Roth vs Traditional asset location - advanced discussion

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Roth vs Traditional asset location - advanced discussion

Post by xerty24 » Tue Jan 18, 2011 3:15 am

For more advanced readers, I wanted to start a discussion of the secondary effects that might impact whether you put stocks vs bonds in your Roth vs Traditional IRA. We've recently beat nearly to death the point about how it doesn't matter for your after-tax returns how you divide up assets between a Roth IRA and a tIRA, as long as you perform the appropriate tax adjustment to your AA (assumed henceforth). If you don't understand this, please read the Wiki and consider posting in this thread instead. Thank you.

There are 3 obvious possible allocations for a stock/bond split between Roth and Traditional:

1. Roth aggressive (put stocks in Roth first, bonds in Traditional)
2. Roth passive (put stocks in Traditional first, bonds in Roth)
3. Mixed (put an equal share of stocks and bonds in each)

Here are a few of my ideas of these secondary factors, together with which of the above allocations they favor. Please critique and contribute your own:

1. Tax deductions [Roth Aggressive]. If you put riskier assets in your Roth, you might get unlucky and end up with an account balance lower than your basis (i.e. contributions and conversions). If this happens, you can cash out the Roth and take a misc 2% tax deduction for your loss. A fully pretax account can't have this happen since your basis is zero. This effect is especially important in the first year.

2. Tax-Market correlations [Roth Passive]. Politicians seem unwilling to raise taxes shortly after poor stock market performance. As such, your tax rate might be lower than you expected when you picked your AA during a time of poor stock performance. Lower taxes makes your tIRA worth more, so putting stocks in the tIRA reduces your risk (i.e. in the tIRA stocks go down, but taxes go down too, so it's not as bad on an after-tax basis). OTOH, if stocks do really well in your tIRA, but your tax rate is higher than expected, you don't care as much since you're rich and can afford it :D.

3. Estate planning [?]. If you have more money in IRAs than you'll need, you should consider whether your heirs are going to be in a higher or lower tax bracket than yourself. If yours is higher, you should plan on leaving them the tIRA and spending your Roth first (v.versa if theirs is higher). You should consider managing a portion of that IRA (whatever part you expect to leave to them) according to an AA appropriate to their age and risk, while managing the remaining portion of that IRA and the other one according to your AA.

4. RMDs & longevity risk [Roth Aggressive]. RMDs apply only to tIRAs and accelerate mandatory taxable withdrawals once you get old enough, increasing your effective tax rate on the tIRA's assets (by moving them to taxable sooner than desired where efficiency is worse). The longer you live, the worse a problem this becomes. If you live a long time your estimated tax rate ends up being too low (due to RMDs) and hence your AA ends up being more tilted towards Roth. You can partially hedge your longevity risk (of running out of money) by putting stocks in your Roth, since if you live longer than expected (and are worried about making your money last) you'll want a larger stock allocation for extra expected return. Note that your AA is only tilted towards stocks in the scenarios where you want a riskier AA, i.e. that you in fact end up living longer than predicted.

Are there any other minor factors that might weigh on this decision, aside from the "usual" ones of making sure you pick good, cheap funds wherever they are available?

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Post by Bob's not my name » Sat Jan 22, 2011 9:24 am

5. Emergency fund [Roth passive] If you're relying upon your Roth as a back-up emergency fund you want it in short term fixed income.

6. Conversion bets [Roth mixed] If you're playing the convert-double-recharacterize-half game, you might want one converted Roth in stocks, the other in bonds.

