by illinifans » Sun Feb 09, 2014
Hello, fairly new boglehead here. Please help me better understand asset location. My wife and I have a solid asset allocation (80% stocks, 20% bonds) at the moment and can easily rebalance with the funds in our Roth IRAs and 401k's.
From what I understand from the wiki and after reading a couple books (Bogleheads Guide, Four Pillars of Investing) ideally its better to keep your bond allocation in the 401k (since earnings will eventually be taxed) and stocks in Roth to maximize/expand tax advantaged space. However, with the goal of using the least expensive funds available (Bogleheads 101, right? 
) we have our bonds in our Roths (Vanguard Total Bond Admiral Shares, .1 ER) and both our 401k's are all stock.
) we have our bonds in our Roths (Vanguard Total Bond Admiral Shares, .1 ER) and both our 401k's are all stock.
Is there a rule of thumb or guideline on when to use a bond fund with a higher ER (for example, PIMCO Total Return, .46 ER) in 401k to optimize "asset location" ? We are fortunate to have great low-cost stock index funds in my wife's 401k (Vanguard Institutional Index, .05 ER) that we currently use so I'm torn between using lowest cost funds and ability to expand tax advantaged space.
And now I've read a blog or two from The Finance Buff and White Coat Investor that argue bonds might be best in taxable so I'm a little more confused...
Specifically, would it be wise to trade 40 basis points +/- to have stocks in Roth and bonds in 401k considering we will have 30+ years of inventing before touching the money?
Tried to keep this fairly general but I can list my portfolio if that helps. Am I over-thinking this or is it a real concern?
Thanks!
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Re: Stocks/Bonds in 401k or Roth IRA?
by Laura » Sun Feb 09, 2014 4:00 pm
You have a good bond fund in your 401k so I don't think the 40 basis points makes a huge difference in the long run. I think you can go either way and come out all right. Remember that money that goes into the roth and the 401k at the same tax rate as it comes out arrives at the same total value. We use roth or traditional when we are predicting that income tax rates will be higher or lower in retirement. If you are in the same tax bracket there is no difference in the two accounts so I wouldn't sweat over this too much. I often find the 401k to be better because it is larger. As your asset allocation calls for more bonds, roths often are not large enough to hold them old since you can only add $5.5k per year instead of $17.5k plus matching contributions. At that time you would be into the 401k anyway.
Laura
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Re: Stocks/Bonds in 401k or Roth IRA?
by illinifans » Mon Feb 10, 2014 5:14 pm
Thanks for the response Laura. I didn't think it would make a huge difference one way or the other, thanks for clearing that up. Right now the size of our Roth accounts are about twice as big as our 401k so I'll probably just keep the funds put, but as we contribute more the next few years (and our 401k surpasses the Roth) I'll rebalance and allocate bonds to 401k.
Thanks again.
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Joined: 2 Dec 2013
Re: Stocks/Bonds in 401k or Roth IRA?
by Bob's not my name » Mon Feb 10, 2014 8:48 pm
Makes no difference in general. So locate assets to achieve lowest cost. http://thefinancebuff.com/stocks-or-bonds-in-roth.html
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Re: Stocks/Bonds in 401k or Roth IRA?
by retiredjg » Mon Feb 10, 2014 9:15 pm
Even among people who believe that bonds should be in tax-advantaged accounts, there is no consensus on the question of whether to hold bonds or stocks in Roth IRA. Opinions vary and all three sides have a reasonable argument (in my opinion).
This is one of those questions that comes up pretty often - I personally think it is of very small importance. So many other things are more important, like cost and like putting money into your 401k. There is also the matter of how money flows into your accounts. For example it is more important to use a higher cost bond in your 401k than to put less money in the 401k and get a lower cost bond somewhere else.
Do what works for you.
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