Where to take more risk: 401k or Roth?

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Boogieknight
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Where to take more risk: 401k or Roth?

Post by Boogieknight » Mon Nov 06, 2017 6:03 pm

I'm sure this question has been asked before, but I couldn't find it. Sorry if it's substantially redundant. Send links if it is.

For someone who has both a 401k and a Roth IRA, where should that person put the riskier assets?. Or say that person ultimately wanted a 75/25 stock/bond overall portfolio, should it be 80/20 in one and 70/30 in the other? Or 100/0 in one and 50/50 in the other? Or does it even matter? I should know the answer to that question but I don't.

That someone person is my daughter. She is 26, an engineer with a beaten-down Fortune 50, an industrial. three years in, maxes out only the matched part of her 401k for now, but maxes out the Roth (to $5500/year), and maxes out her HSA (all cash for now) every year. Roughly equal assets in the 401k and the Roth, maybe a bit more in the 401k.

Your insights gratefully appreciated. Take care....

cherijoh
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Re: Where to take more risk: 401k or Roth?

Post by cherijoh » Mon Nov 06, 2017 6:52 pm

Boogieknight wrote:
Mon Nov 06, 2017 6:03 pm
I'm sure this question has been asked before, but I couldn't find it. Sorry if it's substantially redundant. Send links if it is.

For someone who has both a 401k and a Roth IRA, where should that person put the riskier assets?. Or say that person ultimately wanted a 75/25 stock/bond overall portfolio, should it be 80/20 in one and 70/30 in the other? Or 100/0 in one and 50/50 in the other? Or does it even matter? I should know the answer to that question but I don't.

That someone person is my daughter. She is 26, an engineer with a beaten-down Fortune 50, an industrial. three years in, maxes out only the matched part of her 401k for now, but maxes out the Roth (to $5500/year), and maxes out her HSA (all cash for now) every year. Roughly equal assets in the 401k and the Roth, maybe a bit more in the 401k.

Your insights gratefully appreciated. Take care....
As you increase the stock/bond ratio, the expected return increases. "Expected" return is NOT guaranteed, but if you have a long time horizon (like your daughter does), you are likely to end up with a higher return in the account with the "riskier" asset allocation. Since earnings in Roth IRAs are tax-free (while you would pay taxes on then in a traditional IRA or 401k), it makes sense to have more stocks in your Roth. (However, some young people use their Roth as an extended emergency fund, in which case it makes sense to be more conservative in your Roth).

For someone you daughter's age an 85/15, 80/20 or 75/25 overall stock/bond allocation would be appropriate. I'd go 100% stock in the Roth and then calculate what % bonds in the 401k would bring her to her desired overall allocation.

JBTX
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Re: Where to take more risk: 401k or Roth?

Post by JBTX » Mon Nov 06, 2017 7:07 pm

I think the answer is it does not matter, provided that you adjust for funds that are pre tax (traditional), and funds that are post tax (Roth).

Remember that Roth contributions are worth more, because they will have no tax when withdrawn, and traditional contributions will (unless you are in the zero percent tax bracket rate in retirement).

So to get a theoretically correct asset allocation percent across traditional and Roth, one would in theory need to adjust and set the allocation in after tax amounts. Practically, I am not sure anybody really does it. I certainly don't.

What I have done is mostly put stocks in the Roth, because I want the higher growth investment not to have any tax on it, and fixed income in traditional.

So my overall dollar allocation is probably around 60/40. But if I were to do it in after tax adjusted dollars, it would probably be somewhat higher stocks (65/35???) because my Roths have a higher percentage of stocks than my traditional investments.

Boogieknight
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Re: Where to take more risk: 401k or Roth?

Post by Boogieknight » Mon Nov 06, 2017 7:26 pm

OP jumping back in. Thanks for the responses.

