What asset classes to put in a Roth?

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What asset classes to put in a Roth?

Postby Kelly » Fri Mar 08, 2013 7:50 am

Folks,

What asset class do you hold in your Roth acct and why?

On the one hand I want to grow my roth as large as possible (no RMDs, tax free distributions) so I hold those assets with the highest risk/return profiles (small cap value, mico caps,etc).

Another school of thought is that the gov't effectively shares in this risk if those assets are held in a taxable account. In other words, if there is a loss I can offset gains with that loss for tax purposes. Some scholars argue that the std dev of assets held in a taxable account can be viewed as std dev x (1-marginal tax rate).

My problem with the risk sharing school is that the risk will not be shared if you are a buy hold index investor. A day trader would be sharing the risk. If you area a buy and hold type then the hold the riskier assets in the Roth.

I've not seen any research in this area.

Any thoughts?

Kelly
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Re: What asset classes to put in a Roth?

Postby Cernel » Fri Mar 08, 2013 8:03 am

Since my Roth Accounts, account for only 12% of my total portfolio, I have included only equities (TSM and SCV) in them. I also have holdings in TSM and SCV in both my IRAs and non-retirement account, so in essence I have spread the risk across my entire portfolio.
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Re: What asset classes to put in a Roth?

Postby Boglenaut » Fri Mar 08, 2013 8:24 am

In theory, one should maintain the same AA in Roth as in Traditional, or try a best guess estimate to correct for future tax impacts.. In actuality, I tend to put more US equities (especially REIT and small cap) in Roth and more bonds in Traditional. I don't bother correcting for tax implications because it's too complicated with too many unknowns.
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Re: What asset classes to put in a Roth?

Postby Kelly » Fri Mar 08, 2013 8:44 am

Boglenaut wrote:In theory, one should maintain the same AA in Roth as in Traditional, or try a best guess estimate to correct for future tax impacts.. In actuality, I tend to put more US equities (especially REIT and small cap) in Roth and more bonds in Traditional. I don't bother correcting for tax implications because it's too complicated with too many unknowns.


What theory are you referring to? (I'm not questioning you, just interested)
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Re: What asset classes to put in a Roth?

Postby rkhusky » Fri Mar 08, 2013 8:54 am

I put things in my Roth that I don't have in my 401K, like emerging markets and small international.
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Re: What asset classes to put in a Roth?

Postby linenfort » Fri Mar 08, 2013 11:44 am

In my Roth, I put

✇ Corporate bond funds, like Vanguard's VCIT (The "I" is for intermediate-term). I would not want to own this in taxable because of the distributions.

✇ a REIT index fund. Same reason as above.

Some gold, so that if I ever want to sell some, I can do so in a tax-deferred account.

My Roth IRA is still small, though, so it doesn't seem like such a big deal yet. I'm opening an individual Roth 401(k) for next year, and then maybe the dividends and distributions will seem big enough to matter.
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Re: What asset classes to put in a Roth?

Postby jon-nyc » Fri Mar 08, 2013 2:18 pm

I have some EM in my wife's ancient Roth, but its less than 0.3% of our assets so it doesn't much matter.
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Re: What asset classes to put in a Roth?

Postby Kelly » Fri Mar 08, 2013 2:35 pm

Let me frame this another way. Is there validity to the argument that the gov't shares in the risk of assets held in a taxable accounts if those assets are index funds held for the long haul?? I'm not seeing it.
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Re: What asset classes to put in a Roth?

Postby feh » Fri Mar 08, 2013 3:40 pm

Our Roths are only about 9% of our portfolio. They hold US and Intl small caps.
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Re: What asset classes to put in a Roth?

Postby rkhusky » Fri Mar 08, 2013 4:13 pm

Kelly wrote:Let me frame this another way. Is there validity to the argument that the gov't shares in the risk of assets held in a taxable accounts if those assets are index funds held for the long haul?? I'm not seeing it.


I don't know about sharing in the risk, but if one uses tax avoidance strategies effectively, the government gets less money.
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Re: What asset classes to put in a Roth?

Postby Gleevec » Fri Mar 08, 2013 5:54 pm

I put REITs and bond funds (non munis) in a Roth due to tax implications.

Excellent overview of tax managed asset allocation from bogleheads wiki here:
http://www.bogleheads.org/wiki/Principl ... _Placement
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Re: What asset classes to put in a Roth?

