401k Question - High Turnover Funds

[kenmoremmm]

i should already know this answer, but my brain is fuzzy.

i have a 401k. it has trad 401k contribution, roth 401k contributions, and employer contributions (pre-tax). does it matter which kind of funds i have in each 'account type'? for example, a REIT with higher dividends and less tax efficiency compared to VTSAX (very tax efficient) compared to a tax-free bond fund.

or, since they're all under the umbrella of the 401k, do tax efficiencies not matter?

[EricEng]

Tax efficiency won't matter and you are wasting potential gains going with tax advantaged funds inside a tax advantaged 401k.  Just go for the biggest gains as annual cap gains taxes won't matter or exist in your 401k of any form, trad or roth.

[Proud Foot]

Within something like this I wouldn't worry too much about tax efficiency of the funds. Tax efficiency matters a lot more when you are looking at taxable investments. The only tax strategy I might suggest is if your desired asset allocation includes bonds to hold the bonds in the traditional portion of your 401k and the higher growth equities in the Roth portion of your 401k.

A 90/10 stock/bond allocation will grow the exact same whether you have it allocated equally across all types of contributions to your 401k or specifically allocated. If your 10% bonds are wholly held in your traditional then you will have a lower traditional balance that will be taxable upon distribution than if you had equal allocation across all types.

[terran]

All other things being equal I would put low expected growth investments in a traditional 401(k)/IRA (since you'll pay tax at ordinary income tax rates, so smaller is better) and high expected growth investments Roth 401(k)/IRA (since you'll pay no tax, so larger is better). I would prefer to have REITs and bonds in either than in taxable since the income generated by those would be taxed at ordinary income tax rates in taxable while stocks would mostly be taxed at lower long term capital gain rates. You might find https://www.bogleheads.org/wiki/Tax-efficient_fund_placement useful.