My question is "where to put the risk?" Not "where to put the stocks?" I'm trying to inquire from more of a theoretical perspective. Or at least get an answer based on theory/math/probability. And like JBTX, I think the answer is "it doesn't matter." but I'm not sure. I hesitated to indicate that my daughter is relatively young, because I wanted it to be about "where to put the risk without getting into typical long-term growth rates of asset classes and such. Though I did infer that stocks are riskier I suppose. And in my own portfolio, I tend to take less risk in my Roth. But I'm almost 63.

And of course, if I could be sure that stocks would outperform bonds, stocks would go in her Roth. But if I was sure that stocks would outperform bonds, she wouldn't own bonds. We'd be 100/0 everywhere.

I'm inclined to tell her to go maybe 80/20 or 90/10 in the 401k, and 60/40 in the Roth, which does have a somewhat lower balance. Shooting for 75/25 overall.

Any more thoughts?

billfromct
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Re: Where to take more risk: 401k or Roth?

Post by billfromct » Mon Nov 06, 2017 8:30 pm

My daughter (26 & in grad school with 40 years until retirement) is 100% in stocks in her Roth IRA (started at age 16) & 100% in stocks in her Vanguard Annuity, started by her grandmother at age 6 or 7.

Over the long run, stocks will out perform bonds, especially at such low bond interest rates now.

You're asking about risk. The higher the risk, the higher the return. The longer the time frame before she will need the money (35-40 years), the more risk she can take & recover from a market down turn.

My daughter's IPS (investment policy statement) has her moving into her bond allocation, in her retirement accounts, 15-20 years before retirement.

My daughter has her MM/savings/CDs in her taxable account where she can access the money should she need it. Over all, her asset allocation is 85%/15%.

Of course if someone will bail out of stocks at the next correction or bear market (one will come but no one knows when), then bonds in your retirement accounts may make sense at age 26 to moderate your loses during the next correction. But the same bonds will moderate her gains in the next bull market.

I looked at the stock market returns from 1940 through 2016 (chosen randomly) & the S&P 500 equivalent had a positive return in 75% of those years. Of course, past performance is no guarantee of future returns.

bill

ThrustVectoring
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Re: Where to take more risk: 401k or Roth?

Post by ThrustVectoring » Mon Nov 06, 2017 8:53 pm

Boogieknight wrote:
Mon Nov 06, 2017 7:26 pm
OP jumping back in. Thanks for the responses.

My question is "where to put the risk?" Not "where to put the stocks?" I'm trying to inquire from more of a theoretical perspective. Or at least get an answer based on theory/math/probability. And like JBTX, I think the answer is "it doesn't matter." but I'm not sure. I hesitated to indicate that my daughter is relatively young, because I wanted it to be about "where to put the risk without getting into typical long-term growth rates of asset classes and such. Though I did infer that stocks are riskier I suppose. And in my own portfolio, I tend to take less risk in my Roth. But I'm almost 63.

And of course, if I could be sure that stocks would outperform bonds, stocks would go in her Roth. But if I was sure that stocks would outperform bonds, she wouldn't own bonds. We'd be 100/0 everywhere.

I'm inclined to tell her to go maybe 80/20 or 90/10 in the 401k, and 60/40 in the Roth, which does have a somewhat lower balance. Shooting for 75/25 overall.

Any more thoughts?
There's actually a theoretical best place to put risk in your portfolio: inside an IRA that has been converted from Traditional to Roth and is still within the recharacterization window. If the risk ends up making money, you do nothing and put all the gains in your Roth account. If the risk ends up losing you money, you recharacterize it as traditional and save the income tax on the conversion. Essentially, this account can make gains in post-tax dollars but losses in pre-tax, so the ideal amount of risk to put here is "all of it".

The followup is "what IRA eligible investments tend to be the most capital-efficient way to put risk into an account", and that's long call or put options. Unfortunately, crafting an options strategy is beyond my pay grade, and I don't have any traditional IRA balances that I could convert, so this is a theoretical consideration for me. It's probably holding cash in Traditional, call options in recharacterizable account, and either cash or stocks in the Roth in order to manage the overall portfolio beta. Also an option is going heavier on stocks and putting SPY Put options in the recharacterizable account. Doing both would probably convince the IRS to call shenanigans so I wouldn't do that. The math probably makes more sense to do call options with a large traditional / small Roth balance and put options with small traditional / large Roth, but again, this is beyond my pay grade.