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Re: Roth vs Traditional asset location - advanced discussion

Post by Bob's not my name » Sat Jan 22, 2011 9:34 am

xerty24 wrote:3. Estate planning [?]. If you have more money in IRAs than you'll need, you should consider whether your heirs are going to be in a higher or lower tax bracket than yourself. If yours is higher, you should plan on leaving them the tIRA and spending your Roth first (v.versa if theirs is higher). You should consider managing a portion of that IRA (whatever part you expect to leave to them) according to an AA appropriate to their age and risk, while managing the remaining portion of that IRA and the other one according to your AA.
The estate planning issues are complex. I did a Roth conversion for an elderly person last year. When I started managing this estate, the tIRA was relatively small. I invested it aggressively (while balancing out the AA elsewhere in the estate) so that it might grow above the nuisance threshold after it is divided multiple ways among the heirs. With the bull market and the Roth conversion (taxes paid out of taxable space), the value of the IRA has more than doubled. So now I have it mostly in low risk fixed income, to preserve its particular tax-free income value to heirs in their peak earning years.

I always invest in an AA appropriate for the elderly person's age, even though the estate will pass undiminished to the heirs. I figure the heirs can adjust their own AA's to compensate if they like -- it's not my problem.

None of this has much to do with Roth vs. traditional AA, in the sense that the tIRA and Roth never existed simultaneously.

User avatar
Peter Foley
Posts: 5049
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Post by Peter Foley » Sat Jan 22, 2011 11:37 am

xerty
I think two other factors are important. Accumulation stage versus withdrawal stage, and the limits on Roth contributions. When you combine these factors, as one is nearing withdrawal stage the Roth aggressive approach does not seem appropriate - unless you are investing for your heirs.

TIRA (which is the equivalent of deferred/401k) provides a better opportunity to make up losses through future savings.

livesoft
Posts: 72045
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft » Sat Jan 22, 2011 12:04 pm

One could "rebalance" asset classes between Roth and traditional.

If you believe the market is undervalued, then put equities in Roth and bonds in traditional.

If you believe the market is overvalued, then put bonds in Roth and equities in traditional. Or borrow against your 401(k), invest the same and when the inevitable losses in your taxable account occur, tax-loss harvest. Your 401(k) after loan repayment will not have lost money. :)

If you don't know if the market is undervalued or overvalued, then have stocks and bonds in your Roth.

555
Posts: 4955
Joined: Thu Dec 24, 2009 7:21 am

Post by 555 » Sat Jan 22, 2011 12:18 pm

It's all about tax brackets. The future ones are unknown. So you can't `adjust' to make trad and Roth equivalent.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc » Sat Jan 22, 2011 1:20 pm

555 wrote:It's all about tax brackets. The future ones are unknown. So you can't `adjust' to make trad and Roth equivalent.
If you mean adjusting AA you need to define what your goal is. Some (most?) people want to adjust their AA to keep there risk constant in terms of modern portfolio theory, i.e. variance. Others want to adjust their AA to keep their risk of not making their final after tax money constant.

If you are trying to keep your AA constant, it is a present value calculation since we adjust our AA on a regular basis and we know what our current tax rates are. If you want to use the other risk approach it is a future value calculation and you are correct in that we don't know the future tax rates but we can usually estimate them close enough for this type of calculation because it is only the portion that is in a higher (lower) tax bracket that is of concern.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Ozonewanderer
Posts: 643
Joined: Mon Apr 12, 2010 12:27 am
Location: Central NY, South FL

Post by Ozonewanderer » Sun Jan 23, 2011 2:30 am

Sorry for jumping into the middle of this, but as a result of this thread I did read up on tax adjusted AAs in the Wiki and the related referenced thread. I'm glad to have found this discussion. I had not heard of "tax adjusted AA" before.

I can see the relevance of tax adjusting one's holdings across Roth and TIRA accounts. However, wouldn't it be simplest to select an AA then use the same AA for the holdings in both the Roth and TIRA? That is, if one's goal is a 60/40 allocation then use 60/40 in the Roth and 60/40 in the traditional. Wouldn't this achieve the desired goal of hitting one's target AA on a tax adjusted basis without the complications of guessing what one's future tax rate will be and fine tuning the AA to compensate for it?

