Asset allocation in Roth vs pre-tax

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international001
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Asset allocation in Roth vs pre-tax

Post by international001 » Thu May 10, 2018 8:11 am

If you have the option of a pre-tax (trad IRA, 401k) vs roth (roth IRA, roth 401k), what is the common wisdom?

My thought
Consider everything like a big portfolio.
Allocate the assets with most retrun (REITs, SCV, ..) in Roth
rest in pre-tax

(step 4 in https://www.bogleheads.org/wiki/Tax-eff ... _placement)

Any other considerations?

-J

PFInterest
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Re: Asset allocation in Roth vs pre-tax

Post by PFInterest » Thu May 10, 2018 12:56 pm

nope. gotta weigh growth potential, tax liability and available funds.

KlangFool
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Re: Asset allocation in Roth vs pre-tax

Post by KlangFool » Thu May 10, 2018 1:00 pm

OP,

1) Start with putting the fixed income and REIT into the Trad. 401K and Trad. IRA. This will minimize your tax. Then, fill up the rest with your stock index fund.

2) Do not worry about putting stock index fund into your taxable account. You can use tax loss harvesting and tax gain harvesting to minimize your tax burden.

Then, you are done. It is very simple.

KlangFool

international001
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Re: Asset allocation in Roth vs pre-tax

Post by international001 » Thu May 10, 2018 1:11 pm

KlangFool wrote:
Thu May 10, 2018 1:00 pm
OP,

1) Start with putting the fixed income and REIT into the Trad. 401K and Trad. IRA. This will minimize your tax. Then, fill up the rest with your stock index fund.

2) Do not worry about putting stock index fund into your taxable account. You can use tax loss harvesting and tax gain harvesting to minimize your tax burden.

Then, you are done. It is very simple.

KlangFool
taxable account was out of the picture. I was just asking between pre-tax and post-tax (roth) tax advantage accounts

BTW, off the original topic, there is a case for bonds in taxable because they grow less (it's mentioned in the link I sent)

KlangFool
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Re: Asset allocation in Roth vs pre-tax

Post by KlangFool » Thu May 10, 2018 1:21 pm

international001 wrote:
Thu May 10, 2018 1:11 pm
KlangFool wrote:
Thu May 10, 2018 1:00 pm
OP,

1) Start with putting the fixed income and REIT into the Trad. 401K and Trad. IRA. This will minimize your tax. Then, fill up the rest with your stock index fund.

2) Do not worry about putting stock index fund into your taxable account. You can use tax loss harvesting and tax gain harvesting to minimize your tax burden.

Then, you are done. It is very simple.

KlangFool
taxable account was out of the picture. I was just asking between pre-tax and post-tax (roth) tax advantage accounts

BTW, off the original topic, there is a case for bonds in taxable because they grow less (it's mentioned in the link I sent)
international001,

1) Which does not apply to most people unless and until they run out of room to put the bond into their tax-advantaged accounts

<<I was just asking between pre-tax and post-tax (roth) tax advantage accounts>>

2) I had answered the question. It works even in that specific case.

KlangFool

ThrustVectoring
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Re: Asset allocation in Roth vs pre-tax

Post by ThrustVectoring » Fri May 11, 2018 11:55 am

international001 wrote:
Thu May 10, 2018 8:11 am

Allocate the assets with most retrun (REITs, SCV, ..) in Roth
If you believe that they have the most return, why are you holding other assets? This always makes little sense to me. And if it's for diversification and a better risk-adjusted return, why wouldn't you have that mix in your Roth to maximize its risk-adjusted growth?

IMO any argument to tilt your Roth allocation in a certain direction based on expected return works better as an argument to tilt your portfolio in that direction based on expected return.

international001
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Re: Asset allocation in Roth vs pre-tax

Post by international001 » Fri May 11, 2018 2:30 pm

*expected* return. Or the thing that is most likely over the long term.

Of course, if things don't turn out as you thing, and bonds perform better than REITs or SCV, you achieve the opposite.

