tax planning more difficult. The goal is to flatten out your tax rate through trying to realize approximately equal amounts of income every year while staying under particular thresholds for RMDs, ACA subsidies, long-term capital gains income tax thresholds, taxes on social security benefits, etc. If your tax-deferred account ends up having significantly more money than expected, the result of this is having a pile of money that you can't access without severe penalties (sometimes over 100% depending on AGI). If your tax-deferred account ends up having significantly less money than expected, you wind up having paid taxes in earlier years for no reason.

Overall, if you're at the stage where you're optimizing your withdrawals for tax purposes, you want your tax-deferred account to have a lot of fixed income. I'd only put bonds in my Roth if my 401(k) was entirely bonds and my desired asset allocation needs more.

cjg
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Re: New Trend: Bonds in Roth IRA

Post by cjg » Wed May 23, 2018 3:14 pm

ThrustVectoring wrote:
Wed May 23, 2018 12:56 pm
IMHO you don't need to hold bonds anywhere, at least if you're over a decade away from retirement.

As far as risk goes, extra stocks in a tax-deferred account makes tax planning more difficult. The goal is to flatten out your tax rate through trying to realize approximately equal amounts of income every year while staying under particular thresholds for RMDs, ACA subsidies, long-term capital gains income tax thresholds, taxes on social security benefits, etc. If your tax-deferred account ends up having significantly more money than expected, the result of this is having a pile of money that you can't access without severe penalties (sometimes over 100% depending on AGI). If your tax-deferred account ends up having significantly less money than expected, you wind up having paid taxes in earlier years for no reason.

Overall, if you're at the stage where you're optimizing your withdrawals for tax purposes, you want your tax-deferred account to have a lot of fixed income. I'd only put bonds in my Roth if my 401(k) was entirely bonds and my desired asset allocation needs more.
Thanks for the viewpoint on this, I hadn't thought much about the withdrawal phase considerations. Wouldn't it still make sense to put bonds in Roth until you get close to the point of hitting RMDs for the risk reason I mentioned?

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willthrill81
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Re: New Trend: Bonds in Roth IRA

Post by willthrill81 » Wed May 23, 2018 4:09 pm

cjg wrote:
Wed May 23, 2018 3:14 pm
ThrustVectoring wrote:
Wed May 23, 2018 12:56 pm
IMHO you don't need to hold bonds anywhere, at least if you're over a decade away from retirement.

As far as risk goes, extra stocks in a tax-deferred account makes tax planning more difficult. The goal is to flatten out your tax rate through trying to realize approximately equal amounts of income every year while staying under particular thresholds for RMDs, ACA subsidies, long-term capital gains income tax thresholds, taxes on social security benefits, etc. If your tax-deferred account ends up having significantly more money than expected, the result of this is having a pile of money that you can't access without severe penalties (sometimes over 100% depending on AGI). If your tax-deferred account ends up having significantly less money than expected, you wind up having paid taxes in earlier years for no reason.

Overall, if you're at the stage where you're optimizing your withdrawals for tax purposes, you want your tax-deferred account to have a lot of fixed income. I'd only put bonds in my Roth if my 401(k) was entirely bonds and my desired asset allocation needs more.
Thanks for the viewpoint on this, I hadn't thought much about the withdrawal phase considerations. Wouldn't it still make sense to put bonds in Roth until you get close to the point of hitting RMDs for the risk reason I mentioned?
It depends on how you view returns; some focus on risk-adjusted returns, and if that's the case, then it probably doesn't really matter where bonds are placed. Many believe that Roth accounts should be all stocks all the time as long as doing so doesn't compromise your overall AA. The primary reason for this is the belief that stocks will outperform bonds over the long-term, which has certainly been the case so far, but it glosses over the fact that there have been extended periods where bonds outperformed stocks (e.g. 2000-2009).

I personally lead toward the stocks-in-Roth viewpoint, especially if you don't need money from Roth accounts any time soon, but it may not be an important decision. Only time will tell.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

PugetSoundguy
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Re: New Trend: Bonds in Roth IRA

Post by PugetSoundguy » Wed May 23, 2018 4:21 pm

One reason I have some bonds in a Roth is because the particular form of bonds (TIPS) is not available in my other tax-advantaged accounts. Others who have tax-advantaged accounts that may have somewhat restricted offerings, such as employer-sponsored 401k plans or the federal Thrift Savings Plan, may face a similar challenge. So if I want some TIPS (I do) and I want them in a tax-advantaged account of some kind (I do), for me it has to be in the Roth.

