Advice about portfolio, especially bonds

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sjb150
Posts: 9
Joined: Wed Sep 13, 2017 11:05 pm

Advice about portfolio, especially bonds

Post by sjb150 » Fri Sep 15, 2017 2:07 pm

Hi all,
I’m new to this forum but I’ve spent a good deal of time reading many posts as well as a couple of Boglehead books. I wanted to first thank this community for all I’ve learned, and for leading me to leave my financial manager and to follow a low-cost index fund approach. It feels great.

My portfolio below is mainly the result of these factors:
1) I got a late start investing in a retirement account
2) I had a windfall from selling an apartment
3) I invested a chunk of the funds from my apartment sale in Betterment. When leaving my manager a few months ago, I was no longer sold on using Betterment, so I reinvested in mainly ETFs at Schwab, where I already had a brokerage account. Thinking ahead to consolidating with the Betterment account, I bought mainly Vanguard funds.

As a result, I have relatively little in my retirement account compared with my taxable. I’m looking for some guidance about this situation, in particular about appropriate bonds and where to put them. My questions follow the portfolio info.

-----------------------------------------------------------------


Emergency funds: 40k
Tax Filing Status: Single
Tax Rate: 28% Federal, 6.65% State
State of Residence: NY
Age: 40
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20% of stocks

Portfolio size: 800K

Taxable in Schwab:
20% Vanguard total market ETF (VTI) (%0.04 ER)
10% Calvert Large Cap Core Index Fund (CISIX) (%0.19 ER)
6% Vanguard total international ETF (VXUS) (%0.11 ER)
11% Vanguard total bond market ETF (BND) (%0.05 ER)

Taxable in Betterment:
30% Collection of mainly Vanguard ETFs
13% Collection of bonds, see below *

My Roth 401k:
7% Vanguard 500 Index Admiral (VFIAX) (%0.04 ER)
3% Vanguard Intermediate Term Bond Index Admiral (VBILX) (%0.07 ER)

* Breakdown of bonds in Betterment (totaling 100%):
50% iShares National AMT-Free Muni Bond ETF (MUB) (%0.25 ER)
20% Vanguard total international bond ETF (BNDX) (%0.12 ER)
10% Vanguard short-term inflation protected (VTIP) (%0.07 ER)
10% iShares short-term treasury bond ETF (SHV) (%0.15 ER)
5% iShares emerging markets USD bond ETF (EMB) (%0.39 ER)
5% iShares investment-grade corporate bond ETF (LQD) (%0.15 ER)

New annual Contributions:
My Roth 401k: $18K + 5% of salary matched by employer
Taxable: at the moment, just dividends and distributions

Funds available in my 401k (In the interest of readability, I’m only listing the ones I believe are relevant, and not listing the higher cost mutual funds):
Vanguard 500 Index Admiral (VFIAX) (%0.04 ER)
Vanguard Intermediate Term Bond Index Admiral (VBILX) (%0.07 ER)
Blackrock Inflation Protected Bond K (BPLBX) (%0.30 ER)
Vanguard Developed Markets Idx (VTMGX) (%0.07)
Vanguard retirement funds 2020, 2030, 2040, and 2050

----------------------------------------

My questions:
1) I believe it’s generally recommended here to do AA across all accounts as opposed to in each account. If I were to follow this approach, I would have entirely bonds in my 401k. Is this okay?

2) Are my 401k bond choices - VBILX and BPLBX - good for this approach? How much should be in the inflation protected?

3) How do my bonds in taxable look (BND + the ones from Betterment)? Having the municipals seems right, though as a NY state resident I’m wondering if I should switch to some NY municipals.

4) I’m keeping aside about 150K to go towards a home, within 1-2 years, and would like to keep it invested in lower-risk bonds. Any recommendations for doing that?

