Author Topic: Allocating Accounts 401k and Taxable  (Read 1441 times)

FRT15

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Allocating Accounts 401k and Taxable
« on: June 14, 2016, 01:49:28 PM »
I am 34 and working on creating my asset allocation and am looking for some input on asset location.   I have approx. 133k in 401k money market and 400k in taxable account sitting in cash.  I have done a good job of saving but a poor job of doing anything with it.  My goal is to create a 50/50 stock bond allocation and include international as well.  I do plan to continue maxing out the 401k and also continue building the taxable account with 2k per month.   

Would you recommend I put all bonds in 401k and all stock index funds in taxable or hold both stock/bond in both 401k and taxable?   I do have low cost index fund options in both my 401k and through wells trade where I get free mutual fund and etf trades.

Thanks for the insight.

DrF

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Re: Allocating Accounts 401k and Taxable
« Reply #1 on: June 14, 2016, 02:01:35 PM »
Read this on why holding cash is bad for long term portfolio growth. (Edit: you can disregard their salespitch to invest with Betterment)
https://www.betterment.com/resources/investment-strategy/the-real-cost-of-cash-drag/

Then read this on why holding bonds in a taxable account is not optimal (still doable, but not the best option).
https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
http://www.schwab.com/public/schwab/nn/articles/The-Importance-of-Tax-Efficient-Investing

Here's some good material to start you off with.

seattlecyclone

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Re: Allocating Accounts 401k and Taxable
« Reply #2 on: June 14, 2016, 02:03:17 PM »
There are two schools of thought on this. Bogleheads advocates putting bonds in the 401(k) first because bond interest is taxed higher than dividends and capital gains. On the other hand, White Coat Investor recommends putting bonds in the taxable account first because they're not likely to earn as much over the long term. Read both and see which resonates more for you.

FRT15

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Re: Allocating Accounts 401k and Taxable
« Reply #3 on: June 14, 2016, 02:17:43 PM »
Thanks for the input.  The debate on where to put bonds is interesting.  Would you recommend a single bond fund or splitting into multiple bond funds?   Like a mix of short, long, muni, tips.   I would like to keep the portfolio simple. 

DrF

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Re: Allocating Accounts 401k and Taxable
« Reply #4 on: June 14, 2016, 02:24:57 PM »
Different bond funds can be used under specific scenarios to achieve a desired result (eg, hold munis in a taxable account to reduce taxable events).

What's the reason you are holding bonds? To diversify? In order to efficiently rebalance in the future? If so, hold the entire bond market and forget about it.

weather55

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Re: Allocating Accounts 401k and Taxable
« Reply #5 on: June 14, 2016, 05:54:15 PM »
I would be holding bonds to lower the volatility and downside of the portfolio.  Would you say there is a diversification benefit to holding total bond in 401k and munis in taxable at the same time?

GrOW

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Re: Allocating Accounts 401k and Taxable
« Reply #6 on: June 14, 2016, 07:14:21 PM »
Thanks for the input.  The debate on where to put bonds is interesting.  Would you recommend a single bond fund or splitting into multiple bond funds?   Like a mix of short, long, muni, tips.   I would like to keep the portfolio simple.

I would avoid over diversification as you note at the end. There is something to be said for simple diversification like 3-4 funds total.