What goes in Roth First? Revisited

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

What goes in Roth First? Revisited

Postby bobsmith » Sun Mar 24, 2013 1:02 pm

About 3 weeks ago I posted a similar topic. As usual I got a lot of nice people here generously offering their advice and a few links to follow up on and study. Also, as usual, the advice, on balance, contradicted itself, so I was left no more informed than when I started howbeit with a lot more (conflicting) information. So, I called Vanguard, explained my situation and asked their advice. They said Bonds go into Roth first. I called my tax guy. He said Stocks go in First. Checking the boggleheads wiki suggests Bonds go in First. I've also been reading some of James Lange's books about Roth, and he says Stocks go in First.

So, exasperated, I decided to try to run the scenario myself using Excel. I've already spend several hours exploring this question, so why not spend a few more?

Here's how I set it up:
Initial Investment: $5000 in a roth. $5000 in a taxable non-retirment Account.
Allocation: 85% Stocks 15% Bonds
Assumed Gain: 9% stocks. 5% bonds
Time period: 40 years
Contributions along the way?: $0
Inflation: 0%
Income Tax Bracket: 25% (unchanging for life)
Capital Gains Bracket: 15% (unchanging for life)


Assumptions:
All gains each year are reinvested.
100% of non-roth gain on Bond investments is counted as income and is taxed at 25% at end of each year.
Investing only with mutual funds

NOTE: My overall strategy would of course be to put off paying capital gains taxes as long as I could. In these Scenarios I'm not advocating for paying them annually or as a lump sum after 40 years, etc. It was just too complicated to make assumptions about how much I'd be taking out and using and when.

Scenario #1: Capital Gains on non-roth Stocks subtracted at end of each year.
STOCKS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $230,365
Percentage of total investment held in Roth: 68.17%
BONDS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $215,889
Percentage of total investment held in Roth: 55.81%
Conclusion:
The Stocks-in-First strategy seems the clear winner with added benefit of a proportionally larger (12% more) Roth account. Winner: Stocks First

Scenario #2: Taxable stock gains go 100% unrealized until the end of 40 years, then paid in one lump sum at 15% rate.
STOCKS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $257,556
Percentage of total investment held in Roth: 60.98%
BONDS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $254,733
Percentage of total investment held in Roth: 47.30%
Conclusion:
The Stocks-in-First strategy has slightly more value than Bonds-First. In the real world some of those bonds gains would be taxed at the lower capital gains rates. The Stocks first strategy leaves us with 14% more in the Roth. Winner: Stocks First

Scenario #3: Taxable stock gains go 100% unrealized and are NEVER paid because investor dies and passes it down to descendents who take advantage of step up benefit.
STOCKS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $273,521
Percentage of total investment held in Roth: 57.42%
BONDS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $277,540
Percentage of total investment held in Roth: 43.41%
Conclusion:
The Bonds-in-First strategy has slightly larger value than Stocks-First. This is perhaps the most unrealistic scenario as it assumes I'd never spend any of the gains from my investments and leave it all to my heirs. Also the Bonds-first strategy would leave me with 14% less in my Roth. An inherited Roth has its own set of advantages to my heirs and so a larger Roth over the lifetime of my heirs will probably benefit them more than the small difference in balances at my death.
Winner: TIE

Final Thoughts:
Running the scenarios with a smaller bond return of 3% gave a slightly better advantage to Stock First strategy in all Scenarios. In Scenario #2 with a larger investment, paying capital gains on a lump sum at the end might push me into the 20% cap gains, but I kept it at 15%. Does not accounting for inflation leave out an important variable in this comparison? Of course the real world market is more volatile but paying taxes every year on unprotected bonds is certain. I can see where a more volatile market might change the advantage to Bonds First strategy, but I'm not sure how to calculate this. Maybe when I have more time...

I hope I didn't make any Excel errors. Personally I have no attachment to either strategy. I just want to do what's best. If anyone can think of any important variables I left out, please correct me! None of these puristic scenarios is realistic to the real world. Of course I'm going to have some realized gains along the way at various times. But all things considered, I think the results of this exercise are clear. STOCKS FIRST in a Roth!

I welcome and appreciate your criticism!
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby Hastibe » Sun Mar 24, 2013 2:14 pm

I would also be interested in people's feedback on Bob's calculations--I ran a series of similar calculations (though a bit more rudimentary--I just ran a version of Bob's scenario #2) on whether it makes sense to invest stocks or bonds in my Roth first, and my calculations also came back with a slight advantage to holding stocks in the Roth first.
Hastibe
 
Posts: 150
Joined: Sun Jan 20, 2013 12:33 am

Re: What goes in Roth First? Revisited

Postby livesoft » Sun Mar 24, 2013 2:15 pm

What's wrong with BOTH BONDS and STOCKS FIRST in a Roth IRA?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 32484
Joined: Thu Mar 01, 2007 9:00 pm

Re: What goes in Roth First? Revisited

Postby Doc » Sun Mar 24, 2013 2:55 pm

bobsmith wrote: ...
Assumptions:
All gains each year are reinvested.


And at the end of the period the equity returned more than the FI which it would even if there was no tax at all. Your are measuring the effect of risk not tax efficiency. You have to allow for rebalancing.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4756
Joined: Sat Feb 24, 2007 2:10 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Sun Mar 24, 2013 3:03 pm

Doc wrote:
bobsmith wrote: ...
Assumptions:
All gains each year are reinvested.


And at the end of the period the equity returned more than the FI which it would even if there was no tax at all. Your are measuring the effect of risk not tax efficiency. You have to allow for rebalancing.


FI = First in?

Ah, yes, great observation Doc! I forgot to reallocate to keep the 85/15 ratio. I'll tweak the spreadsheet and post back. This might take a bit...
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby grabiner » Sun Mar 24, 2013 3:30 pm

Doc wrote:
bobsmith wrote: ...
Assumptions:
All gains each year are reinvested.


And at the end of the period the equity returned more than the FI which it would even if there was no tax at all. Your are measuring the effect of risk not tax efficiency. You have to allow for rebalancing.


It's not even a rebalancing issue; Roth dollars are worth more than taxable dollars. If you gain $1000 in your Roth, you have $1000 more to invest tax-free. If you gain $1000 in your taxable account, you have $1000 more to invest in your taxable account, and the IRS will take 15% of that gain plus taxes on any dividends. SImilarly, if you lose $1000, that is a total loss in a Roth but the IRS will share your loss in a taxable account. Thus equal dollar amounts in stocks in a Roth and bonds in a taxable account are a riskier portfolio than the other way around.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 12746
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: What goes in Roth First? Revisited

Postby retiredjg » Sun Mar 24, 2013 3:51 pm

I think you are asking the wrong question. "What goes in Roth first" can only be examined in light of what your other choices and needs are.

For example, if you need space for bonds (so that bonds don't flow into taxable if you support that thinking), the answer would be bonds. If you have all the space you want for whatever you want to invest in, the answer might be stocks cause they might grow more. Or bonds so your Roth space doesn't shrink so much. Or both to get the best of both worlds and have a rebalance spot.

I also think this question is so far down the decision tree as to have little importance in the long run. But that's just the opinion of a satisficer. :happy
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby Doc » Sun Mar 24, 2013 4:13 pm

grabiner wrote:
Doc wrote:
bobsmith wrote: ...
Assumptions:
All gains each year are reinvested.


And at the end of the period the equity returned more than the FI which it would even if there was no tax at all. Your are measuring the effect of risk not tax efficiency. You have to allow for rebalancing.


It's not even a rebalancing issue; Roth dollars are worth more than taxable dollars. If you gain $1000 in your Roth, you have $1000 more to invest tax-free. If you gain $1000 in your taxable account, you have $1000 more to invest in your taxable account, and the IRS will take 15% of that gain plus taxes on any dividends. SImilarly, if you lose $1000, that is a total loss in a Roth but the IRS will share your loss in a taxable account. Thus equal dollar amounts in stocks in a Roth and bonds in a taxable account are a riskier portfolio than the other way around.


The rebalancing issue was in the spreadsheet calculation. If you don't hold your AA constant you wind up measuring risk instead of tax consequences because stocks grow faster than FI (Fixed Income).

Whether $1000 in taxable and $1000 in a ROTH is more or less risky than the reverse depends on your definition or risk. If risk is measured in the classical way as the ratio of equity to fixed income they are both the same and will remain the same if you rebalance properly. If you measure risk as not meeting your goals then you may get a difference. This is simpley the difference of holding risk (variance) constant and accepting lower returns because of taxes or keeping the same after tax return and accepting a higher risk (variance).