Thank you in advance for any thoughts!


mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Advice about portfolio, especially bonds

Post by mega317 » Fri Sep 15, 2017 2:57 pm

1. Yes
2. I would use exclusively VBILX. I think at your age you are sufficiently protected from inflation by stocks and your income.
3. I would use municipal bonds in your bracket, a combination of national and state might be appropriate.
4. There is a thread on this question just about every day. You are in a somewhat unique position because your taxable account is quite large. Some in your position would stay invested according to your AA and just sell what you need when you purchase. The usual answer is that money needed in 1-2 years should stay safe. Common choices are are online savings accounts, CDs, money market funds, short-term bonds. Some high-income folks around here tend to like vanguard muni bond funds for this.

More important than any of this: why are you using a Roth 401k? It is costing you 27k pre-tax to put 18k in the Roth 401k. If you use a traditional, you can put 18k in the 401k and have 9k left which will be 6k after taxes. Then you can fill your backdoor Roth IRA. Which you should be doing.

JBTX
Posts: 1530
Joined: Wed Jul 26, 2017 12:46 pm

Re: Advice about portfolio, especially bonds

Post by JBTX » Fri Sep 15, 2017 3:17 pm

sjb150 wrote:
Fri Sep 15, 2017 2:07 pm
Hi all,
I’m new to this forum but I’ve spent a good deal of time reading many posts as well as a couple of Boglehead books. I wanted to first thank this community for all I’ve learned, and for leading me to leave my financial manager and to follow a low-cost index fund approach. It feels great.

My portfolio below is mainly the result of these factors:
1) I got a late start investing in a retirement account
2) I had a windfall from selling an apartment
3) I invested a chunk of the funds from my apartment sale in Betterment. When leaving my manager a few months ago, I was no longer sold on using Betterment, so I reinvested in mainly ETFs at Schwab, where I already had a brokerage account. Thinking ahead to consolidating with the Betterment account, I bought mainly Vanguard funds.

As a result, I have relatively little in my retirement account compared with my taxable. I’m looking for some guidance about this situation, in particular about appropriate bonds and where to put them. My questions follow the portfolio info.

-----------------------------------------------------------------


Emergency funds: 40k
Tax Filing Status: Single
Tax Rate: 28% Federal, 6.65% State
State of Residence: NY
Age: 40
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20% of stocks

Portfolio size: 800K

Taxable in Schwab:
20% Vanguard total market ETF (VTI) (%0.04 ER)
10% Calvert Large Cap Core Index Fund (CISIX) (%0.19 ER)
6% Vanguard total international ETF (VXUS) (%0.11 ER)
11% Vanguard total bond market ETF (BND) (%0.05 ER)

Taxable in Betterment:
30% Collection of mainly Vanguard ETFs
13% Collection of bonds, see below *

My Roth 401k:
7% Vanguard 500 Index Admiral (VFIAX) (%0.04 ER)
3% Vanguard Intermediate Term Bond Index Admiral (VBILX) (%0.07 ER)

* Breakdown of bonds in Betterment (totaling 100%):
50% iShares National AMT-Free Muni Bond ETF (MUB) (%0.25 ER)
20% Vanguard total international bond ETF (BNDX) (%0.12 ER)
10% Vanguard short-term inflation protected (VTIP) (%0.07 ER)
10% iShares short-term treasury bond ETF (SHV) (%0.15 ER)
5% iShares emerging markets USD bond ETF (EMB) (%0.39 ER)
5% iShares investment-grade corporate bond ETF (LQD) (%0.15 ER)

New annual Contributions:
My Roth 401k: $18K + 5% of salary matched by employer
Taxable: at the moment, just dividends and distributions

Funds available in my 401k (In the interest of readability, I’m only listing the ones I believe are relevant, and not listing the higher cost mutual funds):
Vanguard 500 Index Admiral (VFIAX) (%0.04 ER)
Vanguard Intermediate Term Bond Index Admiral (VBILX) (%0.07 ER)
Blackrock Inflation Protected Bond K (BPLBX) (%0.30 ER)
Vanguard Developed Markets Idx (VTMGX) (%0.07)
Vanguard retirement funds 2020, 2030, 2040, and 2050