272 Sheep
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Re: Where to take more risk: 401k or Roth?

Post by 272 Sheep » Mon Nov 06, 2017 9:04 pm

Generally, on this board, Roth IRAs are the most valuable and the last to be spent.
If that is true, that gives the Roth account the longest term time horizon, an
appropriate place to be 100% stocks.

Your daughter, age 26, has time on her side and can easily weather a major down market
provided she cam stomach it and has enough emergency funds.

I am 65 years old but adding Bonds to the Roth.
This allows me to take less risk in my TIRA 40/60 (money I will spend first) verses
taking more risk in Roth 60/40 (money I will spend last)
And maintaining my overall target of 50/50.
So your age and circumstances also play into this.

Hope this helps.
Carl W.

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badbreath
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Re: Where to take more risk: 401k or Roth?

Post by badbreath » Mon Nov 06, 2017 9:57 pm

My daughter 25 is 100% in stock index in her 401k. I told her when she is 40 - 45 think about bonds.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

DrGoogle2017
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Re: Where to take more risk: 401k or Roth?

Post by DrGoogle2017 » Tue Nov 07, 2017 12:31 am

Mine is 27 and she is close to 100% in equities, more like 99.7% due to a small amount in a Wellington mutual fund. I have it there for grandfather purpose only, just in case it’s close to new investors in the future. So I would suggest 100% in stocks for both Roth and 401k, but Roth is more profitable if you have to choose.

Erwin007
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Re: Where to take more risk: 401k or Roth?

Post by Erwin007 » Tue Nov 07, 2017 1:24 am

Riskier assets should have the potential for more growth and increased value over time. I would rather have the largest pot of money that is all mine (no taxes owed on distributions), relatively speaking. So for me, that means my Roth IRA is all S&P 500 and Total International (since the international options in my 403b and 457b have high expense ratios).

I am 38 but have been contributing the max to my Roth for over 10 years.

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Re: Where to take more risk: 401k or Roth?

Post by itstoomuch » Tue Nov 07, 2017 2:05 am

Depends.
When we were working, and even now in retirement, I always took more risk in IRA/Roth because I could trade individual stocks/funds at will.
But if you do trade or take extraordinary risks in the IRA/Roth be careful in how you trade because there is no such thing as a tax loss just as there isn't a ST or LT capital gains. But for some who are really traders and want even more risk, taxables are better.

If the choice is just between 401k and Roth, I would do place risker assets in Roth and market time the assets. Why, because the goal is the make :moneybag :moneybag :moneybag that would never be taxed at retirement or at home purchase, et al.

Disclaimer: We bought a retirement home this year (67/70yo) using Roth money as the DP. Using taxable or IRA money would mean that I would have to liquidate at least additional 33% from somewhere to account for federal taxes (25% marginal).
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3funder
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Re: Where to take more risk: 401k or Roth?

Post by 3funder » Tue Nov 07, 2017 5:14 am

It's probably more advantageous to keep a higher percentage of stock in your Roth, as RMDs don't apply.
Last edited by 3funder on Wed Nov 15, 2017 4:41 pm, edited 1 time in total.

Boogieknight
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Re: Where to take more risk: 401k or Roth?

Post by Boogieknight » Tue Nov 07, 2017 5:16 am

OK I get it, what virtually all of you said. And I already knew it. That conventional wisdom says, with greater risk comes greater returns, at least in a long-enough timeframe, however long that is. Investing 101. And that greater returns are better rewarded in a tax-free Roth than in an eventually-taxable 401k. Investing 102. (And repeating this for my daughter to read here.)

I guess I was just wanting to make sure there was not an "ah-HAH!" insight in there somewhere that I was missing. Apparently there is not, which might explain why I could not find any discussion of what is really a theoretical question before I posted. The closest was ThrustVelocity's recharacterization discussion, which I also understand, but that's a limited window with a very limited timeframe. Bad things can easily happen after the window closes.