The idea of sharing equity loss with the IRS is a fallacious argument. If I expect equities to lose money I should invest in bonds in both accounts and I don't have any losses to share.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4756
Joined: Sat Feb 24, 2007 2:10 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Sun Mar 24, 2013 5:51 pm

retiredjg wrote:I think you are asking the wrong question. "What goes in Roth first" can only be examined in light of what your other choices and needs are.

For example, if you need space for bonds (so that bonds don't flow into taxable if you support that thinking), the answer would be bonds. If you have all the space you want for whatever you want to invest in, the answer might be stocks cause they might grow more. Or bonds so your Roth space doesn't shrink so much. Or both to get the best of both worlds and have a rebalance spot.

I also think this question is so far down the decision tree as to have little importance in the long run. But that's just the opinion of a satisficer. :happy


I get what you're saying and what you're speculating, but now I'm trying to just look at the math. This may not be that critical of an issue, but if decide to put stocks outside the roth, it will be a hard decision to undo later because of the unrealized capital gains.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Sun Mar 24, 2013 6:19 pm

Ug, this is getting complicated on the ol' spread sheet.

So far I've been able to repeat Scenario #1 which takes the capital gains tax out each year. After the tax is removed, I reallocate annually. In all Scenarios I'm able to do the reallocation OUTSIDE the Roth. Here are the results using the same parameters as above.

STOCKS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $195,122
Percentage of total investment held in Roth: 80.49%
BONDS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $185,644
Percentage of total investment held in Roth: 73.56%

Conclusion: Stocks first still wins, but the balances are closer at the end. The Roth, as a percentage of all holdings grows, but in relation to the Bond-first strategy the difference has also shrunk from about 12% difference to only a 6% difference. I'm not sure if this has more to do with allocation or taxes, but Stock-first strategy still wins under these conditions.

Scenario #2: Pay Capital gains at end of 40 years.
Well, much like the bond income that must be paid annually, if I sell some taxable stock to buy bonds in order to keep AA, then I MUST realize those capital gains for THAT year. This is a little more complicated as I'll need to determine the cost basis only on the amounts I'm transferring from stocks to bonds as well as the changing cost basis of the core investment. Frankly, I've been at this too long and am getting burnt out. I can't imagine how to account for loss harvesting and I still have the problem of dealing with a truly volatile market. My spreadsheet isn't setup to calculate for a situations where I would need to buy more bonds. Anyway, I'll have to post back later, but the assumption would be that for all Scenarios, the difference will shrink more and more away from a Stocks-first strategy.


EDIT: This whole section is flawed. I had some errors in Excel. However, I've now re-run the Scenarios figuring for AA. I didn't want to delete everything here in an edit in case this confused someone, but scroll down to my next post where I have the latest results....
Last edited by bobsmith on Sun Mar 24, 2013 9:37 pm, edited 1 time in total.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Sun Mar 24, 2013 7:35 pm

bobsmith wrote:...but if decide to put stocks outside the roth, it will be a hard decision to undo later because of the unrealized capital gains.

This sounds like your choice is putting your stocks into Roth IRA vs into taxable. If you have Roth space that is available for use, the obvious choice (to Bogleheads) is to fill the Roth space (with anything) in preference to filling taxable space and leaving the Roth IRA space unused.

That brings up the question of what (if anything) will go into taxable if you put the stocks into Roth IRA.

You are approaching the problem by looking at what should go into Roth IRA. Is it possible you should first be looking at the order in which you fill containers? By "containers" I mean accounts such as 401k, 403b, IRA, Roth IRA, taxable. That would be more in line with how people here usually view things.

What I'm saying is that we usually look first at "fill this, then that, then this other thing". Then we decide which asset class to put in each. You are asking a different question entirely. I'm not sure it is the right question.
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Sun Mar 24, 2013 10:36 pm

Okay, here I go again, running the exact same situation as in my OP, but this time figuring for annual Asset Allocations.

Drift is corrected at the end of each year to keep allocation.

Scenario #1: Capital Gains on non-roth Stocks subtracted at end of each year.
STOCKS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $217,078
Percentage of total investment held in Roth: 72.35%
BONDS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $209,642
Percentage of total investment held in Roth: 54.50%
Conclusion:
The Stocks-in-First strategy seems the clear winner with a balance that's about 4% ahead, and plus you end up with about 18% more in the Roth. Of course this Scenario is unrealistic because you wouldn't intentionally fully realize and pay your capital gains every year.
Winner: Stocks First

Scenario #2: Taxable stock gains go 100% unrealized until the end of 40 years, then paid in one lump sum at 15% rate.
STOCKS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $232,244
Percentage of total investment held in Roth: 67.62%
BONDS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $242,634
Percentage of total investment held in Roth: 44.98%
Conclusion:
The Bonds-in-First strategy hold about 4% more in assets, but the Roth holds 23% less of the total investment. The AA adjustment really hurt the Stocks-first strategy because the stocks-first had to pay capital gains all along the way just to move assets into bonds. Meanwhile, the Bonds-First strategy was able to do all its reallocating inside the Roth leaving the gains on the non-roth stocks unrealized for the entire 40 years. And of course you aren't paying that higher 25% income tax on the bond gains inside the Roth. Again, this makes the very unrealistic assumption that you wouldn't withdraw anything from the non-roth. Still 4% better is still better. I think you have to give this one to Bonds-First.
Winner: Bonds-First

Scenario #3: Taxable stock gains go 100% unrealized and are NEVER paid because investor dies and passes it down to descendents who take advantage of step up benefit.
STOCKS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $239,169
Percentage of total investment held in Roth: 65.66%
BONDS IN FIRST
Total (Roth value + non-roth values with taxes paid in full (no realized gains)): $266,191
Percentage of total investment held in Roth: 41.00%
Conclusion:
The Bonds-in-First strategy ends up with 11% more. This is perhaps the most unrealistic scenario as it assumes I'd never spend any of the gains from my investments and leave it all to my heirs. But this might be viable over a shorter time frame if you don't need the money and are just planning to leave it to your kids. Inherited Roths are outstanding accounts to leave your heirs, so that 24% smaller Roth may make the Stock-First strategy better if you know your descendents are savers not spenders. Even so, I think the 11% means this one goes to bonds first.
Winner: Bonds-First

What's my final conclusion? I don't know. Bonds seem to win if you can manage to put off realizing those capital gains. This isn't the clear answer I was hoping for when I started this process. I might run it again with only a 3% bond return, or tweak the spreadsheet to have occasional withdrawls. I'd expect a real world volatile market would benefit bonds-first because taxes on non-roth bonds are certain even in bearish years. Again, comments and especially corrections are appreciated. (Swehoo, this was a lot of work)
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Sun Mar 24, 2013 10:52 pm

retiredjg wrote:
bobsmith wrote:...but if decide to put stocks outside the roth, it will be a hard decision to undo later because of the unrealized capital gains.

This sounds like your choice is putting your stocks into Roth IRA vs into taxable. If you have Roth space that is available for use, the obvious choice (to Bogleheads) is to fill the Roth space (with anything) in preference to filling taxable space and leaving the Roth IRA space unused.

That brings up the question of what (if anything) will go into taxable if you put the stocks into Roth IRA.

You are approaching the problem by looking at what should go into Roth IRA. Is it possible you should first be looking at the order in which you fill containers? By "containers" I mean accounts such as 401k, 403b, IRA, Roth IRA, taxable. That would be more in line with how people here usually view things.

What I'm saying is that we usually look first at "fill this, then that, then this other thing". Then we decide which asset class to put in each. You are asking a different question entirely. I'm not sure it is the right question.


To my mind I'm addressing exactly what you're talking about, although I think it all fits into three categories, pre-tax, Roth and taxable accounts. I posted this topic 3 weeks ago and I got lots of good subjective information about what should go in first. Unfortunately, as often happens here, the responses all contradicted themselves. So with this thread I'm trying to understand the variables myself and come to my own conclusions. I'm not having much luck. ha ha. But I guess I'm leaning towards Bonds-first.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby assumer » Sun Mar 24, 2013 11:10 pm

I'm going to link to an obligatory "relative vs. absolute tax efficiency" article which I'm sure a bunch of others have already seen.

But if, as some others have suggested, it really doesn't make a significant difference, especially with the low rates on bonds these days, then perhaps it's not necessarily bad to have a single target-date fund in both roth and in taxable?
assumer
 
Posts: 415
Joined: Sat Dec 22, 2012 12:11 am

Re: What goes in Roth First? Revisited

Postby nedsaid » Sun Mar 24, 2013 11:45 pm

A good Target Date fund or a good Balanced Fund or an asset allocation fund are excellent candidates for a Roth. A nice all in one investment.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2297
Joined: Fri Nov 23, 2012 1:33 pm

Re: What goes in Roth First? Revisited

Postby Bob's not my name » Mon Mar 25, 2013 5:45 am

bobsmith wrote:as often happens here, the responses all contradicted themselves
I suspect they contradicted each other, not themselves.

