no bonds in roth?

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bling
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no bonds in roth?

Post by bling » Sun Mar 04, 2018 1:23 pm

i've been following https://www.bogleheads.org/wiki/Tax-eff ... _placement almost a little too much, and i'm starting to reconsider and see if i should make minor changes.

my primary question is whether i should be keeping a small amount in bonds in my roth so that when a market recession happens, i'm able to buy the stocks at a lower price, and hence increase the expected return going forward.

right now, my roth space is entirely stocks. if the market tanks, to rebalance i'd have to exchange bonds to stocks in my 401k -- however those gains are taxed at distribution, whereas the roth is not.

i'm thinking of moving $10k into bonds for mine and DW's roth accounts, to get the admiral shares (and then selling bonds in my 401k so my AA remains the same). any downsides?

thanks!

edit: if it matters, i'm currently in my early 30s with a 70/30 AA. all of my bonds are in my 401k, and the rest is spread out across my 401k/roth/taxable.
Last edited by bling on Sun Mar 04, 2018 1:39 pm, edited 1 time in total.

retiredjg
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Re: no bonds in roth?

Post by retiredjg » Sun Mar 04, 2018 1:27 pm

I dont see any downside for putting some bonds in Roth IRA. Your reason is as good as any.

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Alexa9
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Re: no bonds in roth?

Post by Alexa9 » Sun Mar 04, 2018 1:30 pm

Roth dollars are worth more. You probably want 20% bonds to rebalance especially after this huge bull run we've had. The market will inevitably drop again. It depends on your age, net worth, and willingness to take risk. You might hold more bonds in your 401k like you said to get your target allocation. If you're younger than 40, you could go 100% equities in your Roth and just have DRIP turned on during market downturns, but 80/20 has similar returns with less volatility. It all depends on how the market performs during your lifetime. Ignore past returns for the most part and stick to your strategy.

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jhfenton
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Re: no bonds in roth?

Post by jhfenton » Sun Mar 04, 2018 1:34 pm

I have no bonds in our Roth IRAs because I view those assets as having a longer time horizon than our traditional assets. We were 100% equities until age 45. At 48 (this year), and an estimate 14 years till retirement, we are about 80/20 overall. But I see no reason we would touch our Roth assets until age 70*, so those assets still have a 22-year time horizon. In my mind, assets with that time horizon can reasonably be 100% equities. Adding bonds reduces volatility, it doesn't increase expected return. In 5-10 years, I will start gradually incorporating some bonds into our Roth accounts.

*I expect from age 62-70 we will withdraw from our traditional IRAs and convert traditional assets to Roth. I see no reason we would withdraw from our Roths then.

lazyday
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Re: no bonds in roth?

Post by lazyday » Sun Mar 04, 2018 2:18 pm

bling wrote:
Sun Mar 04, 2018 1:23 pm
my primary question is whether i should be keeping a small amount in bonds in my roth so that when a market recession happens, i'm able to buy the stocks at a lower price, and hence increase the expected return going forward.
If this works, then it should also work for you to sell all your stocks now, move to bonds, and then after the recession buy stocks again.

If the 401k is 100% fixed income, then it makes sense to me to put bonds into the Roth. The market timing argument doesn't make much sense to me.

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Re: no bonds in roth?

Post by JBTX » Sun Mar 04, 2018 2:21 pm

I have most of my bonds in traditional. Reason being id rather get the growth long term in Roth

It is worth noting that it doesn’t really matter, IF you tax adjust your balances. Traditional is pretax and Roth is post tax. So dollar for dollar your Roth is worth more. A dollar in Roth may be approximately $1.12 or $1.22 in a traditional.

bling
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Re: no bonds in roth?

Post by bling » Sun Mar 04, 2018 5:47 pm

lazyday wrote:
Sun Mar 04, 2018 2:18 pm
bling wrote:
Sun Mar 04, 2018 1:23 pm
my primary question is whether i should be keeping a small amount in bonds in my roth so that when a market recession happens, i'm able to buy the stocks at a lower price, and hence increase the expected return going forward.
If this works, then it should also work for you to sell all your stocks now, move to bonds, and then after the recession buy stocks again.