2beachcombers
Posts: 645
Joined: Sat Jul 31, 2010 5:10 pm
Location: Savannah

ROTH AA

Post by 2beachcombers » Sun Jan 23, 2011 9:33 am

xerty--thanks for the post, I have been playing with this for more than two years. My post wonders a little from your request but what follows is the only way I can explain my attempt to add value to your thread( A's in Physics, D's in english).

Additional considerations for AA in either case is the future plan for those assets. Do you plan on using the $$. Do you need to reduce the RMDs? Financially, can you pass one or the other or both to your heirs? Does your SS Value matter?.

Before you can decide what AA for each asset, does the $ ratio of the two matter?

]And if so: The Next question is how much to convert?
Due to the uncertainty of future taxes, I am driving to a 50/50 balance of IRA/Roth after-tax. Three tax factors drive this. One is the potential of a flat tax in the future (without deductions, many of us in retirement could end up with a lower tax bracket), second the RMD's driving tax brackets higher in retirement, and the third is estate planning and LTC. The IRA will be the emergency fund to cover LTC(tax deductability)(this tilts IRA to bonds). Remainder to heirs/or spouse denies IRA to lower tax bracket heir.

Future taxes and time horrizons also impact pre-RMD timing:

I have been working with the folks at IRAHELP.com on their forum. They are are great help with IRA/ROTH/SS decisions. Another secondary consideration for your post is the compound effect of the 3 factors above and taxes(for the time period pre RMD). The general concensus is to delay SS to 70(even if you start taking $ out of the IRA or borrow the $), and convert to ROTH before RMDs are required. This reduces future RMDs as the principal is lower.

Also, Bernstein's Manifesto discusses the value of SS in terms of a TIPS equivalent. This is now the prime factor in my total AA decisions.[/b

my AA plans:(20+yr horrizon, all $$ to heirs)(total AA 50/50)

SS--TIPS
tira--corp bonds
roth--SC US and int equities, reits
tax--TSM, INT, EEM

jerry

User avatar
BlueEars
Posts: 3845
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Sun Jan 23, 2011 11:20 am

snip
Last edited by BlueEars on Sun Mar 27, 2011 12:00 am, edited 1 time in total.

Febreze
Posts: 287
Joined: Sat Mar 06, 2010 10:35 am

Post by Febreze » Mon Jan 24, 2011 10:17 am

My position is Roth Aggressive. Here's why:

Over long periods of time, risk should equal return. Thus, the tax-benefits of the Roth are better served by using aggressive investments.

[Negation of Emergency Fund Theory Above]

You can be aggressive in the Roth IRA and still use it as an emergency fund as long as you have 2x the assets you need in it. For example:

$10k Emergency Fund Desired
50/50 Stock/Bond Allocation Desired
$40k Total Assets split equally between Roth an Traditional IRA.

Put $20k of Stocks in Roth and $20k of Bonds in Traditional.

Emergency Arises--> Remove $10k of stocks from Roth. Transfer $5k of bonds from Traditional into $5k of stocks into Traditional.

End Result--> $10k Stocks in Roth, $5k Stocks in Traditional, $15k Bonds in Traditional, 50-50 AA maintained.

Provided you have 2x the emergency fund needs in the Roth IRA, then even in a down economy, you should still have the assets in there to pull out the necessary funds. In the above example, imagine stocks lost 50% and bonds stayed the same when you need the $10k:

Roth IRA: $10k Stocks
Traditional IRA: $20k Bonds
Liquidate entire Roth, realize the $10k you need. Trade $10k of stocks into $10k of bonds within the Traditional IRA to rebalance back to 50-50.

[Counterargument to Tax-Loss Strategy]

I'd argue that it's almost never a good idea to liquidate a Roth IRA for a tax-loss. Even if you realize some immediate tax savings, you do so at the opportunity cost of losing that precious and limited Roth space that you can never get back again. It's better to keep the Roth intact, and let whatever assets remain in it, grow back up, all tax-free.

The alternative would be to liquidate it, and then invest the aggressive stocks into taxable account with your liquidated assets. In theory, if your stocks lost money, they will inevitably gain money over long periods of time, assuming you are indexing.
Last edited by Febreze on Tue Jan 25, 2011 11:14 am, edited 1 time in total.