As has been discussed in many threads here, current low interest rates have made the issue a toss-up. You should use the lowest cost funds in your 403b. After that, modeling is likely to let you down. You can do a lot of interesting things with stocks in a taxable account. You can tax loss harvest. You can realized LTCG at 0% federal tax in a lower income year or when a life change like marriage and a mortgage puts you in the 15% bracket. You can realize the gains when you want to, whereas bond interest is typically distributed over time; this may allow you to get the most out of certain tax credits by staying under the phaseout that year, or out of the financial aid phantom tax system. You can donate appreciated stock to charity. You can gift appreciated stock to your kid and have him sell it at a 0% tax rate (subject to the kiddie tax limit).

State and local taxes can also be an important consideration -- including whether you are likely to move between states, since here again the flexibility stocks give you on the timing of income can be an important advantage. Massachusetts taxes STCG at 12%. Philadelphia taxes interest, dividends, and STCG at 4%. Tennessee taxes only investment income.

By the way, you should think of the 403b as pre-tax and the Roth as post-tax (not tax-free). Both types of tax-advantaged account provide tax-free growth. For most people pre-tax savings are the better deal, because many states favor pre-tax, and because most people are in a lower federal tax bracket in retirement.
Bob's not my name
 
Posts: 6810
Joined: Sun Nov 15, 2009 10:24 am

Re: What goes in Roth First? Revisited

Postby assumer » Mon Mar 25, 2013 7:26 am

nedsaid wrote:A good Target Date fund or a good Balanced Fund or an asset allocation fund are excellent candidates for a Roth. A nice all in one investment.


Indeed. I was actually referring to target date funds also in taxable if the decision between stocks / bonds tax efficiency really is a toss up in the current environment.
assumer
 
Posts: 415
Joined: Sat Dec 22, 2012 12:11 am

Re: What goes in Roth First? Revisited

Postby BrianJone » Mon Mar 25, 2013 9:38 am

I'm new here but have a similar question as originally posted. One thing I'm wondering though, is about the risk of stocks vs bonds. It isn't mentioned above, but when someone invests in stocks, isn't there a greater increase is risk (decrease in value including principal) when related to the risk of a AAA bond? Would anyone have any comment to be made about this point and how that may alter the calculations above?
User avatar
BrianJone
 
Posts: 67
Joined: Thu Mar 07, 2013 7:02 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Mon Mar 25, 2013 9:55 am

bobsmith wrote:To my mind I'm addressing exactly what you're talking about, although I think it all fits into three categories, pre-tax, Roth and taxable accounts.

No, I think you missed it.

I'm saying the decision on categories comes first. What you put in the category is secondary.

There's an order in which you should fill the categories (under most circumstances). What goes into a category, such as Roth IRA, may change depending on which categories you have available.

Specifically, for most folks, category order for retirement money should probably be:

    401k up to the match (if any)
    IRA (traditional or Roth depending on circumstances)
    401k to the max
    taxable

Or

    401k up to the max
    IRA (traditional or Roth)
    taxable

These are variations on the same theme - to fill all your tax-advantaged accounts before using a taxable account for retirement money.

Using this order, if you don't save enough to use the taxable account, what goes into Roth is already decided for you - it is whatever is needed to supplement the best 1 or 2 funds in the 401k and it often ends up being stocks. But if the 401k is small and the Roth IRA is large, the answer might end up being bonds (at least for awhile).

Once you save enough for a taxable account to come into the picture, conventional thinking would put stocks in taxable which might make bonds fall back into the Roth IRA. However, some people believe that during the current low interest rate environment using muni bonds in taxable is preferable which would leave stocks in Roth IRA.

So the question is not stocks in Roth vs stocks in taxable. The question is bonds in tax-advantaged vs muni bonds in taxable. That decision will dictate what goes into Roth.

A decision that actually would use the question you are asking in your thread is when you have both tIRA space and Roth IRA space available and you don't know what to put where. In that situation, some people would put stocks into Roth first because the stocks are expected to grow faster. Some people would put bonds into the Roth space because they don't want their Roth space to shrink. Some put both in there. Some people say it does not matter.

I don't know who is right, but I think it does not matter much because this is a relatively minor decision that may or may not affect your bottom line in the long run. Other decisions are more important and should be considered first.

    -how much to save
    -stock to bond ratio
    -how much international
    -what accounts to fill first, second, third
    -expenses of the funds
    -tax efficiency
    -
    -
    -
    -what to put into Roth IRA
People may differ on the where things fall in this list, but I think almost everyone would tell you that all these things are more important than what goes into Roth IRA first. And once you've gone through this list, what goes into Roth IRA is likely to be already decided for you.
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 10:01 am

Bob's not my name wrote:
bobsmith wrote:as often happens here, the responses all contradicted themselves
I suspect they contradicted each other, not themselves.

As has been discussed in many threads here, current low interest rates have made the issue a toss-up. You should use the lowest cost funds in your 403b. After that, modeling is likely to let you down. You can do a lot of interesting things with stocks in a taxable account. You can tax loss harvest. You can realized LTCG at 0% federal tax in a lower income year or when a life change like marriage and a mortgage puts you in the 15% bracket. You can realize the gains when you want to, whereas bond interest is typically distributed over time; this may allow you to get the most out of certain tax credits by staying under the phaseout that year, or out of the financial aid phantom tax system. You can donate appreciated stock to charity. You can gift appreciated stock to your kid and have him sell it at a 0% tax rate (subject to the kiddie tax limit).

State and local taxes can also be an important consideration -- including whether you are likely to move between states, since here again the flexibility stocks give you on the timing of income can be an important advantage. Massachusetts taxes STCG at 12%. Philadelphia taxes interest, dividends, and STCG at 4%. Tennessee taxes only investment income.

By the way, you should think of the 403b as pre-tax and the Roth as post-tax (not tax-free). Both types of tax-advantaged account provide tax-free growth. For most people pre-tax savings are the better deal, because many states favor pre-tax, and because most people are in a lower federal tax bracket in retirement.


This is all solid advice and I appreciate at you taking the time to spell it out. I appreciate the suggestion that I should be more focused on other things or that there are other variables which would negate some of the results of the comparisons I'm trying to make. If your on-topic comment is that with regards to what goes in first, it's a toss-up, then I would say I'm starting to agree. Thanks.

Also, for the record I did not mean to say that people contracted themselves, but rather that different people with different opinions contradicted one another. And BTW, it's happening again here which is why I decided to try and run the numbers myself.

I strongly disagree that anyone should think of Roths and pre-tax accounts the same way. They are very different in many respects and which one is better depends a lot on your current and retirement income levels plus there are benefits to your descendents that are different. Just a few decades ago income taxes were much higher and with the decimation of the estate tax it's not far fetched to think income tax might be much higher in a few decades when people are cashing in their TIRAs.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 11:15 am

retiredjg wrote:
bobsmith wrote:To my mind I'm addressing exactly what you're talking about, although I think it all fits into three categories, pre-tax, Roth and taxable accounts.

No, I think you missed it.

I'm saying the decision on categories comes first. What you put in the category is secondary.

There's an order in which you should fill the categories (under most circumstances). What goes into a category, such as Roth IRA, may change depending on which categories you have available.

Specifically, for most folks, category order for retirement money should probably be:

    401k up to the match (if any)
    IRA (traditional or Roth depending on circumstances)
    401k to the max
    taxable

Or

    401k up to the max
    IRA (traditional or Roth)
    taxable

These are variations on the same theme - to fill all your tax-advantaged accounts before using a taxable account for retirement money.

Using this order, if you don't save enough to use the taxable account, what goes into Roth is already decided for you - it is whatever is needed to supplement the best 1 or 2 funds in the 401k and it often ends up being stocks. But if the 401k is small and the Roth IRA is large, the answer might end up being bonds (at least for awhile).

Once you save enough for a taxable account to come into the picture, conventional thinking would put stocks in taxable which might make bonds fall back into the Roth IRA. However, some people believe that during the current low interest rate environment using muni bonds in taxable is preferable which would leave stocks in Roth IRA.

So the question is not stocks in Roth vs stocks in taxable. The question is bonds in tax-advantaged vs muni bonds in taxable. That decision will dictate what goes into Roth.
retiredjg wrote:
bobsmith wrote:To my mind I'm addressing exactly what you're talking about, although I think it all fits into three categories, pre-tax, Roth and taxable accounts.

No, I think you missed it.

I'm saying the decision on categories comes first. What you put in the category is secondary.

There's an order in which you should fill the categories (under most circumstances). What goes into a category, such as Roth IRA, may change depending on which categories you have available.

