Author Topic: Question: 401k AA in bonds  (Read 492 times)

SimpleLifer

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Question: 401k AA in bonds
« on: August 03, 2019, 06:17:47 PM »
I think I saw somewhere that (paraphrasing this!) the preferred asset allocation is to have 401k funds be invested in bonds.

Right now my 401k is the most diversified:
33% VTSNX
33% VIEIX
33% VINIX

About 50% of my portfolio is in tax-deferred accounts...changing asset allocation in my taxable account creates more tax events than I want to take on at this point.  So I'm thinking that (if I understand this advise), that I should move my 401k to something like VIPSX instead...

I was wondering if anyone might be able to help me understand the reasoning for this.  I'm thinking it has to do with traditionally higher management fees for 401k's, and putting assets that fluctuate less in the higher fee accounts.

secondcor521

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Re: Question: 401k AA in bonds
« Reply #1 on: August 03, 2019, 06:41:19 PM »
If you choose to hold bonds, it is considered better to hold them in a tax deferred account because bonds produce more income than stocks, and the tax shelter defers taxation on that higher income.

See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement#Step_2:_Place_your_least_tax_efficient_funds_first

SimpleLifer

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Re: Question: 401k AA in bonds
« Reply #2 on: August 03, 2019, 08:22:53 PM »
If you choose to hold bonds, it is considered better to hold them in a tax deferred account because bonds produce more income than stocks, and the tax shelter defers taxation on that higher income.

See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement#Step_2:_Place_your_least_tax_efficient_funds_first

This is EXACTLY what I was looking for, and in all my searches could not find it!  Thank you! 

MustacheAndaHalf

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Re: Question: 401k AA in bonds
« Reply #3 on: August 04, 2019, 07:35:05 AM »
There's an alternative for people in high tax brackets: a tax-exempt bond fund.  For example, government entities don't tax each other, so when a municipality issues bonds, those are not taxed at the state or Federal level.

Since Traditional IRAs get taxed at ordinary income tax rates - just like bonds in taxable - it does make sense to put bonds there.  But also keep to your overall asset allocation: Vanguard's target date funds for those 25+ years from retirement hold 10% bonds.

SimpleLifer

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Re: Question: 401k AA in bonds
« Reply #4 on: August 05, 2019, 11:18:13 PM »
There's an alternative for people in high tax brackets: a tax-exempt bond fund.  For example, government entities don't tax each other, so when a municipality issues bonds, those are not taxed at the state or Federal level.

Since Traditional IRAs get taxed at ordinary income tax rates - just like bonds in taxable - it does make sense to put bonds there.  But also keep to your overall asset allocation: Vanguard's target date funds for those 25+ years from retirement hold 10% bonds.

thank you for bringing this to my attention!  I just posted another question in this sub-forum about overall AA (I've got a $500K "windfall" to invest in the next ~30 days)...I haven't pulled the trigger yet.