User avatar
BlueEars
Posts: 3845
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Mon Jan 24, 2011 11:22 am

I think the most important reason for having a Roth in retirement is to be able to blend income streams and thus manage marginal tax rates. For those without a pension these income streams are generally = taxable_savings + IRA + Roth + SS. So you probably do not want to be too aggressive with the Roth AA.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc » Mon Jan 24, 2011 11:25 am

Les wrote:I think the most important reason for having a Roth in retirement is to be able to blend income streams and thus manage marginal tax rates. For those without a pension these income streams are generally = taxable_savings + IRA + Roth + SS. So you probably do not want to be too aggressive with the Roth AA.
Arguably the only reason applicable to a large number of investors.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Justin618
Posts: 211
Joined: Fri Mar 02, 2007 10:37 am
Location: accumulation phase

Post by Justin618 » Mon Jan 24, 2011 11:55 am

For the record, I’m “Roth Aggressive”. In the long run, I figure my riskier assets will outperform my safer assets, increasing the size of the Roth account in proportion to the Traditional one.

I’ve heard this Tax-Adjusted Asset Allocation concept before, and never thought it made any sense. As the William Bernstein EF Article linked from the Wiki says --- “Asset classes do not care where they are held”.

The first decision to make is your AA. Suppose I want a 50/50 AA, and have 20k in two retirement accounts (a 10k Roth, and a 10k Traditional). Being Roth Aggressive, I use the 10k Roth for a TSM equity fund, and the 10k Traditional for a TBM fund. My AA is now 50/50.

Now if you want to consider future taxes on my Traditional account (eg 25%), my tax-adjusted is AA is 57% TSM and 43% TBM, and I should rebalance – but why would I want to do that? Without rebalancing for tax adjustments, my portfolio will continue to grow as a 50/50 allocation – which is the goal after all.

Justin
"Investing is simple, but not easy" - Buffett.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc » Mon Jan 24, 2011 12:14 pm

Justin618 wrote: I’ve heard this Tax-Adjusted Asset Allocation concept before, and never thought it made any sense. As the William Bernstein EF Article linked from the Wiki says --- “Asset classes do not care where they are held”.

The first decision to make is your AA. Suppose I want a 50/50 AA, and have 20k in two retirement accounts (a 10k Roth, and a 10k Traditional). Being Roth Aggressive, I use the 10k Roth for a TSM equity fund, and the 10k Traditional for a TBM fund. My AA is now 50/50.
“Asset classes do not care where they are held”. But how much of each you actually own "free and clear" does. In your example you own the entire $10k in the ROTH because you have already paid the taxes but you only "own" $7.5k in the Traditional because you will eventually have to pay those taxes. So you AA is not 50/50. (Assumed 25% bracket.)

Xerty was asking in the OP what secondary factors may be involved in the placement decision once you have gone beyond the "tax bracket" aspects.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

RobG
Posts: 1240
Joined: Wed Feb 28, 2007 12:59 am
Location: Bozeman, MT

Post by RobG » Mon Jan 24, 2011 12:24 pm

Les wrote:I think the most important reason for having a Roth in retirement is to be able to blend income streams and thus manage marginal tax rates. For those without a pension these income streams are generally = taxable_savings + IRA + Roth + SS. So you probably do not want to be too aggressive with the Roth AA.
Les - Can you please elaborate on this? I don't understand your logic because there is no minimum required distribution from a roth. This would suggest you'd want as much as possible in the roth so you have maximum flexibility in your income stream source to minimize taxes.

rg

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Post by hsv_climber » Mon Jan 24, 2011 12:45 pm

Since OP is looking for "crazy" ideas & suggestions, here is another one: What if Congress will change tax code in the future to switch to "fair tax" (also called Value Added Tax) instead of income tax?

Chances of that to happen are extremely low, but not zero. If that to happen then tIRA will become identical to Roth.