So I guess this strategy (described in the BH wiki), makes the tails of the distribution (for the total return in retirement) fatter. But still, the expected return would also increase.

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willthrill81
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Re: Asset allocation in Roth vs pre-tax

Post by willthrill81 » Fri May 11, 2018 2:42 pm

ThrustVectoring wrote:
Fri May 11, 2018 11:55 am
international001 wrote:
Thu May 10, 2018 8:11 am

Allocate the assets with most retrun (REITs, SCV, ..) in Roth
If you believe that they have the most return, why are you holding other assets? This always makes little sense to me. And if it's for diversification and a better risk-adjusted return, why wouldn't you have that mix in your Roth to maximize its risk-adjusted growth?
Over a 20 year period or longer, history has shown that stocks have nearly always trounced fixed income in terms of purchasing power (i.e. real returns). Over shorter periods, stocks still have the edge but there is a more variance in the returns, hence, people often hold at least some of their shorter term money in FI.

Remember that you cannot 'eat' a risk-adjusted return, only a real one.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

international001
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Re: Asset allocation in Roth vs pre-tax

Post by international001 » Fri May 11, 2018 5:30 pm

I'm talking over 20 years. I still want to get away with some of the risk. This is why I have 10% bonds (like Vanguard target funds do), and I'm not investing everything on small cap value EM. But the way of getting the highest *expected* return would be to use roth Ira for the most high-risk-return investments

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willthrill81
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Re: Asset allocation in Roth vs pre-tax

Post by willthrill81 » Fri May 11, 2018 6:50 pm

international001 wrote:
Fri May 11, 2018 5:30 pm
I'm talking over 20 years. I still want to get away with some of the risk. This is why I have 10% bonds (like Vanguard target funds do), and I'm not investing everything on small cap value EM. But the way of getting the highest *expected* return would be to use roth Ira for the most high-risk-return investments
:thumbsup
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Johnnie
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Re: Asset allocation in Roth vs pre-tax

Post by Johnnie » Sat May 12, 2018 3:11 pm

ThrustVectoring wrote:
Fri May 11, 2018 11:55 am
international001 wrote:
Thu May 10, 2018 8:11 am

Allocate the assets with most retrun (REITs, SCV, ..) in Roth
If you believe that they have the most return, why are you holding other assets? This always makes little sense to me. And if it's for diversification and a better risk-adjusted return, why wouldn't you have that mix in your Roth to maximize its risk-adjusted growth?

IMO any argument to tilt your Roth allocation in a certain direction based on expected return works better as an argument to tilt your portfolio in that direction based on expected return.
That's a good point, but it's not necessarily an argument for putting lower risk asset classes in a Roth. It also argues that - if you think it makes sense to load higher-risk, higher-return assets into the Roth - it ideally should contain two or more such asset classes that are non-covariant. To the extent possible.

I have SCV, ISCV and EM in my Roth. Mainly because I had room in it for more than one asset class in my slice-and-dice, which is when I started thinking about this. I think it's right, and international's argument is the closest I've seen here to a convincing counter.
"I know nothing."

ThrustVectoring
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Re: Asset allocation in Roth vs pre-tax

Post by ThrustVectoring » Sun May 13, 2018 2:28 am

Johnnie wrote:
Sat May 12, 2018 3:11 pm
ThrustVectoring wrote:
Fri May 11, 2018 11:55 am
international001 wrote:
Thu May 10, 2018 8:11 am

Allocate the assets with most retrun (REITs, SCV, ..) in Roth
If you believe that they have the most return, why are you holding other assets? This always makes little sense to me. And if it's for diversification and a better risk-adjusted return, why wouldn't you have that mix in your Roth to maximize its risk-adjusted growth?

IMO any argument to tilt your Roth allocation in a certain direction based on expected return works better as an argument to tilt your portfolio in that direction based on expected return.
That's a good point, but it's not necessarily an argument for putting lower risk asset classes in a Roth. It also argues that - if you think it makes sense to load higher-risk, higher-return assets into the Roth - it ideally should contain two or more such asset classes that are non-covariant. To the extent possible.