Postby Doc » Fri Mar 08, 2013 6:53 pm

rkhusky wrote: I don't know about sharing in the risk, but if one uses tax avoidance strategies effectively, the government gets less money.


Wrong metric. One shouldn't give a hoot how much money the government gets. The only thing that counts is how much you have left after the government gets paid. The name of the game is to maximize after tax returns not minimize taxes. The easiest way to minimize taxes is bet on number 18 on the roulette wheel and keep letting it ride until you have no money left. :D
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Re: What asset classes to put in a Roth?

Postby linenfort » Fri Mar 08, 2013 7:02 pm

Doc, I thought minimizing taxes was a part of maximizing returns. At least, not mutually exclusive. :confused
Or do you just have a problem with the way rhusky phrased the same point as yours?
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Re: What asset classes to put in a Roth?

Postby fidelio » Sat Mar 09, 2013 3:16 am

i can see that there is no consensus here -- for asset class, some say bonds, reits, others have microcaps in their roths; and, it seems taxes, while always relevant, should not be the driving force in roth choices. i guess anything goes ,,,,,
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Re: What asset classes to put in a Roth?

Postby jidina80 » Sat Mar 09, 2013 6:15 am

To maximize after-tax returns, the asset class that is expected to have the highest returns usually belongs in the Roth IRA. The Roth IRA does not have government as a co-owner taking future taxes, unlike one's Traditional IRA or taxable accounts, so it makes sense to grow the Roth fastest and let the government take it's taxes from the slower-growing accounts. If the past is a guide, STOCKS will probably return more than bonds in the long term, so I place low-cost diversified stock funds in my Roth.
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Re: What asset classes to put in a Roth?

Postby trasmuss » Sat Mar 09, 2013 6:52 am

There is an extra benefit to holding stocks in a non deferred account if you are in the 15% or lower bracket. Currently dividends are tax free.

I hold only equities in our Roths to hopefully maximize long term returns. I hold all our bonds in our tax deferred IRA's/401k's (as well as equities). I hold additional equity index funds in our taxable accounts to get the free dividends. In 2008 I was also able to shift my taxable index fund to a similar taxable index fund to tax harvest allowing me to take a $3,000 tax deduction for many years to come.

Having all our bonds in our IRA's/401k's may have the additional benefit over the long run of minimizing gains in those accounts and reducing required minimum distributions.

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Re: What asset classes to put in a Roth?

Postby Johm221122 » Sat Mar 09, 2013 9:49 am

fidelio wrote:i can see that there is no consensus here -- for asset class, some say bonds, reits, others have microcaps in their roths; and, it seems taxes, while always relevant, should not be the driving force in roth choices. i guess anything goes ,,,,,

I would decide what goes in 401 first (because you have limited choices)
Taxable next (need to be tax efficient)
Then use Roth for what you need to fill your AA
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Re: What asset classes to put in a Roth?

Postby magellan » Sat Mar 09, 2013 10:22 am

Asset location is one area where I allowed myself to do some market timing after the crash in 2008-2009. I moved our REIT holdings from a traditional IRA to a Roth in early 2009 (keeping our overall AA on target of course). Each $10,000 invested has grown to over $30k since and because it's in a Roth, it's all tax free. I definitely was lucky, but the move was grounded in sound logic. In general, REITs are a good asset class for a Roth because they throw off lots of non qualified dividend income and they have a high expected return. Given their recent performance though, I can't imagine we'll see another big growth spurt anytime soon.

(Edit: I deleted the rest of this post since it's inaccurate in light of what I learned in the posts below.)

Jim
Last edited by magellan on Sun Mar 10, 2013 7:11 am, edited 1 time in total.
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Re: What asset classes to put in a Roth?

Postby Doc » Sat Mar 09, 2013 10:38 am

linenfort wrote:Doc, I thought minimizing taxes was a part of maximizing returns. At least, not mutually exclusive. :confused
Or do you just have a problem with the way rhusky phrased the same point as yours?


Sometimes minimizing taxes will also maximize returns but not always. Trivial example: Would you rather have an investment that returned $10200 with $1000 in tax due or one that returned $10000 with only $900 of taxes due? If the risk is the same I go for the higher taxes paid. Another real example might be to compare tax exempt bonds with taxable bonds in the lower tax brackets. In that case lower taxes also means lower after tax returns.

