Bonds in Retirement Accounts

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lazier_fan
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Joined: Fri Jun 22, 2018 12:05 pm

Bonds in Retirement Accounts

Post by lazier_fan » Wed Jul 10, 2019 6:32 am

I know that, as a general rule, bonds go into retirement accounts and equities go in brokerage accounts (when there is no more room in retirement accounts for them). I've got both Roth and Traditional IRAs and am a relatively young, risk-loving person so my bond position is low (I'm 90/10 equities). Are there considerations to take into account when allocating bonds among these accounts? Is there an advantage to a certain approach? My thinking is that, overall, stocks have outperformed equities historically so keep bonds in Traditional as much as possible to allow equities to benefit from tax-free growth in a Roth. Am I missing something?

22twain
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Re: Bonds in Retirement Accounts

Post by 22twain » Wed Jul 10, 2019 6:54 am

lazier_fan wrote:
Wed Jul 10, 2019 6:32 am
My thinking is that, overall, stocks have outperformed equities historically so keep bonds in Traditional as much as possible to allow equities to benefit from tax-free growth in a Roth.
That is indeed the usual advice here.
My investing princiPLEs do not include absolutely preserving princiPAL.

Bayareatechie
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Joined: Tue May 14, 2019 11:37 pm

Re: Bonds in Retirement Accounts

Post by Bayareatechie » Wed Jul 10, 2019 8:11 am

The wiki goes into great detail on the reasoning behind putting bonds in traditional first. https://www.bogleheads.org/wiki/Tax-eff ... _placement

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Bonds in Retirement Accounts

Post by megabad » Wed Jul 10, 2019 10:13 am

lazier_fan wrote:
Wed Jul 10, 2019 6:32 am
My thinking is that, overall, stocks have outperformed equities historically so keep bonds in Traditional as much as possible to allow equities to benefit from tax-free growth in a Roth. Am I missing something?
When deciding to do anything in Traditional IRA vs Roth IRA, the correct decision always involves at least a little predicting the future. Your stated sentiment is the general advice given. This will probably be ok for most, but maybe not optimal for some. I would suggest that most people (probably in the 22%/24% bracket) close to retirement would benefit from trying to target a taxable IRA/401k portfolio that will at least fill the current 12% bracket. Far from retirement, this is less relevant (as tax laws and asset growth will be very difficult to predict). That said, if you plan on working a long time and accumulating significant assets, personally I tend to lean toward equities in Roth early in career and bonds in Traditional just as you indicate. This gives you less likelihood to overshoot in your Traditional account at retirement (causing your RMD to be higher than desired).

MRMN
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Re: Bonds in Retirement Accounts

Post by MRMN » Wed Jul 10, 2019 10:25 am

22twain wrote:
Wed Jul 10, 2019 6:54 am
lazier_fan wrote:
Wed Jul 10, 2019 6:32 am
My thinking is that, overall, stocks have outperformed equities historically so keep bonds in Traditional as much as possible to allow equities to benefit from tax-free growth in a Roth.
That is indeed the usual advice here.
Stocks are the same thing as equities, no? Might need a revision here?

megabad
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Re: Bonds in Retirement Accounts

Post by megabad » Wed Jul 10, 2019 4:06 pm

MRMN wrote:
Wed Jul 10, 2019 10:25 am
22twain wrote:
Wed Jul 10, 2019 6:54 am
lazier_fan wrote:
Wed Jul 10, 2019 6:32 am
My thinking is that, overall, stocks have outperformed equities historically so keep bonds in Traditional as much as possible to allow equities to benefit from tax-free growth in a Roth.
That is indeed the usual advice here.
Stocks are the same thing as equities, no? Might need a revision here?
good catch :happy I think we all just read over it an assumed the first "equities" read bonds.

22twain
Posts: 1938
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Re: Bonds in Retirement Accounts

Post by 22twain » Wed Jul 10, 2019 4:56 pm

Yeah, I hope that was a typo by the OP. :)
My investing princiPLEs do not include absolutely preserving princiPAL.

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grabiner
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Re: Bonds in Retirement Accounts

Post by grabiner » Wed Jul 10, 2019 9:29 pm

Bayareatechie wrote:
Wed Jul 10, 2019 8:11 am
The wiki goes into great detail on the reasoning behind putting bonds in traditional first. https://www.bogleheads.org/wiki/Tax-eff ... _placement
That isn't what the wiki says. It recommends placing bonds in tax-advantaged accounts, whether traditional or Roth: "If your investments are all in tax-advantaged accounts, fund placement will not have a large impact on your returns. Tax-advantaged accounts include tax-deferred accounts, such as traditional 401(k), 403(b), and Traditional IRA, and the tax-free Roth versions of those accounts such as Roth IRA."