Specifically, for most folks, category order for retirement money should probably be:

    401k up to the match (if any)
    IRA (traditional or Roth depending on circumstances)
    401k to the max
    taxable

Or

    401k up to the max
    IRA (traditional or Roth)
    taxable

These are variations on the same theme - to fill all your tax-advantaged accounts before using a taxable account for retirement money.

Using this order, if you don't save enough to use the taxable account, what goes into Roth is already decided for you - it is whatever is needed to supplement the best 1 or 2 funds in the 401k and it often ends up being stocks. But if the 401k is small and the Roth IRA is large, the answer might end up being bonds (at least for awhile).

Once you save enough for a taxable account to come into the picture, conventional thinking would put stocks in taxable which might make bonds fall back into the Roth IRA. However, some people believe that during the current low interest rate environment using muni bonds in taxable is preferable which would leave stocks in Roth IRA.

So the question is not stocks in Roth vs stocks in taxable. The question is bonds in tax-advantaged vs muni bonds in taxable. That decision will dictate what goes into Roth.

A decision that actually would use the question you are asking in your thread is when you have both tIRA space and Roth IRA space available and you don't know what to put where. In that situation, some people would put stocks into Roth first because the stocks are expected to grow faster. Some people would put bonds into the Roth space because they don't want their Roth space to shrink. Some put both in there. Some people say it does not matter.

I don't know who is right, but I think it does not matter much because this is a relatively minor decision that may or may not affect your bottom line in the long run. Other decisions are more important and should be considered first.

    -how much to save
    -stock to bond ratio
    -how much international
    -what accounts to fill first, second, third
    -expenses of the funds
    -tax efficiency
    -
    -
    -
    -what to put into Roth IRA
People may differ on the where things fall in this list, but I think almost everyone would tell you that all these things are more important than what goes into Roth IRA first. And once you've gone through this list, what goes into Roth IRA is likely to be already decided for you.


A decision that actually would use the question you are asking in your thread is when you have both tIRA space and Roth IRA space available and you don't know what to put where. In that situation, some people would put stocks into Roth first because the stocks are expected to grow faster. Some people would put bonds into the Roth space because they don't want their Roth space to shrink. Some put both in there. Some people say it does not matter.

I don't know who is right, but I think it does not matter much because this is a relatively minor decision that may or may not affect your bottom line in the long run. Other decisions are more important and should be considered first.

    -how much to save
    -stock to bond ratio
    -how much international
    -what accounts to fill first, second, third
    -expenses of the funds
    -tax efficiency
    -
    -
    -
    -what to put into Roth IRA
People may differ on the where things fall in this list, but I think almost everyone would tell you that all these things are more important than what goes into Roth IRA first. And once you've gone through this list, what goes into Roth IRA is likely to be already decided for you.


First, thanks for the long reply. You've helped me in other threads too, retiredjg.

I generally agree with the category order you first listed, but would caution people that 401k/403b plans can charge a lot in fees and the advice you get from vendors is sometimes bad like putting an annuity into a tax sheltered account when you are relatively young or loading you up with poorly diversified managed funds. Personal IRAs are cheaper with a good no-load company and you can pick your fund family.

I don't mean to say that Roths and TIRAs are the same, but in your example, I would think of the personal IRA and 401k as one in terms of allocation decisions. You have the freedom to allocate or re-allocate across both types of accounts with zero tax consequences so why limit yourself to working around the existing funds in your 401k? Then again, I'm an index investor so I don't see the need for more than 3 or so funds which would be relatively easy to represent in different accounts even with different fund families. The only problem would be if you are paying front-load fees in your 401k. Therefore I don't see why you say the decision is made for you. You have the freedom to do what you want.

A decision that actually would use the question you are asking in your thread is when you have both tIRA space and Roth IRA space available and you don't know what to put where....Some people would put bonds into the Roth space because they don't want their Roth space to shrink. Some put both in there. Some people say it does not matter.


That's a good question you posit, and you could throw in other variations like an option to convert that tIRA into a Roth as well as the use of tax-exempt bonds. In fact, I raised this issue in another post and by the time the thread was finished every opposing position was advocated by someone, usually more than once. Deciding what to put in a Roth over a taxable account is what I'm concerning myself with at this time. I never meant to suggest that other decisions were less important.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 11:27 am

BrianJone wrote:I'm new here but have a similar question as originally posted. One thing I'm wondering though, is about the risk of stocks vs bonds. It isn't mentioned above, but when someone invests in stocks, isn't there a greater increase is risk (decrease in value including principal) when related to the risk of a AAA bond? Would anyone have any comment to be made about this point and how that may alter the calculations above?


That's a good observation and I tried to touch on it myself. The real market is more volatile and it certainly could alter the results. But there's no volatility to paying dividend (income) taxes outside a retirement account which would suggest bonds are safer inside an IRA. Likewise, a very low return on bonds would tend to favor the stock-first strategy while a very bearish market would tend to favor bonds in first. I'll try to run the example with some volatile returns if I get time. I'm still working this stuff out myself. Others here might offer a more informed opinion.
Last edited by bobsmith on Mon Mar 25, 2013 3:07 pm, edited 1 time in total.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 11:58 am

I ran the same spreadsheet with lower bond returns and then with lower stock returns. As one would expect, the better stocks do in relation to bonds the more stocks-first strategy is favored and vice versa. As has also been pointed out, the next decade is likely to mean poorer than average bond returns.

Thanks to info in this thread and others I'm thinking about this another way. Consider that a stocks-in first strategy is more easily reversed than a bonds-in strategy especially when we are expecting a decade of suppressed bond gains. Mostly, unprotected bond gains, by their nature, require they be annually taxed as income. Unlike with Stocks, the gain is mostly realized each year and you can't put it off. Also, should inflation rates rise, you might even be able to reap a capital loss on a bond fund. So if I decide to do a stock-first strategy, then 10 years down the line I want to reallocate to bonds-first, this change in strategy wouldn't have a lot of negative tax consequences. However, the opposite is not true because the assumption would be that stocks outside a taxable account would create a lot of unrealized gains that would have to be paid in order to later convert them into bonds. Maybe I should be looking at a stocks-in-first strategy for now, knowing I can more easily change it later when the bond returns bounce back...
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Mon Mar 25, 2013 12:38 pm

bobsmith wrote:I generally agree with the category order you first listed, but would caution people that 401k/403b plans can charge a lot in fees and the advice you get from vendors is sometimes bad like putting an annuity into a tax sheltered account when you are relatively young or loading you up with poorly diversified managed funds. Personal IRAs are cheaper with a good no-load company and you can pick your fund family.

Even a high cost 403b is worth using to the max unless the expense ratios are way high (near 2% or 3%) and you expect to be there a very long time.

An annuity inside a traditional IRA is ridiculous and probably should be outlawed. But an annuity inside a 403b is generally of no concern - it acts just like a mutual fund. The only concern is the expense ratio.

As for diversification - you don't try to get it all in the 403b because they rarely have good choices for everything you need.


You have the freedom to allocate or re-allocate across both types of accounts with zero tax consequences so why limit yourself to working around the existing funds in your 401k?

Because you should use the 401k/403b (almost always to the max) and it is usually the most restrictive of the accounts you can choose from. So you start with the best couple of funds there and build the rest of the portfolio around that.


The only problem would be if you are paying front-load fees in your 401k.

This is rare. Loads are almost always waived in a 401k/403b.


Deciding what to put in a Roth over a taxable account is what I'm concerning myself with at this time.

Again, you are looking at this backwards. What goes into Roth is not the question. The question is what to put in taxable (stocks or muni bonds). Or put another way, taxable bonds in tax-advantaged account vs. muni bonds in taxable.

Conventional answer is stocks in taxable, bonds in Roth. Non-conventional answer (from those who would rather use muni bonds during this period when things are upside down as you discovered back in February) would be munis in taxable and stocks in Roth IRA.


But....I suspect you probably should not be using taxable anyway. For most people, it is only after you save $17,500 + $5,500 that you should even consider a taxable account for long term savings. You should be filling your 403b, but you don't want to because you think the choices are bad. This is almost certainly a mistake in my opinion.

Depending on how much you save, you might achieve the same thing by using traditional IRA (deducting the contributions from your taxable income). Or filling the tIRA and then switching to the 403b you don't like would work as well.
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby Doc » Mon Mar 25, 2013 1:09 pm

Bobsmith, ditch the spread sheet.

Start with a ROTH vs. taxable basic difference. (The other questions are just subsets of this with greater initial capital amounts.)

There is no tax on the gains in the ROTH so all you need to do is calculate the annualized tax loss for the asset in taxable:

Tax loss = (rate of return) * (tax rate)

For bonds it is simple because the tax rate is just your marginal rate now.