As a non-trivial example take the subsequent post:

jidina80 wrote:The Roth IRA does not have government as a co-owner taking future taxes, unlike one's Traditional IRA or taxable accounts, so it makes sense to grow the Roth fastest and let the government take it's taxes from the slower-growing accounts.


jidini is concentrated on taxes paid but if you instead look at the correct metric of after tax return both the tIRA and the ROTH are equivalent so he arrives at an erroneous conclusion.

There are some cases where the calculation becomes easier if you minimize taxes but you have to make sure that the particular case also maximizes the after tax return.
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Re: What asset classes to put in a Roth?

Postby jidina80 » Sat Mar 09, 2013 10:53 am

Doc wrote:
jidina80 wrote:The Roth IRA does not have government as a co-owner taking future taxes, unlike one's Traditional IRA or taxable accounts, so it makes sense to grow the Roth fastest and let the government take it's taxes from the slower-growing accounts.

jidini is concentrated on taxes paid but if you instead look at the correct metric of after tax return both the tIRA and the ROTH are equivalent so he arrives at an erroneous conclusion.

Not true, if one already has a Roth and Traditional IRA. Remember, to optimize decision-making, we always make decisions from where we are today and looking forward - Not the past. What you paid to get the Roth last year should not influence today's decisions. If you already have it, the question is 'what goes where'.

You can test it yourself with a simple spreadsheet example:
* Investor "A" has $1000 Traditional IRA earning 3% annual total return and a $700 Roth IRA earning 7% annual total return.
* Investor "B" has $1000 Traditional IRA earning 7% annual total return and a $700 Roth IRA earning 3% annual total return.
When cashing out after, say, 20 years, investor "A" will have more after-tax money.
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Re: What asset classes to put in a Roth?

Postby Doc » Sat Mar 09, 2013 11:10 am

jidina80 wrote:
Doc wrote:
jidina80 wrote:The Roth IRA does not have government as a co-owner taking future taxes, unlike one's Traditional IRA or taxable accounts, so it makes sense to grow the Roth fastest and let the government take it's taxes from the slower-growing accounts.

jidini is concentrated on taxes paid but if you instead look at the correct metric of after tax return both the tIRA and the ROTH are equivalent so he arrives at an erroneous conclusion.

Not true, if one already has a Roth and Traditional IRA. Remember, to optimize decision-making, we always make decisions from where we are today and looking forward - Not the past. What you paid to get the Roth last year should not influence today's decisions. If you already have it, the question is 'what goes where'.

You can test it yourself with a simple spreadsheet example:
* Investor "A" has $1000 Traditional IRA earning 3% annual total return and a $1000 Roth IRA earning 7% annual total return.
* Investor "B" has $1000 Traditional IRA earning 7% annual total return and a $1000 Roth IRA earning 3% annual total return.
When cashing out after, say, 20 years, investor "A" will be paying far less in taxes.


Your example is comparing two investments with different pre-tax returns with no rebalancing and also assumes that $1000 of pretax money is exactly the same as $1000 of after tax money which is not correct. You are seeing the effect of different risk levels which overshadows any tax effects that may or may not be present.

There are many threads on this board that compare a ROTH and a tIRA. In the absence of changes in the tax rate and some inheritance issues which are really changes in the tax rate both types of accounts return the same after tax amount if both are funded with the same pretax amount. I.E a $1000 balance in a tIRA is equal to only $750 in a ROTH in the 25% tax bracket. In a few cases the RMD's from the tIRA can increase your tax bracket which marginally makes the the high return assets in the ROTH preferred.
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Re: What asset classes to put in a Roth?

Postby magellan » Sat Mar 09, 2013 11:26 am

Doc wrote:Your example is comparing two investments with different pre-tax returns...

As I read it, jidina80's original post asserted that with all else equal, it makes sense to put the higher expected return asset class in a Roth and the lower expected return asset class in a tIRA. That seems irrefutable to me. Are we missing something?

Jim
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Re: What asset classes to put in a Roth?

Postby Doc » Sat Mar 09, 2013 11:35 am

magellan wrote:
Doc wrote:Your example is comparing two investments with different pre-tax returns...