I have SCV, ISCV and EM in my Roth. Mainly because I had room in it for more than one asset class in my slice-and-dice, which is when I started thinking about this. I think it's right, and international's argument is the closest I've seen here to a convincing counter.
There's legit arguments for doing different stuff to Roth vs tax-deferred. "Put more return in Roth because it's tax exempt" just isn't one of them, because you want better returns on all your investments, not just Roth.

Like, probably the biggest one is to for planning a withdrawal strategy. More variable gains in a tax-deferred account means you vary how much taxable income you can and must eventually realize in retirement, which could mean going over ACA subsidy limits, poorly optimizing the Roth conversions and getting hit with unexpectedly large RMDs, or running out of tax-deferred gains to access early through a Roth IRA conversion ladder.

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willthrill81
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Re: Asset allocation in Roth vs pre-tax

Post by willthrill81 » Sun May 13, 2018 9:27 am

ThrustVectoring wrote:
Sun May 13, 2018 2:28 am
There's legit arguments for doing different stuff to Roth vs tax-deferred. "Put more return in Roth because it's tax exempt" just isn't one of them, because you want better returns on all your investments, not just Roth.
From the Bogleheads Wiki:
If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth, because the Roth is free from Required Minimum Distributions (RMDs), is not counted as income for making Social Security taxable, and probably is less subject to the risk of changing tax rates.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

ETadvisor
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Re: Asset allocation in Roth vs pre-tax

Post by ETadvisor » Sun May 13, 2018 9:46 am

willthrill81 wrote:
Sun May 13, 2018 9:27 am
ThrustVectoring wrote:
Sun May 13, 2018 2:28 am
There's legit arguments for doing different stuff to Roth vs tax-deferred. "Put more return in Roth because it's tax exempt" just isn't one of them, because you want better returns on all your investments, not just Roth.
From the Bogleheads Wiki:
If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth, because the Roth is free from Required Minimum Distributions (RMDs), is not counted as income for making Social Security taxable, and probably is less subject to the risk of changing tax rates.
I would focus on stocks/bonds and since historically stocks have highest expected return over bonds, I would not put any bonds in Roth, if possible.

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Re: Asset allocation in Roth vs pre-tax

Post by abuss368 » Sun May 13, 2018 9:57 am

international001 wrote:
Thu May 10, 2018 8:11 am
If you have the option of a pre-tax (trad IRA, 401k) vs roth (roth IRA, roth 401k), what is the common wisdom?

My thought
Consider everything like a big portfolio.
Allocate the assets with most retrun (REITs, SCV, ..) in Roth
rest in pre-tax

(step 4 in https://www.bogleheads.org/wiki/Tax-eff ... _placement)

Any other considerations?

-J
If you have a tax advantaged account only I would strongly consider a one fund solution such as the LifeStrategy or Target Funds. Each of these funds is designed by Vanguard investment experts to be very low cost and diversified. This one fund includes four total market funds: Total Stock and Total International Stock and also Total Bond and Total International Bond.

Jack Bogle has often recommend, and for good reason, to "keep investing simple".

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

international001
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Re: Asset allocation in Roth vs pre-tax

Post by international001 » Sun May 13, 2018 10:35 am

abuss368 wrote:
Sun May 13, 2018 9:57 am
international001 wrote:
Thu May 10, 2018 8:11 am
If you have the option of a pre-tax (trad IRA, 401k) vs roth (roth IRA, roth 401k), what is the common wisdom?

My thought
Consider everything like a big portfolio.
Allocate the assets with most retrun (REITs, SCV, ..) in Roth
rest in pre-tax

(step 4 in https://www.bogleheads.org/wiki/Tax-eff ... _placement)

Any other considerations?

-J
If you have a tax advantaged account only I would strongly consider a one fund solution such as the LifeStrategy or Target Funds. Each of these funds is designed by Vanguard investment experts to be very low cost and diversified. This one fund includes four total market funds: Total Stock and Total International Stock and also Total Bond and Total International Bond.