For equities the tax rate is less than the capital gains rate because of the tax deferral. The effective rate depends on the statutory LTCG rate, the length of the investment and the annual rate of return. For example a "pure" (no dividends) equity investment with an 8% ROR held for 20 years has an effective tax rate of 8.4% if held for 20 years. (LTCG statutory tax rate of 15%.)

The effective tax rate can be determined easily using a coupon bond / zero coupon analogy.

The calculation can be done with the calculator that comes with Windows in scientific mode, with any number of bond calculators available on line or even (gasp) with Excel. Don't use these numbers for a future value calculation because that reintroduces the asset allocation problem. Just compare the annualized tax loss for A with that of B and say which goes where first.

viewtopic.php?p=527230#p527230

Interesting under current market conditions a TBM market index fund is more tax efficient than an S&P 500 fund under reasonable assumptions for ROR and length of investment for taxpayers in the 25% tax bracket.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4756
Joined: Sat Feb 24, 2007 2:10 pm

Re: What goes in Roth First? Revisited

Postby Bob's not my name » Mon Mar 25, 2013 1:11 pm

bobsmith wrote:
Bob's not my name wrote:I strongly disagree that anyone should think of Roths and pre-tax accounts the same way. They are very different in many respects and which one is better depends a lot on your current and retirement income levels plus there are benefits to your descendents that are different.
Which one is better depends only indirectly on your retirement income level. It depends directly on your retirement tax bracket. I managed the finances of an elderly person with $150,000 annual income who was in the 0% bracket. 0% is a very low tax rate. Also, many states exempt some or all IRA withdrawals from taxation. Secondary factors are the insurance value of a TIRA, the conversion options available to early retirees and late retirees, the RMD differences (if they endure), and the estate tax avoidance value of conversions.
Bob's not my name
 
Posts: 6810
Joined: Sun Nov 15, 2009 10:24 am

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 2:02 pm

retiredjg wrote:
bobsmith wrote:I generally agree with the category order you first listed, but would caution people that 401k/403b plans can charge a lot in fees and the advice you get from vendors is sometimes bad like putting an annuity into a tax sheltered account when you are relatively young or loading you up with poorly diversified managed funds. Personal IRAs are cheaper with a good no-load company and you can pick your fund family.

Even a high cost 403b is worth using to the max unless the expense ratios are way high (near 2% or 3%) and you expect to be there a very long time.

An annuity inside a traditional IRA is ridiculous and probably should be outlawed. But an annuity inside a 403b is generally of no concern - it acts just like a mutual fund. The only concern is the expense ratio.

As for diversification - you don't try to get it all in the 403b because they rarely have good choices for everything you need.


You have the freedom to allocate or re-allocate across both types of accounts with zero tax consequences so why limit yourself to working around the existing funds in your 401k?

Because you should use the 401k/403b (almost always to the max) and it is usually the most restrictive of the accounts you can choose from. So you start with the best couple of funds there and build the rest of the portfolio around that.


The only problem would be if you are paying front-load fees in your 401k.

This is rare. Loads are almost always waived in a 401k/403b.


Deciding what to put in a Roth over a taxable account is what I'm concerning myself with at this time.

Again, you are looking at this backwards. What goes into Roth is not the question. The question is what to put in taxable (stocks or muni bonds). Or put another way, taxable bonds in tax-advantaged account vs. muni bonds in taxable.

Conventional answer is stocks in taxable, bonds in Roth. Non-conventional answer (from those who would rather use muni bonds during this period when things are upside down as you discovered back in February) would be munis in taxable and stocks in Roth IRA.


But....I suspect you probably should not be using taxable anyway. For most people, it is only after you save $17,500 + $5,500 that you should even consider a taxable account for long term savings. You should be filling your 403b, but you don't want to because you think the choices are bad. This is almost certainly a mistake in my opinion.

Depending on how much you save, you might achieve the same thing by using traditional IRA (deducting the contributions from your taxable income). Or filling the tIRA and then switching to the 403b you don't like would work as well.


I agree with most of what you've said, although I think your first layout of personal IRA before 401k is critical rather than the other way around. For those who can put away more than $5500, income bracket plays a big role in determining whether or not you should put things in a 401k with high fees. Why shelter away money if you're in a 15% tax bracket and have a limited 0% capital gains tax? I also strongly disagree that most 403b's don't charge loads. While it may be true that many don't charge front loads, 12b1 fees are common in the plans and vendors I've looked at and I've looked at quite a few in and out of my state. Also annuities typically charge some kind of M&E fee and part of what you are paying for is tax sheltering, so I think for most people they are poor choice inside a 401k.

I didn't say you had to get it all in the 403b. I agree a 403b is more restrictive which is why you're better off, IMO, funding a personal IRA first. But I don't see how that equates with the choice being made for you.

Again, you are looking at this backwards. What goes into Roth is not the question.


But it IS the question I'm trying to answer here on this thread that I started and under the conditions I set up. You've made your view pretty clear on this which is that you don't know or care and it probably doesn't matter anyway. That's a valid position and my own calculations are seeming to confirm that conclusion. I know your heart is in the right place with your other off-topic suggestions, but they don't apply to me in my current situation.
Last edited by bobsmith on Mon Mar 25, 2013 2:32 pm, edited 1 time in total.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby BrianJone » Mon Mar 25, 2013 2:14 pm

bobsmith wrote:I ran the same spreadsheet with lower bond returns and then with lower stock returns. As one would expect, the better stocks do in relation to bonds the more stocks-first strategy is favored and vice versa. As has also been pointed out, the next decade is likely to mean poorer than average bond returns.

Thanks to info in this thread and others I'm thinking about this another way. Consider that a stocks-in first strategy is more easily reversed than a bonds-in strategy especially when we are expecting a decade of suppressed bond gains. Mostly, unprotected bond gains, by their nature, require they be annually taxed ...




Bonds are subject to annual taxes within a Roth? I didn't know this to be true, can anyone explain please?
User avatar
BrianJone
 
Posts: 67
Joined: Thu Mar 07, 2013 7:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 2:29 pm

BrianJone wrote: Bonds are subject to annual taxes within a Roth? I didn't know this to be true, can anyone explain please?


No, they are not. I'm speaking in terms of the experiment I was running for this comparison. In one approach bonds would be outside the IRA in which case they would be taxable. In the other approach they would be inside and not subject to tax.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 3:04 pm

Doc wrote:Bobsmith, ditch the spread sheet.

Start with a ROTH vs. taxable basic difference. (The other questions are just subsets of this with greater initial capital amounts.)

There is no tax on the gains in the ROTH so all you need to do is calculate the annualized tax loss for the asset in taxable:

Tax loss = (rate of return) * (tax rate)

For bonds it is simple because the tax rate is just your marginal rate now.


This much I understand and have setup correctly.

For equities the tax rate is less than the capital gains rate because of the tax deferral. The effective rate depends on the statutory LTCG rate, the length of the investment and the annual rate of return. For example a "pure" (no dividends) equity investment with an 8% ROR held for 20 years has an effective tax rate of 8.4% if held for 20 years. (LTCG statutory tax rate of 15%.)


Yes, this is a valid point, although I don't understand the math behind why it works out that way.


The effective tax rate can be determined easily using a coupon bond / zero coupon analogy.

The calculation can be done with the calculator that comes with Windows in scientific mode, with any number of bond calculators available on line or even (gasp) with Excel. Don't use these numbers for a future value calculation because that reintroduces the asset allocation problem. Just compare the annualized tax loss for A with that of B and say which goes where first.

viewtopic.php?p=527230#p527230

Interesting under current market conditions a TBM market index fund is more tax efficient than an S&P 500 fund under reasonable assumptions for ROR and length of investment for taxpayers in the 25% tax bracket.


I'm spent. I've wasted another morning on this and I still don't entirely get what you're saying. I'll have to do my homework and learn more about it in order to understand your point or setup a calculation. I'll gladly dump the excel spreadsheet though as it hasn't done much good in helping me wade through the inconclusive advice I've been given over this issue. In the meantime, while you've been very helpful in making me aware of the variables and how to calculate them, do you have any opinion on the issue itself? Would you favor bonds first or stocks first, or does it just not matter very much? Or might it be wise to start with a stock-first strategy and shift out of it later when bonds bounce back?
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Mon Mar 25, 2013 3:07 pm

bobsmith wrote:I agree with most of what you've said, although I think your first layout of personal IRA before 401k is critical rather than the other way around.

Only if you use deductible contributions to traditional IRA. If you are using Roth IRA instead, you don't get the deferral on taxes. Giving up that tax deferral in the 25% bracket is a mistake in my opinion.


I agree a 403b is more restrictive which is why you're better off, IMO, funding a personal IRA first.

Again, only if you get the tax deferral. If you use Roth IRA, you lose that.


But I don't see how that equates with the choice being made for you.