Thanks all for the responses.

I do question the notion that greater risk begets greater returns even in the long run, at least going forward. With the Fed destroying markets, who knows. And as someone mentioned above, there's no such thing as tax loss harvesting in a Roth. I hate the thought of losing money in a Roth. To the extent that one is loss averse, which I am, it's even more disheartening inside a Roth. So in my own "investing" (if that's what you call it these days) I'm becoming more cautious in my Roth. But maybe I need to stop thinking like a 62-year-old and think like a 26-year-old.

Now I'll open a related can of worms, er, "discussion thread." My daughter works for GE. Engineer there, bright future, at least to the extent that GE has a bright future. So who knows. Her 401k is in a low-cost 2055 target fund. 90% of it. She has two-years new cash ($11,000) in the Roth, deposited last April for 2016 and recently for 2017. 100 GE shares at $20 per OK? I would think so, if for no other reason than it shows some company buy-in. Or do you roll the dice and say 550 shares, damn the torpedoes, If she blows you have 35-40 years still ahead....

(And a hat tip to 3funder. The lack of RMDs (required distributions at age 70 1/2) is kind of a big deal. So is inheritability. My daughter will figure that out someday as my wife and I have rolled a LOT of money into our own Roths.)

I have told my daughter, sure you have a lot of money in your 401k and your Roth (and her HSA). But for her at her (young) age the best thing that could happen is a 50% drop in equity values. So maybe $11,000 of GE in her new Roth is kind of a win-win....

PharmerBrown
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Re: Where to take more risk: 401k or Roth?

Post by PharmerBrown » Tue Nov 07, 2017 7:33 am

I am a fan of taking more risk in the 401k because I'm partially using someone else's money (the govt.). I like the guaranteed money in the Roth.

Chadnudj
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Re: Where to take more risk: 401k or Roth?

Post by Chadnudj » Tue Nov 07, 2017 7:57 am

Boogieknight wrote:
Tue Nov 07, 2017 5:16 am
Now I'll open a related can of worms, er, "discussion thread." My daughter works for GE. Engineer there, bright future, at least to the extent that GE has a bright future. So who knows. Her 401k is in a low-cost 2055 target fund. 90% of it. She has two-years new cash ($11,000) in the Roth, deposited last April for 2016 and recently for 2017. 100 GE shares at $20 per OK? I would think so, if for no other reason than it shows some company buy-in. Or do you roll the dice and say 550 shares, damn the torpedoes, If she blows you have 35-40 years still ahead...

No. No. A thousand times no.

Your daughter's career and income (at present) is already tied to GE.....and you want to concentrate her retirement risk (at least a significant portion of her Roth) there too? So if GE goes under, she not only loses her job but also loses her retirement funds? And why? To show "company buy-in" for some reason? That company buy-in and $2.50 will buy you a cup of coffee at Starbucks, and that's about it.

Diversification is the only relatively free lunch out there. You should be buying low-cost, diversified, passive index funds (I'm fond of the Three Fund portfolio, but your mileage may vary) in traditional 401k and Roth IRA accounts, as these are the bedrocks of your retirement assets. If you (or your daughter) want to "play" at picking individual stocks, take a small amount of your portfolio in your taxable account (less than 5% of your total portfolio) and do it there.

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Re: Where to take more risk: 401k or Roth?

Post by rkhusky » Tue Nov 07, 2017 8:12 am

Boogieknight wrote:
Tue Nov 07, 2017 5:16 am

... there's no such thing as tax loss harvesting in a Roth. ...


... The lack of RMDs (required distributions at age 70 1/2) is kind of a big deal. ...
There is also no tax loss harvesting in a 401K or any tax advantaged account. It''s only available in taxable.

Roth IRA's currently have no RMD's, but Congress could change that at any time, and the idea has already been floated. While I would plan use the current law, I would consider options if changes occur.

niners9088
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Re: Where to take more risk: 401k or Roth?

