What Funds Do You Have in Your Roth?
What Funds Do You Have in Your Roth?
It's a simple question, but came up as I began to split hairs once again reading the wiki on tax adjusted asset allocation. The gist of the piece is to consider your tax bracket upon retirement for your Trad IRA. This makes much sense. Further down though, under asset location, it states that if all things are equal (with the caveat it rarely is), "it's slightly better to put assets with higher expected returns in the Roth."
Of course if we knew which assets would have higher returns that's all we'd buy, but I take this to imply that risk over time will be rewarded. That said, my Roth and my Trad IRA tend to mirror each other fairly closely.
I'm curious how others approach this.
Of course if we knew which assets would have higher returns that's all we'd buy, but I take this to imply that risk over time will be rewarded. That said, my Roth and my Trad IRA tend to mirror each other fairly closely.
I'm curious how others approach this.
- House Blend
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It doesn't matter.
Once you've adjusted your asset locations for maximum tax efficiency, then all you have to do is maintain your desired AA. If tax is 25%, it doesn't matter whether you have $1M in a Roth and $1M in a traditional 401k, or $1.75M in a Roth and $0 in a 401k. Both are worth the same after taxes.
(However, under the heading of "all else being equal...", you might prefer the all-Roth situation because it avoids RMDs.)
Caveat: this assumes that you've tax-adjusted your AA, and recognize that $1 in a Roth is worth more than $1 in a traditional 401k or taxable account. Admittedly I think most people don't tax-adjust their AA, so putting the faster-growing assets into the Roth without tax-adjusting your AA is just another way of tricking yourself into increasing your allocation to riskier assets.
Disclosure: I don't tax adjust my AA. (But my Roth is a tiny percentage of my portfolio.)
Once you've adjusted your asset locations for maximum tax efficiency, then all you have to do is maintain your desired AA. If tax is 25%, it doesn't matter whether you have $1M in a Roth and $1M in a traditional 401k, or $1.75M in a Roth and $0 in a 401k. Both are worth the same after taxes.
(However, under the heading of "all else being equal...", you might prefer the all-Roth situation because it avoids RMDs.)
Caveat: this assumes that you've tax-adjusted your AA, and recognize that $1 in a Roth is worth more than $1 in a traditional 401k or taxable account. Admittedly I think most people don't tax-adjust their AA, so putting the faster-growing assets into the Roth without tax-adjusting your AA is just another way of tricking yourself into increasing your allocation to riskier assets.
Disclosure: I don't tax adjust my AA. (But my Roth is a tiny percentage of my portfolio.)
- zaboomafoozarg
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I put bond funds (VBMFX) into my Roth IRA because 1) my 401k doesn't offer nearly as good bond fund choices, and 2) because it's generally a lot better to have bonds in tax-deferred or tax-free accounts. I'm going to continue to max out the Roth IRA with bonds, and fill out the remainder of my bond AA in my 401k as needed.
I try to put assets with higher expected returns in the Roth (stocks) and bonds in the traditional. That assumes the value of the accounts corresponds to my desired stock/bond allocation. As I am in the middle of doing Roth conversions (a multi-year project), this is my goal rather than how it is currently set.
Yes, they may have the same value as far as determining your net worth at any time, but don't you want to minimize taxes, allowing more of the assets to belong to you? To minimize taxes with the $1M Roth and $1M traditional IRA, wouldn't you put stocks in the Roth (expected higher growth) and let the slower-growing bonds stay in the traditional IRA? House Blend, I think you are influenced by having a smaller Roth and to maintain your AA, you need to put both in the traditional IRA.House Blend wrote:Once you've adjusted your asset locations for maximum tax efficiency, then all you have to do is maintain your desired AA. If tax is 25%, it doesn't matter whether you have $1M in a Roth and $1M in a traditional 401k, or $1.75M in a Roth and $0 in a 401k. Both are worth the same after taxes.
- englishgirl
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I don't have enough tax advantaged space outside of my 401k (where I have limited funds to select from) to be able to play the game of guessing which assets might return the most.
So I have TIPS and international in my Roth. When I leave my employer and roll over my 401k, that might change. Or might not.
So I have TIPS and international in my Roth. When I leave my employer and roll over my 401k, that might change. Or might not.
Sarah
I have almost all bond funds in my Roth account. I have a Build America Bond that pays 6.84 percent interest for 12 years. This is because its a tax advantage account, so I put the equities in my taxable account. My Vanguard CFP advisor also said to put more bond funds in tax defered account and index equity funds in taxable accounts. I hope this helps you.
