Roth IRA Asset Allocation?

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Topic Author
AxiomUncert
Posts: 2
Joined: Mon Jun 14, 2021 1:05 pm

Roth IRA Asset Allocation?

Post by AxiomUncert »

Hello all,

I'm an 18-year-old looking to follow the Bogle philosophy for longterm investing and, between savings and income from a current internship at college, am looking for advice regarding allocation of funds. At the moment, I will give a basic breakdown of my liquid and invested assets:

- ~$3,000-5,000 in paper shares that were gifted in my name many years ago
- $9,000 in liquid funds in a checking account which I've just requested be connected to my brokerage
- $10,000 in a brokerage, all of which is invested in VTI
- $5,000 in a second brokerage, $1,000 of which is in Facebook and $4,000 of which is in VTI
- $2,000 in a Roth IRA that's invested in VTI

All said, with the funds to be earned throughout this summer, I should be able to bring my total investments to ~$40,000 by August. As such, my goal is to diversify into international funds (is there a specific percentage that would be ideal?) but would prefer to do so manually with rebalancing instead of eating the extra fees from VT. Also, I was wondering if (since I will be maxing my contribution to my Roth) there are any asset classes returning taxable distributions (example: REITs) that would be a better choice for the Roth in order to maximize the efficiency of my taxable allocation while remaining diversified.

Thanks
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Duckie
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Re: Roth IRA Asset Allocation?

Post by Duckie »

AxiomUncert, welcome to the forum.
AxiomUncert wrote: Mon Jun 14, 2021 1:17 pm - ~$3,000-5,000 in paper shares that were gifted in my name many years ago
Transfer the paper shares to your brokerage. Paper just makes things complicated. (I hope you know the cost basis.)
- $10,000 in a brokerage, all of which is invested in VTI
- $5,000 in a second brokerage, $1,000 of which is in Facebook and $4,000 of which is in VTI
Combine these. You don't need to be messing with two different brokerages at this stage.
- $2,000 in a Roth IRA that's invested in VTI
Holding VTI in taxable and in a Roth IRA could potentially be a problem. If you ever sell VTI in taxable for a loss the VTI in the Roth IRA might create a "wash sale". The way around that is to hold something else in the Roth IRA. ITOT would be similar but not "substantially identical".
As such, my goal is to diversify into international funds (is there a specific percentage that would be ideal?)
People recommend anything between 0% and 50% of stocks. Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. I usually split the difference and recommend 30% of stocks.
Also, I was wondering if (since I will be maxing my contribution to my Roth) there are any asset classes returning taxable distributions (example: REITs) that would be a better choice for the Roth in order to maximize the efficiency of my taxable allocation while remaining diversified.
REITs are great in a Roth IRA, but most stock index funds will do just fine.
Topic Author
AxiomUncert
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Joined: Mon Jun 14, 2021 1:05 pm

Re: Roth IRA Asset Allocation?

Post by AxiomUncert »

I'm not currently aware of the cost basis, but I can look into that. I definitely agree that the paper shares complicate things, but it's been hard to get around to doing anything about them since my mother is currently storing them away somewhere which provides a bit of inertia on the matter.

In terms of the two brokerages, the issue is again one of inertia. I made my original brokerage account with E*TRADE before turning 18 as a custodial account, but I decided that I wanted to go with Schwab once I had the choice and ended up creating my own over there. Transferring the account seems cumbersome, so I have yet to do so. In the meantime, though, I don't make any deposits into the former account and have used the latter for both taxable brokerage and my Roth.
Holding VTI in taxable and in a Roth IRA could potentially be a problem. If you ever sell VTI in taxable for a loss the VTI in the Roth IRA might create a "wash sale". The way around that is to hold something else in the Roth IRA. ITOT would be similar but not "substantially identical".
Am I to understand that losses in a Roth are deductable even though the account is not taxable? If so, I was not aware of this.

I'll go 30% into international, then. Thanks for giving me a solid number!
REITs are great in a Roth IRA, but most stock index funds will do just fine.
Well, would REITs' returns exceed those of indices if the income tax on distributions were removed? Buying VTI should already make me diversified into domestic real estate, so I'd think that investing further would 1) decrease diversification and 2) be pointless if returns are going to be less than would be expected from the aggregate of other sectors. I'd also be hesitant to invest in RE at the moment even if only for the height of the housing market, currently. Not sure if my perception of that and the move away from commercial real estate towards increased remote work in some sections is correct, but it seems risky to throw more money into the housing market.
sycamore
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Re: Roth IRA Asset Allocation?

Post by sycamore »

Welcome to the forum, AxiomUncert!
AxiomUncert wrote: Mon Jun 14, 2021 6:48 pm
Holding VTI in taxable and in a Roth IRA could potentially be a problem. If you ever sell VTI in taxable for a loss the VTI in the Roth IRA might create a "wash sale". The way around that is to hold something else in the Roth IRA. ITOT would be similar but not "substantially identical".
Am I to understand that losses in a Roth are deductable even though the account is not taxable? If so, I was not aware of this.
Losses in a Roth are not deductible. I think Duckie was talking about a situation like this:

Day 1, In taxable, you have 100sh VTI shares which have dropped below their purchase price, and you sell them for a loss

Day 2, buy 100sh VTI in Roth. These are considered "replacement" shares and thus the loss amount (from the taxable shares) are added to the basis of the Roth shares. But since you can't claim losses on shares from a Roth (or Trad IRA), you'll never get the tax loss benefit.

See this Bogleheads wiki article for more info.
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Duckie
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Re: Roth IRA Asset Allocation?

Post by Duckie »

AxiomUncert wrote: Mon Jun 14, 2021 6:48 pm
Holding VTI in taxable and in a Roth IRA could potentially be a problem. If you ever sell VTI in taxable for a loss the VTI in the Roth IRA might create a "wash sale". The way around that is to hold something else in the Roth IRA. ITOT would be similar but not "substantially identical".
Am I to understand that losses in a Roth are deductable even though the account is not taxable?
No, losses in a Roth IRA are not deductible. But you can't sell for a loss in taxable when you buy the same thing in another account within a 61-day window. That's 30 days before the sale, day of sale, and 30 days after sale. For example, if you automatically reinvested VTI dividends in your Roth IRA 20 days before you sell VTI in taxable for a loss, part of that loss would be disallowed. By not holding VTI in the Roth IRA you don't have to worry about a wash sale.
I'll go 30% into international, then. Thanks for giving me a solid number!
Be aware that's 30% of stocks. So if your portfolio AA is 70% stocks and 30% bonds that's 30% of 70% or 21% international stocks.
Well, would REITs' returns exceed those of indices if the income tax on distributions were removed?
I don't know, I never checked. You specifically mentioned REITs so I responded to that. REITs kick out a lot of taxable income so they're best held in a tax-sheltered account. I wasn't recommending you hold a REIT fund at all, I don't myself, but if you're going to then a Roth IRA is the perfect place for it.
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