401k/IRA vs. Roth IRA

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FireHorse
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401k/IRA vs. Roth IRA

Post by FireHorse » Fri Oct 12, 2018 8:36 pm

Why are BHs recommending two different investment portfolios for 401k/IRA vs Roth IRA??
They are all retirement accounts.

DSInvestor
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Re: 401k/IRA vs. Roth IRA

Post by DSInvestor » Fri Oct 12, 2018 8:42 pm

IRA (Traditional / Roth ) is limited to $5500/yr in contributions. 401(k) is limited to 18.5K. The rules permit one to contribute to 401k as well as IRA so you could contribute as much as 24K/yr per person if you use both 401k and IRA.

If your employer plan offers an employer match that requires you to make contributions, you should contribute at least as much to the 401k to capture the maximum match.
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Peter Foley
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Re: 401k/IRA vs. Roth IRA

Post by Peter Foley » Fri Oct 12, 2018 8:52 pm

If I understood the question correctly . . .

Because Roth withdrawals, both contributions and earnings, may be tax free, it makes sense to put those assets (investment portfolios) with the best chance for gains in one's Roth.

FireHorse
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Re: 401k/IRA vs. Roth IRA

Post by FireHorse » Fri Oct 12, 2018 9:05 pm

I should have made my questions more clear- based on the threads and library knowledge, it seems BHs prefer bond index in IRA/401k and stocks index and int'l index in Roth IRA, why?

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Duckie
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Re: 401k/IRA vs. Roth IRA

Post by Duckie » Fri Oct 12, 2018 9:52 pm

FireHorse wrote:it seems BHs prefer bond index in IRA/401k and stocks index and int'l index in Roth IRA, why?
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free.

So the preference is your entire bond AA in pre-tax and just stocks in Roth. Since you probably have more room in pre-tax, fill the space with more stocks.

Mr_Yan
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Re: 401k/IRA vs. Roth IRA

Post by Mr_Yan » Sat Oct 13, 2018 9:46 am

I've had this same question for a while too. It seemed to me that people were trying to speak out of both sides of their mouths on this topic - allocate in buckets then rebalance. But I didn't think you could pour one bucket into the other per IRS rules so it seemed to be contradiction.
Duckie wrote:
Fri Oct 12, 2018 9:52 pm
FireHorse wrote:it seems BHs prefer bond index in IRA/401k and stocks index and int'l index in Roth IRA, why?
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free.

So the preference is your entire bond AA in pre-tax and just stocks in Roth. Since you probably have more room in pre-tax, fill the space with more stocks.
What about the benefits of rebalancing overtime? I thought one of the cornerstones of holding different asset classes was the ability to sell one class that was hot for a while to buy the lagging class and keep in balance according to risk tolerance. If I held the bonds in my traditional and was all stock in my Roth wouldn't I be prohibited from fully rebalancing across accounts? For this reason my accounts look like 80% stock and 20% bond in each of the 5 retirement accounts (his 401k, her IRAs, his IRAs).

OR am I thinking wrong here.

According to the bucket idea we hold bonds just in the traditional so that account looks real heavy in the bonds to stock ratio. Then I only rebalance between bonds and US and International stocks within the traditional account and only rebalance US to international stocks in the Roth.

Example assume equal account balance for Roths and Traditional:
20% bonds, 70% US Total Stock Market, 10% International

Tradional IRA
20% (whole portfolio) Bond Fund - Schwab SWAGX
20% (whole portfolio) US Total Stock Market - Schwab SWTSX

Tradional 401k
10% (whole portfolio) S&P 500 Index - my new 401k kinda sucks

Roth IRA
40% (whole portfolio) US Total Stock Market - Schwab SWTSX
10% (whole portfolio) MSCI EAFE - Schawb SWISX

Thanks
Yan

MNGopher
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Re: 401k/IRA vs. Roth IRA

Post by MNGopher » Sat Oct 13, 2018 10:05 am

Think of all your accounts as all part of the same portfolio. As long as it averaged out to your desired asset allocation, it doesn't matter what % of stock is in the individual accounts. Say you want to be 70/30 stock/bond ratio, you could be 90-100 stock in your Roth and around 50-60 stock in tax deferred and you fine as long as overall it averages 70/30. As you near retirement and your risk tolerance changes you can always sell stocks and buy bonds in each account without creating a taxable event. Most people plan to spend Roth later in life to give it more time to grow tax free, so it is OK to take a little more risk here because it will be a long time before you need the money.

FireHorse
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Re: 401k/IRA vs. Roth IRA

Post by FireHorse » Sat Oct 13, 2018 11:22 am

I think I am getting it. Many thanks to all.
The theory is that our AA requires stock/bond to balance as 70/30 or 60/40, pre-tax account is a good place for bond due to tax reason. Huge amount of bond in taxable account could lead to tax consequences.
Technically we all prefer growth but we need to respect the AA to protect our portfolio from the down turn of the market.

pre-tax account - majority are bond fund, with balance of stock index
roth-IRA - US stock index and Int'l stock index
taxable account - majority are US stock index and Int'l stock index, with some bond if you wish

Please feel free to comment

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Earl Lemongrab
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Re: 401k/IRA vs. Roth IRA

Post by Earl Lemongrab » Sat Oct 13, 2018 12:44 pm

Any recommendations will (or should be) tailored to the individual. In my case, all of my fixed income is in the 401(k). There's no reason for me to hold bonds in the Roth, as the 401(k) has good choices in that area. I have a bond index fund with a .05% ER, and a stable-value fund. So I split my FI there 50/50.

The Roth in its early days was nearly filled with REIT holdings. Now it's expanded (thanks Mega Backdoor!) and has value funds and such as well.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

FireHorse
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Re: 401k/IRA vs. Roth IRA

Post by FireHorse » Tue Oct 16, 2018 10:52 am

Earl Lemongrab wrote:
Sat Oct 13, 2018 12:44 pm
Any recommendations will (or should be) tailored to the individual. In my case, all of my fixed income is in the 401(k). There's no reason for me to hold bonds in the Roth, as the 401(k) has good choices in that area. I have a bond index fund with a .05% ER, and a stable-value fund. So I split my FI there 50/50.

The Roth in its early days was nearly filled with REIT holdings. Now it's expanded (thanks Mega Backdoor!) and has value funds and such as well.
Thanks Earl Lemongrab.
Congrats on your ER. I am on the same boat, and just finalized IRA rollover. With all the planning and investment, the rollover date was last week which was after the two day market drop. Go figure, luck isn't on my side :confused

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