----------------------------------------

My questions:
1) I believe it’s generally recommended here to do AA across all accounts as opposed to in each account. If I were to follow this approach, I would have entirely bonds in my 401k. Is this okay?
You can debate it both ways, but generally most think it is better to have bonds in tax deferred account. With equities in taxable accounts much of cap gains and dividends will be at lower long term rate. Also you can manage what your recognized gain and loss is to some degree (tax loss harvesting)
2) Are my 401k bond choices - VBILX and BPLBX - good for this approach? How much should be in the inflation protected?
No issues with VBILX. BPLBX has 0.30% expense ratio which is low but not as low as index funds. If that is all you have it is probably fine, otherwise you may be able to find something better.
3) How do my bonds in taxable look (BND + the ones from Betterment)? Having the municipals seems right, though as a NY state resident I’m wondering if I should switch to some NY municipals.
I have no opinion either way

4) I’m keeping aside about 150K to go towards a home, within 1-2 years, and would like to keep it invested in lower-risk bonds. Any recommendations for doing that?

Thank you in advance for any thoughts!
Agree that online savings account would be better for short terms savings within 1-2 years.

Also, you appear to have no traditional IRA's or 401K's. You are in a relatively high tax bracket now, which may favor traditionals, and having some traditional 401k/IRA is good in retirement to "fill up" some of the lower tax brackets.

dbr
Posts: 23770
Joined: Sun Mar 04, 2007 9:50 am

Re: Advice about portfolio, especially bonds

Post by dbr » Fri Sep 15, 2017 3:23 pm

sjb150 wrote:
Fri Sep 15, 2017 2:07 pm


My questions:
1) I believe it’s generally recommended here to do AA across all accounts as opposed to in each account. If I were to follow this approach, I would have entirely bonds in my 401k. Is this okay?

Yes, you probably prefer that in general.

2) Are my 401k bond choices - VBILX and BPLBX - good for this approach? How much should be in the inflation protected?

It seems out of style on the forum these days to hold TIPS. I think there is a credible argument that all bonds should be only TIPS because why take inflation risk when it can be avoided. Half of each is a possible alternative.

3) How do my bonds in taxable look (BND + the ones from Betterment)? Having the municipals seems right, though as a NY state resident I’m wondering if I should switch to some NY municipals.

Taken as a whole of your assets it would seem local munis would make sense for the entirety. The compromise is half a national fund and half a state fund.

4) I’m keeping aside about 150K to go towards a home, within 1-2 years, and would like to keep it invested in lower-risk bonds. Any recommendations for doing that?

Put it in a savings account.


Thank you in advance for any thoughts!

Swansea
Posts: 466
Joined: Sat Feb 13, 2016 5:16 am

Re: Advice about portfolio, especially bonds

Post by Swansea » Fri Sep 15, 2017 3:28 pm

I think you should consider more holdings in mid-cap and small-cap stocks in your equity side. I've held and sold Vanguard Extended Market and think it is a good fund.

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Kevin M
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Re: Advice about portfolio, especially bonds

Post by Kevin M » Fri Sep 15, 2017 3:31 pm

The conventional wisdom would lead to locating bonds in tax-advantaged accounts, but there is debate here as to whether or not that's the best approach. If you go with conventional, then all 401k and IRA in bonds would be fine until whatever is in those accounts exceeds your target bond allocation. The low-cost intermediate-term bond index fund would be a fine choice for this in the 401k.

If you go with the less conventional wisdom that bonds are better in taxable, then a low-cost NY muni fund, like the Vanguard one, would be a rational choice.

If you're not sure, you could do half of the bond allocation in each (to the extent you can do half in the 401k + IRA).

As others have said, you probably want to have some of your tax-advantaged in traditional to fill up the lower tax brackets in retirement, unless you're pretty sure you'll fill them up with taxable investment income, pension income, social security income, and other non-retirement account sources. Typical approach is traditional 401k plus Roth IRA (backdoor if necessary, which probably is in your case). If you think you'll still end up with too much in traditional at retirement, you can do some Roth 401k and some traditional 401k. Keep in mind that you might retire early and be able to convert from traditional to Roth at lower tax rates than your current tax rates.