User avatar
BlueEars
Posts: 3845
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Mon Jan 24, 2011 1:28 pm

RobG wrote:
Les wrote:I think the most important reason for having a Roth in retirement is to be able to blend income streams and thus manage marginal tax rates. For those without a pension these income streams are generally = taxable_savings + IRA + Roth + SS. So you probably do not want to be too aggressive with the Roth AA.
Les - Can you please elaborate on this? I don't understand your logic because there is no minimum required distribution from a roth. This would suggest you'd want as much as possible in the roth so you have maximum flexibility in your income stream source to minimize taxes.

rg
Hi Rob, yes you do want as much as possible in the Roth. The 64 dollar question is how to get there once you've stuffed it with as much contributions or conversions as possible.

If you can time the market well then you should have 100% of the Roth in equities when the market's going up. That would be the extreme. If you are extremely risk adverse then you'd maybe put the entire Roth into short term bonds -- the other extreme.

FWIW, my personal choice is to moderately time my AA in the IRA vs the Roth. Right now I think stocks are a nice place to be so our Roth's are equity rich (but for us never in the 70% and above range). I haven't decided on how low to go with equities in the Roth's. To answer this, I have been working on a personal market valuation model. That's my idea of investment fun. But of course markets can go down for other reasons like geopolitical events or regulatory mismanagement. So that's why I don't like the Roth aggressive approach. But I'm retired so not in the major Roth funding mode -- which is another reason why people will choose different IRA & Roth AA strategies.

Hopefully this answers your question.

User avatar
Justin618
Posts: 211
Joined: Fri Mar 02, 2007 10:37 am
Location: accumulation phase

Post by Justin618 » Mon Jan 24, 2011 2:07 pm

But how much of each you actually own "free and clear" does.
I 100% understand what you've said. I just disagree. In 30 seconds and a few mouse clicks, I can change my AA at any time. I can switch the equity from the Roth to the Traditional at the drop of the hat, and vice versa with the bonds.

Using my above example, I have a 20k portfolio pre-tax, and 17.5k portfolio post-tax. That should not affect my AA of assets held in the portfolio - I should maintain my desired my AA (50/50), and just recognize that I have a deferred tax liability and that the portfolio in aggregate is not as large as it looks on paper.

Assume I had a 50/50 allocation in taxable account, and the equity holding had a large looming capital gains tax, whereas the bond side had no capital gains. Using your thinking, I should adjust from my desired 50/50 allocation to account for the future capitals gains tax.

Justin
"Investing is simple, but not easy" - Buffett.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Re: Roth vs Traditional asset location - advanced discussion

Post by jidina80 » Mon Jan 24, 2011 2:12 pm

Does it really make sense to put a broad-based stock fund in a Traditional IRA, where all gains are eventually taxed a ordinary income tax rates? If held in a taxable account, capital gains tax rates are lower, opportunities for tax-loss havesting exist, and foreign tax credits can be had.

Just.

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Re: Roth vs Traditional asset location - advanced discussion

Post by hsv_climber » Mon Jan 24, 2011 2:28 pm

jidina80 wrote:Does it really make sense to put a broad-based stock fund in a Traditional IRA, where all gains are eventually taxed a ordinary income tax rates? If held in a taxable account, capital gains tax rates are lower, opportunities for tax-loss havesting exist, and foreign tax credits can be had.

Just.
It makes sense to look at the whole portfolio, identify the best / cheapest placement of the funds and consider tax implications as well.

But asking a question out of context generally does not help. For example, what if tIRA is 90% of your AA. Where are you planning to hold the broad-based stock fund then?

Anyway, it is a discussion for some other thread, since Op has clearly asked to avoid this type of discussion here.