Dottie57
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Re: New Trend: Bonds in Roth IRA

Post by Dottie57 » Wed May 23, 2018 4:46 pm

PugetSoundguy wrote:
Wed May 23, 2018 4:21 pm
One reason I have some bonds in a Roth is because the particular form of bonds (TIPS) is not available in my other tax-advantaged accounts. Others who have tax-advantaged accounts that may have somewhat restricted offerings, such as employer-sponsored 401k plans or the federal Thrift Savings Plan, may face a similar challenge. So if I want some TIPS (I do) and I want them in a tax-advantaged account of some kind (I do), for me it has to be in the Roth.
+1

ThrustVectoring
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Re: New Trend: Bonds in Roth IRA

Post by ThrustVectoring » Thu May 24, 2018 12:08 am

cjg wrote:
Wed May 23, 2018 3:14 pm
ThrustVectoring wrote:
Wed May 23, 2018 12:56 pm
IMHO you don't need to hold bonds anywhere, at least if you're over a decade away from retirement.

As far as risk goes, extra stocks in a tax-deferred account makes tax planning more difficult. The goal is to flatten out your tax rate through trying to realize approximately equal amounts of income every year while staying under particular thresholds for RMDs, ACA subsidies, long-term capital gains income tax thresholds, taxes on social security benefits, etc. If your tax-deferred account ends up having significantly more money than expected, the result of this is having a pile of money that you can't access without severe penalties (sometimes over 100% depending on AGI). If your tax-deferred account ends up having significantly less money than expected, you wind up having paid taxes in earlier years for no reason.

Overall, if you're at the stage where you're optimizing your withdrawals for tax purposes, you want your tax-deferred account to have a lot of fixed income. I'd only put bonds in my Roth if my 401(k) was entirely bonds and my desired asset allocation needs more.
Thanks for the viewpoint on this, I hadn't thought much about the withdrawal phase considerations. Wouldn't it still make sense to put bonds in Roth until you get close to the point of hitting RMDs for the risk reason I mentioned?
Maybe? There's cleverer stuff you can do, though, with options strategies with legs in different accounts. Likely involves either writing a cash-covered put in Roth and buying calls in tax-deferred, or writing covered calls in tax deferred and buying put options in Roth. I'm not expert enough to build good examples (let alone explain the benefits clearly), only familiar enough with option strategies to know that you can efficiently move risk around with them.

retiredjg
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Re: New Trend: Bonds in Roth IRA

Post by retiredjg » Thu May 24, 2018 9:44 am

I don't think it is a new trend. In fact, when I was new here, it was suggested to hold bonds in Roth before putting bonds into taxable.

Some people actually prefer to hold some bonds in Roth IRA. Further still, I recall one poster who preferred to fill Roth IRA with TIPS. :shock:

GAAP
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Re: New Trend: Bonds in Roth IRA

Post by GAAP » Thu May 24, 2018 10:10 am

I would think it comes down to how much you have to invest, your desired allocation, and the places you can invest it.

If you're doing Roth Conversions, you may eventually run out of TIRA space. If you're spending from taxable first, you may run out of taxable space. In either of those situations, if your AA has any bonds in it, they'll probably be in Roth.

GoldenFinch
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Re: New Trend: Bonds in Roth IRA

Post by GoldenFinch » Thu May 24, 2018 12:43 pm

Not everybody is investing in the most tax efficient or most optimal way. For some of us it’s an exercise in continuing education.

Dandy
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Re: New Trend: Bonds in Roth IRA

Post by Dandy » Fri May 25, 2018 8:21 am

I self insure our LTC exposure. We have modest total Roth assets (<6% but have those conservatively invested since they are part of the LTC "coverage" (if not directly then to replace assets that are used to cover LTC). I also use our Roth's for some rebalancing. Most of our equity exposure is in taxable and our TIRA has about 80% fixed income which I am hesitant to increase nor do I want to sell taxable equities for rebalancing.

So, not ideal. I am comfortable with Roth's not being equity heavy.