As I read it, jidina80's original post asserted that with all else equal, it makes sense to put the higher expected return asset class in a Roth and the lower expected return asset class in a tIRA. That seems irrefutable to me. Are we missing something?

Jim


If all other things like tax rates are equal it doen't matter. You may pay more in taxes with the higher asset in the tIRA but the after tax return is the same. Minimizng taxes is the wrong way to look at the question. The important thing is after tax returns. The easiest way to minimize taxes is to put all your mony on #17 at the roulette table and let your winnings ride (aka reinvest dividends) until you run out of money. Taxes are zero. Great have a nice retirement.
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Re: What asset classes to put in a Roth?

Postby magellan » Sat Mar 09, 2013 3:59 pm

Doc wrote:If all other things like tax rates are equal it doen't matter. You may pay more in taxes with the higher asset in the tIRA but the after tax return is the same. Minimizng taxes is the wrong way to look at the question. The important thing is after tax returns.

I think maybe we're talking past each other on this. We're contemplating this as solely an asset location question, with the assumption that the overall asset allocation is fixed and the amount of 'space' in the tIRA and Roth is also fixed. There's no extra risk-taking happening and we're not trying to decide whether a Roth is better than a tIRA.

As I understand the problem under these assumptions, after tax returns will be much higher in Jidina80's example if you put the 7% asset in the Roth and the 3% asset in the tIRA, compared to the other way around. Do you think that's not true?


Jim

EDIT - OK - thanks to the posts below, now I see Doc's point and where I went wrong. The thing I missed was that $1000 of an asset class held in a tIRA is only worth $1000 x (1-tax rate) after taxes are paid. So in terms of asset allocation, say at a 30% tax rate, you're really only holding $700 of the asset class in the tIRA after taxes are considered. By swapping out $1000 of an asset class from the tIRA to the Roth, you increase your allocation to the high return asset class, and thus you increase the riskiness of the portfolio. This is because the same amount of the same asset held in the Roth is actually worth a lot more after tax than when it's held in the tIRA.
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Re: What asset classes to put in a Roth?

Postby livesoft » Sat Mar 09, 2013 4:28 pm

Our Roths hold
DGS emerging small cap
VNQ US REIT
VCSH corporate short-term bond

I consider our small Roth IRAs to be precious future tax-free space. Sure, I want to have them grow huge and tax-free, but I also don't want to lose lots of money so I have to start over. The amounts that one can contribute each year while working are $5K to $6K, so if the Roth tanks, one cannot top it up by moving a chunk of money from elsewhere (OK, one can "convert" some tIRA to Roth IRA, but the taxes deter that conversion until the future.)

So if one puts something like emerging markets small cap (DGS) or REIT index (VNQ) into their Roth, they would not be making any money unless they did a great job with market timing and buying in a relatively narrow window of 12 months between August 2008 and August 2009. That is, those things with highest expected return are also those things with highest expected losses.

Thus I believe one should also have some low risk assets in their Roth so that they can try to capture a rebalancing bonus or even do some market timing between their Roth IRA and their traditional IRA or rollover IRA or 401(k). That's what magellan described previously in this thread.

So when you believe the market is getting bubbly, one can exchange DGS and VNQ for VCSH in the Roth and in the traditonal one can go the other way: VCSH for DGS & VNQ. One keeps the same asset allocation, but with a slightly different asset location.
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.
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Re: What asset classes to put in a Roth?

Postby livesoft » Sat Mar 09, 2013 4:29 pm

fidelio wrote:i can see that there is no consensus here -- for asset class, some say bonds, reits, others have microcaps in their roths; and, it seems taxes, while always relevant, should not be the driving force in roth choices. i guess anything goes ,,,,,

This may be more about what folks have in other accounts than anything to do with a specific Roth strategy.
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.
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Re: What asset classes to put in a Roth?

Postby Toons » Sat Mar 09, 2013 4:31 pm

Lifestrategy Growth and Wellesley in Roth here :happy
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Re: What asset classes to put in a Roth?

Postby Dario33 » Sat Mar 09, 2013 4:35 pm

REIT in my Roth. It constitutes about 10% of our total portfolio.
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Re: What asset classes to put in a Roth?