Topic Author
xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Re: Roth vs Traditional asset location - advanced discussion

Post by xerty24 » Mon Jan 24, 2011 2:33 pm

jidina80 wrote:Does it really make sense to put a broad-based stock fund in a Traditional IRA, where all gains are eventually taxed a ordinary income tax rates? If held in a taxable account, capital gains tax rates are lower, opportunities for tax-loss havesting exist, and foreign tax credits can be had.
Yes, it absolutely does. If you expect to make money on stocks (on average) and your tax rates to stay roughly constant, a traditional IRA will outperform taxable stocks.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Re: Roth vs Traditional asset location - advanced discussion

Post by jidina80 » Mon Jan 24, 2011 2:50 pm

xerty24 wrote: Yes, it absolutely does. If you expect to make money on stocks (on average) and your tax rates to stay roughly constant, a traditional IRA will outperform taxable stocks.
That's a good simple example in your link. I remember now having done the same math many years ago.

Just.

2beachcombers
Posts: 645
Joined: Sat Jul 31, 2010 5:10 pm
Location: Savannah

tIRA allocation

Post by 2beachcombers » Mon Jan 24, 2011 3:04 pm

I agree with just.
Does it really make sense to put a broad-based stock fund in a Traditional IRA, where all gains are eventually taxed a ordinary income tax rates? If held in a taxable account, capital gains tax rates are lower, opportunities for tax-loss havesting exist, and foreign tax credits can be had.

Just.
Put the equities/REITs in Roths--no taxes. Put bonds in tIRA--expand out your RMDs---jump two tax brackets with a significant tIRA. You pay additional taxes on the principal growth and a probable bracket issue.
tIRA great place for long term care insurance policy and emergency funds

jerry

jerry

RobG
Posts: 1240
Joined: Wed Feb 28, 2007 12:59 am
Location: Bozeman, MT

Post by RobG » Mon Jan 24, 2011 3:25 pm

Les wrote:
Hopefully this answers your question.
Yes, thanks.

YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Roth vs Traditional asset location - advanced discussion

Post by YDNAL » Mon Jan 24, 2011 3:36 pm

Removed.
Last edited by YDNAL on Mon Jan 24, 2011 5:46 pm, edited 1 time in total.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Re: Roth vs Traditional asset location - advanced discussion

Post by Bob's not my name » Mon Jan 24, 2011 4:00 pm

xerty24 wrote:If you don't understand this, please read the Wiki

natureexplorer
Posts: 4197
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Post by natureexplorer » Mon Jan 24, 2011 4:24 pm

Does the following makes sense?

If stocks do badly, you will be glad to have put bonds in Roth and stocks in Traditional. This asset location will somewhat reduce the effect of the badly performing stocks. It also creates the possibile opportunity to Roth-convert during bear markets.

If stocks do well, you end up paying more in taxes as the bigger withdrawals pushed you into a higher tax bracket, but you won't mind since your portfolio did so well.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc » Mon Jan 24, 2011 8:40 pm

People, if your tax rate remains constant there is absoutely no difference in the future after tax value of a ROTH or a tIRA given equal starting values on a consistant tax basis. A $10k pretax balance in a tIRA is NOT equal to $10k after tax balance in a ROTH.

Xerty is asking about secondary issues like estate planning and how RMD's might affect that tax rate.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Post by Bob's not my name » Mon Jan 24, 2011 8:45 pm

You mean a Roth isn't a magic kingdom in which greater return is had without greater risk?

2beachcombers
Posts: 645
Joined: Sat Jul 31, 2010 5:10 pm
Location: Savannah

RMDs

Post by 2beachcombers » Tue Jan 25, 2011 8:58 am

Disagree with Doc:
People, if your tax rate remains constant there is absoutely no difference in the future after tax value of a ROTH or a tIRA given equal starting values on a consistant tax basis. A $10k pretax balance in a tIRA is NOT equal to $10k after tax balance in a ROTH.

Xerty is asking about secondary issues like estate planning and how RMD's might affect that tax rate.
_________________
Regards,

Doc
Assume the same AA in both ROTH and tIRA. Jump ahead 20 yrs with the same Tax rate . Fidelity model shows a small but significant gain(7% of equivalent after tax income --in my case).

