Bond allocation question

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abs9986
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Bond allocation question

Post by abs9986 » Wed May 15, 2019 12:30 pm

Given my company 401k options, I am maxing my contribution to an s&p 500 index fund and investing taxable in vanguatd total stock index What I'm realizing is that I am having to rebalance my Roth IRA to account for my 20% bond allocation. Is it ok that my Roth IRA is being used more and more for my bond allocation or should I try to use more of the 401k and taxable?

I thought taxable is bad for bonds and I have terrible bond choices in the 401k. Over time my entire Roth IRA account will probably become bonds - is that a problem?

Broken Man 1999
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Re: Bond allocation question

Post by Broken Man 1999 » Wed May 15, 2019 12:49 pm

I wouldn't think so. You can make asset changes with no tax consequences in a Roth.

You are looking at an overall portfolio allocation, as I do.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

mega317
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Re: Bond allocation question

Post by mega317 » Wed May 15, 2019 12:53 pm

If your 401k bond options really are terrible, then bonds in the Roth is a wonderful backup plan. Some people post on this forum that their options are terrible but it turns out they have a good quality intermediate term bond fund, but the expense ratio is closer to 0.5% than 0.05%. That's not terrible.

Municipal bonds in taxable could also be a part of the plan in a high tax bracket.

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TierArtz
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Re: Bond allocation question

Post by TierArtz » Wed May 15, 2019 1:03 pm

You face a "pick your poison" situation. You need to decide which will induce the greatest regret: Paying a higher than optimal ER on a bond fund in a 401k (perhaps that's the issue) and having to eventually pay tax on the S&P 500 growth, or losing out on maximal tax-free growth in your Roth IRA that equities could have provided.

The conflicting principals section of the "Asset allocation in multiple accounts" wiki contains such examples: https://www.bogleheads.org/wiki/Asset_a ... Principles

If you have not already read it, check out the "Tax-efficient fund placement" wiki: https://www.bogleheads.org/wiki/Tax-eff ... _placement

As for me, my 401(k) and TSP are 100% bonds, my Roth IRA is 100% stocks, and my taxable contains enough tax-exempt bond fund index to hit my desired bond allocation.

Lee_WSP
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Re: Bond allocation question

Post by Lee_WSP » Wed May 15, 2019 4:13 pm

I would personally only have equities in a ROTH. Otherwise, what's the point of paying the taxes now to not pay taxes on growth if it doesn't grow?

How bad are the bond choices in the tax deferred accounts? It can't be that bad can it? If it really is, then I suppose bonds in taxable may very well be a good option given the circumstances (ie no better option to achieve the desired portfolio).

But personally, I'd put the bonds in the 401k or taxable. You can choose muni bond funds that are tax exempt too.

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Duckie
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Re: Bond allocation question

Post by Duckie » Wed May 15, 2019 6:08 pm

abs9986 wrote:I thought taxable is bad for bonds and I have terrible bond choices in the 401k.
List the bond/stable value options in your 401k. We need the fund names, ticker symbols, and plan expense ratios (for stable value we need the current interest rate). Sometimes what some posters consider terrible, aren't that bad.

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abs9986
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Re: Bond allocation question

Post by abs9986 » Wed May 15, 2019 6:10 pm

Isn't it all the same in the end? Whether I put my bond allocation in the Roth IRA or 401k or combo of both. Like if I'm looking at my portfolio as a whole then shouldn't I chase the lowest ER?

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Duckie
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Re: Bond allocation question

Post by Duckie » Wed May 15, 2019 6:20 pm

abs9986 wrote:Isn't it all the same in the end? Whether I put my bond allocation in the Roth IRA or 401k or combo of both. Like if I'm looking at my portfolio as a whole then shouldn't I chase the lowest ER?
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. Also it's better to avoid putting taxable bonds in a taxable account.

Both can be done, but if your 401k has a half-way decent bond option that would be a better choice. Satisfy our curiosity. What are your 401k fixed income options?

Lee_WSP
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Re: Bond allocation question

Post by Lee_WSP » Wed May 15, 2019 6:23 pm

abs9986 wrote:
Wed May 15, 2019 6:10 pm
Isn't it all the same in the end? Whether I put my bond allocation in the Roth IRA or 401k or combo of both. Like if I'm looking at my portfolio as a whole then shouldn't I chase the lowest ER?
No.

A ROTH grows tax free. You've already paid the taxes on it.

A normal 401k, tIRA, or other tax deferred retirement vehicle merely defers the payment of the taxes.

So, to maximize the tax savings potential of the ROTH, you put the highest growing funds in it.

In the end though, it may not matter much if your effective tax rate is in the bottom during withdrawals. But, if your marginal rate is in the top 3 bands, you're going to be happy you have more money in the ROTH.

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oldcomputerguy
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Re: Bond allocation question

Post by oldcomputerguy » Wed May 15, 2019 7:23 pm

abs9986 wrote:
Wed May 15, 2019 12:30 pm
I thought taxable is bad for bonds and I have terrible bond choices in the 401k. Over time my entire Roth IRA account will probably become bonds - is that a problem?
You will likely get much more useful replies from the folks here if you post your questions using the form shown in "Asking Portfolio Questions". As Duckie noted above, we would at least need the fund tickers and expense ratios of your 401k investment options in order to be much help.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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