- touchdowntodd
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- House Blend
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I agree that you do want to maximize after-tax returns, but that doesn't dictate stocks-in-Roth, bonds-in-401k. This comes up from time to time, and I'm not the first person to point this out.celia wrote:Yes, they may have the same value as far as determining your net worth at any time, but don't you want to minimize taxes, allowing more of the assets to belong to you? To minimize taxes with the $1M Roth and $1M traditional IRA, wouldn't you put stocks in the Roth (expected higher growth) and let the slower-growing bonds stay in the traditional IRA? House Blend, I think you are influenced by having a smaller Roth and to maintain your AA, you need to put both in the traditional IRA.House Blend wrote:Once you've adjusted your asset locations for maximum tax efficiency, then all you have to do is maintain your desired AA. If tax is 25%, it doesn't matter whether you have $1M in a Roth and $1M in a traditional 401k, or $1.75M in a Roth and $0 in a 401k. Both are worth the same after taxes.
One way to understand the issue is to recognize that the IRS owns a slice of your 401k. To keep things simple, we'll assume that all assets are either in a Roth or a traditional 401k, and assume that withdrawals are taxed at 25%. So your 401k can also be viewed as "tax-free" like the Roth, the only difference is that the balance in it is 25% smaller than it looks.
So if you have $1M in a Roth and $1M in a 401k, what you really have are $1M and $0.75M in two separate tax-free accounts. Once you understand it that way, it doesn't matter which one has short term treasuries in it and which one has emerging markets small cap value.
Now suppose your target AA is 50% stocks/50% bonds.
The caveat I referred to in my earlier post would be in thinking that you could put all stocks in either account and have it make no difference. It does make a difference. If your Roth is 100% stock, then after tax-adjusting you've got $1M in stocks and $0.75 in bonds. That's 57% stocks. If you want 50% stocks, one way to do it would be to use $0.875M stocks in the Roth, the remaining $0.125M in bonds, and all bonds in the 401k. Doesn't matter which asset class grows faster as long as you maintain your overall tax-adjusted AA. You'll net the same after taxes no matter which account holds what.
Summary (not directed at you celia, just a hypothetical you):
Go ahead and load up on risky assets for your Roth and safer assets in your 401k. If you don't tax adjust your AA, you need to understand that you are taking on more risk by doing it that way than if you do the reverse. If you do tax-adjust, it makes no difference.
I have written several times before that a Roth IRA is precious future tax-free space. You do NOT want to lose too much money in your Roth IRA.
One way to lose a lot of money in your Roth IRA is to buy the asset class that is expected to have the highest expected return. "What?", you may ask.
"What?" Yes, the asset class with the highest expected return is also the most riskiest and the same one with highest expected chance of a loss.
Thus, for my Roth IRA, I have a mix of equities and bonds. However, I shift assets depending on recent history in the stock market. If there is a ReallyBadDay (RBD), then I shift some from bonds to equities. If there is a recovery from a RBD, then I shift some from equities to bonds.
Currently, our Roths have fixed income as VCSH and some risky equities such as emerging markets small cap (EWX, DGS) emerging markets large cap (VWO), and REITs (VNQ). The EWX has the biggest loss for the year so far. Ouch!
One way to lose a lot of money in your Roth IRA is to buy the asset class that is expected to have the highest expected return. "What?", you may ask.
"What?" Yes, the asset class with the highest expected return is also the most riskiest and the same one with highest expected chance of a loss.
Thus, for my Roth IRA, I have a mix of equities and bonds. However, I shift assets depending on recent history in the stock market. If there is a ReallyBadDay (RBD), then I shift some from bonds to equities. If there is a recovery from a RBD, then I shift some from equities to bonds.
Currently, our Roths have fixed income as VCSH and some risky equities such as emerging markets small cap (EWX, DGS) emerging markets large cap (VWO), and REITs (VNQ). The EWX has the biggest loss for the year so far. Ouch!
I agree with livesoft in that I like some bond funds in Roths, in our case roughly a third, so they don't lose too much when the market goes down. I hold Vanguard REIT fund in a Roth at Vanguard. Wife and I have Fidelity Roths with the following Spartan funds: FBIDX, FSIIX, FSTMX, FSEMX, FSBIX and the ETF TIP.
