Bonds in Roth IRA
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One More Thing
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Bonds in Roth IRA
This has probably been covered many times before but I keep reading that bonds are not recommended in a Roth IRA and rather it is recommended that you go 100% stocks. What is the rationale behind this? What happened to "dry powder?" Aren't bonds and bond funds less tax efficient than stocks and stock funds? Last I recall a mere 10% allocation to bonds reduces long term drawdown without significantly affecting long term returns.
Re: Bonds in Roth IRA
Usually, the rationale is "put your assets with the biggest growth potential in Roth". By putting stocks in Roth, you're betting that they will grow faster than other asset classes, and expand your Roth space. You hope to maximise gains where you're not paying taxes on them.
Put assets with the lowest expected growth where you will pay the most taxes on the gains. For bonds, that would be 401(k) or Traditional IRA.
Nothing, it's just not recommended. Determine the AA that works for you, implement it, and don't try to time the market.
Yes, they are.One More Thing wrote: ↑Fri Jan 28, 2022 6:11 pm Aren't bonds and bond funds less tax efficient than stocks and stock funds?
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ClassOf2021
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Re: Bonds in Roth IRA
Many people like to put all or mostly stocks in Roth IRA. This is not because bonds don't do well in Roth IRA. They do fine. It is because stocks are expected to grow more than bonds over the long haul and people want the assets with the most income to be tax free.
Not everyone follows this suggestion. Some use mostly bonds or simply a mix of stocks and bond in Roth IRA.
My feeling is that "what goes in Roth" is far enough down the decision tree that it is of minor, not major, importance. In spite of that, this suggestion seems to be a major and important rule for many.
What you put in Roth is not going to matter a great deal in the long run. It will certainly not determine if or when you can retire.
My suggestion is to put all or mostly stocks/stock funds into Roth IRA when all other things are equal. When not, don't worry about it and pay more attention to things that are more important (like having the right stock to bond ratio for you, costs, convenience and personal preference, and tax-efficiency).
Not everyone follows this suggestion. Some use mostly bonds or simply a mix of stocks and bond in Roth IRA.
My feeling is that "what goes in Roth" is far enough down the decision tree that it is of minor, not major, importance. In spite of that, this suggestion seems to be a major and important rule for many.
What you put in Roth is not going to matter a great deal in the long run. It will certainly not determine if or when you can retire.
My suggestion is to put all or mostly stocks/stock funds into Roth IRA when all other things are equal. When not, don't worry about it and pay more attention to things that are more important (like having the right stock to bond ratio for you, costs, convenience and personal preference, and tax-efficiency).
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Re: Bonds in Roth IRA
+1.retiredjg wrote: ↑Fri Jan 28, 2022 6:33 pm Many people like to put all or mostly stocks in Roth IRA. This is not because bonds don't do well in Roth IRA. They do fine. It is because stocks are expected to grow more than bonds over the long haul and people want the assets with the most income to be tax free.
Not everyone follows this suggestion. Some use mostly bonds or simply a mix of stocks and bond in Roth IRA.
My feeling is that "what goes in Roth" is far enough down the decision tree that it is of minor, not major, importance. In spite of that, this suggestion seems to be a major and important rule for many.
What you put in Roth is not going to matter a great deal in the long run. It will certainly not determine if or when you can retire.
My suggestion is to put all or mostly stocks/stock funds into Roth IRA when all other things are equal. When not, don't worry about it and pay more attention to things that are more important (like having the right stock to bond ratio for you, costs, convenience and personal preference, and tax-efficiency).
Another (minor) impact of 100% stocks in Roth is a slight increase in risk due to the change in tax allocation. Probably not important enough to lose sleep over.
Re: Bonds in Roth IRA
IMO taxes are important but should not control investment decisions. AA is the key driver so the issue becomes whether total assets in all accounts meets your personal AA.
Having said that, I am keeping Roth IRA 100% equities even though 70 and retired. This was the BH advice at retirement and I am following it. I don't expect to need the Roth for living expenses, so for me the Roth is a "safety net" and "legacy" assets. The Roth assets should grow for several decades (lifetime + DW lifetime + 10 years for heirs). As pointed out, for this time period equities should increase in value more than other asset classes.
For me tax rate on capital gains/appreciation is (1) 15% for taxable accounts (2) 24% for traditional IRA and (3) 0% for Roth IRA. So I also try to keep most (but not all) equities beyond those in the Roth IRA in taxable accounts. No tax is due on capital appreciation in taxable accounts unless they are sold. So there is the possibility of the step up in basis at death and no tax on the accumulated appreciation for heirs.
Having said that, I am keeping Roth IRA 100% equities even though 70 and retired. This was the BH advice at retirement and I am following it. I don't expect to need the Roth for living expenses, so for me the Roth is a "safety net" and "legacy" assets. The Roth assets should grow for several decades (lifetime + DW lifetime + 10 years for heirs). As pointed out, for this time period equities should increase in value more than other asset classes.
For me tax rate on capital gains/appreciation is (1) 15% for taxable accounts (2) 24% for traditional IRA and (3) 0% for Roth IRA. So I also try to keep most (but not all) equities beyond those in the Roth IRA in taxable accounts. No tax is due on capital appreciation in taxable accounts unless they are sold. So there is the possibility of the step up in basis at death and no tax on the accumulated appreciation for heirs.
Re: Bonds in Roth IRA
The recommendation isn't really "no bonds in Roth". That's more of a soundbite answer and an oversimplification. It is about choosing which assets to hold in which account types based on your asset allocation and the accounts you have available.
If you only have Roth accounts and your asset allocation calls for holding bonds, then of course you are going to put bonds in a Roth. If you have a mix of traditional and Roth, you'd place your bonds in traditional, assuming traditional has enough room for the entire allocation.
If you only have Roth accounts and your asset allocation calls for holding bonds, then of course you are going to put bonds in a Roth. If you have a mix of traditional and Roth, you'd place your bonds in traditional, assuming traditional has enough room for the entire allocation.