Post by niners9088 » Tue Nov 07, 2017 8:27 am

GE's 401k has some of the lowest expense ratios available. I wouldn't/don't hold any GE stock even at this depressed level. Also I would look at moving out of the target date fund and into a self split portfolio. With Large cap expense ratio of 0.01% you can easily get a portfolio expense ratio close to 0.03%.

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Re: Where to take more risk: 401k or Roth?

Post by jhfenton » Tue Nov 07, 2017 8:37 am

At this point, at age 47, we're 80/20 overall, but still 100% equities in our Roth. All of our fixed income is in my wife's huge rollover IRA, where I do nearly all of our rebalancing, and in my 401(k).

Why? Our Roth accounts have a longer time horizon. We will probably not touch our Roth accounts until at least age 70, meaning they have a 23-year time horizon. The years between retirement (60-62?) and taking SS at age 70, will presumably be spent filling up our lower tax brackets with withdrawals and Roth conversions from traditional accounts. So our traditional accounts only have a 13-15 year time horizon before we starting using them.

And with the longer time horizon, I'm betting that equities will out-perform over 23 years and we will see more growth in the tax-free Roths. As we get closer to retirement, I'll start taking down the risk a bit in our Roth accounts.

Boogieknight
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Re: Where to take more risk: 401k or Roth?

Post by Boogieknight » Tue Nov 14, 2017 10:24 am

My daughter is starting to think a bit more seriously about putting a couple hundred shares of GE in one of her retirement accounts now.... :happy But who knows where the bottom might be. I don't think it's zero though, like Sears....

And by the way, the ER on the 2055 target date fund in her 401k is 0.07. Looks great on the surface, but that "fund" actually holds five Blackrock funds. And the ERs on those funds range from 0.13 and up. So is she really paying two ERs totaling somewhere north of 0.20% Still reasonable but there may be some room to economize. Perhaps by doing the 90/10 target split ourselves, as a previous poster mentioned.

The online description of her 2055 target date fund even specifically says "this is not a mutual fund." I help run my company's 401k plan but it is very small and I offer real mutual funds directly, as low-cost as the administrator will permit without going apoplectic. Is GE's "fund of funds" approach typical of large plans? Is she paying two ERs? I have yet to look to see if there are any per year annual fees and the like. Maybe GE's 0.07 takes that place, and the Blackrock fund ERs should be considered the only real ER. Am I making any sense?

goingup
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Re: Where to take more risk: 401k or Roth?

Post by goingup » Tue Nov 14, 2017 10:36 am

Boogieknight wrote:
Tue Nov 14, 2017 10:24 am
And by the way, the ER on the 2055 target date fund in her 401k is 0.07. Looks great on the surface, but that "fund" actually holds five Blackrock funds. And the ERs on those funds range from 0.13 and up. So is she really paying two ERs totaling somewhere north of 0.20%
You are incorrect. The ER of the TR2055 is .07. Period. This is a common misconception that a "fund of funds" has ERs that stack up on one another.

Look at the 401K administrator's on-line fund information and prospectus for ER information.

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DaftInvestor
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Re: Where to take more risk: 401k or Roth?

Post by DaftInvestor » Tue Nov 14, 2017 10:40 am

Your questions might be answered by reading the wiki:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

thangngo
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Re: Where to take more risk: 401k or Roth?

Post by thangngo » Tue Nov 14, 2017 10:57 am

Boogieknight wrote:
Mon Nov 06, 2017 6:03 pm
I'm sure this question has been asked before, but I couldn't find it. Sorry if it's substantially redundant. Send links if it is.

For someone who has both a 401k and a Roth IRA, where should that person put the riskier assets?. Or say that person ultimately wanted a 75/25 stock/bond overall portfolio, should it be 80/20 in one and 70/30 in the other? Or 100/0 in one and 50/50 in the other? Or does it even matter? I should know the answer to that question but I don't.

That someone person is my daughter. She is 26, an engineer with a beaten-down Fortune 50, an industrial. three years in, maxes out only the matched part of her 401k for now, but maxes out the Roth (to $5500/year), and maxes out her HSA (all cash for now) every year. Roughly equal assets in the 401k and the Roth, maybe a bit more in the 401k.