Obviously, the choice is not always "made for you", but general tendencies do apply. Usually, the best choice in a 401k/403b is a large cap stock fund and some kind of fixed income investment (bond fund or stable value fund). Rarely is an international fund the best choice. That pretty much forces the international stock fund into the IRA/Roth IRA.


But it IS the question I'm trying to answer here on this thread that I started and under the conditions I set up.

I agree. That's why I said yesterday that I think you are asking the wrong question. :D

You are looking for the best funds and fund placement between Roth IRA and taxable. I think you first should be looking for the best funds in your tax-deferred accounts (403b and/or tIRA). Then look at the other. It appears to me that you are leaving tax-deferral out of the picture when that is one of the most important elements you should include.

I know this is not what you want to hear, so I'll just leave it at that and wish you good luck! :beer


Edited to blue because I don't think the others who are trying to help you with this realize that you are probably skipping your opportunities for tax-deferral and I wanted them to see it.
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby Quinn » Mon Mar 25, 2013 3:37 pm

http://www.bogleheads.org/wiki/Tax-Adju ... Allocation

Haven't read over the whole thread, but using the above as a resource helps clarify a lot of this placement issue. With a constant tax-adjusted asset allocation across your portfolio, you should find that your optimal placement is one that creates the least tax drag.
Quinn
 
Posts: 25
Joined: Thu Mar 01, 2012 1:11 am

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 4:10 pm

retiredjg wrote:
bobsmith wrote:I agree with most of what you've said, although I think your first layout of personal IRA before 401k is critical rather than the other way around.

Only if you use deductible contributions to traditional IRA. If you are using Roth IRA instead, you don't get the deferral on taxes. Giving up that tax deferral in the 25% bracket is a mistake in my opinion.

I agree a 403b is more restrictive which is why you're better off, IMO, funding a personal IRA first.

Again, only if you get the tax deferral. If you use Roth IRA, you lose that.


I understand that if you believe you will later be in a lower marginal bracket there are advantages to putting money into a Tira instead of a Roth. However, if you are young and are putting away tons of money into a Tira each year, you might find you won't live long enough to get it all out without putting yourself in a higher tax bracket along the way. Also, historically, we are living in a time of low income taxes and with estate taxes being gutted and many fiscal problems left unaddressed, I don't think it's folly to suggest that income taxes might well be higher for everyone a few decades from now. This also relates to the issue of a Roth. Pay now and gains are tax free for your lifetime and the lifetime of your descendents as well. Or you could argue that you should convert your roth later instead of sooner which also depends on income bracket and has its own pros and cons.

Also, Roth 403b/401ks are available in many plans and, as you point out, personal contributions to IRA can be in pre-tax form. Someone could just as easily have a Roth 403b and a personal IRA that was pre-tax.

But I don't see how that equates with the choice being made for you.

Obviously, the choice is not always "made for you", but general tendencies do apply. Usually, the best choice in a 401k/403b is a large cap stock fund and some kind of fixed income investment (bond fund or stable value fund). Rarely is an international fund the best choice. That pretty much forces the international stock fund into the IRA/Roth IRA.[/quote]

Okay, if you're saying that the quality or types of funds is limited inside 401k plans and that's why you have to look there first, in order to avoid poor quality funds or funds that just aren't available, I get your point. Sorry it too me so long to get it.

It appears to me that you are leaving tax-deferral out of the picture when that is one of the most important elements you should include.


Maybe you're right. I do have a hard time understanding why it's good to have all your money wrapped up in Tiras during your retirement years. After some point, I fail to see the advantage and maybe that's something I need to research more. Roths, however, with their tax free growth and tax free withdrawls seem like a no-brainer.

I know this is not what you want to hear, so I'll just leave it at that and wish you good luck! :beer


Well, I'm not so sure you're hearing me either, but here you are taking time out of your day to give me some good and well-intended advice, and as argumentative as I may seem, I want you to know I appreciate and respect that. :happy
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 4:11 pm

deleted because I posted it more than once.
Last edited by bobsmith on Mon Mar 25, 2013 5:01 pm, edited 1 time in total.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 4:14 pm

deleted because I posted it more than once.
Last edited by bobsmith on Mon Mar 25, 2013 5:03 pm, edited 1 time in total.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby Doc » Mon Mar 25, 2013 4:40 pm

There are some "wrong" words being used in this thread. I'm not paying enough attention to know if the resulting ideas are also "wrong".

"Tax deferral" is a common term often interpreted improperly when referring to a traditional IRA (tIRA). The tax that is "deferred" is only the initial tax that you didn't pay when you made the contribution. When you start withdrawing the money you have to pay that original tax plus interest at at a rate equal to the rate earned on the IRA itself. Your part of the contribution, the after tax portion, plus all the earning on your share are tax free just like a ROTH.

So if the tax rate doesn't change between the time of your contribution and withdrawal there is no difference in your tIRA and a ROTH for equal pre-tax contributions. The ROTH does however have a higher contribution limit on a pre-tax basis because they good folks in Washington decided to make the same dollar limit but didn't spell out that limit was pre-tax or after tax clearly. The same goes for your 401k. Same tax consequences and again often higher contribution limits.

"Tax deferral" should be reserved for LTCG where you really do defer the tax on the entire annual growth until you sell.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4756
Joined: Sat Feb 24, 2007 2:10 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 5:17 pm

Doc wrote:There are some "wrong" words being used in this thread. I'm not paying enough attention to know if the resulting ideas are also "wrong".

"Tax deferral" is a common term often interpreted improperly when referring to a traditional IRA (tIRA). The tax that is "deferred" is only the initial tax that you didn't pay when you made the contribution. When you start withdrawing the money you have to pay that original tax plus interest at at a rate equal to the rate earned on the IRA itself. Your part of the contribution, the after tax portion, plus all the earning on your share are tax free just like a ROTH..


So it's not as simple as saying you pay income tax on whatever you take out according the marginal bracket of the year in which you make the withdrawl? Say I invest $10,000 in an tIRA then when I retire the account is worth $100,000. Then, in a year when my marginal tax bracket is 25%, I take out $1000. Do I owe tax or interest? What would I actually end up paying to Uncle Sam?
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Mon Mar 25, 2013 5:37 pm

bobsmith wrote:I understand that if you believe you will later be in a lower marginal bracket there are advantages to putting money into a Tira instead of a Roth.

Correct. But you may not realize that it is a wash if you take it out at 25% as opposed to putting it in at 25%. You'll have the same amount of money in the end no matter which road you take (traditional or Roth) if your marginal tax bracket is the same. In other words, the whole concept of Rothness being better because it grows tax free is technically accurate, but completely hogwash because it does not mean what people think it means. There is no magic in Roth.

Also, if you put the money into traditional, even if you end up in the same tax bracket in retirement, there is the possibility that some will be coming out of the IRA at less than 25% because it is flowing into the lower tax brackets. The exception is if you have a pension, in which case the pension is probably filling the lower tax brackets.

So looking at these 2 things, and realizing that people often retire in a lower bracket anyway, you can see there is a very good possibility that you will either have more money in the end or at least the same amount of money in the end if you use traditional 403b/IRA now as opposed to Roth 403b/IRA. This will likely be true, not completely but at least to a certain extent, even if rates go up some.

This is why I'm suggesting that using your tax deferred 403b is a good thing. Also, getting some money into Roth status is a good thing - I'm not saying that everything should go into the 403b. The ideal, if you could do it, would be to fill a traditional 403b and a Roth IRA. That gives many people maximum deferral of taxes along with also getting some money into Roth status. Tax-diversification.


However, if you are young and are putting away tons of money into a Tira each year, you might find you won't live long enough to get it all out without putting yourself in a higher tax bracket along the way.

If you consistently fill a traditional 403b and never put anything into Roth 403b or Roth IRA, and if you work up until you have to take RMDS...I suppose that could happen. But there is no reason to try to get it all out. Just take out what you need or what is required when you reach RMD age. This will not necessarily push you into a higher bracket.


Also, Roth 403b/401ks are available in many plans and, as you point out, personal contributions to IRA can be in pre-tax form. Someone could just as easily have a Roth 403b and a personal IRA that was pre-tax.

Some people could. But the eligibility to deduct contributions to tIRA disappears at a lower modified adjusted gross income than the eligibility to contribute to Roth IRA. So it could happen, but is less likely to happen.


Okay, if you're saying that the quality or types of funds is limited inside 401k plans and that's why you have to look there first, in order to avoid poor quality funds or funds that just aren't available, I get your point.

Yes, that is what I was saying.


Maybe you're right. I do have a hard time understanding why it's good to have all your money wrapped up in Tiras during your retirement years. After some point, I fail to see the advantage and maybe that's something I need to research more. Roths, however, with their tax free growth and tax free withdrawls seem like a no-brainer.