Kevin
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Kevin M
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Re: Advice about portfolio, especially bonds

Post by Kevin M » Fri Sep 15, 2017 3:36 pm

A good alternative to a savings account for short-term is the Ally no-penalty 11-month CD earning 1.5%, but some savings accounts are paying as much as 1.4%. For a 2-year timeframe, the USAlliance 25-month CD at 2.00% APY is the best deal I know of, but it requires joining the credit union (took me about 15 minutes when I did so a couple of years ago, but some people have more problems with this). There are a few banks with 2-year CDs at 1.85%.

Kevin
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JBTX
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Joined: Wed Jul 26, 2017 12:46 pm

Re: Advice about portfolio, especially bonds

Post by JBTX » Fri Sep 15, 2017 3:58 pm

Kevin M wrote:
Fri Sep 15, 2017 3:31 pm
The conventional wisdom would lead to locating bonds in tax-advantaged accounts, but there is debate here as to whether or not that's the best approach. If you go with conventional, then all 401k and IRA in bonds would be fine until whatever is in those accounts exceeds your target bond allocation. The low-cost intermediate-term bond index fund would be a fine choice for this in the 401k.

If you go with the less conventional wisdom that bonds are better in taxable, then a low-cost NY muni fund, like the Vanguard one, would be a rational choice.

If you're not sure, you could do half of the bond allocation in each (to the extent you can do half in the 401k + IRA).

As others have said, you probably want to have some of your tax-advantaged in traditional to fill up the lower tax brackets in retirement, unless you're pretty sure you'll fill them up with taxable investment income, pension income, social security income, and other non-retirement account sources. Typical approach is traditional 401k plus Roth IRA (backdoor if necessary, which probably is in your case). If you think you'll still end up with too much in traditional at retirement, you can do some Roth 401k and some traditional 401k. Keep in mind that you might retire early and be able to convert from traditional to Roth at lower tax rates than your current tax rates.

Kevin
As to last paragraph, as I think through it she may have $1.5 to $2.0M in taxable accounts in 20 years with substantial capital gains that will at least partially fill up bottom brackets during retirement. Thoughts?

sjb150
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Joined: Wed Sep 13, 2017 11:05 pm

Re: Advice about portfolio, especially bonds

Post by sjb150 » Fri Sep 15, 2017 4:10 pm

Thanks, much of my information so far has come from those links. The next frontier for me will be the TLH, but not worrying about it just yet.

sjb150
Posts: 9
Joined: Wed Sep 13, 2017 11:05 pm

Re: Advice about portfolio, especially bonds

Post by sjb150 » Fri Sep 15, 2017 4:15 pm

Thank you for the response. It got me wondering if I should even hold on to the VTIPs I'll inherit from Betterment.

As why I'm using Roth instead Traditional, it was actually a relatively recent switch, and the short answer is I didn't know any better. I plan to move it back now, and to investigate the Roth IRA.
mega317 wrote:
Fri Sep 15, 2017 2:57 pm
1. Yes
2. I would use exclusively VBILX. I think at your age you are sufficiently protected from inflation by stocks and your income.
3. I would use municipal bonds in your bracket, a combination of national and state might be appropriate.
4. There is a thread on this question just about every day. You are in a somewhat unique position because your taxable account is quite large. Some in your position would stay invested according to your AA and just sell what you need when you purchase. The usual answer is that money needed in 1-2 years should stay safe. Common choices are are online savings accounts, CDs, money market funds, short-term bonds. Some high-income folks around here tend to like vanguard muni bond funds for this.