Jack Bogle has often recommend, and for good reason, to "keep investing simple".

Best.
Not when it come to taxes. You have to consider best strategy for taxable/pre-tax/roth separately

If you expect 5% return on asset1 and and 8% on asset2, putting one in pre-tax in the other in roth maximizes your return. This is even considering RMD

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abuss368
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Re: Asset allocation in Roth vs pre-tax

Post by abuss368 » Sun May 13, 2018 10:41 am

international001 wrote:
Sun May 13, 2018 10:35 am
Not when it come to taxes. You have to consider best strategy for taxable/pre-tax/roth separately

If you expect 5% return on asset1 and and 8% on asset2, putting one in pre-tax in the other in roth maximizes your return. This is even considering RMD
The challenge with this strategy is no one know in advance what the future risk adjusted returns will be for any asset class. That's why the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Asset allocation in Roth vs pre-tax

Post by marcopolo » Sun May 13, 2018 10:44 am

ThrustVectoring wrote:
Fri May 11, 2018 11:55 am
international001 wrote:
Thu May 10, 2018 8:11 am

Allocate the assets with most retrun (REITs, SCV, ..) in Roth
If you believe that they have the most return, why are you holding other assets? This always makes little sense to me. And if it's for diversification and a better risk-adjusted return, why wouldn't you have that mix in your Roth to maximize its risk-adjusted growth?

IMO any argument to tilt your Roth allocation in a certain direction based on expected return works better as an argument to tilt your portfolio in that direction based on expected return.
I view this as a two step process. I first determine my desired risk profile and set a Asset Allocation based on that. This will include assets with different expected returns. Once i have done that, now i need to think about Asset Location. What vehicles do i use to hold the previously chosen assets. In this context, I think it makes sense to put the ones with highest expected returns into a Roth. Just because that has tax advantages (if the higher expected returns materialize) does not mean i should go back and put all my assets in the highest expected-return asset class because that would then change the risk profile of my entire portfolio.
Once in a while you get shown the light, in the strangest of places if you look at it right.

ThrustVectoring
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Re: Asset allocation in Roth vs pre-tax

Post by ThrustVectoring » Sun May 13, 2018 10:49 am

international001 wrote:
Sun May 13, 2018 10:35 am
abuss368 wrote:
Sun May 13, 2018 9:57 am
international001 wrote:
Thu May 10, 2018 8:11 am
If you have the option of a pre-tax (trad IRA, 401k) vs roth (roth IRA, roth 401k), what is the common wisdom?

My thought
Consider everything like a big portfolio.
Allocate the assets with most retrun (REITs, SCV, ..) in Roth
rest in pre-tax

(step 4 in https://www.bogleheads.org/wiki/Tax-eff ... _placement)

Any other considerations?

-J
If you have a tax advantaged account only I would strongly consider a one fund solution such as the LifeStrategy or Target Funds. Each of these funds is designed by Vanguard investment experts to be very low cost and diversified. This one fund includes four total market funds: Total Stock and Total International Stock and also Total Bond and Total International Bond.

Jack Bogle has often recommend, and for good reason, to "keep investing simple".

Best.
Not when it come to taxes. You have to consider best strategy for taxable/pre-tax/roth separately

If you expect 5% return on asset1 and and 8% on asset2, putting one in pre-tax in the other in roth maximizes your return. This is even considering RMD
This is false. If you expect 5% return on asset1 and 8% on asset2, the maximum return is putting asset2 in both pre-tax and Roth. The only thing that asset1 can do is reduce variance.

international001
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Re: Asset allocation in Roth vs pre-tax

Post by international001 » Mon May 14, 2018 11:32 am

ThrustVectoring wrote:
Sun May 13, 2018 10:49 am


This is false. If you expect 5% return on asset1 and 8% on asset2, the maximum return is putting asset2 in both pre-tax and Roth. The only thing that asset1 can do is reduce variance.
I think I answered that same concern some responses ago. It's about *expected* return. Of course, while keeping vairance/returns low

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