If the 401k is 100% fixed income, then it makes sense to me to put bonds into the Roth. The market timing argument doesn't make much sense to me.
i'm not trying to time the market -- when the market falls, my rebalancing bands will be hit and i'll need to sell bonds and buy stocks. right now i can only do that in my 401k space.

also, i don't understand why 401k being 100% fixed income makes any difference... if the market falls, i'd sell it in 401k and replace the bonds with stocks. the roth remains untouched.

livesoft
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Re: no bonds in roth?

Post by livesoft » Sun Mar 04, 2018 6:01 pm

If some equity fund in my Roth has a big, too fast, run-up, then I will exchange it to an ETF which has less of run-up such as a Total Stock Market (TSM) Index ETF and at the same time, I will exchange a TSM Index ETF in my tax-deferred account into the thing I sold in my Roth.

It is a rather innocuous double exchange, but sometimes it works out that the thing sold in the Roth drops more than TSM does. You may ask then, "How do you get back to where you started?" That's what RBDs are for.
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gostars
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Re: no bonds in roth?

Post by gostars » Sun Mar 04, 2018 9:23 pm

You're making the assumption that the market crash will take it to back below what it is now, which has a faint whiff of market timing to me. What if we go on another 10 year run and the market doubles what it is today, then crashes back 30% from that? You end up losing out on growth you would have otherwise had in the Roth, and end up having more growth in the tax-deferred space that you'll have to pay taxes on. If you keep Roth space in 100% stocks, and then need to rebalance in your 401k in the future, that's not a bad thing. It'll be a temporary situation, as the rebound in stocks combined with the increasing shift to bonds as you age will have you rebalancing the 401k back towards bonds.

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Re: no bonds in roth?

Post by livesoft » Sun Mar 04, 2018 9:46 pm

I wanted to add one more thing that some of us can do: Even though our Roths are 100% equities, since we are doing Roth conversions each year, if markets do tank bringing the Roth IRA values down, then we can add to the Roth by a conversion. So we could exchange from a bond fund in a tax-deferred account into an equity fund in the Roth.
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bling
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Re: no bonds in roth?

Post by bling » Sun Mar 04, 2018 9:53 pm

livesoft wrote:
Sun Mar 04, 2018 9:46 pm
I wanted to add one more thing that some of us can do: Even though our Roths are 100% equities, since we are doing Roth conversions each year, if markets do tank bringing the Roth IRA values down, then we can add to the Roth by a conversion. So we could exchange from a bond fund in a tax-deferred account into an equity fund in the Roth.
this really only works during retirement because of RMDs, right? for someone like myself in the accumulation phase it's probably not worthwhile to pay taxes on the distribution.

lazyday
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Re: no bonds in roth?

Post by lazyday » Mon Mar 05, 2018 4:25 am

bling wrote:
Sun Mar 04, 2018 5:47 pm
i'm not trying to time the market -- when the market falls, my rebalancing bands will be hit and i'll need to sell bonds and buy stocks. right now i can only do that in my 401k space.
"Market timer" can be an insult here, so maybe I should have worded my post better. You're proposing a change that requires proper timing of a down market for you to benefit. gostars explained it well.
i don't understand why 401k being 100% fixed income makes any difference
I think that it can make sense for some people to put bonds into a Roth. For example, if the 401k is already 100% fixed income and the AA calls for even more fixed income. So I'm not against bonds in a Roth, I just am not convinced by the idea of having bonds in a Roth to benefit during a recession.

lazyday
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Re: no bonds in roth?

Post by lazyday » Mon Mar 05, 2018 4:42 am

JBTX wrote:
Sun Mar 04, 2018 2:21 pm
I have most of my bonds in traditional. Reason being id rather get the growth long term in Roth

It is worth noting that it doesn’t really matter, IF you tax adjust your balances. Traditional is pretax and Roth is post tax. So dollar for dollar your Roth is worth more. A dollar in Roth may be approximately $1.12 or $1.22 in a traditional.
Even if you adjust balances, it seems to me that it does matter.