Best Wishes, SpringMan
Livesoft's point is good and it is also important how you are planning to use your Roth. We are retired and running low in our other already taxed monies. Instead of taking more from IRA and going into another tax bracket we plan to start taking from Roths now and take advantage of some of the tax break now. We have a little over 15% in Roths, so a 50/50 allocation to Wellington/Wellesley can bring us almost a .5% income flow that is tax free. We also have some of those 3+ percent real rate IBonds which we will now reluctantly move to our emergency fund.
We have Total International and a little bit of Total Stock Market in our Roths. The TISM is there because our 403b accounts don't have great international options. The TSM is there to keep our AA %s right. Eventually the Roths will probably end up being all TISM.
We didn't try to figure out which sector would perform best/worst. We just picked the best accounts in our 403b accounts and then used Vanguard Roths for the rest.
We didn't try to figure out which sector would perform best/worst. We just picked the best accounts in our 403b accounts and then used Vanguard Roths for the rest.
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I was riding on all bonds for a while -- TIPS and Short Term Index in my Roth and Traditional respectively. When Vanguard opened up their Energy fund to having a minimum of $3000, I decided to go 50/50 TIPS and Energy in each IRA. The IRA's have a low enough balance that this isn't a major impact relative to my 401k, but I'm getting some skin in the game. Going forward I will rebalance annually, and make my contributions to whatever IRA I am allowed to contribute to for a particular year.
==> Same stuff in both IRA's. Just using those accounts to have access to things I can't get elsewhere.
I could have done the same technique with REIT, but, what can I say, I like Energy. Note that Energy has a bit of a turn-over rate, so it belongs in my tax-deferred. I cannot afford the 100k for the index version in my taxable account (and I don't have a brokerage account for ETF's).
Good luck to you.
==> Same stuff in both IRA's. Just using those accounts to have access to things I can't get elsewhere.
I could have done the same technique with REIT, but, what can I say, I like Energy. Note that Energy has a bit of a turn-over rate, so it belongs in my tax-deferred. I cannot afford the 100k for the index version in my taxable account (and I don't have a brokerage account for ETF's).
Good luck to you.
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I have three stock funds in my Roth (the most tax inefficient I own). Fixed income (stable value, bond funds, TIP fund) in my 401K and traditional IRA. Remainder of stock funds and a couple individual stocks in my non-retirement account (to take advantage of the capital gains rate, which for me is much below ordinary income tax rate currently and probably after retirement)
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Present asset allocation of 77% Vanguard Admiral class GNMA bond fund ( VFIJX ) ) & 23% Vanguard Admiral class High - Yield junk bond fund ( VWEAX ) for my last money spent in retirement after my deferred company 401(k) account has been depleted through withdrawals , regular annual Roth conversions , and required minimum distributions ( RMD ) later .
Until recently I was in a situation, for a long time, that my Roth and 401K were the only tax advantaged space I had. I did have a job where I traveled and did contract work, that allowed me to also open a taxable account that is almost entirely TSM. I then rolled over some small 401Ks I had left behind from very early on, which I filled with TSM and the REIT Index.
My Roth consists of TBM, the small cap index, and international held in the trio of the European, Pacific, and emerging market indexes. This was before Total International held any emerging cap, and my thought was I could rebalance between the three of these and eventually get them all to admiral status.
Recently, for a number of reasons, I left my previous job for something that keeps me around more. Since I had maxed out my 401K during my 8+ years, when I rolled it over to a Trad IRA at VG (with a much better choice of funds), I suddenly had a good deal of space. Now my Trad IRA has TSM, TBM, TIPS, Total Int'l, and the small value index.
Right now my 401K is actually very good: VG institutional funds for a 500 index, Total Int'l, and TBM -- a low cost, three fund approach.
For the record, I do have a fairly long time until retirement, likely 30 years. No doubt the time goes quickly, but I will not need to live off this money in the near future and can look a bit more down field. So I wasn't thinking of the Wellesley, but it may seem a better option, reining things in as I inch toward retirement.
I rebalanced not so long ago and while my domestic/international ratio is right on target, the bond to stock ratio is within tolerance but still high. So with the $3K I have left to contribute in my Roth I was mulling over a few options. It could be TSM -- which is in every other place in my portfolio, and for good reason. I could make it the small value index; I would reduce what I hold for small value in my Trad IRA as it increases in my Roth, basically transferring it over. Or some other large cap fund option -- something relatively low cost but perhaps more tax inefficient. Any of these options would keep my allocation in line.