Postby Leesbro63 » Sat Mar 09, 2013 4:44 pm

I've struggled with this decision too and currently have only fixed income in my Roth and Traditional IRAs. (Each makes up about 5% of my total portfolio..I "Rothified" half my traditional IRA in 2010, so they are roughly equal in value). The struggle is the push-pull between the fact that equities have the higher expected return...nice to get tax free in a Roth. Versus the fact that equities can be low-tax anyway, outside the IRA, if you hold forever and let your heirs get a stepped up basis.
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Re: What asset classes to put in a Roth?

Postby jidina80 » Sat Mar 09, 2013 7:25 pm

Doc wrote: .......There are many threads on this board that compare a ROTH and a tIRA. In the absence of changes in the tax rate and some inheritance issues which are really changes in the tax rate both types of accounts return the same after tax amount if both are funded with the same pretax amount. I.E a $1000 balance in a tIRA is equal to only $750 in a ROTH in the 25% tax bracket. In a few cases the RMD's from the tIRA can increase your tax bracket which marginally makes the the high return assets in the ROTH preferred.

You are right. I stand corrected. Thank you.

However, I'll stick with my answer that the asset class with the highest expected long-term return (stocks) belong in the Roth, because it is free from Required Minimum Distributions and not counted as income that may make Social Security taxable.
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Re: What asset classes to put in a Roth?

Postby Doc » Sat Mar 09, 2013 7:55 pm

jidina80 wrote:However, I'll stick with my answer that the asset class with the highest expected long-term return (stocks) belong in the Roth, because it is free from Required Minimum Distributions and not counted as income that may make Social Security taxable.


Yes if the RMD changes/increases the tax rate there will be a difference and in that case the higher return asset should go in the ROTH. I think that it is unlikely for most people that RMD's will change the tax bracket by more than a few percent and that probably is not enough to worry about because other factors become more important. Phasing out of SS is another storey. The best way out of the SS problem is to save enough so that your retirement income is so high that all your SS is taxed and then the ROTH and the tIRA become equal again. :D

When I originally did my retirement planning I assumed that all the SS would be taxed. Now being retired I find myself going through hoops trying to find a way to make that not true. Usually with only marginal success.
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Re: What asset classes to put in a Roth?

Postby Dandy » Sun Mar 10, 2013 9:54 am

Does it depend on how you view your Roth? i.e. is it the last source of funds (i will probably leave it to my heirs) vs it is acting as my emergency fund ( I don't want to tap existing taxable funds and incur tax liability)? For the former maybe heavily weghted toward equities and for the latter not so much?
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Re: What asset classes to put in a Roth?

Postby Doc » Sun Mar 10, 2013 12:14 pm

Dandy wrote:Does it depend on how you view your Roth? i.e. is it the last source of funds (i will probably leave it to my heirs) vs it is acting as my emergency fund ( I don't want to tap existing taxable funds and incur tax liability)? For the former maybe heavily weghted toward equities and for the latter not so much?


No. You take the money needed for an emergency from wherever you want and just rebalance the other accounts as necessary.
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Re: What asset classes to put in a Roth?

Postby Artsdoctor » Sun Mar 10, 2013 1:25 pm

Yet another example of how many varieties exist for managing a Roth. Of course you'll find the traditional way of investing in the Roth as the most commonly espoused: put the money with the greatest chance of growth there and tap it last, after you've exhausted every other savings vehicle.

But I think that's way too simple. Doc's point always is the focal point: the only thing that really matters is how much is in your pocket after taxes are paid. Period. Getting there is another story. For a Roth, ask yourself what it's there for and when you're going to need it.

Are you planning on using it for estate planning? Are you ever going to tap it? Or do you plan on turning it over to your heirs untouched? It's very unlikely you're going to fill it up with bonds if you want to give it away to your heirs.

Are you in your 20s and is the Roth your primary savings account at this point in time, making up the bulk of your portfolio? Then it's going to be diversified in the traditional manner of stocks/bonds, per your planned asset allocation.

Are you in your mid-life accumulator phase? Then things can get pretty interesting since you can really play a bit. Put extremely tax-inefficient funds in it (international real estate, for example, if you've included that in your AA). Emerging market small caps, small-cap international, whatever you want to push that accelerator down to the floor. If the balance tanks during a horrific bear market like 2008, you'll almost certainly recover something if you don't need the money for 25 years or so. If you want to rebalance because of the bear market, you can do it temporarily in a tax-deferred account; there will be plenty of time to bring back your asset allocation in line later on. I still can't believe how versatile and helpful it was to have several types of investment accounts during the 2008 meltdown. There was plenty of time to "fix it" over the several years that followed.

