Maybe NOT Bonds into Roth IRA
Maybe NOT Bonds into Roth IRA
I've posted this before and never really got any consensus so I'm posting it again with less complicating factors than originally. My question is this: Might one need to rethink the Equity-in-Taxable/Fixed-Income-In-Tax-Sheltered for a Roth IRA? It seems that there is a missed opportunity to (hopefully) grow the tax-free asset bigger, faster.
Re: Maybe NOT Bonds into Roth IRA
I think if you set up a spreadsheet and put your numbers (dollars invested, expected return, taxes, number of years, ...) into it, you could decide what is best for you.
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Re: Maybe NOT Bonds into Roth IRA
I have been of the opinion (not supported by others) that the ROTH should have stocks to the extent the allocation permits it. It is the highest expected return with zero taxes. I anticipate ROTHs will be knocked out at some point so get 'em while you can.
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Re: Maybe NOT Bonds into Roth IRA
Sure. Great idea. Good points, etc.
But please don't complain whenever bonds will outperform stocks.
For the record, I've already closed RothIRA (with 100% individual stocks) once in my life (in 2001) when I've had a chance to deduct the losses.
Bottom line - why not 100% stocks on all accounts?
Otherwise:
But please don't complain whenever bonds will outperform stocks.
For the record, I've already closed RothIRA (with 100% individual stocks) once in my life (in 2001) when I've had a chance to deduct the losses.
Bottom line - why not 100% stocks on all accounts?
Otherwise:
It seems that there is a missed opportunity to (hopefully) grow "all" asset bigger, faster.
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Hi Leesbro:Leesbro63 wrote:I've posted this before and never really got any consensus so I'm posting it again with less complicating factors than originally. My question is this: Might one need to rethink the Equity-in-Taxable/Fixed-Income-In-Tax-Sheltered for a Roth IRA? It seems that there is a missed opportunity to (hopefully) grow the tax-free asset bigger, faster.
Christine Benz, Morningstar's director of personal finance and a Panel Expert at our Boglehead reunions, has written this article which helps answer your question:
What Goes Where? The Art of Asset Location
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Maybe NOT Bonds into Roth IRA
I'll look at her article, Taylor. Thanks for the link.
Re: Maybe NOT Bonds into Roth IRA
So you don't like my consistent answer to this question. Why?
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Re: Maybe NOT Bonds into Roth IRA
Sounds good to me. Personally, my Roth is for TIPS. I don't have access to TIPS elsewhere in tax advantaged accounts, and I like the idea of having a real return with a tax free withdrawal.
Re: Maybe NOT Bonds into Roth IRA
Livesoft, I forgot what you said! Sorry!
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Re: Maybe NOT Bonds into Roth IRA
This one comes up every few months.
It comes down to the fact that if you actually adjust your assets for taxes, and look at it all as after-tax money, and adjust your AA accordingly, then it doesn't matter if you put high-returning asset classes into tax-free accounts, tax-deferred accounts, or taxable accounts. The problem is it's hard to make that adjustment, so most people don't.
If you do not make that adjustment (and most don't) and you decide to put high-expected return assets into Roth accounts, then yes, your expected return is higher. But it isn't magic. It's just that you're taking more risk. Your after-tax asset allocation is actually weighted more toward stocks. So you'd expect a higher return, no?
It comes down to the fact that if you actually adjust your assets for taxes, and look at it all as after-tax money, and adjust your AA accordingly, then it doesn't matter if you put high-returning asset classes into tax-free accounts, tax-deferred accounts, or taxable accounts. The problem is it's hard to make that adjustment, so most people don't.
If you do not make that adjustment (and most don't) and you decide to put high-expected return assets into Roth accounts, then yes, your expected return is higher. But it isn't magic. It's just that you're taking more risk. Your after-tax asset allocation is actually weighted more toward stocks. So you'd expect a higher return, no?
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Re: Maybe NOT Bonds into Roth IRA
To keep things simple for me I keep my ROTH as a seperate entity from my very Boglish main portfolio. My ROTH is composed of 50% FTSE Emerging Markets Index and 50% Fidelity New Markets Income. I plan on letting it sit for the next 7 to ten years with rebalancing per 10% bands.
Re: Maybe NOT Bonds into Roth IRA
I don't think you are going to get a consensus.Leesbro63 wrote:I've posted this before and never really got any consensus....
I don't think so. Rethinking this "rule" pushes bonds into taxable. I suppose if you are in a very low tax bracket, it does not matter since you can just use the same bonds in taxable that you would use in a tax-advantaged account. But if you are in the 25% or higher bracket, you'd probably need to use tax-exempt bonds which generally pay less than taxable bonds.Might one need to rethink the Equity-in-Taxable/Fixed-Income-In-Tax-Sheltered for a Roth IRA?
So you'd be trading possible better return on one side of the teeter-totter with probable lesser return on the other side of the teeter-totter. That does not make good sense to me.
This is a different question from whether to fill your Roth with stocks or bonds when neither choice will push bonds into taxable. I've never seen consensus on this question either.
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Re: Maybe NOT Bonds into Roth IRA
I guess the downside to doing that is that those asset classes could very well LOSE a big amount, at least in the short/intermediate term. And if it's after the "recharacterizing" deadline, you will have paid tax on a balance that has become a phantom value.midareff wrote:To keep things simple for me I keep my ROTH as a seperate entity from my very Boglish main portfolio. My ROTH is composed of 50% FTSE Emerging Markets Index and 50% Fidelity New Markets Income. I plan on letting it sit for the next 7 to ten years with rebalancing per 10% bands.
Re: Maybe NOT Bonds into Roth IRA
Here's a concrete example (hopefully I got the math right). Suppose your asset allocation calls for $1,000 in bonds. You can either:
1. Put $1,000 in bonds in the Roth. This means you have $1,000 more in stocks in your taxable account.
2. Put $1,000 in bonds in the taxable account. This means you have $1,000 more in stocks in your Roth.
Let's assume historical averages where the stocks earn 10%, and the bonds earn 7%. After one year:
Option 1: Roth grows to $1,070. Taxable grows to $1,100. Net gain: $70 from the Roth, $85 from long term capital gains (assuming 15%).
Option 2: Roth grows to $1,100. Taxable grows to $1,070. Net gain: $100 from Roth, $70 - taxes on taxable income.
If you're in the 25% tax bracket, option 1 gains $155 and option 2 gains $152.50. In higher tax brackets, one would want to use a municipal bond in the taxable account, and if you assume a 5% return on the municipal bond it's still better to put the bonds in a Roth as opposed to a taxable account.
Also, having stocks in a taxable account gives more options for tax-loss harvesting.
1. Put $1,000 in bonds in the Roth. This means you have $1,000 more in stocks in your taxable account.
2. Put $1,000 in bonds in the taxable account. This means you have $1,000 more in stocks in your Roth.
Let's assume historical averages where the stocks earn 10%, and the bonds earn 7%. After one year:
Option 1: Roth grows to $1,070. Taxable grows to $1,100. Net gain: $70 from the Roth, $85 from long term capital gains (assuming 15%).
Option 2: Roth grows to $1,100. Taxable grows to $1,070. Net gain: $100 from Roth, $70 - taxes on taxable income.
If you're in the 25% tax bracket, option 1 gains $155 and option 2 gains $152.50. In higher tax brackets, one would want to use a municipal bond in the taxable account, and if you assume a 5% return on the municipal bond it's still better to put the bonds in a Roth as opposed to a taxable account.
Also, having stocks in a taxable account gives more options for tax-loss harvesting.