Placing equities into Traditional can bump you up into a higher tax bracket. And even if it won’t according to your estimate of future equity returns (and future tax brackets), what if your returns estimate is wrong? If you estimate low, you could be much better off with equities in Roth, while if you estimate high, you could be slightly better off with equities in Traditional. While there can be a diminishing benefit to wealth and it is nice to protect against worst cases such as bonds outperforming equity, with low equity returns you might be in such a low tax bracket even with equity in Roth that using Traditional isn’t much help.

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Re: no bonds in roth?

Post by moshe » Mon Mar 05, 2018 7:53 am

You also might consider holding bonds in a Roth as an emergency fund substitute. Contributions to a Roth, because they are post tax, can be withdrawn at any time without penalty.

However, earnings are subject to more complex tests based on Roth account age and need, medical, etc.

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Johnnie
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Re: no bonds in roth?

Post by Johnnie » Mon Mar 05, 2018 9:58 pm

Alexa9 wrote:
Sun Mar 04, 2018 1:30 pm
Roth dollars are worth more. You probably want 20% bonds to rebalance especially after this huge bull run we've had.
I'm not so sure about that last. But I'm not so sure about what I have either.

Three years from retirement, 55/45, and I've got my potential high-flyers in the Roth - emerging, intl small cap value, US SCV. The Roth is 22 percent of my equities, the rest in regular IRAs. The regular IRAs also have bond funds.

The Roth holds things that if they go they really go. I don't know that I want that precious Roth space to be only partially invested. If those asset classes tumble and I want to rebalance I can still do that in my regular IRA. A little less tax goodness but I don't see what I've lost in that case.

What am I missing?
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Alexa9
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Re: no bonds in roth?

Post by Alexa9 » Mon Mar 05, 2018 10:21 pm

Johnnie wrote:
Mon Mar 05, 2018 9:58 pm

What am I missing?
Since Roth dollars are worth more you may want to be more aggressive or more conservative. If we hit another 2008 and you need that money, you'd probably want some bonds to cushion your losses in your Roth and rebalance. I suppose you could not touch your Roth until late retirement if need be, but I guess it's up to you how you view stock market risk and your retirement needs. If you have both Roth and Traditional, you should plan your taxes efficiently as well. It is more complicated than it appears to maximize returns and minimize taxes and losses.

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David Jay
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Re: no bonds in roth?

Post by David Jay » Tue Mar 06, 2018 10:32 pm

We hold exclusively LifeStrategy Growth (80/20) in our Roth accounts.
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Re: no bonds in roth?

Post by ThrustVectoring » Wed Mar 07, 2018 2:40 am

Alexa9 wrote:
Mon Mar 05, 2018 10:21 pm
Johnnie wrote:
Mon Mar 05, 2018 9:58 pm

What am I missing?
Since Roth dollars are worth more you may want to be more aggressive or more conservative. If we hit another 2008 and you need that money, you'd probably want some bonds to cushion your losses in your Roth and rebalance. I suppose you could not touch your Roth until late retirement if need be, but I guess it's up to you how you view stock market risk and your retirement needs. If you have both Roth and Traditional, you should plan your taxes efficiently as well. It is more complicated than it appears to maximize returns and minimize taxes and losses.
That makes zero sense, it implies that if you list an account in cents rather than dollars you'd want to be more aggressive or conservative because the cents are worth less than the dollars are. That's the same thing that's going on with Roth vs Traditional accounts - the tax deferred dollars are worth like 80 to 90 cents on the dollar, depending on expected tax burden.

There's an argument to be made to put more of your 401k in bonds for adding tax burden predictability to your withdrawal strategy. If you're doing the whole "retire at 60, drain most of the 401k into a Roth IRA or spending money before hitting 70 for social security and RMDs" thing, and your 401k is in fixed income, you know how much you are going to drain over the next decade. You could even do a "buy a certificate of deposit that matures at the desired value each year" thing to ladder into it, too.

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Re: no bonds in roth?

