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Learning, Sharing, and Teaching => Investor Alley => Topic started by: patch45 on October 23, 2020, 09:37:46 AM

Title: Rebalance Roth IRA + trad 401k to remove bonds from Roth?
Post by: patch45 on October 23, 2020, 09:37:46 AM

-28 / Software Engineer/ HCOL USA

- Income $128k/yr

- Current assets: $95k in traditional 401k (100% stocks), $45k in Roth IRA (55% stocks/45% bonds), $140k in taxable (95% stocks/5% bonds)

- Goal total allocation 90% stocks, 10% bonds

I'm wondering about the tax implications of my asset allocation. I had heard that it's best to put bonds in tax advantaged accounts, so I naively put most of my bonds into my Roth IRA. On further reading, it seems this might not have been a great idea, seeing as my one account that will not be taxed on withdrawal will also barely grow.

I'm wondering if I should rebalance both my traditional 401k and Roth IRA (thankfully no tax implications there) so that my Roth IRA is 100% VTSAX, and maintain my total asset allocation of 90/10 by rebalancing the 401k to include bonds. There is one wrinkle. My IRA is through Vanguard, so I have access to VBTLX, with an expense ratio of 0.05%. My 401k is through Voya, so my best bet is a bond fund with an expense ratio of 0.41%.

In addition I think I will eventually make enough salary that I would have to do a backdoor Roth, so I'm strongly considering leaving my money in my 401k instead of rolling over to a traditional IRA. By doing this I can avoid the pro rata rule when I do have to do the backdoor.



Can anyone help me make sense of this multivariable equation? My gut says the benefit of not getting taxed on years of growth in a Roth IRA will more than balance out the extra cost of the bond fund having a 10x higher expense ratio, but I am unsure

Title: Re: Rebalance Roth IRA + trad 401k to remove bonds from Roth?
Post by: terran on October 23, 2020, 09:20:39 PM

Yeah, I'd probably still do it. Besides, what's the expense ratio on the stock fund your 401(k)? If your 401(k) grows faster by being in stocks instead of bonds it will also mean you're paying more towards the expense ratio unless it's the same as or lower than the ER of VTSAX in your Roth. Or just go 100% stock.

Title: Re: Rebalance Roth IRA + trad 401k to remove bonds from Roth?
Post by: Joel on October 23, 2020, 11:13:10 PM

I typically put my bonds as part of my unvested employer match in my 401K, in case I don’t stay at a job long enough to receive the match, less earnings are forfeited.

Title: Re: Rebalance Roth IRA + trad 401k to remove bonds from Roth?
Post by: Sandi_k on October 24, 2020, 12:50:00 PM

Yes, you are thinking about this correctly: bonds in 401(k), stocks in Roth.

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

And no pre-tax IRAs that can mess up the back door Roth.

https://www.bogleheads.org/wiki/Backdoor_Roth

Well done!