Your insights gratefully appreciated. Take care....
It's a good question. By definition, you can take more risk in the accounts that you do not need to withdraw for a very long time. Considering your daughter has 40 year time horizon, both 401k and Roth IRA somewhat fit this criteria, except Roth IRA has penalty-free when you withdraw your contribution.

However, risk and return go hand-in-hand. After asking the question about risk, you should consider asking questions about tax efficiency and maximize your return when you take a certain level of risk.

DrGoogle2017
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Re: Where to take more risk: 401k or Roth?

Post by DrGoogle2017 » Tue Nov 14, 2017 12:27 pm

GE is a falling knife, the stock is not stable enough to buy. I’m afraid It could be a lose lose situation, not the other way around. I’m wondering when will Warren Buffet is going to announce he liquidates all his investment on GE. Maybe he already did.

Boogieknight
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Re: Where to take more risk: 401k or Roth?

Post by Boogieknight » Tue Nov 14, 2017 1:07 pm

goingup said "The ER of the TR2055 is .07. Period. This is a common misconception that a "fund of funds" has ERs that stack up on one another."

So what you are saying is that Blackrock made a deal with GE to reduce their ER on shares held in GE's 401k plan to 0.07% or less? Because that's the only way that the total ER could be that low, unless GE actually subsidized some of Blackrock's expenses, which of course is doubtful.

I looked for the fund information online and could not find it before i had other things to do. I will look again. Because an honest-to-goodness 0.07% ER seems almost too good to be true. And But like I said before I still have not taken the time to review statements to see if there are any once-a-year fees or anything like that.

BTW thank you all for your comments and help.

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Re: Where to take more risk: 401k or Roth?

Post by Nate79 » Tue Nov 14, 2017 2:59 pm

My large employer has Blackrock S&P500 index fund with ER of 0.02 ......

0.07 isn't too good to be true. You would need the fund expense breakdown, ER of each fund and there are probably various net fee reductions. But if 0.07 is listed as the net ER then that is what it is.

randomguy
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Re: Where to take more risk: 401k or Roth?

Post by randomguy » Tue Nov 14, 2017 3:51 pm

JBTX wrote:
Mon Nov 06, 2017 7:07 pm
I think the answer is it does not matter, provided that you adjust for funds that are pre tax (traditional), and funds that are post tax (Roth).

It does matter even if the taxes are the same. Even if the taxes are the same (after SS, medicare,ACA, normal income taxes, AMT, and who the heck knows what else), the ability to choose if you want to take an RMD or not matters. For example imagine you are paying 25% taxes no matter what
So you have
a) 1 million roth, 500k tIRA - net value = 1.375 after tax
b) 375k ROTH, 1.333 million tira = 1.375 after tax

They have the same value but in case B, you must take out 50k or so at 70 versus the 20k in case a for RMDs. If you are not spending the money, you might prefer to let it compound tax free. And if you every need to spend a lot of money, the ROTH can help avoid bracket creep.

And yes this is a pretty minor benefit.

livesoft
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Re: Where to take more risk: 401k or Roth?

Post by livesoft » Tue Nov 14, 2017 4:51 pm

I think the idea to put the riskiest asset class in a Roth IRA is flawed. The riskiest asset class is also the asset class that will drop the mostest during a downturn. And 100% equities in a Roth does not give one an opportunity to buy more shares when things drop. So what to do?

What I do is some blatant market timing. While my portfolio overall asset allocation is about 60/40, I will have some bonds in Roth IRAs when I think market is overvalued while having more equities in a tax-deferred 401(k). But when a market drop happens, I will shift bonds to equities in a Roth IRA (along with a concomitant exchange of equities to bonds in a 401(k)). But, but, but ... that's only part of the story.

The other part of the story is that I like a small-cap and value tilted portfolio. So once my Roth is 100% equities, I will shift from a total market index fund for less risk to a small-cap value fund (in 2016) for more risk, and then when SCV has popped (end of 2016), I will shift to a small-cap foreign fund (beginning of 2017) in the Roth.