Are you entering retirement and are you going to need the Roth? You might want to redistribute your assets accordingly because you may not have the time to recover some significant losses in an account with a huge SD. So maybe go back to the basics of TSM, Total International, and some sort of bonds. It'll give you stability and an opportunity to rebalance (the stability that livesoft describes).

In mid-life your Roth is probably not going to be your biggest investment vehicle unless you've converted a lot of money to it. So I wouldn't really sweat asset location too much. But it is a very valuable tool for both retirement planning and estate planning. I would probably forgo using it for emergency funds as a rule because of opportunity cost.

Now if you inherit a Roth, some of the rules above may change because you'll need to take (tax-free) RMDs.

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Re: What asset classes to put in a Roth?

Postby BlueEars » Mon Mar 11, 2013 6:43 pm

Have any of you considered the following strategy?

1) Keep same AA mix in Roth and tIRA. Try to keep same funds/ETF's in both.
2) As equity markets climb from SP500 low (4 years now) reduce equities in Roth and increase them in tIRA so as to keep the AA mix constant overall
3) If a substantial equity decline occurs consider going back to #1
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Re: What asset classes to put in a Roth?

Postby dyeusdi » Tue Mar 19, 2013 8:47 pm

magellan wrote:
Doc wrote:If all other things like tax rates are equal it doen't matter. You may pay more in taxes with the higher asset in the tIRA but the after tax return is the same. Minimizng taxes is the wrong way to look at the question. The important thing is after tax returns.

OK - thanks to the posts below, now I see Doc's point and where I went wrong. The thing I missed was that $1000 of an asset class held in a tIRA is only worth $1000 x (1-tax rate) after taxes are paid. So in terms of asset allocation, say at a 30% tax rate, you're really only holding $700 of the asset class in the tIRA after taxes are considered. By swapping out $1000 of an asset class from the tIRA to the Roth, you increase your allocation to the high return asset class, and thus you increase the riskiness of the portfolio. This is because the same amount of the same asset held in the Roth is actually worth a lot more after tax than when it's held in the tIRA.


Edit: Nevermind --my post-tax adjustment math didn't work out. Doc's completely right. Nothing like putting your foot in your mouth to learn a difficult idea. You can push risk around, and yes increase your Roth balance, but once you tax-adjust your allocation you are forced to proportionally decrease the 401k's earnings. :oops:

This doesn't make sense to me. I've read the above links and actively searched the forum, but maybe someone here can correct my thinking. By my calculations, if you tax-adjust and rebalance your allocation, placing higher yielding classes in Roth (over 401k or tIRA) does marginally increase return.

For simplicity, say you have $10,000 in your 401k and $8,000 in your Roth. Given an effective tax rate of 20%, they should be equal in post-tax value ($8k each). Assume 10% stock and 5% bond returns over the course of one year, for the sake of this optimistic example. Hopefully my math works out.

If both accounts were held at 90% stocks, the after tax worth of both accounts would be $17,520, for a return of 9.5%.

If the Roth were allowed to go 100% stock, to maintain the same risk exposure your 401k would be 18% bonds. The after tax worth would be $17,528 for a return of 9.55%. Edit: Here I made my mistake in post-tax adjsutment. Because the accounts are worth the same, the math is simple: 20% bonds both pre and post tax in the 401k leads to a return of 9.5%, exactly same as above.

So, there is an increase in return ($8!) and the potential for using risk to pump the Roth balance seems to exist, albeit marginally. I'm guessing that in-account rebalancing, RMDs, and contribution liquidity are all more important considerations. For simplicity, and because I'm still early in learning (Edit: :D ), I actually do what BlueEars does: matching allocations between my Rollover and Roth IRAs (both at Vanguard).
Last edited by dyeusdi on Wed Mar 20, 2013 9:07 am, edited 1 time in total.
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Re: What asset classes to put in a Roth?

Postby Scott S » Tue Mar 19, 2013 10:18 pm

I have all of my bond holdings in the 401(k) and Roth, and since I am currently at 78/22, there's plenty of room left over in each for some of my stock holdings. 8-)
My Plan: * Age-10 in bonds until I reach age 60, 50/50 thereafter. * Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS. * Everything over 2 months' expenses gets invested.
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Re: What asset classes to put in a Roth?

