Need to up bond holding to stay within AA, where to pu them?

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timboo
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Need to up bond holding to stay within AA, where to pu them?

Post by timboo » Mon Jan 13, 2020 9:05 am

I find my stock allocation creeping up higher than I'd like. Currently my defined contribution plan and my 457 plan are both 100% bonds. My Roth IRA is mostly stock funds, but some bond funds. My taxable account, other than my emergency money market funds, is all Total Stock Market fund. Where should I put the additional bond funds I need to buy, in my Roth IRA or in my taxable account? I would have assumed to shift my Roth from stocks to bonds, but I've read never put bond funds in a Roth IRA.

fabdog
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Re: Need to up bond holding to stay within AA, where to pu them?

Post by fabdog » Mon Jan 13, 2020 9:20 am

I don't put bonds in my Roth as I want to leave that space for my highest expected return assets. If your other tax deferred space is already 100% bonds, I'd put it in taxable. Depending on your tax rate, you may find tax free bond funds are a good choice

Mike

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grabiner
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Re: Need to up bond holding to stay within AA, where to pu them?

Post by grabiner » Mon Jan 13, 2020 8:57 pm

Whether to put bonds in tax-favored or taxable depends on your tax bracket; what is it, both federal and state? I normally prefer bonds in tax-favored accounts unless you are in a high tax bracket, or in a moderate bracket and can use a low-cost muni fund for your high-tax state.

The guidance about not putting bonds in a Roth is based on looking at the dollar value, rather than the trade-off between risk and return. If you will withdraw money in a 25% bracket, then $4000 in a traditional account and $3000 in a Roth account are equivalent; you will get the same return if either account is in bonds and the other is in stock. Once you adjust for this (so that you consider either allocation to be 50/50), the preference for stock in the Roth goes away. (If all else is equal, it is slightly better to hold stock in the Roth, because putting stock in the traditional IRA may lead to RMDs you don't need if the stock market booms, or withdrawals in a higher tax bracket than you expected.)
Wiki David Grabiner

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timboo
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Re: Need to up bond holding to stay within AA, where to pu them?

Post by timboo » Mon Jan 13, 2020 9:08 pm

grabiner wrote:
Mon Jan 13, 2020 8:57 pm
Whether to put bonds in tax-favored or taxable depends on your tax bracket; what is it, both federal and state? I normally prefer bonds in tax-favored accounts unless you are in a high tax bracket, or in a moderate bracket and can use a low-cost muni fund for your high-tax state.
I'm in the 24% Federal and 6.5% state brackets.

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grabiner
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Re: Need to up bond holding to stay within AA, where to pu them?

Post by grabiner » Mon Jan 13, 2020 9:17 pm

timboo wrote:
Mon Jan 13, 2020 9:08 pm
grabiner wrote:
Mon Jan 13, 2020 8:57 pm
Whether to put bonds in tax-favored or taxable depends on your tax bracket; what is it, both federal and state? I normally prefer bonds in tax-favored accounts unless you are in a high tax bracket, or in a moderate bracket and can use a low-cost muni fund for your high-tax state.
I'm in the 24% Federal and 6.5% state brackets.
It's close in that bracket. Are the stock or bond options in your 401(k) better? If the stock options are better (for example, you have a low-cost S&P 500 fund and higher-cost bond funds), then I would prefer holding stocks in the 401(k). Otherwise, I would prefer stocks in the taxable account.

In either case, don't sell existing stocks in the taxable account for a significant capital gain. If you do want to hold bonds in te taxable account, use your stock dividends and new money to buy bonds, and hold additional bonds in your retirement accounts to get your target allocation.
Wiki David Grabiner

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