soupcxan said:
How would holding bonds in a Roth "waste" the tax-exempt status of the account? You should hold your least tax efficient assets in such an account, not the assets with the highest expected returns. Bonds and REITs are great candidates for a Roth IMHO.
Capital gains from equities, if held long-term, are taxed at a lower rate than your marginal income. However, distributions from bonds are taxed at your marginal rate, therefore they are less tax-efficient and should be held in a tax-advantaged account (such as a Roth or regular IRA).
Sorry if I was a bit confusing. This was assuming you have access to investing in both types of accounts.
For the sake of argument, figure that you've got a $10k Roth and a $10k 401k. Each of these accounts are tax sheltered, so growth of the account would be the same with identical investments. Now figure that over some time period, a stock fund would grow to $18k, while a bond fund would grow to $16k.
At retirement time, you'd be paying taxes as income on the 401k but not the Roth. So, you might have 2 cases:
Roth in a stock fund, 401k in a bond fund:
Roth is worth 18k - no taxes
401k is worth 16k - income tax on 16k
Roth in a bond fund, 401k in a stock fund:
Roth is worth 16k - no taxes
401k is worth 18k - income tax on 18k
So, you'd be better off using your Roth for the asset that is expected to have the higher return. That's all I meant. Bonds definitely should be in a sheltered area, but I'll leave them in my 401k/rolled over IRA accounts rather than my Roth accounts. Not all tax shelters are created equal...