Katietsu
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Re: New Trend: Bonds in Roth IRA

Post by Katietsu » Fri May 25, 2018 8:30 am

I started with fixed income in Roth because I viewed the Roth accounts as a second tier emergency fund. I had no access to the money in the employer accounts, unless the emergency had involved job loss. I still have some fixed income there because it has a guaranteed minimum 4% rate that I have trouble giving up - even though I would be ahead now if I had.

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jeffyscott
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Re: New Trend: Bonds in Roth IRA

Post by jeffyscott » Fri May 25, 2018 9:51 am

ThrustVectoring wrote:
Thu May 24, 2018 12:08 am
There's cleverer stuff you can do, though, with options strategies with legs in different accounts. Likely involves either writing a cash-covered put in Roth and buying calls in tax-deferred, or writing covered calls in tax deferred and buying put options in Roth. I'm not expert enough to build good examples (let alone explain the benefits clearly), only familiar enough with option strategies to know that you can efficiently move risk around with them.
I'd be surprised to learn that these sorts of things are available in employer controlled accounts. I know nothing like that was allowed in mine, we had a PCRA brokerage option but could only buy mutual funds, not even ETFs were allowed.

In my case, some bonds in Roth because of what was available in tax deferred. What I'll probably do, now that I am retired, is use Roth conversions to move stocks from tax deferred to Roth over the next few years.
press on, regardless - John C. Bogle

CurlyDave
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Re: New Trend: Bonds in Roth IRA

Post by CurlyDave » Fri May 25, 2018 10:02 am

cjg wrote:
Tue May 22, 2018 4:02 pm
...If stocks do really well, you end up with a higher tax rate than expected in retirement - no big deal, you have plenty of money. If they do poorly, you end up with a lower tax rate than expected - great because your safe withdrawal rate is lower as well.
I do not understand why the second outcome is described as "great".

Wouldn't the real objective be to maximize spendable income rather than just minimizing taxes?

I personally know people who pay very low tax rates -- some of them even zero. It is not the lifestyle I want for myself.

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grabiner
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Re: New Trend: Bonds in Roth IRA

Post by grabiner » Sun May 27, 2018 10:53 pm

CurlyDave wrote:
Fri May 25, 2018 10:02 am
cjg wrote:
Tue May 22, 2018 4:02 pm
...If stocks do really well, you end up with a higher tax rate than expected in retirement - no big deal, you have plenty of money. If they do poorly, you end up with a lower tax rate than expected - great because your safe withdrawal rate is lower as well.
I do not understand why the second outcome is described as "great".

Wouldn't the real objective be to maximize spendable income rather than just minimizing taxes?
The idea here that putting stock in the Roth takes advantage of the asymmetry, without taking any more eisk. Suppose that you expect to retire in a 25% bracket, and you have $400K in a 401(k) and $300K in a Roth IRA. If the market rises by 10%, you get $40K if you put stock in the 401(k) but this becomes $30K after tax, and $30K tax-free if you put stock in the Roth IRA, so the two accounts are of equal value; if one is all stock, the effective allocation is 50/50.

But that assumes that you will actually withdraw in a 25% tax bracket. If you put stock in the Roth and the market loses half its value, you lose $150K. If you put stock in the 401(k) and the stock market crashes, you might wind up with a $200K loss. If that loss is all taxed at 25%, your taxes are reduced by $50K, so you lose $150K. But if your tax rate drops to 15%, you save only $30K in taxes, and lose $170K; your actual loss might be somewhere in between.

Conversely, if the stock market doubles, putting stock in the Roth gains you $300K. Putting stock in the 401(k) gains you $400K in taxable income, but if that gain is taxed at 28%, the tax is $112K, not $100K, so you get $288K after tax.

The other reason to put stocks in a Roth is that a stock market boom might increase your tax bill by forcing you to take RMDs which are larger than you need. You won't need to spend the RMDs, but you will have to invest them, and lose in future taxes.
Wiki David Grabiner

Independent George
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Re: New Trend: Bonds in Roth IRA

Post by Independent George » Sun May 27, 2018 11:06 pm

I always thought the main reason to keep bonds in your IRA was to avoid paying taxes on the interest during your accumulation phase, since your capital gains rates will presumably be lower than your normal income tax rate, and will only be taxed on the sale.

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