Author Topic: Roth IRA and bond mutual fund  (Read 2384 times)

dodojojo

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Roth IRA and bond mutual fund
« on: September 11, 2013, 11:54:52 PM »
Hi, from reading here and Bogleheads, the advice tends to favor bond and real estate mutual funds for tax-deductible investing.  As such, I've just spent a couple of hours going over my allocations in my 401K and 403B accounts.  I have rebalanced those funds so my overall investment is roughly 67% stocks, 27% bonds and %6 in real estate.   I am 40.  This rebalancing allows me to invest in taxable funds without throwing my stock/bond ratio out of whack (I'm aiming for 75%/25% for stocks/bonds).  I will direct a portion of my savings account towards the total domestic and international stock funds.  Again, my understanding is that it's better to invest in stocks in taxable accounts rather than in bonds and real estate.

I'm not eligible for the traditional IRA this year but I'm good for the Roth.  As  I do not have any international bond funds, I would like to start.  Can I go ahead and invest in the international bond index for my Roth?  Even though it's not tax deductible now, since it's still an IRA, will I get protection against dividend income for the tax year?  Or should I stay clear of bond funds in general if it's not a tax-deductible investment (for the current tax year)?
« Last Edit: September 11, 2013, 11:57:38 PM by dodojojo »

sherr

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Re: Roth IRA and bond mutual fund
« Reply #1 on: September 12, 2013, 08:48:40 AM »
Dividends into a Roth IRA are not taxed (nothing but your initial contribution is), so it's fine to have bond funds there. For the purposes of determining what kind of investments go where Roth and Traditional IRA / 401ks are equivalent, it's just a matter of whether you want to pay taxes now or at withdrawal time. Assuming equivalent tax rates you will end up with the same amount of money either way.

I would also amend your first statement slightly: what you want to do is figure out what asset allocation you want, and then assign the investments to the appropriate buckets as tax-efficiently as possible. I would not, for example, buy more bonds / REITs than I really wanted in my 401k just because that is a tax-efficient place to put them. But it sounds like you're getting ready to invest in more taxable funds in stocks to bring you back to your desired asset allocation, so you're probably doing exactly the right thing.

dodojojo

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Re: Roth IRA and bond mutual fund
« Reply #2 on: September 13, 2013, 08:48:23 PM »
Thanks Sherr for clarifying the Roth IRA question.

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But it sounds like you're getting ready to invest in more taxable funds in stocks to bring you back to your desired asset allocation

Correct.  I'm not buying bonds just for tax-efficiency.  I want bonds as 25% of my overall investment.  If I'm going to do that, I then want them to be as tax-efficient as possible.  So I spent some time this week increasing my bonds holding in my 401K.  Now I can buy into domestic and international stock funds with my taxable dollars--and keep my 75/25 allocation.