And now you also have an additional lever to manage your taxes via controlling your non-taxable income. :lol:


jerry

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Post by Bob's not my name » Tue Jan 25, 2011 9:45 am

So it is a magic kingdom after all.

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Re: RMDs

Post by hsv_climber » Tue Jan 25, 2011 9:59 am

2beachcombers wrote: Assume the same AA in both ROTH and tIRA. Jump ahead 20 yrs with the same Tax rate . Fidelity model shows a small but significant gain(7% of equivalent after tax income --in my case).
That does not make any sense... Unless Fidelity will just donate this extra 7% to your account (or they are comparing tIRA @ Fidelity to a RothIRA @ Vanguard :wink: )

Or you did not understand the requirements set force by Doc...

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: RMDs

Post by Doc » Tue Jan 25, 2011 10:42 am

hsv_climber wrote:
2beachcombers wrote: Assume the same AA in both ROTH and tIRA. Jump ahead 20 yrs with the same Tax rate . Fidelity model shows a small but significant gain(7% of equivalent after tax income --in my case).
That does not make any sense... Unless Fidelity will just donate this extra 7% to your account (or they are comparing tIRA @ Fidelity to a RothIRA @ Vanguard :wink: )

Or you did not understand the requirements set force by Doc...
Right it doesn't make any sense and I believe this is the reason:

A common mistake with doing these type of calculations using future values is that people forget to re-balance. This means that the asset with the highest return and therefore the highest risk tend to grow faster. This risk factor tends to mask any tax factor present and eventually will overwhelm any tax factor that may or may not exist.

It remains a mathematical fact that the future value of a ROTH and a tIRA are exactly the same in the absence of changes in tax rate.

ROTH = PreTax$Invested x (1-TaxRate) x (1+Growth)

tIRA = PreTax$Invested x (1+Growth) x (1-TaxRate)

These equation are identical. The order of multiplication does not matter. Only the order of paying the taxes changes. The after tax future value does not. If an asset returns the same after tax amount it follows that you can't get ahead by putting a particular asset in one type of account of the other. Sure you can get more in one than the other by using different growth numbers for each asset but you can do that just by changing your AA. People, some books and many online calculators don't make the distinction between the two effects.

This is the same as where Xerty started from:
We've recently beat nearly to death the point about how it doesn't matter for your after-tax returns how you divide up assets between a Roth IRA and a tIRA, as long as you perform the appropriate tax adjustment to your AA (assumed henceforth).
and Justin's misapplication of Bernstein
As the William Bernstein EF Article linked from the Wiki says --- “Asset classes do not care where they are held”.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
BlueEars
Posts: 3845
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Tue Jan 25, 2011 11:05 am

Doc, I like your equation explanation. Shouldn't your equations indicate that these tax rates might be quite different? You pay the Roth at your current tax rate, TaxRate1. You take out the IRA and get taxed at the future tax rate, TaxRate2.

Now we get into further complications on what the future rate may be. If you have a big Roth you might be able to manage the IRA tax rate down somewhat. And the IRA tax rate will be greatly affected by your income streams in retirement plus somewhat of how big the IRA is and how much you want to live it up by withdrawing more. Then there is the unknown of which way future income tax rates are going to go -- who is betting that they are going to go down? Some people get divorced and so enter retirement as a single with a single person's tax rate. Sometimes spouses die.

So that IRA tax rate is highly variable. I'm sure this has been discussed a lot before but just thought I'd refresh the issue.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc » Tue Jan 25, 2011 12:18 pm

Les wrote:Doc, I like your equation explanation. Shouldn't your equations indicate that these tax rates might be quite different? You pay the Roth at your current tax rate, TaxRate1. You take out the IRA and get taxed at the future tax rate, TaxRate2.

Now we get into further complications on what the future rate may be. If you have a big Roth you might be able to manage the IRA tax rate down somewhat. And the IRA tax rate will be greatly affected by your income streams in retirement plus somewhat of how big the IRA is and how much you want to live it up by withdrawing more. Then there is the unknown of which way future income tax rates are going to go -- who is betting that they are going to go down? Some people get divorced and so enter retirement as a single with a single person's tax rate. Sometimes spouses die.