More important than any of this: why are you using a Roth 401k? It is costing you 27k pre-tax to put 18k in the Roth 401k. If you use a traditional, you can put 18k in the 401k and have 9k left which will be 6k after taxes. Then you can fill your backdoor Roth IRA. Which you should be doing.

sjb150
Posts: 9
Joined: Wed Sep 13, 2017 11:05 pm

Re: Advice about portfolio, especially bonds

Post by sjb150 » Fri Sep 15, 2017 4:19 pm

Thank you JBTX!

sjb150
Posts: 9
Joined: Wed Sep 13, 2017 11:05 pm

Re: Advice about portfolio, especially bonds

Post by sjb150 » Fri Sep 15, 2017 4:25 pm

Thank you for the helpful response DBR. Were you suggesting local munis for all my bonds in taxable, or just for the portion that was going to be munis? Because my next step was determining a good ration of the munis with the BND/BNDX.
dbr wrote:
Fri Sep 15, 2017 3:23 pm
sjb150 wrote:
Fri Sep 15, 2017 2:07 pm


My questions:
1) I believe it’s generally recommended here to do AA across all accounts as opposed to in each account. If I were to follow this approach, I would have entirely bonds in my 401k. Is this okay?

Yes, you probably prefer that in general.

2) Are my 401k bond choices - VBILX and BPLBX - good for this approach? How much should be in the inflation protected?

It seems out of style on the forum these days to hold TIPS. I think there is a credible argument that all bonds should be only TIPS because why take inflation risk when it can be avoided. Half of each is a possible alternative.

3) How do my bonds in taxable look (BND + the ones from Betterment)? Having the municipals seems right, though as a NY state resident I’m wondering if I should switch to some NY municipals.

Taken as a whole of your assets it would seem local munis would make sense for the entirety. The compromise is half a national fund and half a state fund.

4) I’m keeping aside about 150K to go towards a home, within 1-2 years, and would like to keep it invested in lower-risk bonds. Any recommendations for doing that?

Put it in a savings account.


Thank you in advance for any thoughts!

sjb150
Posts: 9
Joined: Wed Sep 13, 2017 11:05 pm

Re: Advice about portfolio, especially bonds

Post by sjb150 » Fri Sep 15, 2017 4:34 pm

Thank you Kevin. At my knowledge level, I don't have any reason to deviate from the conventional approach of bonds in tax-advantaged. And I plan to change my 401k to traditional.

Newbie question: can you clarify what is meant by 'filling the lower tax brackets in retirement' and why it is desirable?
Kevin M wrote:
Fri Sep 15, 2017 3:31 pm
The conventional wisdom would lead to locating bonds in tax-advantaged accounts, but there is debate here as to whether or not that's the best approach. If you go with conventional, then all 401k and IRA in bonds would be fine until whatever is in those accounts exceeds your target bond allocation. The low-cost intermediate-term bond index fund would be a fine choice for this in the 401k.

If you go with the less conventional wisdom that bonds are better in taxable, then a low-cost NY muni fund, like the Vanguard one, would be a rational choice.

If you're not sure, you could do half of the bond allocation in each (to the extent you can do half in the 401k + IRA).

As others have said, you probably want to have some of your tax-advantaged in traditional to fill up the lower tax brackets in retirement, unless you're pretty sure you'll fill them up with taxable investment income, pension income, social security income, and other non-retirement account sources. Typical approach is traditional 401k plus Roth IRA (backdoor if necessary, which probably is in your case). If you think you'll still end up with too much in traditional at retirement, you can do some Roth 401k and some traditional 401k. Keep in mind that you might retire early and be able to convert from traditional to Roth at lower tax rates than your current tax rates.

Kevin

dbr
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Re: Advice about portfolio, especially bonds

Post by dbr » Fri Sep 15, 2017 5:14 pm

sjb150 wrote:
Fri Sep 15, 2017 4:25 pm
Thank you for the helpful response DBR. Were you suggesting local munis for all my bonds in taxable, or just for the portion that was going to be munis? Because my next step was determining a good ration of the munis with the BND/BNDX.

In general if munis are indicated in taxable then you would want all the bond holding in taxable to be tax free. That is caused when your tax rate on ordinary income is very high. Otherwise the calculation in theory is that you don't need munis at all. These days the low yields on bonds make the calculation fuzzy. If you go munis in a high tax state you might be nervous about the risk and use a diversified national fund at the loss of the state tax exemption for part of it. I was thinking that if you are talking about 10% or 15% of your entire wealth a little risk is not a big deal.

An aside is the US Treasuries are state tax exempt, so there is an angle there.

