No good bond fund in 401k

[frogstomp81]

The best bond fund I have in my 401k is PTTRX with a expense ratio of .46(Actively Managed), would it be better to use that fund in my 401k, or to buy VBMFX/VBTLX in my taxable account? I thought having Bonds in my Roth was good, but further reading indicates that I might not want to have them there. So now I would like to get something with higher return potential into my Roth IRA, and don't know where I should go with bonds. What would you do, and why would you do it that way?

[Radagast]

I assume you have a good stock fund in the 401k. For the purpose of rebalancing I'd keep about half of your IRA as bonds and all of the 401k as stocks. This works out to about 85%stocks / 15% bonds for both accounts combined, if you max out both of them. Treat both tax sheltered accounts as a single entity, and do all the buying and selling for rebalancing it in the IRA where you have a good bond option. You don't want to rebalance a taxable account.

[mizchief]

Can you explain why you don't want to rebalance a taxable account?  I'm a beginner and trying to get up to speed.  Thanks!

[seattlecyclone]

Rebalancing in a taxable account will often lead to capital gains that you have to pay taxes on that year. You can make as many transactions as you want within your IRA or 401(k) without owing any tax. Therefore you may prefer to do any needed rebalancing in one of those accounts (unless your taxable account has losses to harvest, in which case you may be better off doing it there).

[mizchief]

Thanks!  Makes sense!

[frogstomp81]

I did some more research and found that I can invest in pretty much anything via my 401k's Self Directed Brokerage Account through Schwab. That being the case I figured it may make sense to buy a bond fund that way. It turns out they charge $76.00!!! for mutual fund transactions but I can get no load/no fee ETFs (Schwab's only) or pay $8.95 per trade for other ETFs/Stocks. This being the case I came up with 4 scenarios and am wondering which is optimal.

1. Leave Bonds in Roth.

2. Invest in SCHZ through my self-directed brokerage account (no load/no fee but a bid/as spread of ~5.4% as of a few minutes ago on M*).

3. Invest in BND through my self-directed brokerage account ($8.95 transaction fee but only a 0.12% bid/ask via M*).

4. Put bond fund in taxable, as I have seen suggested on some sites.

I figure option 3 is clearly better than 2 as long as transactions are large enough to keep the transaction costs to a low %. Not sure how to figure out which of the other 3 options is the best. What would you do in this scenario and why? I would like to stick with VBMFX/BND or something reasonably equivalent.

 

[Jeremy E.]

http://jlcollinsnh.com/stock-series/
I recommend this to anyone that wants to learn about investing

[Radagast]

I doubt the spread on SCHZ is really 5.4%. ETF.com has it averaging 0.04%. ETF's such as SCHZ should only be traded between 9 and 4 Eastern time. Otherwise bid/ask spreads will be outrageous. This goes for all of them, even BND (which should normally be around 0.01%).

Whether SCHZ is a good investment is a different question, but your Option 3 seems like a bad idea because of the even higher transaction costs.

[frogstomp81]

I never knew that Bid/Ask spread varied so much outside of 9-4... and I learned something today. Thanks Radagast!