Roth assets -- stocks or bonds?

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Topic Author
Justin Time
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Roth assets -- stocks or bonds?

Post by Justin Time »

I am a retired 69 year old with mid seven figure assets allocated as shown below. I try to keep a 50:50 stock:bond ratio.

S+P 500 Index 48.2%
Interm Bond Funds (US) 38.9%
High Yield ETF (ANGL) 5.7%
Real Estate Fund 3.4%
CD 0.4%
Cash 3.5%

The distribution per account type is:
Taxable
44.0% S+P 500 Index
1.3% Cash

Trad IRA
38.9% Interm Bond Funds (US)
1.9% Cash

Roth IRA
2.6% S+P 500 Index
5.7% High Yield ETF (ANGL)
3.4% Real Estate Fund

Inherited IRA
1.6% S+P 500 Index

Checking
0.4% Cash

CD
0.4% 3 yr CD

I am not taking Soc Sec yet. I do ROTH conversions each year up to the 24% bracket. My current strategy is fill the Trad IRA with bonds and the Brokerage and ROTH accounts with stocks. However, this approach makes me too heavy in stocks and I must therefore put some bonds in either the Brokerage or the ROTH account. My thinking has been to put the bonds in the ROTH account to avoid tax on the interest, but I am not sure that this is the best approach. So, after filling up the Trad IRA with bonds, where should I put the excess bonds that are required to hit my 50:50 stock:bond allocation?

Thanks,
Justin
wetgear
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Re: Roth assets -- stocks or bonds?

Post by wetgear »

Justin Time wrote: Wed Jun 23, 2021 10:56 am Inherited IRA
1.6% S+P 500 Index
I'd start by moving this 1.6% to bonds. After that iBonds (tax differed) might be a good choice to inch you closer to your target AA. Other bonds aren't really paying well now days so they aren't that tax inefficient to hold in taxable now days. If you have a mortgage paying that down instead of buying more bonds could also work in your favor mathematically. I'd probably put the bonds in Roth last but you seem to be in great shape financially so even a few sub optimal moves aren't going to make much of a difference.
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Justin Time
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Re: Roth assets -- stocks or bonds?

Post by Justin Time »

I'd start by moving this 1.6% to bonds.
Ugh! -- good catch. I don't know how I missed that! Thanks also for the iBonds suggestion.
SnowBog
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Re: Roth assets -- stocks or bonds?

Post by SnowBog »

+1 on I Bonds - that effectively is extra tax-deferred space (and not taxable at the state level).

Depending on your current / expected tax bracket, you could look at muni bonds (like VTEB or MUB), or maybe even state muni funds (if you live in a high taxed state).

But unless you are in (or will be in) the top tax brackets, you'll probably do better (even after taxes) with buying taxable bonds.

Personally, I wouldn't put bonds in Roth (when you have other options). While that might be more tax efficient, you are sacrificing what is likely much larger growth in stocks to avoid paying what's probably a very small tax on bond interest (especially with yields being so low currently).
Last edited by SnowBog on Wed Jun 23, 2021 7:35 pm, edited 1 time in total.
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grabiner
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Re: Roth assets -- stocks or bonds?

Post by grabiner »

It's probably better to keep stocks in your taxable account and put bonds in the Roth IRA if your traditional IRA is too small for your bonds.

The reason is that, for you, stocks are likely to lose less to taxes than bonds in a taxable account. You will probably not sell all your taxable stocks during your lifetime, and thus you will avoid much of the capital-gains tax when you leave them to your heirs or donate them to charity.

The actual advantage of bonds in traditional versus Roth is relatively slight. If you invest $10,000 in your traditional account and $7600 in your Roth account the same way, and withdraw in a 24% bracket, you will have the same amount of money. It wouldn't matter which account held bonds and which held stocks. It matters only because a rising stock market with stocks in the traditional account might force you to take RMDs larger than you need, or to withdraw some of the traditional IRA in a 32% bracket; neither of these will happen with stocks in the Roth.

(edited to fix typo)
Last edited by grabiner on Thu Jun 24, 2021 7:44 am, edited 1 time in total.
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SnowBog
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Re: Roth assets -- stocks or bonds?

Post by SnowBog »

grabiner wrote: Wed Jun 23, 2021 7:05 pm It's probably better to keep stocks in your taxable account and put bonds in the Roth IRA if your traditional IRA is too large for your bonds.

The reason is that, for you, stocks are likely to lose less to taxes than bonds in a taxable account. You will probably not sell all your taxable stocks during your lifetime, and thus you will avoid much of the capital-gains tax when you leave them to your heirs or donate them to charity.
Great perspective! I hadn't thought about longer term estate planning.
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Eagle33
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Re: Roth assets -- stocks or bonds?

Post by Eagle33 »

grabiner wrote: Wed Jun 23, 2021 7:05 pm It's probably better to keep stocks in your taxable account and put bonds in the Roth IRA if your traditional IRA is too large for your bonds.
It's getting late & I may be missing something, but if traditional IRA is too large, then why can't more bonds fit in it?
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grabiner
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Re: Roth assets -- stocks or bonds?

Post by grabiner »

Eagle33 wrote: Wed Jun 23, 2021 10:33 pm
grabiner wrote: Wed Jun 23, 2021 7:05 pm It's probably better to keep stocks in your taxable account and put bonds in the Roth IRA if your traditional IRA is too large for your bonds.
It's getting late & I may be missing something, but if traditional IRA is too large, then why can't more bonds fit in it?
Typo fixed above; should be "too small".
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Topic Author
Justin Time
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Re: Roth assets -- stocks or bonds?

