You would want as much money in the account with tax-free withdrawals (Roth IRA) and as little money in the account that will tax withdrawals as ordinary income (401(k)). If in the 22%-32% bracket, your rate is 15%. There’s a significant debate in the financial community about where investors should put their bonds. Whenever I do calculators it says I’m not protected and my profile is too risky and doesn’t need to be. Market value: $238.0 million. For instance, if you took a loss on Fidelity's Spartan Total Stock Market Index Fund, you could immediately exchange the money into Vanguard's Total Stock Market Index Fund.  These two investments essentially behave identically, but the government views them as substantially different, allowing you to stay in the market and yet still “harvest” the loss.  So you didn't sell low, and you still get the tax deduction. What assets do you keep in your taxable account? What if you are, say, 5 years out from early retirement and intend to withdraw contributions from the Roth IRA account for living expenses for the first 5 years until the Traditional -> Roth ladder kicks takes full effect? Some retirement accounts can save you a fortune in taxes over time -- get all the details here. stocks) or investments that are very tax-inefficient (i.e. This minimizes the 401(k)’s value (which will be taxed upon withdrawal as ordinary income), relative to the value of the Roth IRA. Let’s say that you had to put bonds in a retirement account, and you could put the bonds in either your 401(k) or your Roth IRA. Vanguard Intermediate-Term Tax-Exempt Fund ( VWITX ): The income-generating nature of bond funds can produce unwanted taxes in a taxable account but bond funds like VWITX can be a smart move for investors with taxable accounts. I have four accounts currently holding retirement funds: HSA, Roth 401K, Roth IRA, and taxable brokerage. You have entered an incorrect email address! Thanks. Income from individual municipal bonds and bond funds is typically federally tax-free. This is another cool trick, especially if you regularly give to charity. For example, let’s say that you wanted to hold an 80% stock / 20% bond portfolio and you have a $50,000 taxable account and a $50,000 401(k). I was thinking about doing something to balance it out I guess…more less risk. The assumptions are that the stocks return 10% annually; 4% of the value is realized as long-term capital gains each year and 4% as dividends or short-term capital gains. When you buy mutual funds, ETFs, or individual stocks or bonds outside of your tax-advantaged retirement accounts with your own hard-earned after-tax dollars, they will reside in a plain old brokerage account. A municipal bond, also known as a muni, is debt security used to fund capital expenditures for a county, municipality, or state. Some people keep it simple and purchase their desired asset allocation in each of their accounts, including their taxable account, 401(k), HSA, 529, etc. Before I went to medical school, I worked on Wall Street as a trader at an investment bank. Whether or not a brokerage account is taxable depends on the type of account. If taxable bond funds or individual bonds are held in a tax-free account such as a Roth IRA, then the income from them would be free from federal taxes, provided certain requirements are met. Stocks and stock mutual funds in a taxable account are awesome estate planning tools.  Here's how it works.  You buy a stock when you are young.  You hold onto it your whole life and it appreciates and appreciates in value.  If you sold it the day before you died, you would pay a huge capital gains tax.  If your heirs sell it the day after you die, no taxes are owed. VWITX invests in high-quality municipal bonds, which are tax-exempt at the federal level. What is the asset allocation of your Roth IRA? In this case it seems as if one might want a less risky Roth, and thus some bonds. When the investment is sold, the difference between the sale price and the cost basis is taxed as either short-ter… However, muni bonds and taxable bonds of similar risk had very similar yields at the time the post was written, so I just used 2% both inside and outside the tax-protected account. 2 B. You are the new owner of a bond that was reissued: You owe tax on the interest the bond earns after it was reissued but when or after you cash the bond, the 1099-INT (see below) will show all interest earned from date of issue, including interest earned before it was reissued. Also available on Audible! If you hold an investment in a foreign country, such as an international stock fund, the fund has to pay taxes to the foreign country on some of its gains.  You can deduct these taxes on YOUR taxes, but only if you hold the investment in a taxable account.  If you hold it in a 401K or IRA you're just out the money used to pay those taxes. Lack of understanding about how taxes work often leads physicians to be paranoid about them.  So they rush into “investments” like cash-value life insurance (whole life, universal life, variable life etc) or variable annuities in order to protect themselves from those awful taxes.  But the truth of the matter is that accounts like that cost you so much that the costs outweigh the tax benefits.  Most high-income professionals would be far better using a good old taxable account. Now, here's the fun part.  Nobody likes to sell a good investment just because it is down.  With tax-loss harvesting, you exchange one investment in which you have a loss, for another which is similar, but not identical. This will maximize the Roth IRA’s value (which will not get taxed at retirement), relative to the value of the 401(k). Write CSS OR LESS and hit save. One portfolio puts the stocks in a taxable account and the bonds in a tax-deferred account. A concept that will help you determine whether to invest in taxable or tax-free bonds is the calculation of the taxable equivalent yield. To determine whether it’s advantageous to use tax-free bonds, calculate the tax-equivalent yield of a tax-free bond fund by multiplying it by (1 – your marginal tax rate). If bonds are tax-efficient now, and then yields rise to make them less tax-efficient, you can go from bonds in taxable to bonds in tax-advantaged with little, no, or negative tax cost; therefore, it is reasonable to hold bonds in a taxable account now and switch later if appropriate. Stocks and stock funds - because they generate lower taxes than taxable bonds and bond funds do. Do you think bonds should go in a taxable, 401(k), or Roth IRA account? Does it make sense to have some bonds in the Roth, and some bonds in my traditional account? You could hold $40,000 in stocks and $10,000 in bonds in each account, or you could choose to hold $50,000 in stocks in one account and $30,000 stocks / $20,000 bonds in the other account. Although I noted that income from muni bonds generally isn't subject to federal income tax, the payouts of certain municipal bonds are subject to the Alternative Minimum Tax.