Post by toblerone » Wed Mar 07, 2018 3:41 am

My Roth used to be 100% TSM (VTI), but as it grew I decided I wanted to have something in the Roth to re-balance with if necessary. Like on a RRBD (really, really BD) which is when I'd love to back up the truck. So it is now 90-10 TSM/TBM, even thought my overall AA is 65-35. It's just an extra row on the spreadsheet and easy to manage. In the long run it probably won't make much, if any difference in return, but I like the option when it comes to maintaining my AA across different types of accounts.

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Johnnie
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Re: no bonds in roth?

Post by Johnnie » Sat Mar 10, 2018 5:18 pm

toblerone wrote:
Wed Mar 07, 2018 3:41 am
My Roth used to be 100% TSM (VTI), but as it grew I decided I wanted to have something in the Roth to re-balance with if necessary. Like on a RRBD (really, really BD) which is when I'd love to back up the truck. So it is now 90-10 TSM/TBM, even thought my overall AA is 65-35. It's just an extra row on the spreadsheet and easy to manage. In the long run it probably won't make much, if any difference in return, but I like the option when it comes to maintaining my AA across different types of accounts.
Here's my question, and I think the answer is the solution to a math question and also a backtest question that some here could do in the time it takes for me to write these paragraphs, but I'm not one of them:

Assuming your portfolio is 65/35 overall (or pick other), in the long run is it better to have a sliver of Roth space occupied by the asset class that doesn't grow - ie. bonds - or use all of that Roth for pedal-to-the-metal asset classes like EM? In the scenario you suggest, having some bonds in the Roth gives you a one-time chance to buy low after a drawdown, but at the cost until then of reducing potential tax-free equity gains on the upside by 10 percent.

My Roth contains EM, small cap value and international small cap value. On the latter two, I hold about half of each in the Roth and half in a rollover IRA that also contains a short term bond fund. That makes it easy to rebalance all three asset classes between the two types of account as needed, while keeping the Roth fully invested in risk assets.

Again, what am I missing? (There must be something. :oops: )
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Hillview
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Re: no bonds in roth?

Post by Hillview » Sat Mar 10, 2018 7:06 pm

Interesting thread. I am thinking of putting all of my Roth (soon to be Roth through a conversion) into stocks, thought being that I don't think I will need it for decades and putting it into the AA that is most likely to grow. I will be following this threat!

livesoft
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Re: no bonds in roth?

Post by livesoft » Sat Mar 10, 2018 7:14 pm

Johnnie wrote:
Sat Mar 10, 2018 5:18 pm
... - or use all of that Roth for pedal-to-the-metal asset classes like EM? I
[...]
Again, what am I missing? (There must be something. :oops: )
EM is sometimes brake_pedal-to-the-metal, so one's Roth would have suffered when EM was going nowhere, say 2013-2015.
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Re: no bonds in roth?

Post by welderwannabe » Sat Mar 10, 2018 7:19 pm

I keep no bonds in my Roth. Instead I have more bonds in my Megacorp 401k to make up the difference.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: no bonds in roth?

Post by gostars » Sat Mar 10, 2018 8:23 pm

Johnnie wrote:
Sat Mar 10, 2018 5:18 pm
Again, what am I missing? (There must be something. :oops: )
You're trying to time the market by hoping it will someday be lower than it is today. There is no guarantee that will ever happen. Even if it does, you're also assuming that you can pick the bottom and make the switch at the right time.

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Re: no bonds in roth?

Post by cfs » Sat Mar 10, 2018 8:28 pm

Some investors have bonds in their Roth IRA.

Not on my watch, two Roth IRAs in my home, and both are 100% in "aggressive" equities.

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Johnnie
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Re: no bonds in roth?

Post by Johnnie » Sat Mar 10, 2018 10:21 pm

gostars wrote:
Sat Mar 10, 2018 8:23 pm
Johnnie wrote:
Sat Mar 10, 2018 5:18 pm
Again, what am I missing? (There must be something. :oops: )
You're trying to time the market by hoping it will someday be lower than it is today. There is no guarantee that will ever happen. Even if it does, you're also assuming that you can pick the bottom and make the switch at the right time.
I'm not doing that, the person I addressed this to is doing that by keeping 10% of his Roth in bonds so he can rebalance during a market decline. I'm just rebalancing annually between equity classes, and between stocks/bonds, per the Merriman school. My only flourish is keeping the Roth fully invested in my riskier asset classes. My overall asset allocation counts assets in all accounts.
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gostars
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Re: no bonds in roth?