Post by Justin Time »

grabiner wrote: Wed Jun 23, 2021 7:05 pm You will probably not sell all your taxable stocks during your lifetime, and thus you will avoid much of the capital-gains tax when you leave them to your heirs or donate them to charity.
I think Congress will do away with the step-up in cost basis at death. I could, of course, use-up all of my gift-tax exclusion now before laws change, but gifting the majority of retirement to my heirs seems extreme and unwise at this point (per the Monty Python skit, "I'm not dead yet").
SnowBog wrote: Wed Jun 23, 2021 6:26 pm Depending on your current / expected tax bracket, you could look at muni bonds (like VTEB or MUB), or maybe even state muni funds (if you live in a high taxed state).
One reason I want to minimize interest-bearing securities in the taxable account is that Medicare premiums are income-based. This income includes 85% of Soc Sec, any taxable AND tax-free income, and any ROTH conversions. These income streams can easily cause your Medicare premiums to double or triple.
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billthecat
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Re: Roth assets -- stocks or bonds?

Post by billthecat »

SnowBog wrote: Wed Jun 23, 2021 6:26 pm +1 on I Bonds - that effectively is extra tax-deferred space (and not taxable at the state level).

Depending on your current / expected tax bracket, you could look at muni bonds (like VTEB or MUB), or maybe even state muni funds (if you live in a high taxed state).

But unless you are in (or will be in) the top tax brackets, you'll probably do better (even after taxes) with buying taxable bonds.
I'm in the top tax brackets, and opted to hold total bond in my taxable account. I get a little less yield than munis now, but looking ahead to when I retire and shift into lower tax brackets I'll be getting more yield then. So this way my holdings are allocated how I'll want them for decades. i don't know if this is a rational approach and I'm open to feedback.
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SnowBog
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Re: Roth assets -- stocks or bonds?

Post by SnowBog »

billthecat wrote: Thu Jun 24, 2021 1:06 pm
SnowBog wrote: Wed Jun 23, 2021 6:26 pm +1 on I Bonds - that effectively is extra tax-deferred space (and not taxable at the state level).

Depending on your current / expected tax bracket, you could look at muni bonds (like VTEB or MUB), or maybe even state muni funds (if you live in a high taxed state).

But unless you are in (or will be in) the top tax brackets, you'll probably do better (even after taxes) with buying taxable bonds.
I'm in the top tax brackets, and opted to hold total bond in my taxable account. I get a little less yield than munis now, but looking ahead to when I retire and shift into lower tax brackets I'll be getting more yield then. So this way my holdings are allocated how I'll want them for decades. i don't know if this is a rational approach and I'm open to feedback.
Without knowing more details, makes sense to me. Especially since I believe ACA and Medicare include tax-exempt interest anyway.

That said, I went the opposite way (holding munis), but am planning for an early retirement - potentially without ACA (spouse may qualify for buying into retiree coverage) where we'll likely spend down our munis while doing Roth conversions.

For the OP, I think the main issue is how much the interest in taxable adds - and how that impacts their Medicare premiums.

If I understand, they have stocks of 52.3% (assuming converting 1.6% from inherited IRA to Bonds). Not sure what real estate fund they hold, that maybe should be included as well... But if it's mostly mortgage backed securities, one could argue that's "bond like".

So minimally, it sounds like they are trying to convert 2.3% and maybe up to 7.7% into fixed income.

If we assume a "mid seven figure portfolio" is $5M, we are taking about $115k - $385k of bonds needing to find a home...

Which actually brings up a different point - where's this money coming from? If this is going to be added to taxable, then presumably that means selling something already in taxable. But that would mean paying taxes on any gains... Depending on how large those gains are, that might be the overriding factor...

But let's assume there's "new money" to add these bonds to taxable. The yield listed on BND is 2.07%. So that would mean interest of between $2,400 - $8,000 (on the bond estimate between $115k - $385k) at current yields. Not sure if that's enough to push OP into higher Medicare premiums (and if so how much more those are). But that seems the tradeoff...
Topic Author
Justin Time
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Joined: Wed Mar 14, 2018 12:44 pm

Re: Roth assets -- stocks or bonds?

Post by Justin Time »

SnowBog wrote: Thu Jun 24, 2021 3:01 pm For the OP, I think the main issue is how much the interest in taxable adds - and how that impacts their Medicare premiums.
All my current investment decisions are driven by the ROTH conversion target (24% bracket) and the IRMA break points. Thus, any additional taxable income offsets my ROTH conversion amount dollar-for-dollar. In practice, I cannot fill-up the 24% bracket completely due to the IRMA break point but it is close.

SnowBog wrote: Thu Jun 24, 2021 3:01 pm Which actually brings up a different point - where's this money coming from? If this is going to be added to taxable, then presumably that means selling something already in taxable. But that would mean paying taxes on any gains... Depending on how large those gains are, that might be the overriding factor...
Yes, this is why I plan to sell the stock in my ROTH and replace it with bonds. Then I thought --- is it better to sell stock in my taxable account rather than the ROTH? Then I thought, this would be a good question for Bogleheads because it doesn't seem right to put a high-growth investment (stock) in a ROTH. Anyhow, years ago someone told me that a ROTH can provide 'tax flexibility' to my portfolio. I did not realize until now the value of having that flexibility when it comes to asset reallocation.
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