Does FIFO, LIFO, etc. matters in 401k, rIRA, and tIRA?

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Does FIFO, LIFO, etc. matters in 401k, rIRA, and tIRA?

Postby aida2003 » Fri May 10, 2013 11:14 am

I need to rebalance our portfolio and while stuggling to pull the trigger so to speak I started to 'invent' :twisted: :oops: questions in my head to delay the action.
Anyway, the title of this thread is my question today. My own answer is that since all the money in 401k & deductible tIRA's are taxable when withdrawn it doesn't matter in which sequence shares are sold and all shares are treated equally (=average cost or FIFO, e.g.) by the 401k providers. The same applies to RIRA: all money is tax-free when withdrawn and doesn't matter which shares are sold. I'm not so sure about traditional IRA funded with non-deductible money, because contributions are after-tax, but then earnings are taxed. In this instance, it would seem that FIFO, LIFO, or average cost would matter.

Investors do tax loss harvesting in taxable accounts. What about tax related strategies in retirement accounts like 401k, Roth IRA, and traditional IRA? I'm not talking about what asset classes to keep in which accounts.

I never thought about the above questions before, but now while struggling mentally :mrgreen: how to rebalance our portfolio here I have them in my head. Does it really matter how to rebalance: 100% contributions to bonds or leave current contribution settings as they are, but exchange some shares from equity funds to bond funds (PTTRX or Vang.TIPS are only two options).

Thank you.
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Re: Does FIFO, LIFO, etc. matters in 401k, rIRA, and tIRA?

Postby House Blend » Fri May 10, 2013 12:55 pm

You're right that tax rules for IRAs are no excuse to delay rebalancing. Get off your <expletive> and get it done.
aida2003 wrote:The same applies to RIRA: all money is tax-free when withdrawn and doesn't matter which shares are sold.


No. The rules governing withdrawals from Roth IRAs are rather messy, and depend on your age, the time elapsed since your first contribution, the total dollar amount you have contributed, yadda, yadda, yadda. But these rules don't interact with fund selection or trading, only *when* contributions and conversions were made and *how much*.

An easier rule to remember is that if you wait until age 59.5, then it's all tax free.
Investors do tax loss harvesting in taxable accounts. What about tax related strategies in retirement accounts like 401k, Roth IRA, and traditional IRA? I'm not talking about what asset classes to keep in which accounts.

An example involving Roth conversions is what I would call "recharacterization arbitrage".

Say you plan to do a $10K Roth conversion in 2013. Instead, you convert $20K:
$10K worth of short bonds
$10K worth of small cap value.
Then in 2014, you see how these two investments have turned out. If SCV has done its thing and outperformed, you leave it in the Roth and recharacterize the short bonds back to your trad IRA. If SCV has tanked, then you recharacterize it.

Either way the net tax cost is the same, but recharacterization offers you the ability to profit from hindsight: no matter what the market does, you get to pick the option that leaves a greater fraction of your portfolio in the Roth.
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Re: Does FIFO, LIFO, etc. matters in 401k, rIRA, and tIRA?

Postby aida2003 » Fri May 10, 2013 3:29 pm

House Blend wrote:You're right that tax rules for IRAs are no excuse to delay rebalancing. Get off your <expletive> and get it done.

An easier rule to remember is that if you wait until age 59.5, then it's all tax free.


I forgot to mention that RIRA is all fine and tax-free after 59.5, thanks for noting this important piece of information. So, in such a case assuming that a person does not touch his/her RIRA until 59.5 or later, it doesn't matter what shares (with higher or lower cost basis) sell in order to buy bonds within the same RIRA in order to rebalance his/her AA? Would it be the same case within a 401k? Can a person trade as much as s/he wants exchanging partially from one fund to raise a position in another fund because after age of 59.5 all money will be taxable and no computing for cost basis, etc.?

Yes, I read another article today that enforced my confiction that I must rebalance. That's my goal to do within a week (or two).
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Re: Does FIFO, LIFO, etc. matters in 401k, rIRA, and tIRA?

Postby ciscovp » Fri May 10, 2013 3:41 pm

No, it does not matter. Just treat it as average cost.
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