I would not suggest having all your money in traditional. But I would suggest trying to have more than half in traditional. Then when you retire, you start converting traditional money to Roth at (hopefully) something less than 25%.
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Mon Mar 25, 2013 5:45 pm

Doc wrote:There are some "wrong" words being used in this thread. I'm not paying enough attention to know if the resulting ideas are also "wrong".

"Tax deferral" is a common term often interpreted improperly when referring to a traditional IRA (tIRA).

I think this might be directed to me, so I'll answer.

I believe that bobsmith is asking his Roth vs taxable question because he does not want to use his 403b plan. So my references to "tax deferral" meant using the available tax-deferred space in the 403b.

As far as I know that is the correct terminology, but if not, please educate me so I can say it right next time. :happy
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby Doc » Mon Mar 25, 2013 7:36 pm

bobsmith wrote:
Doc wrote: ... words ...quote]

So it's not as simple as saying you pay income tax on whatever you take out according the marginal bracket of the year in which you make the withdrawal? Say I invest $10,000 in an tIRA then when I retire the account is worth $100,000. Then, in a year when my marginal tax bracket is 25%, I take out $1000. Do I owe tax or interest? What would I actually end up paying to Uncle Sam?


Tax or interest? What it is called is not important you have to pay the same amount of dollars whatever you choose to call it.

When you made that original investment of $10,000, $2500 was accrued taxes that you owed the IRS but were allowed to defer. Later when the account had grown by 10 times you had your original "net" or after tax investment of $7500 times 10 or $75,000 plus the Guv's $2500 which also grew by 10 time to $25,000. At that point the Guv said please give me my money that I allowed you to defer with everything that I, the Guv, earned on it because of your excellent management.

If you used a ROTH instead you still wind up with $75,000. Whether or not Guv was able to increase it's original $2500 by a factor of ten is left to the imagination of the tax payer. :P

The only benefit of a ROTH over a tIRA or visa versa is if the tax rate changes (assuming the same pretax investment). As a very general statement a young worker in a low bracket will benefit from a ROTH and a worker in the prime of his career with a high tax bracket will benefit from the tIRA simply because because of likely changes in his marginal tax rate between the time of his contribution and the withdrawal in retirement.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4756
Joined: Sat Feb 24, 2007 2:10 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 8:37 pm

retiredjg wrote:
bobsmith wrote:I understand that if you believe you will later be in a lower marginal bracket there are advantages to putting money into a Tira instead of a Roth.

Correct. But you may not realize that it is a wash if you take it out at 25% as opposed to putting it in at 25%. You'll have the same amount of money in the end no matter which road you take (traditional or Roth) if your marginal tax bracket is the same. In other words, the whole concept of Rothness being better because it grows tax free is technically accurate, but completely hogwash because it does not mean what people think it means. There is no magic in Roth.

Also, if you put the money into traditional, even if you end up in the same tax bracket in retirement, there is the possibility that some will be coming out of the IRA at less than 25% because it is flowing into the lower tax brackets. The exception is if you have a pension, in which case the pension is probably filling the lower tax brackets.

So looking at these 2 things, and realizing that people often retire in a lower bracket anyway, you can see there is a very good possibility that you will either have more money in the end or at least the same amount of money in the end if you use traditional 403b/IRA now as opposed to Roth 403b/IRA. This will likely be true, not completely but at least to a certain extent, even if rates go up some.

This is why I'm suggesting that using your tax deferred 403b is a good thing. Also, getting some money into Roth status is a good thing - I'm not saying that everything should go into the 403b. The ideal, if you could do it, would be to fill a traditional 403b and a Roth IRA. That gives many people maximum deferral of taxes along with also getting some money into Roth status. Tax-diversification.


However, if you are young and are putting away tons of money into a Tira each year, you might find you won't live long enough to get it all out without putting yourself in a higher tax bracket along the way.

If you consistently fill a traditional 403b and never put anything into Roth 403b or Roth IRA, and if you work up until you have to take RMDS...I suppose that could happen. But there is no reason to try to get it all out. Just take out what you need or what is required when you reach RMD age. This will not necessarily push you into a higher bracket.


Also, Roth 403b/401ks are available in many plans and, as you point out, personal contributions to IRA can be in pre-tax form. Someone could just as easily have a Roth 403b and a personal IRA that was pre-tax.

Some people could. But the eligibility to deduct contributions to tIRA disappears at a lower modified adjusted gross income than the eligibility to contribute to Roth IRA. So it could happen, but is less likely to happen.


Okay, if you're saying that the quality or types of funds is limited inside 401k plans and that's why you have to look there first, in order to avoid poor quality funds or funds that just aren't available, I get your point.

Yes, that is what I was saying.


Maybe you're right. I do have a hard time understanding why it's good to have all your money wrapped up in Tiras during your retirement years. After some point, I fail to see the advantage and maybe that's something I need to research more. Roths, however, with their tax free growth and tax free withdrawls seem like a no-brainer.

I would not suggest having all your money in traditional. But I would suggest trying to have more than half in traditional. Then when you retire, you start converting traditional money to Roth at (hopefully) something less than 25%.


Okay, I do think I need to look into this more and I do still think this has nothing directly to do with what I was asking at the start of this thread and I do think that question may still be relevant. :P

HOWEVER, seeing as you seem to have generously and tenaciously dedicated yourself to trying to get this concept through my thick skull, I'm going to go back an reconsider whether or not it's best for me to max out the 403bs. The reason I haven't done so isn't because of fees but because I already had a lot in there and I was worried I would just end up with a ton of money in there at retirement, more than I would ever need to take out. I only recently learned I could make ROTH 403b contributions which has renewed my interest in the 403b plan. Anyway, let me do some homework on it then I'll come back and bother you with more questions.

I will say that I completely understand what you mean about taking the money out later when you have a lower tax bracket and I understand what you mean about it being a wash if you get in and out of it with the same tax bracket. You guessed right about me getting a pension and I'm thinking that if I know I'll be in a 25% bracket from here out, I might just want to go ahead and do the Roth 403b now. I'm still concerned about taxes being higher in the future. I suspect they will be. Let me research it more before I waste your time with obvious questions.

Thanks! :happy
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Mon Mar 25, 2013 8:46 pm

Doc wrote:
bobsmith wrote:
Doc wrote: ... words ...quote]

So it's not as simple as saying you pay income tax on whatever you take out according the marginal bracket of the year in which you make the withdrawal? Say I invest $10,000 in an tIRA then when I retire the account is worth $100,000. Then, in a year when my marginal tax bracket is 25%, I take out $1000. Do I owe tax or interest? What would I actually end up paying to Uncle Sam?


Tax or interest? What it is called is not important you have to pay the same amount of dollars whatever you choose to call it.

When you made that original investment of $10,000, $2500 was accrued taxes that you owed the IRS but were allowed to defer. Later when the account had grown by 10 times you had your original "net" or after tax investment of $7500 times 10 or $75,000 plus the Guv's $2500 which also grew by 10 time to $25,000. At that point the Guv said please give me my money that I allowed you to defer with everything that I, the Guv, earned on it because of your excellent management.

If you used a ROTH instead you still wind up with $75,000. Whether or not Guv was able to increase it's original $2500 by a factor of ten is left to the imagination of the tax payer. :P

The only benefit of a ROTH over a tIRA or visa versa is if the tax rate changes (assuming the same pretax investment). As a very general statement a young worker in a low bracket will benefit from a ROTH and a worker in the prime of his career with a high tax bracket will benefit from the tIRA simply because because of likely changes in his marginal tax rate between the time of his contribution and the withdrawal in retirement.


I actually understand everything you stated. Thank you. I only just learned about the math working out to be a wash a few weeks back here on bogleheads. Anyway, so in the example I laid out, I would end up paying $250 in tax on that $1000, right? Your comment about interest and tax threw me a bit. Essentially I'm just paying income tax on whatever comes out, right?
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Mon Mar 25, 2013 9:02 pm

bobsmith wrote:You guessed right about me getting a pension and I'm thinking that if I know I'll be in a 25% bracket from here out, I might just want to go ahead and do the Roth 403b now.

:oops: OMG...

This is almost funny. Your pension pretty much blows my whole point out of the water. I'm brain dead for now. Maybe tomorrow....
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby Doc » Tue Mar 26, 2013 9:42 am

bobsmith wrote:Essentially I'm just paying income tax on whatever comes out, right?


In "IRS speak" you are "just paying income tax on whatever comes out" because that makes for an easy calculation of the amount owed but makes a hash out of understanding what is going on.

In "Investor Speak" you are paying no tax on your share of the account and paying back the now current value of the accrued taxes that you deferred at the start.

IRS speak is concerned with how much you pay in taxes.

Investor speak is concerned with how much you have left after all those taxes have been paid.

The amount you have after tax is all that matters to an investor. How much you pay in taxes to get there is a political matter.

