Stock or Bond fund in my Roth account?

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jkirkmd
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Stock or Bond fund in my Roth account?

Post by jkirkmd » Sat Jul 28, 2018 5:10 pm

I’m planning on making a conversion to a Roth account in the near future, and wonder which is best in a Roth account - a stock fund, like VTSAX, or a bond fund, like VBTLX? I won’t be touching it for more than 5 years. Or, does it matter which asset class I use, as long as it’s consistent with my overall asset allocation?

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flamesabers
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Re: Stock or Bond fund in my Roth account?

Post by flamesabers » Sat Jul 28, 2018 5:27 pm

Generally you'll want to place tax-efficient funds in your taxable accounts and put your tax-inefficient funds in your tax-advantaged accounts. The reasoning for this is interest for bond funds will be taxed as ordinary income while the dividends and realized gains you get from stock funds may be taxed at a lower rate. You can also use your stock funds for tax loss harvesting if you're interested in that sort of thing.

Here's a wiki page on the topic:

https://www.bogleheads.org/wiki/Tax-eff ... _placement

If you're in a lower tax bracket, this won't be much of an issue then if you're in a higher tax bracket.

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cheese_breath
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Re: Stock or Bond fund in my Roth account?

Post by cheese_breath » Sat Jul 28, 2018 5:34 pm

What's your risk tolerance? You'd want the one that made the greater gains since all gains are tax free in Roths. Stocks have the potential for the greater gains over the long term. But they also have the potential for the greater loss over short terms. So do you feel lucky, or do you want to play it safe?
The surest way to know the future is when it becomes the past.

jkirkmd
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Re: Stock or Bond fund in my Roth account?

Post by jkirkmd » Sat Jul 28, 2018 5:42 pm

All of my funds are in tax-efficient accounts (50/50 AA), and my Roth funds are for the long term. It’s sounding like stock funds would be the way to go, as part of my 50% equity portion.

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jeffyscott
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Re: Stock or Bond fund in my Roth account?

Post by jeffyscott » Mon Jul 30, 2018 7:53 am

I'm doing my first ever conversions this year and we also have essentially all investments in tax-deferred or Roth accounts. I'm converting an emerging market fund first and if things stay as they are, I would do other foreign stock funds next.

My reasoning is US valuations are higher, so more likely to see a decline there and I would prefer to convert after a decline. Also because of valuation differences, the expected returns for foreign and especially emerging may be higher.
press on, regardless - John C. Bogle

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grabiner
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Re: Stock or Bond fund in my Roth account?

Post by grabiner » Mon Jul 30, 2018 9:28 pm

The correct comparison is between $4000 in stock in the traditional account and $3000 in the Roth account if you retire in a 25% bracket; both give you the same return and risk if invested the same way. Once you make this adjustment, there is no direct advantage for holding stock in one account or the other.

It's still slightly better to have stock in the Roth account, primarily because of RMDs. If the stock market booms and you have stock in your traditional account, you may have RMDs which are more than you need, and have to pay tax prematurely. If you have stock in your Roth account, the unneeded gains can be left tax-free to your heirs.
Wiki David Grabiner

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