Just some things to mull over. It's hardly a dire situation. I'm satisfied with my AA for the long haul, but am interested how others approach this, and appreciate all the responses.
My Roth consists of TBM, the small cap index, and international held in the trio of the European, Pacific, and emerging market indexes. This was before Total International held any emerging cap, and my thought was I could rebalance between the three of these and eventually get them all to admiral status.
Recently, for a number of reasons, I left my previous job for something that keeps me around more. Since I had maxed out my 401K during my 8+ years, when I rolled it over to a Trad IRA at VG (with a much better choice of funds), I suddenly had a good deal of space. Now my Trad IRA has TSM, TBM, TIPS, Total Int'l, and the small value index.
Right now my 401K is actually very good: VG institutional funds for a 500 index, Total Int'l, and TBM -- a low cost, three fund approach.
For the record, I do have a fairly long time until retirement, likely 30 years. No doubt the time goes quickly, but I will not need to live off this money in the near future and can look a bit more down field. So I wasn't thinking of the Wellesley, but it may seem a better option, reining things in as I inch toward retirement.
I rebalanced not so long ago and while my domestic/international ratio is right on target, the bond to stock ratio is within tolerance but still high. So with the $3K I have left to contribute in my Roth I was mulling over a few options. It could be TSM -- which is in every other place in my portfolio, and for good reason. I could make it the small value index; I would reduce what I hold for small value in my Trad IRA as it increases in my Roth, basically transferring it over. Or some other large cap fund option -- something relatively low cost but perhaps more tax inefficient. Any of these options would keep my allocation in line.
Just some things to mull over. It's hardly a dire situation. I'm satisfied with my AA for the long haul, but am interested how others approach this, and appreciate all the responses.
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I just came up with a plan that puts:
FBIDX(total bond) into his Roth, 100%
FBIDX (total bond) into her Roth, 100%
Taxable has int equities, cash needs
Her 401k has FSTMX (total US index) and FBIDX (total bond)--only good options
His 401k has VXUS (total int) and BIV (total bond)
my version of a KISS, 4 funds
60/35/5
equities, bonds, cash
my theory with the Roth IRA is I am putting less risky assets in there to double as a quasi emergency fund, I'm able to put a lot in every year through post-tax 401k contribs and in-service withdrawls plus his/her tIRA-->backdoor Roth contribs.. around 30k/yr
as the Roth balances grow beyond 1-yr quasi-cash doomsday scenario needs, will move into equities per AA
FBIDX(total bond) into his Roth, 100%
FBIDX (total bond) into her Roth, 100%
Taxable has int equities, cash needs
Her 401k has FSTMX (total US index) and FBIDX (total bond)--only good options
His 401k has VXUS (total int) and BIV (total bond)
my version of a KISS, 4 funds
60/35/5
equities, bonds, cash
my theory with the Roth IRA is I am putting less risky assets in there to double as a quasi emergency fund, I'm able to put a lot in every year through post-tax 401k contribs and in-service withdrawls plus his/her tIRA-->backdoor Roth contribs.. around 30k/yr
as the Roth balances grow beyond 1-yr quasi-cash doomsday scenario needs, will move into equities per AA
My Roth is about 10% of my Retirement Portfolio and is intended for legacy purposes. As such, it is all invested the Life Strategy Growth Fund. Other than that,I feel that the Roth is best vehicle to hold a TIPS fund allocation.
Last edited by joe8d on Thu Sep 08, 2011 10:14 pm, edited 1 time in total.
All the Best, |
Joe
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Wife's Roth is 100% Wellington.
My TSP accounts and our traditional IRAs are in LifeCycle and Target Retirement funds.
My Roth is SmallCap Value Index, MidCap Value Index, REIT Index, International Real Estate, Value Index, a little PM&M, STAR, and Wellington.
So far, for what it's worth--the wife's account with Wellington is doing better than S&D and that's with everything in PM&M being profit. Livesoft is correct, if you put the highest expected return assets in the Roth you've got to be ready for an extended period of disappointment.
Good Luck
Harry
My TSP accounts and our traditional IRAs are in LifeCycle and Target Retirement funds.
My Roth is SmallCap Value Index, MidCap Value Index, REIT Index, International Real Estate, Value Index, a little PM&M, STAR, and Wellington.
So far, for what it's worth--the wife's account with Wellington is doing better than S&D and that's with everything in PM&M being profit. Livesoft is correct, if you put the highest expected return assets in the Roth you've got to be ready for an extended period of disappointment.
Good Luck
Harry