Post by gostars » Sat Mar 10, 2018 11:09 pm

Johnnie wrote:
Sat Mar 10, 2018 10:21 pm
gostars wrote:
Sat Mar 10, 2018 8:23 pm
Johnnie wrote:
Sat Mar 10, 2018 5:18 pm
Again, what am I missing? (There must be something. :oops: )
You're trying to time the market by hoping it will someday be lower than it is today. There is no guarantee that will ever happen. Even if it does, you're also assuming that you can pick the bottom and make the switch at the right time.
I'm not doing that, the person I addressed this to is doing that by keeping 10% of his Roth in bonds so he can rebalance during a market decline. I'm just rebalancing annually between equity classes, and between stocks/bonds, per the Merriman school. My only flourish is keeping the Roth fully invested in my riskier asset classes. My overall asset allocation counts assets in all accounts.
My mistake, I confused myself between the Roth and rollover when reading your post.

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Re: no bonds in roth?

Post by Greenie » Sat Mar 10, 2018 11:47 pm

I am 67 and my wife is 59. We have no bonds in our Roths. We have enough space in our tax deferred accounts for bonds to meet our asset allocation. Roth accounts will be the last thing we will touch and look at it least a 15 year time line. The Roths will probably be legacy to our daughter.

Bfwolf
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Re: no bonds in roth?

Post by Bfwolf » Sat Mar 10, 2018 11:57 pm

If we are talking about deciding whether to have bonds in a Roth versus a traditional IRA/401k, the long time horizon argument some are making holds no water. Money is fungible. You can hold bonds in your Roth and stocks in your traditional IRA now, and then in the future when you're making RMDs, you can sell bonds in your Roth and buy stocks to make up for the stock money being withdrawn from your traditional IRA. If we're talking about Roths vs taxable accounts, the situation is different due to tax implications of making a sale in the taxable account.

People who say they want to be aggressive with their Roth money because it is worth more are merely taking on a more aggressive tax-adjusted asset allocation. i.e. they tell themselves that their asset allocation is 60/40 but on a tax-adjusted basis it's actually 65/35 because they're holding stocks in their Roth and bonds in their traditional IRAs. This is just self-deception. The best way to avoid this is to calculate your asset allocation on a tax-adjusted basis, in which case it won't matter where you hold your bonds when it comes time to calculate your asset allocation. If you're not going to calculate your asset-allocation on a tax-adjusted basis, the best way to preserve your real desired asset allocation is to hold the same % of bonds in your after-tax accounts as your pre-tax accounts.

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Re: no bonds in roth?

Post by livesoft » Sun Mar 11, 2018 7:04 am

Bfwolf wrote:
Sat Mar 10, 2018 11:57 pm
[...] The best way to avoid this is to calculate your asset allocation on a tax-adjusted basis, in which case it won't matter where you hold your bonds when it comes time to calculate your asset allocation. If you're not going to calculate your asset-allocation on a tax-adjusted basis, the best way to preserve your real desired asset allocation is to hold the same % of bonds in your after-tax accounts as your pre-tax accounts.
Suppose that one is paying no income taxes in retirement as long as RMDs are not large. What then? Wouldn't it make sense to have RMDs as small as possible? In that case wouldn't it make sense to have the tax-deferred account as small as possible and the Roth account as large as possible and even the taxable account as large as possible? And if it makes sense to have RMDs as small as possible, doesn't it make sense to have the assets that are predicted to grow the least over time in the tax-deferred account?
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Re: no bonds in roth?

