I have a mix of accounts for my investments including brokerage, 401k and Roth IRA.

I handle all my own investments and my current target allocation is 48% US stocks, 24% international stocks, 8% REIT, and 20% bonds (all ETFs).

In trying to achieve my target portfolio allocation, should I consider the pre-tax nature of my 401k? For example, I could do either of two things:

  • Use the full value of my 401k investments in determining my portfolio allocation.
  • Assume a 25% tax rate in retirement and discount all my 401k investments by 25% in calculating my current allocation. For example, if I have $100k in bonds in my 401k, I would count that as having $75k in bonds because I'll lose 25% off the top when I withdraw.

It isn't clear to me which makes more sense...

  • 1
    In addition to considering what you've proposed, you should also consider what types of assets are better off inside vs outside your 401k. ie: should you invest in non-dividend stocks outside of your 401k, because long term capital gains have the best tax treatment out of any investment type? Jun 13, 2017 at 14:05
  • @Grade'Eh'Bacon, yes, thank you, I am doing that already.
    – minou
    Jun 13, 2017 at 14:40

1 Answer 1


It is a good policy to treat a percentage of your portfolio as essentially "owned" by the government (at the rate you will be taxed) in the method that you described in your second bullet. For your own retirement purposes you don't care about the asset allocation of the "government's" part of your portfolio just your own.

In practice, it is generally not the biggest deal as retirement allocations is a fuzzy science at best, but especially if you are doing the type of tax-optimization that Bacon describes in his comment then it is probably worth the extra step.

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