The reason it does not matter much is that traditional and Roth accounts are equivalent, once you adjust for the part of the traditional account owned by the IRS. For example, if you will withdraw the money in a 25% tax bracket, then $4000 in a traditional account and $3000 in a Roth account will have the same value if invested the same way, so it doesn't matter which one holds bonds and which one holds stocks. (Putting an equal dollar amount in stocks in the Roth does increase expected returns, but it increases risk as well, so this is not a net benefit; you could just as well increase risk and expected returns by holding more stocks in the traditional account.)

If all else is equal (as if both accounts are IRAs), there are secondary reasons to put stocks in a Roth. If you have stocks in a traditional account and the stock market booms, you might pay tax in a higher bracket than expected, or you might have to take RMDs you don't need to spend.
Wiki David Grabiner

vipertom1970
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Re: Bonds in Retirement Accounts

Post by vipertom1970 » Thu Jul 11, 2019 4:26 pm

could some one give me a summary how to distribute 100K for long term investment since we are on same topic for tax efficient investment. ?

$100,000 to invest, age 50, goal is 60% equities(80% total market and 20% international) and 40% bond, low tax bracket

TIRA:



Roth:



Brokerage:

lakpr
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Re: Bonds in Retirement Accounts

Post by lakpr » Thu Jul 11, 2019 4:29 pm

vipertom1970 wrote:
Thu Jul 11, 2019 4:26 pm
could some one give me a summary how to distribute 100K for long term investment since we are on same topic for tax efficient investment. ?

$100,000 to invest, age 50, goal is 60% equities(80% total market and 20% international) and 40% bond, low tax bracket

TIRA:



Roth:



Brokerage:
Everything into Brokerage. To contribute to TIRA and Roth accounts you need earned income, and furthermore you are constrained by annual limits. $6k for 2019 if you are younger than 50, $7k otherwise. Your post did not indicate any earned income, so TIRA and Roth contributions will be $0

vipertom1970
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Joined: Fri Jun 21, 2019 7:06 pm

Re: Bonds in Retirement Accounts

Post by vipertom1970 » Thu Jul 11, 2019 4:33 pm

sorry, I already got $$ in all three accounts but trying to wrap my head around tax efficient investment. I like to treat all 3 accounts as a total over all so I know which account I will use to re balance.

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Bonds in Retirement Accounts

Post by lakpr » Thu Jul 11, 2019 4:39 pm

In that case,
$40k in bonds, all in TIRA. (40% of the portfolio)
Of the $60k remaining, you want $48k in US equities and $12k in international equities.

Since international equities provide foreign tax credit, but also cause non-qualified dividends, it is really a wash between whether they be held in taxable or Roth. In taxable, you can offset your own tax liability with foreign tax credit, but will have to pay ordinary income taxes on the non-qualified dividends. In Roth both will be zero.

So bottom line is, equities you can divide up any which way you want.

vipertom1970
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Joined: Fri Jun 21, 2019 7:06 pm

Re: Bonds in Retirement Accounts

Post by vipertom1970 » Thu Jul 11, 2019 4:56 pm

thank you ! is this about right ?


TIRA:
Total bond $40,000

Roth:
Total International $12,000

Brokerage:
Total Market $48,000

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Bonds in Retirement Accounts

Post by retiredjg » Thu Jul 11, 2019 5:29 pm

vipertom1970 wrote:
Thu Jul 11, 2019 4:56 pm
thank you ! is this about right ?


TIRA:
Total bond $40,000

Roth:
Total International $12,000

Brokerage:
Total Market $48,000
It would only be right if you have $40k in tIRA, $12k in Roth IRA, and $48k in Brokerage. But you didn't say that. You said you already have money in the three accounts. How much money is actually in each account?

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Bonds in Retirement Accounts

Post by retiredjg » Thu Jul 11, 2019 5:32 pm

lazier_fan wrote:
Wed Jul 10, 2019 6:32 am
My thinking is that, overall, stocks have outperformed equities historically so keep bonds in Traditional as much as possible to allow equities to benefit from tax-free growth in a Roth. Am I missing something?
If those are your only two accounts, that is the suggestion you would get from most here.

Unless you want to tax-adjust each of your accounts in which case it does not matter what you put where. However, very few people tax-adjust their accounts and you didn't mention it so you are probably not doing it either.

Broken Man 1999
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Re: Bonds in Retirement Accounts

Post by Broken Man 1999 » Thu Jul 11, 2019 5:41 pm

I keep our Roths in 100% equity ETFs, currently Total Stock Market Index ETF, and Total International Stock Market Index ETF.

My hope is equities will outperform bonds over our holding period. Hopefully our heirs will enjoy the growth. I hope we never need to withdraw a cent from the Roth accounts.

Our bonds are all in our TIRAs, VA, and savings bonds, all tax-deferred.

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

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