In this case is fliexibilty better that efficiency? A question about fund placement.

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In this case is fliexibilty better that efficiency? A question about fund placement.

Post by Cody » Fri Jan 12, 2018 2:40 pm

Subject should read "better than".

So I have all our equity in Roths and all bonds in our Rollover IRAs (with no taxable $). That is seems to be quite efficient.

Does it make any difference which of the below options I choose at RMD.

Let's say next year the stock market does well - so I want to take my RMD from equity - but its all in our Roths with no equity in Tax deferred where they need to come from.

Option 1: Create flexibility -
Permanently" rebuild the portfolio with some Equity in Tax Deferred and some (probably more) in Roths. And put some bonds in Roths but most in Tax Deferred (make some kind of an educated guess as to how much). That way I can take either equity or bonds from Tax Defferred at RMD (chosing which ever has a better time of things in the market. And I could take either stocks or bonds from our Roths as needed (depending on the markets).

Option 2: Keep as much efficiency as possible
Keep an efficient portfolio as I currently have, keeping all bonds in tax deferred and all equity in Roths. But At RMD If bonds have done well, no problem. Just take them from tax deferred (because that is where they are). BUT if stocks have done well, and since there are no stocks in tax deferred, I take the RMD from bonds (tax deferred) and exchange the same amount of equity to purchase bonds in my Roth (to rebalance) This is "somewhat" inefficient but this way I know exactly how many bonds to put into Roths, no guesswork as in option 1. Is this somehow more costly to execute?

That is a long way of saying should I create a portfolio that is somewhat "balanced" with bonds and Roths in both tax deferred and Roths (option 1) or should I have an efficient portfolio for as much of the time as possible and modify only to extend necessary (option 2)? Rmd (and rebalance if needed later).

Hope it is clear what I am asking.

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Re: In this case is fliexibilty better that efficiency? A question about fund placement.

Post by grabiner » Fri Jan 12, 2018 10:20 pm

There is almost no efficiency loss in holding bonds in a traditional or a Roth IRA, and no flexibility loss

If you have $4000 in a traditional IRA, and $3000 in a Roth IRA, and you withdraw money in a 25% tax bracket, you will get the same return from both funds if they are invested the same way. Therefore, if you take a $4000 RMD from a bond fund in a traditional IRA, and move $3000 from stocks to bonds in a Roth IRA, the effect on your spending will be the same as if you had taken the $4000 RMD from stocks in the traditional IRA.

(There are minor reasons to prefer stocks in the Roth IRA when possible, so it makes sense to hold all your stock in the Roth IRA if it is large enough. If you have stock in your traditional IRA and the market booms, you might have an RMD which is larger than you need, or the RMD might push you into a higher tax bracket.)
Wiki David Grabiner

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