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  • Asset Allocation Question

    I am new to investing and am setting up a tax effect asset allocation among my different accounts - I have a 401K, Roth IRA's (for both my wife and I), and a taxable accounts.

    Looking at the values of my accounts - my taxable account is going to be way way bigger than my tax sheltered accounts. My goal is to have 25% of my investments in bonds. Since bonds are not tax efficient, I will be putting 100% of my 401K and Roths into bonds. A few questions about this:

    1) Is it normal to have all of your tax sheltered accounts in bonds?

    2) My 401K doesn't have great bond fund options. Would VFIUX (Vanguard Intermediate Term Treasury Fund) be a good option for bond investments?

  • #2
    Welcome to the forum. Do not put bonds into a Roth. You want your high return assets here. Put bonds into tax deferred which means you pay no tax on the interest they pay. It also lessens your RMDs down the road. If you do not have room in your tax deferred accounts then buy Muni bonds in your taxable account. I have most of my bonds in my tax deferred. It depends on your asset allocation. Vanguard bond funds are fine.

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    • #3
      Agree with Hatton.

      sure, VFIUX is fine. I actually prefer the total bond market index though.

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      • #4
        Third vote for no bonds in Roth. If there isn’t enough room for your bond AA in your 401k/403b then buy munis in taxable (VWIUX or similar), depending on your tax rate.

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        • #5
          Originally posted by Hatton View Post
          Welcome to the forum. Do not put bonds into a Roth. You want your high return assets here. Put bonds into tax deferred which means you pay no tax on the interest they pay. It also lessens your RMDs down the road. If you do not have room in your tax deferred accounts then buy Muni bonds in your taxable account. I have most of my bonds in my tax deferred. It depends on your asset allocation. Vanguard bond funds are fine.
          She is correct.
          Roth = 100% stocks & REITs and this is where I put a lot of stuff I expect to grow a lot. Small cap value etc. I will not spend Roth for > 20 years and I want it to grow like crazy b/c it grows tax free and comes out tax free.

          Here is more info:
          https://www.bogleheads.org/wiki/Tax-...fund_placement
          Last edited by Tangler; 01-21-2022, 11:59 AM.

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          • #6
            another thing you can do if you can't fit your bond allocation all in the 401k is start buying iBonds and consider that part of your bond allocation in taxable, in addition to munis mentioned above. You're limited to $10k per person per year for iBonds so just another idea as I repeat what others have said: no bonds in Roth

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            • #7
              So fill out my 401K with 100% VFIUX and then put the rest in my taxable account using a tax free bonds (was thinking of using vanguards tax exempt bond admiral fund - VTEAX)?

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              • #8
                My pretax holds a lot of bonds.
                My taxable holds a lot of muni bonds and some I bonds.
                My Roth and HSA have no bonds and never will.

                Read some old Ed Slott stuff to understand why pretax accounts are ticking time bombs. Between RMDs, IRMAA, and high marginal tax rates in retirement, and now with the SECURE act killing stretch IRAs for heirs, and especially as long as the step up basis for taxable accounts holds, I want my pretax accounts to hold my lowest expected return assets.

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                • #9
                  Originally posted by ISeeThruU View Post
                  So fill out my 401K with 100% VFIUX and then put the rest in my taxable account using a tax free bonds (was thinking of using vanguards tax exempt bond admiral fund - VTEAX)?
                  Sure, or VWIUX - intermediate term tax exempt admiral when you run out of head room in tax deferred.

                  and I’d also consider VBTLX - total bond market - in tax deferred

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                  • #10
                    I have some VTEAX in taxable also

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                    • #11
                      Originally posted by Hatton View Post
                      Welcome to the forum. Do not put bonds into a Roth. You want your high return assets here. Put bonds into tax deferred which means you pay no tax on the interest they pay. It also lessens your RMDs down the road. If you do not have room in your tax deferred accounts then buy Muni bonds in your taxable account. I have most of my bonds in my tax deferred. It depends on your asset allocation. Vanguard bond funds are fine.
                      Does the account type (tax deferred, tax free, taxable) make a difference for determining asset allocation?

                      I'm trying to figure out the right steps for actually implementing an asset allocation strategy. It sounds like tax consequence are ignored for calculating the desired dollar value of each asset class, but you would decide which account holds a particular asset class based on tax consequences. So 50% equities and 50% bonds might be handled by putting $1,000 of an equities fund into the Roth and $1,000 of the bond fund into the 401K. Any low or zero tax funds would preferable go into the taxable account.

                      1. Calculate how much belongs in each asset allocation class based on percentage of total portfolio value.

                      2. Decide which account should hold a particular asset class.

                      3. At some point the tax deferred and tax free accounts are full, so I'm assuming the taxable account ends up with everything else needed to hit the asset allocation goals.

                      The problem I see is most people typically won't have three types of accounts when getting started. They'll probably just have a 401K or a Roth IRA holding all the investments. While it's preferable to rebalance by adding more money vs. selling, that might not be possible due to income or restricted space in account. I can't decide whether it would be better to leave the wrong assets in the existing account(s) or sell/buy to distribute them better using the above guidelines.

                      Is there a better approach?

                      Thanks,
                      Chris

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                      • #12
                        The answer is that with such low values in the account, relatively speaking, it probably doesn’t matter in the long run. With low values in the account, new contributions go a long ways towards rebalancing your accounts to your desired asset allocation. Also, with low account values why not just put it all in stocks? You’re as far away from retirement as you’re ever going to be. Rebalance along the way with new contributions or exchanging funds, as needed, in your tax deferred accounts.

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                        • #13
                          Originally posted by csciora View Post

                          Does the account type (tax deferred, tax free, taxable) make a difference for determining asset allocation?

                          I'm trying to figure out the right steps for actually implementing an asset allocation strategy. It sounds like tax consequence are ignored for calculating the desired dollar value of each asset class, but you would decide which account holds a particular asset class based on tax consequences. So 50% equities and 50% bonds might be handled by putting $1,000 of an equities fund into the Roth and $1,000 of the bond fund into the 401K. Any low or zero tax funds would preferable go into the taxable account.

                          1. Calculate how much belongs in each asset allocation class based on percentage of total portfolio value.

                          2. Decide which account should hold a particular asset class.

                          3. At some point the tax deferred and tax free accounts are full, so I'm assuming the taxable account ends up with everything else needed to hit the asset allocation goals.

                          The problem I see is most people typically won't have three types of accounts when getting started. They'll probably just have a 401K or a Roth IRA holding all the investments. While it's preferable to rebalance by adding more money vs. selling, that might not be possible due to income or restricted space in account. I can't decide whether it would be better to leave the wrong assets in the existing account(s) or sell/buy to distribute them better using the above guidelines.

                          Is there a better approach?

                          Thanks,
                          Chris
                          I used new money to rebalance when working. Try to remember these are general guidelines. You will always have some "wrong assets" in existing accounts. No one is perfect. You will read a lot of people post about legacy assets. These are assets acquired before the person was "financially aware". You make the most of your situation without paying excessive taxes to correct it.

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