## February 5, 2018

### Stocks in Roth and Bonds in 401k To Minimize Taxes

Most people have a mix of stocks and bonds in their retirement accounts.      Stocks are expected to grow faster than bonds in the long run.    If you put your stock investments in a tax free account and your bonds in a pre-tax account you'll come out a bit ahead in retirement.

Lets illustrate this with an example.   Pretend you've got \$100,000 split evenly between Roth and 401k accounts with \$50,000 in each.   Now say you've got a 50 stock / 50 bonds allocation.    That would give you \$25,000 in stocks and bonds in each account.   Now say your stocks grow 10% over 20 years and the bonds grow 5%.    Assume you've got a 33% tax rate on your 401k withdrawals.

 Roth 70/30 410k 70/30 stock \$25,000 \$25,000 bond \$25,000 \$25,000 10% for 20yr \$168,187 \$168,187 5% for 20y \$66,332 \$66,332 total \$234,520 \$234,520 tax \$0 \$77,392 after tax \$234,520 \$157,128 TOTAL \$391,648

Now instead put all the stocks in the Roth and all the bonds in the 401k and you get :

 Roth 70/30 410k 70/30 stock \$50,000 \$0 bond \$0 \$50,000 10% for 20yr \$336,375 \$0 5% for 20y \$0 \$132,665 total \$336,375 \$132,665 tax \$0 \$43,779 after tax \$336,375 \$88,885 TOTAL \$425,260

In the end you've got about 8.5% more money simply due to allocating your investments per the tax advantages.

Note:   I'm not saying that you should *only* have stocks in the Roth and bonds in the 401k.    In the above example its set up that way just to illustrate.  If you had a 70/30 split allocation then you'd still need some bonds in your Roth.    Further, reallocating periodically to keep a specific % asset allocation isn't possible if all your stocks are in one and all the bonds are in the other.

Admittedly this is pretty contrived example, but I did that to illustrate the point.    Its more likely you'd have money invested periodically annually over a long period rather than starting with a lump sum and its also likely your effective tax will be lower.

I didn't come up with this idea, but I can't recall where I saw it.