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Kevin M
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Re: Advice about portfolio, especially bonds

Post by Kevin M » Fri Sep 15, 2017 6:29 pm

sjb150 wrote:
Fri Sep 15, 2017 4:34 pm
Newbie question: can you clarify what is meant by 'filling the lower tax brackets in retirement' and why it is desirable?
I think this blog post by forum member tfb (Harry Sit) does a pretty good job of explaining it:
The Case Against Roth 401(k)

Kevin
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retiredjg
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Re: Advice about portfolio, especially bonds

Post by retiredjg » Sat Sep 16, 2017 9:12 am

I didn't read each post carefully, but I'm wondering if you are having Betterment do tax loss harvesting? If yes, you've got some possible wash sale conflicts.

sjb150
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Re: Advice about portfolio, especially bonds

Post by sjb150 » Sat Sep 16, 2017 11:39 am

Thanks for the response. I am not using Betterment for TLH, because I was aware of the conflicts. This is the main reason I've decided they're probably not worth the fee for me.

That said, there are many things I really like about using a robo. I haven't entirely ruled out consolidating into Betterment to take advantage of the TLH, automated rebalancing with dividends, etc, but it's unlikely. I'm not sure if they would even then conflict with my 401k holding VBILX.
retiredjg wrote:
Sat Sep 16, 2017 9:12 am
I didn't read each post carefully, but I'm wondering if you are having Betterment do tax loss harvesting? If yes, you've got some possible wash sale conflicts.

retiredjg
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Re: Advice about portfolio, especially bonds

Post by retiredjg » Sat Sep 16, 2017 11:53 am

Here's my understanding on that. We know that the IRS includes your IRAs and your spouse's IRAs when looking at wash sales. The IRS has never included (or excluded) 401k/etc. plans in this though. They have been silent. People interpret this in different ways.

At least one of the larger robos (either Wealthfront or Betterment, I don't remember which) recommends that you also consider what is in the 401k type plans too. My opinion is that this is from an over-abundance of caution - in case tax law is refined to include the 401k plans rather than be silent on this issue.


It appears to me that VBILX is nothing close to "substantially identical" to anything you have in Betterment right now. However, I suppose it could be "rotated in" as TLHing occurs. But in my opinion (not everyone agrees) what is in your 401k is not relevant.

In your tax bracket, I'd want a different holding in bonds in a taxable account myself.

sjb150
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Re: Advice about portfolio, especially bonds

Post by sjb150 » Sat Sep 16, 2017 12:56 pm

Interesting retiredjg, I didn't know that 401k's were different from IRA's in that regard. I see in Betterment's white paper on TLH that they do consider 401k's as causing wash sales, but as you said, could be out of an abundance of caution.

Your last point highlights another big drawback though: I can't choose which funds I hold with them. For example, I don't have the option of holding any NY state municipal bonds.

retiredjg
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Re: Advice about portfolio, especially bonds

Post by retiredjg » Sat Sep 16, 2017 1:01 pm

Just to be clear....I didn't actually say that IRAs and 401ks are different. I said the IRS has ruled on IRAs but not on 401ks. It is my opinion they are silent for a reason - they don't consider 401ks to be involved. Other people have the opposite opinion.

About the bonds....if I were going to hold bonds in a taxable account and If I needed to use a tax-exempt bond, I'd want probably half of it to be from my own state as well. It makes sense to me too.

I'm not sure you are getting a lot of benefit from Betterment.

sjb150
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Re: Advice about portfolio, especially bonds

Post by sjb150 » Sat Sep 16, 2017 1:57 pm

retiredjg wrote:
Sat Sep 16, 2017 1:01 pm
Just to be clear....I didn't actually say that IRAs and 401ks are different. I said the IRS has ruled on IRAs but not on 401ks. It is my opinion they are silent for a reason - they don't consider 401ks to be involved. Other people have the opposite opinion.
Apologies, I misquoted slightly; you were clear this is an open question. And yeah I'm doubting more and more I'm getting much benefit from Betterment, especially when I see how much help is available here, and perhaps by occasionally meeting with a fee-based advisor.

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