In other words, what I hold in a Roth changes with what has happened in the recent past. And if I am wrong, then it doesn't matter that much since I still have 60/40 spread across Roth, tax-deferred, and taxable in a tax-efficient manner. But the Roth has done well in 2016 and 2017 due to some lucky guesses about which asset class to put in it.

And no way no how would I own Enron GE in my retirement plan if I worked for the company.
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DrGoogle2017
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Re: Where to take more risk: 401k or Roth?

Post by DrGoogle2017 » Tue Nov 14, 2017 5:31 pm

I don’t know if it’s flawed to be 100% in equities for Roth. My daughter’s Roth account has gone up 3 times the total contribution. In the first few years, she only had a few thousands sporadically starting with 2007. She did have one big graduation gift in 2013. No messing about with it ever.

Nowizard
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Re: Where to take more risk: 401k or Roth?

Post by Nowizard » Tue Nov 14, 2017 5:36 pm

We have taken more risk with our Roth, reasoning that it will be the last asset redeemed and can withstand more volatility and, theoretically, greater risk should give greater returns and less taxation.

Tim

MathWizard
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Re: Where to take more risk: 401k or Roth?

Post by MathWizard » Tue Nov 14, 2017 10:01 pm

I don’t take more risk, I accept more volatility for a better expected long term return.
I accept the greater volatility in my Roth, since I plan to keep it the longest.

Some might say you should have some
low volatility in your Roth for whatever
portion is your second tier Emergency Fund.

Pigeye Brewster
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Re: Where to take more risk: 401k or Roth?

Post by Pigeye Brewster » Tue Nov 14, 2017 11:00 pm

I'm all equities in Roth, both Roth IRA and the Roth portion of 401k. Equities have higher expected returns in the long-term. All growth in Roth is tax-free and Roth IRA has no RMD requirements. So I'm planning on it being some of the last to spend, resulting in a time horizon that is likely longer in relative terms. This makes volatility less of a concern. I balance my overall asset allocation by adjusting traditional IRA and 401k.

My current Roth IRA value is 125% more than the contributions. Thank you for your namesake account, Senator Roth.

JBTX
Posts: 1522
Joined: Wed Jul 26, 2017 12:46 pm

Re: Where to take more risk: 401k or Roth?

Post by JBTX » Wed Nov 15, 2017 12:52 pm

randomguy wrote:
Tue Nov 14, 2017 3:51 pm
JBTX wrote:
Mon Nov 06, 2017 7:07 pm
I think the answer is it does not matter, provided that you adjust for funds that are pre tax (traditional), and funds that are post tax (Roth).

It does matter even if the taxes are the same. Even if the taxes are the same (after SS, medicare,ACA, normal income taxes, AMT, and who the heck knows what else), the ability to choose if you want to take an RMD or not matters. For example imagine you are paying 25% taxes no matter what
So you have
a) 1 million roth, 500k tIRA - net value = 1.375 after tax
b) 375k ROTH, 1.333 million tira = 1.375 after tax

They have the same value but in case B, you must take out 50k or so at 70 versus the 20k in case a for RMDs. If you are not spending the money, you might prefer to let it compound tax free. And if you every need to spend a lot of money, the ROTH can help avoid bracket creep.

And yes this is a pretty minor benefit.
Yes the Roth has a lot of other benefits in terms of flexibility which is why I have historically preferred them even if the numbers lean favorable to traditional. The superiority of the traditional is contingent on quite a few assumptions.

Bottom line I think there is a lot of value in having a mix of both.

WhiteMaxima
Posts: 516
Joined: Thu May 19, 2016 5:04 pm

Re: Where to take more risk: 401k or Roth?

Post by WhiteMaxima » Wed Nov 15, 2017 12:57 pm

401k you have to take RMD and its taxable. Roth you can pass along to next heir and tax free. So I will take more risk in Roth. Pass along all risk and reward to next heir. 401k is my life support in my retirement, can't take too much risk.

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