Postby ricb » Wed Mar 20, 2013 12:22 am

For all the right reasons cited in this thread, we also put the riskiest assets into our Roths, instead of into our traditional IRAs. These are conversion Roths, meaning we've been converting from our IRAs and paying the federal and state taxes.

So here is the downside to consider: when you take a hit in a conversion Roth, it's especially painful!

I think risk tolerance is lower in a (conversion) Roth than in traditional IRA or discretionary accounts.
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Re: What asset classes to put in a Roth?

Postby Bob's not my name » Wed Mar 20, 2013 3:53 am

dyeusdi wrote:Edit: Nevermind --my post-tax adjustment math didn't work out. Doc's completely right. Nothing like putting your foot in your mouth to learn a difficult idea.
I did the same thing a few years ago. It's hard to absorb the idea without doing the math, and you get the math wrong the first time.
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Re: What asset classes to put in a Roth?

Postby STC » Wed Mar 20, 2013 8:47 am

livesoft wrote:Our Roths hold
DGS emerging small cap
VNQ US REIT
VCSH corporate short-term bond

I consider our small Roth IRAs to be precious future tax-free space. Sure, I want to have them grow huge and tax-free, but I also don't want to lose lots of money so I have to start over. The amounts that one can contribute each year while working are $5K to $6K, so if the Roth tanks, one cannot top it up by moving a chunk of money from elsewhere (OK, one can "convert" some tIRA to Roth IRA, but the taxes deter that conversion until the future.)

So if one puts something like emerging markets small cap (DGS) or REIT index (VNQ) into their Roth, they would not be making any money unless they did a great job with market timing and buying in a relatively narrow window of 12 months between August 2008 and August 2009. That is, those things with highest expected return are also those things with highest expected losses.

Thus I believe one should also have some low risk assets in their Roth so that they can try to capture a rebalancing bonus or even do some market timing between their Roth IRA and their traditional IRA or rollover IRA or 401(k). That's what magellan described previously in this thread.

So when you believe the market is getting bubbly, one can exchange DGS and VNQ for VCSH in the Roth and in the traditonal one can go the other way: VCSH for DGS & VNQ. One keeps the same asset allocation, but with a slightly different asset location.


You can contribute a lot more then that is you can do an after-tax 401(k) - roll over to a tIRA - roll over to a rIRA. That's an additional $33,500 in a rIRA per year, per person.
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Re: What asset classes to put in a Roth?

Postby learning_head » Wed Mar 20, 2013 1:07 pm

STC wrote:You can contribute a lot more then that is you can do an after-tax 401(k) - roll over to a tIRA - roll over to a rIRA. That's an additional $33,500 in a rIRA per year, per person.


My understanding is most companies do not allow after-tax 401(k) contributions, let alone in-service rollovers from such accounts...
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Re: What asset classes to put in a Roth?

Postby learning_head » Wed Mar 20, 2013 1:31 pm

Kelly wrote:Let me frame this another way. Is there validity to the argument that the gov't shares in the risk of assets held in a taxable accounts if those assets are index funds held for the long haul?? I'm not seeing it.


Why are you not seeing it? If you hold your asset for a period of time (does not matter long or short), and pay some percentage t in tax, then any increase / decrease in your asset price will need to be adjusted by (1-t) (well, this assumes t is the same for increase and decrease, which is not necessarily true), thus lowering your assets variation by that amount.

tIRA/401k vs Roth comparison is simpler - there you just need to adjust dollar amount by ultimate tax you pay in tIRA/401k and then variations will actually be the same (you have to do some math to see that). Taxable vs either of them is somewhat more complex because SD will in fact also vary, even after adjustments on your principal amount.

In short:
Roth: you own principal and earnings
tIRA: AFTER adjusting for taxes, you own principal and earnings (if you did not adjust, govt owns part of both)
traditional: you own principal, govt part owns earnings (and thus, their variations)
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Re: What asset classes to put in a Roth?

