Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

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LovingLife
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Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by LovingLife » Fri Aug 10, 2018 11:19 am

I have both a Traditional IRA and a Roth IRA. I hold a handful of index/mutual funds in each (which is more than what I believe BH recommends, but it's how I've done it thus far), and was wondering:

1. I have some funds that pay dividends (1-3%) and some that pay no dividend. Does it matter whether dividend-paying funds go into the TIRA or the RIRA? I reinvest all dividends and gains.
2. If an index/mutual fund has an equivalent ETF at the same expense ratio and putting minimum investment to access the fund aside, what are the reasons to pick a index/MF over an ETF, or vice versa?

I don't plan to touch the funds until retirement. Current age is late 30s.

Thanks.

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David Jay
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by David Jay » Fri Aug 10, 2018 11:27 am

There's a WIKI for that: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Quick summary:
1. Place the funds which are likely to experience the most growth (i.e. 100% stock funds) in Roth, as you will never pay taxes on any of the gains.
2. Place those funds that are likely to experience less growth (balanced funds, bond funds, money market) in traditional IRA as the gains will be taxed at time of withdrawal as regular income (no capital gains, etc.).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

LovingLife
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by LovingLife » Fri Aug 10, 2018 12:06 pm

Thanks - that's a helpful WIKI.

I don't hold or plan to hold bond funds, but understand your summary of placing higher expected return funds in the Roth and lower expected return funds in the TIRA. Since total return is comprised of gain + dividends, is it correct to assume that it doesn't matter which vehicle (TIRA or Roth) the dividend-paying funds go into, assuming reinvestment of dividends, until withdrawal? Let's assume it's hard to predict whether the dividend-paying funds will generate a better return than their zero dividend counterparts.

Also, any thoughts on the ETF vs. index fund question?

livesoft
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by livesoft » Fri Aug 10, 2018 12:08 pm

Here is a tricky thing I do: Whenever an ETF like DGS is going up, I put it in my Roth IRA where the gains will be tax free. Whenever an ETF like DGS is about to go down, then I sell it in the Roth IRA and buy it in the tIRA. That's because when it goes down in the tIRA it will reduce my future RMDs and taxes. If it goes down in the Roth IRA, I get no tax benefit for that loss.
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ralph124cf
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by ralph124cf » Fri Aug 10, 2018 12:09 pm

Real answer: See above.

Short answer: It doesn't matter, as the real difference in percentage of spendable after tax income is likely to be after the decimal point, not before it.

Ralph

tenkuky
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by tenkuky » Fri Aug 10, 2018 12:11 pm

ralph124cf wrote:
Fri Aug 10, 2018 12:09 pm
Real answer: See above.

Short answer: It doesn't matter, as the real difference in percentage of spendable after tax income is likely to be after the decimal point, not before it.

Ralph
+1
And I don't have the knowledge or energy to do what livesoft suggests. In fact, before this thread, I didn't even think about doing something like that.
Learn every day.

JBTX
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by JBTX » Fri Aug 10, 2018 12:21 pm

livesoft wrote:
Fri Aug 10, 2018 12:08 pm
Here is a tricky thing I do: Whenever an ETF like DGS is going up, I put it in my Roth IRA where the gains will be tax free. Whenever an ETF like DGS is about to go down, then I sell it in the Roth IRA and buy it in the tIRA. That's because when it goes down in the tIRA it will reduce my future RMDs and taxes. If it goes down in the Roth IRA, I get no tax benefit for that loss.
So how do you determine "when it is going up" and "when it is going down? If you could really do that wouldn't you just sell when it is going down?

I've thought about doing the same thing myself but ultimately it requires me to time the market in which I have no ability to do.

As to OP I tend to have Roths more in equities and most of my bonds in traditional. But the theoretically correct answer it doesn't matter if you do your asset allocations based upon projected AFTER tax values.
Last edited by JBTX on Fri Aug 10, 2018 12:24 pm, edited 1 time in total.

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GerryL
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by GerryL » Fri Aug 10, 2018 12:23 pm

Another consideration is how long before you intend to tap the Roth IRA. If you don't intend to use the $$ in your Roth until long after you start taking RMDs -- if ever -- you can accept more volatility. The VG CFP I worked with recently recommended filling up my Roth space with the bulk of my Total International Stock Index fund holdings.

livesoft
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Re: Does it matter which mutual fund goes into my Roth IRA vs. Traditional IRA?

Post by livesoft » Fri Aug 10, 2018 12:59 pm

JBTX wrote:
Fri Aug 10, 2018 12:21 pm
So how do you determine "when it is going up" and "when it is going down? If you could really do that wouldn't you just sell when it is going down?
I follow the trades of Congressmen.

Well, if I just sold, then that would not be "stay-the-course."
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