Post by Bfwolf » Mon Mar 12, 2018 12:32 pm

livesoft wrote:
Sun Mar 11, 2018 7:04 am
Bfwolf wrote:
Sat Mar 10, 2018 11:57 pm
[...] The best way to avoid this is to calculate your asset allocation on a tax-adjusted basis, in which case it won't matter where you hold your bonds when it comes time to calculate your asset allocation. If you're not going to calculate your asset-allocation on a tax-adjusted basis, the best way to preserve your real desired asset allocation is to hold the same % of bonds in your after-tax accounts as your pre-tax accounts.
Suppose that one is paying no income taxes in retirement as long as RMDs are not large. What then? Wouldn't it make sense to have RMDs as small as possible? In that case wouldn't it make sense to have the tax-deferred account as small as possible and the Roth account as large as possible and even the taxable account as large as possible? And if it makes sense to have RMDs as small as possible, doesn't it make sense to have the assets that are predicted to grow the least over time in the tax-deferred account?
This is a great point I hadn't considered.

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Re: no bonds in roth?

Post by toblerone » Mon Mar 12, 2018 8:22 pm

Johnnie wrote:
Sat Mar 10, 2018 5:18 pm
Assuming your portfolio is 65/35 overall (or pick other), in the long run is it better to have a sliver of Roth space occupied by the asset class that doesn't grow - ie. bonds - or use all of that Roth for pedal-to-the-metal asset classes like EM? In the scenario you suggest, having some bonds in the Roth gives you a one-time chance to buy low after a drawdown, but at the cost until then of reducing potential tax-free equity gains on the upside by 10 percent.
Who said it's a "one-time chance to buy low after a drawdown"? As long as I keep my overall AA the same, I can do whatever I want inside the accounts. True, it may not be smart what I do! :oops: But continuing on your example, after the drawdown, and after the market stabilized, for the next Roth contribution I might put $5500 back into bonds again, especially if my overall AA called for it. Nothing wrong with that, and like I said just one more line on the spreadsheet. I would love it if someone could tell me what a horrible idea this is, and why. Or even sub-optimal. I don't expect huge RMDs.

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Johnnie
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Re: no bonds in roth?

Post by Johnnie » Mon Mar 12, 2018 9:44 pm

I agree with you on thing: I'm not 100 percent that what I am doing is the optimal thing.

-- What I am doing: Roth IRA 100 percent invested in the higher-risk asset classes in a slice-and-dice portfolio. The Roth is considered just one component of (say) a 60/40 portfolio, and I have a way to include the Roth in overall rebalancing (described in previous post and it's pretty basic).

Here's the rationale:

I've chosen a slice and dice portfolio and the riskier asset classes in that have the potential for bigger gains over time. If they are in a Roth and the gains are tax free that's a potential super bonus.

The Roth is 22 percent of my portfolio (and hopefully more with some post-retirement conversions). It's a long term investment, but after taking social security at 70 I may distribute small amounts each year to lower the tax bill. Lower RMDs are part of that but not a huge consideration. Legacy desired but doesn't have to be huge, or Roth for that matter.

It seems right but I may be missing something important. I'm not too concerned with short term things that might happen but with the long term soundness of the plan. Acknowledging that the asteroid could hit tomorrow, etc.

Thanks
Last edited by Johnnie on Mon Mar 12, 2018 10:31 pm, edited 1 time in total.
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Re: no bonds in roth?

Post by radiowave » Mon Mar 12, 2018 9:52 pm

I have a low cost, index based target date fund in my Roth . . . works for me.
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Re: no bonds in roth?

Post by boglewill34 » Tue Mar 13, 2018 10:20 am

livesoft wrote:
Sun Mar 11, 2018 7:04 am
Bfwolf wrote:
Sat Mar 10, 2018 11:57 pm
[...] The best way to avoid this is to calculate your asset allocation on a tax-adjusted basis, in which case it won't matter where you hold your bonds when it comes time to calculate your asset allocation. If you're not going to calculate your asset-allocation on a tax-adjusted basis, the best way to preserve your real desired asset allocation is to hold the same % of bonds in your after-tax accounts as your pre-tax accounts.
Suppose that one is paying no income taxes in retirement as long as RMDs are not large. What then? Wouldn't it make sense to have RMDs as small as possible? In that case wouldn't it make sense to have the tax-deferred account as small as possible and the Roth account as large as possible and even the taxable account as large as possible? And if it makes sense to have RMDs as small as possible, doesn't it make sense to have the assets that are predicted to grow the least over time in the tax-deferred account?
This is the smartest thing I've read in a looong time. Thanks!

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