Maintain AA in tIRA only vs across tIRA and Roth

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RetiredCSProf
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Maintain AA in tIRA only vs across tIRA and Roth

Post by RetiredCSProf »

I am 73 and have about $600K in rollover IRAs and $400K in Roth. Pension and SS cover my basic expenses. I have been converting to Roth since I retired, and plan to continue conversions (because of the loss of the inherited stretch IRA under the SECURE Act). I intend to leave the Roth for legacy -- my beneficiary is my son, who is just starting his career.

I have been maintaining an AA of 70/30 across all tax-advantaged IRAs, with 100% equity in Roth. As I continue to take RMDs from equities and make Roth conversions, this has resulted in an increasingly more conservative AA in my rollover IRAs. While I need bond funds to cover xx years of RMDs in a market drop, I do not think I need this same protection for a drop in Roth.

My Fido brokerage advisor recommended that I maintain 60/40 AA across my rollover IRAs, rather than maintain a targeted AA across all tax-advantaged accounts. Does this make sense?
johnny
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by johnny »

I would stick with your current plan. Why move high earning assets to tax deferred account? Just to ensure that Uncle Sam gets a bigger cut?

You may consider allocating a slice of bonds in Roth if you intend to draw on it to keep your income below a certain threshold.
wetgear
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by wetgear »

johnny wrote: Fri May 07, 2021 1:57 pm You may consider allocating a slice of bonds in Roth if you intend to draw on it to keep your income below a certain threshold.
I think OP doesn't intend to take any money from the roth but to pass it all to OP's son who likely has a longer investment horizon. The Fido advisor is probably trying to use a bucket type approach and is suggesting a 60/40 AA allocation for OP and a 100/0 AA for OP's son both within the realm of reasonable for their individual situations. If using 1 AA for all accounts it may force OP's trad IRAs to have too conservative AA for their needs while the roth for their heir stays correctly at 100/0. It's maybe not a terrible idea if indeed OP will never need to touch the roth IRA otherwise the one AA to rule them all approach is probably best.
dbr
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by dbr »

There is no reason in principle to not carry two portfolios for different purposes and to invest them with a different asset allocation and in different kinds of accounts.

It might be a harder problem to show that this results in either the optimum, meaning maximum, legacy for your son or that it produces the greatest after tax income for you. A first question would be do you really mean that you have designated your son as the beneficiary on the Roth but he is not a beneficiary or heir under will to anything else you own?
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RetiredCSProf
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by RetiredCSProf »

dbr wrote: Fri May 07, 2021 6:12 pm ...

A first question would be do you really mean that you have designated your son as the beneficiary on the Roth but he is not a beneficiary or heir under will to anything else you own?
My son is the sole beneficiary of the Roth accounts and everything else. My question is specific to AA across tax-advantaged investment accounts.
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retired@50
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by retired@50 »

RetiredCSProf wrote: Fri May 07, 2021 1:47 pm I am 73 and have about $600K in rollover IRAs and $400K in Roth. Pension and SS cover my basic expenses. I have been converting to Roth since I retired, and plan to continue conversions (because of the loss of the inherited stretch IRA under the SECURE Act). I intend to leave the Roth for legacy -- my beneficiary is my son, who is just starting his career.

I have been maintaining an AA of 70/30 across all tax-advantaged IRAs, with 100% equity in Roth. As I continue to take RMDs from equities and make Roth conversions, this has resulted in an increasingly more conservative AA in my rollover IRAs. While I need bond funds to cover xx years of RMDs in a market drop, I do not think I need this same protection for a drop in Roth.

My Fido brokerage advisor recommended that I maintain 60/40 AA across my rollover IRAs, rather than maintain a targeted AA across all tax-advantaged accounts. Does this make sense?
If I'm following the allocation you describe above, it currently looks something like this.
Roth IRA
400k stocks or stock index funds.

Rollover IRA(s)
300k bonds or bond index funds.
300k stocks or stock index funds.

The above would lead to an overall portfolio of 70% stock / 30% bond.

What I don't see is any mention of a taxable investment account...???
I would presume you've established one since you don't claim to need the RMD money since your expenses are paid with your SS and pension.
As time goes by, and you continue to take RMDs (in stock) and convert additional money to Roth (also stock), then the bond portion will remain in the Rollover IRA(s) until you've just got the $300k left. It's not uncommon for a Rollover IRA to be completely held in bond funds. Mine is.

Will you continue to convert to Roth until the Rollover IRA(s) are empty?

Have I got this right?

Regards,
This is one person's opinion. Nothing more.
dbr
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by dbr »

RetiredCSProf wrote: Fri May 07, 2021 7:07 pm
dbr wrote: Fri May 07, 2021 6:12 pm ...

A first question would be do you really mean that you have designated your son as the beneficiary on the Roth but he is not a beneficiary or heir under will to anything else you own?
My son is the sole beneficiary of the Roth accounts and everything else. My question is specific to AA across tax-advantaged investment accounts.
If all your assets are aimed to the same purpose, then what matters is firstly the asset allocation as a whole and then secondly how to use different taxability of accounts effectively. Usually that starts with using tax deferred accounts to hold as much of the fixed income as possible, to use Roth accounts to hold investments that will grow the most, meaning stocks.