In this case the answer is the same but IRS speak confuses the issue and makes it more likely that you make an error when you are trying to apply the concept to broad questions like in your OP.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
User avatar
Doc
 
Posts: 4756
Joined: Sat Feb 24, 2007 2:10 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Tue Mar 26, 2013 9:59 am

retiredjg wrote:
bobsmith wrote:You guessed right about me getting a pension and I'm thinking that if I know I'll be in a 25% bracket from here out, I might just want to go ahead and do the Roth 403b now.

:oops: OMG...

This is almost funny. Your pension pretty much blows my whole point out of the water. I'm brain dead for now. Maybe tomorrow....


Well, what's more funny, is your stubborn insistence in making your point has caused me to re access my whole situation once again and that's a good thing that wouldn't have happened otherwise and I'm quite grateful. As a rule I don't like to reveal a lot about myself over the internet so I wasn't forthright on my information and background. I won't even do my banking or finances online because of a hacker scare we had years back. In fact I had Vanguard disable my online account. Paranoid? Yeah, probably a little. Anyway, I'm a new comer to the forum, and a stubborn one at that, and you were just trying to help prevent me from making basic investing mistakes without knowing my background. And oh yes, I've made many in the past including all the obvious ones. I don't enjoy learning about investing concepts and managing my own money and in terms of skills, I'm not naturally good at it. But I've been burned and mislead by just about everyone I've encountered in the financial sector from personal advisors to estate planners to insurance salesmen, so from here on out I'm deeply involved. I've got the core concepts down, but I've learned some valuable nuances here thanks to people like you.

But, if I haven't scared you off, let me lay out my whole situation as impersonally as possible in the hope of getting some advice. I'd start a new post but between Doc and you and the 1500+ views this thread has gotten, I imagine I'll get some good information.

I'm married. I file jointly and are our incomes will stay in the 90-110 range meaning we won't go up or down from the 25% bracket. (72-146) I'm in my early 40s. My wife is 22 and models for a living.... Okay okay, she's not a model and she's in her early 40s just like me. When the pension comes in, I'm guessing it will put us at about 60K, which would put us 12k short of the current 25% bracket and there's a fair chance we'll still work some low-stress low-pay jobs, maybe part time. About 10 years ago we got a chunk of money from an inheritance on my wife's side. I'm a saver. I grew up lower middle class, even poor you might say, but I didn't know it. Materialistically, I don't need much to be comfortable and my lifestyle hasn't changed much despite the inheritance. All this points to us being in the 25% from now on including after we retire.

The monkey wrench is that if there's a chance we can retire early and get the better part of the pension we might do that which might mean a few years of low tax bracket in between quitting our jobs and the pension starting. Maybe a 5 year gap? I don't know for sure. But after that it's pension. I just now thought about Social Security. I don't know if/how that's taxed.

So, right now combined we have about 75K in a pre-tax 403b plan. We also have about 140k in personal Roths. Between the two of us we only have access to one 403b plan, so that's $17,500 we could shelter on top of the $11,000 we can do for personal IRAs (Roths have been the preference). Access to a second 401K isn't an option, and there's no matching in the current 403b. I'm currently trying to get the 403b plan to add a some no-load vendors, but it's a fight. Bottom line is, no matter what I'll still have access to either a Roth 403b or a traditional pre-tax 403b. (I can get vanguard in either case but I'll have to pay one of the current vendors a middle man fee of something like 0.5%.)

So here's the thing. I don't and won't have a high enough income to max out the 403b we have access to, but because of the inheritance I have enough money in savings to effectively funnel money through work into the 403b and max it out. At $17,500 I could do this for at least several years. By "savings" I mean money invested in taxable accounts. I could live off of that to supplement my income while my actual income is going into the 403b plan.

However, of the amount I have in the taxable account, 95% of it is domestic or foreign stock and only 5% is bonds. As you'd expect there's no significant unrealized capital loss or gain on the bonds. However, of the stocks, about 30% of their value is in unrealized gain. I have been totally ignorant of the practice of loss harvesting until recently so I've done nothing to manage the gain. The only cost basis method I've ever used is "average basis" and I've only ever owned mutual funds. Not counting the bond fund, I have 4 funds in the taxable account:

Van 500 IN:
percentage of my taxable stock holdings: 45%
percentage that's unrealized LT gain: 31%

Van Xtended Market IN:
percentage of my taxable stock holdings: 33%
percentage that's unrealized LT gain: 47%

Van Total Stk Market IN:
percentage of my taxable stock holdings: 2%
percentage that's unrealized gain: 9% (this one is actually all short term gain)

Van Total International Market IN:
percentage of my taxable stock holdings: 20%
percentage that's unrealized LT gain: 22%

So basically I can afford to "funnel" money out of my savings and into my 403b, but if I do this I will generate capital gain on the stocks I will need to sell. In the past I've funded our personal IRAs (roth) mostly with money out of pocket.

QUESTIONS
#1. Knowing I'll essentially be in a 25% bracket the rest of my life and knowing I can indirectly afford to max out my 403b for several years, should I invest in a Roth 403b or a pre-tax 403b or a mix of both?

#2. Even though I can do it, should I? Is it worth realizing those capital losses in order to do it? (Also, is there any way I can change my cost-basis method to my advantage?)

Okay, my cards are on the table. Advice is greatly appreciated.
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Tue Mar 26, 2013 10:36 am

So I guess we should assume your name is not really bobsmith.... :D

Do you have a final decision on what goes into Roth IRA? Or alternatively, whether you would rather hold taxable bonds in the 403b/Roth (conventional view here on BH) or muni bonds in taxable? This may be somewhat moot since you already have your taxable account pretty much full of stocks.
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby bobsmith » Tue Mar 26, 2013 11:03 am

retiredjg wrote:So I guess we should assume your name is not really bobsmith.... :D

Do you have a final decision on what goes into Roth IRA? Or alternatively, whether you would rather hold taxable bonds in the 403b/Roth (conventional view here on BH) or muni bonds in taxable? This may be somewhat moot since you already have your taxable account pretty much full of stocks.


Oh, NOW you want to talk about what should first go in the Roth account!? :D

Well, I'm due for a reallocation anyway and I may even go a little heavier into stocks because of the expected weak returns in the bond market. Then there's the 403b funding question, and of course I can reallocate within the confines of the retirement plans, etc... so there's still reason to make that determination. But overall, I think I find myself generally agreeing with a satisficer who recently told me this question is "so far down the decision tree as to have little importance in the long run". ;)

sincerely,
Mr. Smith
bobsmith
 
Posts: 137
Joined: Thu Jan 24, 2013 5:02 pm

Re: What goes in Roth First? Revisited

Postby Bob's not my name » Tue Mar 26, 2013 11:39 am

retiredjg wrote:So I guess we should assume your name is not really bob
This is getting pretty close to home.
Bob's not my name
 
Posts: 6810
Joined: Sun Nov 15, 2009 10:24 am

Re: What goes in Roth First? Revisited

Postby retiredjg » Tue Mar 26, 2013 12:09 pm

Bob's not my name wrote:
retiredjg wrote:So I guess we should assume your name is not really bob
This is getting pretty close to home.

Oh my. Thank you for my laugh for today!
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Re: What goes in Roth First? Revisited

Postby retiredjg » Tue Mar 26, 2013 12:24 pm

bobsmith wrote:Oh, NOW you want to talk about what should first go in the Roth account!? :D

Actually, I'm not particularly concerned, but since you might have a preference, I thought that should be worked into a plan.


Well, I'm due for a reallocation anyway and I may even go a little heavier into stocks because of the expected weak returns in the bond market.

No! No! No! Well, ok, if only a little. But really, your risk level (which is determined by your stock to bond ratio) should not change just because one asset class is not paying much. You might chose other fixed income assets though. Such as CDs or I bonds. Many people here have gone that route.


But overall, I think I find myself generally agreeing with a satisficer who recently told me this question is "so far down the decision tree as to have little importance in the long run". ;)

I still think that, but it does become more important if you are not going go use the 403b. And what's this about plans ?

I know you don't like revealing a lot publically, but it would help to know about how much a year could be saved from both salaries (assuming there is nothing taken from taxable). PM the info to me if you prefer.

I don't enjoy learning about investing concepts and managing my own money....

You fooled me.

...and in terms of skills, I'm not naturally good at it.

I would disagree with this evaluation.
retiredjg
 
Posts: 17133
Joined: Thu Jan 10, 2008 1:56 pm

Next

Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Alistair, aorin, Baidu [Spider], BL, Chan_va, chasiu209, cmr86, Crimsontide, csimpson, Faith20879, Jazz56, kellyfj, Longtimelurker, marklearnsbogle, pmoney87, Ruffler, Stan Dup, Zabar and 108 guests