Postby kenyan » Thu Mar 21, 2013 6:22 pm

Doc wrote:The easiest way to minimize taxes is bet on number 18 on the roulette wheel and keep letting it ride until you have no money left. :D


After this post, I finally had my "Eureka!" moment in how to invest. Just as I was about to withdraw my funds and pursue your tax-minimization strategy, you threw all of my plans out the window with this:

Doc wrote:The easiest way to minimize taxes is to put all your mony on #17 at the roulette table and let your winnings ride (aka reinvest dividends) until you run out of money. Taxes are zero. Great have a nice retirement.


Well, crud. Now I don't know where to bet!

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Re: What asset classes to put in a Roth?

Postby Doc » Thu Mar 21, 2013 8:08 pm

kenyan wrote:
Doc wrote:The easiest way to minimize taxes is bet on number 18 on the roulette wheel and keep letting it ride until you have no money left. :D


After this post, I finally had my "Eureka!" moment in how to invest. Just as I was about to withdraw my funds and pursue your tax-minimization strategy, you threw all of my plans out the window with this:

Doc wrote:The easiest way to minimize taxes is to put all your mony on #17 at the roulette table and let your winnings ride (aka reinvest dividends) until you run out of money. Taxes are zero. Great have a nice retirement.


Well, crud. Now I don't know where to bet!
:beer


Hey man. It's called asset allocation. :D
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Re: What asset classes to put in a Roth?

Postby Default User BR » Fri Mar 22, 2013 1:20 pm

learning_head wrote:My understanding is most companies do not allow after-tax 401(k) contributions, let alone in-service rollovers from such accounts...

You can view the results of a highly unscientific poll on the subject. There was a higher percentage reported than I expected, but again results are suspect.


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Re: What asset classes to put in a Roth?

Postby 2beachcombers » Fri Mar 22, 2013 3:33 pm

Have different assets in Roths and IRA due to different time hoirzons. Roths go to heirs-so >20yr time horrizon. IRA's start withdrawals in one year. Also have 15 yr deferred comp fund(deferred taxes also) that disappears in 4 years

IRA = 50% of deferred space; 20% in 4 yrs

Managing Dividends to stay below Medicare Part b/d thresholds.

Also, Roth focused on assets with large nonqual dividends--REIT, VSS

IRAs---VBILX(vanguard intermediates, 50%Corps), LQD, FUSVX(SP500)

Roths--FSRVX(REIT), VSS(int SC), IJS(SC), MLPs(pipelines) FUSVX, IDV(int LV)

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Re: What asset classes to put in a Roth?

Postby 2beachcombers » Sat Mar 23, 2013 9:11 am

jidina80 wrote:
Doc wrote: .......There are many threads on this board that compare a ROTH and a tIRA. In the absence of changes in the tax rate and some inheritance issues which are really changes in the tax rate both types of accounts return the same after tax amount if both are funded with the same pretax amount. I.E a $1000 balance in a tIRA is equal to only $750 in a ROTH in the 25% tax bracket. In a few cases the RMD's from the tIRA can increase your tax bracket which marginally makes the the high return assets in the ROTH preferred.

You are right. I stand corrected. Thank you.

However, I'll stick with my answer that the asset class with the highest expected long-term return (stocks) belong in the Roth, because it is free from Required Minimum Distributions and not counted as income that may make Social Security taxable.



Agree and:
I count my Roths and 90% of my IRAs as tax free due to the following:

50% of my IRA has been converted to a Roth over the past 12 yrs in retirement. My situation, looking to the future, would bump my marginal tax two levels without Roth conversions. In addition, it would have taken us out of the 15% tax bracket in the future. The residual IRA will be rolled over to my wife for futher tax free compounding and RMDs(her age) at a 15% rate. Roths to kids, RMDs tax free.

I don't see any discussion here wrt potential IRA tax reduction/elimination by using medical care deductions. I am planning on using my IRA as an insurance policy for LTC. Residual to heirs and charity. Tax=0.
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Re: What asset classes to put in a Roth?

Postby Bob's not my name » Sat Mar 23, 2013 9:21 am

2beachcombers wrote:I don't see any discussion here wrt potential IRA tax reduction/elimination by using medical care deductions. I am planning on using my IRA as an insurance policy for LTC. Residual to heirs and charity. Tax=0.
Good point. Long term care or assisted living will put most people in the 0% bracket. Even before retirement, a traditional IRA is good insurance against disability or a major medical expense. http://thefinancebuff.com/your-traditio ... -fund.html
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