The statement that you would leave the Roth for legacy confused me because I was struggling to see how that could affect what you are doing when in fact your son is going to inherit everything. One question is what is becoming of the RMD's? I suppose they are in effect also just getting transferred to the Roth, by being used to pay the taxes on the conversion rather than taking the tax out of the amount distributed for conversion.

So, your process of allowing the IRAs to become more conservative while the Roth is all stocks and growing seems to me to be fine if the overall asset allocation is what you want.
Last edited by dbr on Fri May 07, 2021 9:21 pm, edited 2 times in total.
DSBH
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by DSBH »

RetiredCSProf wrote: Fri May 07, 2021 1:47 pm I am 73 and have about $600K in rollover IRAs and $400K in Roth. Pension and SS cover my basic expenses. I have been converting to Roth since I retired, and plan to continue conversions (because of the loss of the inherited stretch IRA under the SECURE Act). I intend to leave the Roth for legacy -- my beneficiary is my son, who is just starting his career.

I have been maintaining an AA of 70/30 across all tax-advantaged IRAs, with 100% equity in Roth. As I continue to take RMDs from equities and make Roth conversions, this has resulted in an increasingly more conservative AA in my rollover IRAs. While I need bond funds to cover xx years of RMDs in a market drop, I do not think I need this same protection for a drop in Roth.

My Fido brokerage advisor recommended that I maintain 60/40 AA across my rollover IRAs, rather than maintain a targeted AA across all tax-advantaged accounts. Does this make sense?
Assuming that you use RMDs to pay for taxes (for all taxable income including RMDs and ROTH conversion) and discretionary spending, have no need to pull spending money from ROTH, and that you would want to convert most/all TIRA to ROTH for your son, it sounds to me like you look at the TIRA as your investment portfolio and the ROTH as your son’s portfolio. In that scenario the recommendation - basically maintain a 60/40 AA for your portfolio - does not seem unreasonable to me.
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Topic Author
RetiredCSProf
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by RetiredCSProf »

DSBH wrote: Fri May 07, 2021 9:05 pm
Assuming that you use RMDs to pay for taxes (for all taxable income including RMDs and ROTH conversion) and discretionary spending, have no need to pull spending money from ROTH, and that you would want to convert most/all TIRA to ROTH for your son, it sounds to me like you look at the TIRA as your investment portfolio and the ROTH as your son’s portfolio. In that scenario the recommendation - basically maintain a 60/40 AA for your portfolio - does not seem unreasonable to me.
DSBH: Thanks; you have explained it better than I did.
retiredjg
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by retiredjg »

The way you are currently doing it makes sense to me (although I have found that having a small slice of bonds in Roth IRA is helpful).

Since stocks have the highest expected return, a Roth IRA full of stocks/stock funds gives the most expected growth tax free. Having a higher allocation to bonds in tIRA means the tIRA grows slower - this is a good thing when you get to RMDs.

The way the advisor suggests might be better for a lot of people. Some folks just don't get the math when done "across" several accounts. Some people would be concerned about the Roth IRA taking a bigger dive during a downturn.

Either way is acceptable. I see no reason for you to change from what you like.
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by abuss368 »

RetiredCSProf wrote: Fri May 07, 2021 1:47 pm I am 73 and have about $600K in rollover IRAs and $400K in Roth. Pension and SS cover my basic expenses. I have been converting to Roth since I retired, and plan to continue conversions (because of the loss of the inherited stretch IRA under the SECURE Act). I intend to leave the Roth for legacy -- my beneficiary is my son, who is just starting his career.

I have been maintaining an AA of 70/30 across all tax-advantaged IRAs, with 100% equity in Roth. As I continue to take RMDs from equities and make Roth conversions, this has resulted in an increasingly more conservative AA in my rollover IRAs. While I need bond funds to cover xx years of RMDs in a market drop, I do not think I need this same protection for a drop in Roth.

My Fido brokerage advisor recommended that I maintain 60/40 AA across my rollover IRAs, rather than maintain a targeted AA across all tax-advantaged accounts. Does this make sense?
It is the overall asset allocation that matters. Investors may at times have different asset allocations in each account for a specific reason. However, whether the markets are rising or failing, the asset allocation will determine how the portfolio is impacted.

Keep investing and life simple!
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chemocean
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Re: Maintain AA in tIRA only vs across tIRA and Roth

Post by chemocean »

Since legacy transfer to son seems to be your primary goal for the combined tIRA and Roth, the amount you leave in your tIRA is balance of:
1) the projected taxable income son can handle over the ten years provided by the Secure Act,
2) the remaining charitable giving through your lifetime,
3) the unknown end-of-life medical expenses that might be tax-deductible.

I agree with the concept of putting all the equities in the Roth for the sake of the son.
If you need to take out funds from the combined fund at time in the future, you can decide at that time who will pay taxes on those withdrawals:
a) you in the year of withdrawal by taking them out of the tIRA, or
b) your son by taking them out of the Roth and leaving him to pay the income tax at some time in the future on the inherited tIRA that you didn't withdrawal for your use.
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