So that IRA tax rate is highly variable. I'm sure this has been discussed a lot before but just thought I'd refresh the issue.
1) No, the equations are correct as written.
Doc wrote:It remains a mathematical fact that the future value of a ROTH and a tIRA are exactly the same in the absence of changes in tax rate.
The location question only changes the tax rate if the RMDs from the tIRA put you in a different tax bracket. This is one of the secondary factors that Xerty is addressing in the OP. It is secondary because it requires a "perfect storm" to have much of an effect. The RMDs have to change the bracket. The difference in bracket has to be greatly influenced by the difference in returns. Only the amount of RMDs in higher bracket itself count. Your predictions on returns for the asset classes have to be more or less correct. Some people will be caught in this storm but most will not. (The question of tax rate changes due changes in the code are more applicable to whether you should invest in a ROTH or tIRA or to do a conversion than to asset placement within existing accounts themselves. It is the latter which is the subject of this thread.)

2) Future tax rates. Right, see 1). And hire a weatherman. :wink:
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Re: RMDs

Post by jidina80 » Tue Jan 25, 2011 12:44 pm

Doc wrote:...It remains a mathematical fact that the future value of a ROTH and a tIRA are exactly the same in the absence of changes in tax rate.

ROTH = PreTax$Invested x (1-TaxRate) x (1+Growth)

tIRA = PreTax$Invested x (1+Growth) x (1-TaxRate)
They are equivalent only if we ignore the other advantages of the Roth IRA over the Traditional IRA:
1) Roth IRA money can be passed on to heirs tax-free.
2) No required withdrawals from Roth after age 70.5
3) Ability to better manage total taxable income each year of retirement by timing Roth withdrawals.
4) In a Roth, we can place the assets with higher expected returns (yes, higher risk, too) and not share the high returns with the government that is your 'partner' in the Traditional IRA.
5) When money is converted from tIRA to Roth, and taxes paid with taxable investments, we effectively are increasing the amount of tax-advantaged investments that we get to keep.

Just.
Last edited by jidina80 on Tue Jan 25, 2011 1:13 pm, edited 1 time in total.

User avatar
BlueEars
Posts: 3845
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Tue Jan 25, 2011 1:01 pm

Doc, maybe I'm not following you. I'll use us as an example of what I mean. When we put in the Roth money for earnings we payed at TaxRate1 = 30% (just a guess). Maybe we use a little of the Roth money to stay in the current lower rate this year. We take a distribution from our tIRA this year at TaxRate2 = 20% (another guess, wife taking SS but not at RMD age yet).

So the Roth tax rate did not equal the tIRA rate for that money spent. The spent Roth and tIRA dollars experienced slightly different outcomes:

ROTH = PreTax$Invested x (1-TaxRate1) x (1+Growth)

tIRA = PreTax$Invested x (1+Growth) x (1-TaxRate2)

In this example the tIRA dollar did better because TaxRate2 < TaxRate1.

To continue the example, we are spending many more tIRA dollars now so as to reduce the amount of tIRA's we'll have to take in RMD's at age 70.5 . But eventually we might have to draw out at a higher tax rate TaxRate3 of 35% and then TaxRate3 > TaxRate1 so the Roth dollar would do slightly better in that case.

This is getting very complex and the differences may be pretty small for many taxpayers. However, it is unlikely to hurt a lot should one make the wrong strategy choices. The main point is to fund both tIRA's and Roth's.

2beachcombers
Posts: 645
Joined: Sat Jul 31, 2010 5:10 pm
Location: Savannah

Post by 2beachcombers » Tue Jan 25, 2011 2:20 pm

Les and Just.--agree with your thoughts. Maybe Doc can add our equation components and then translate for us. :lol:

Just wrote:
They are equivalent only if we ignore the other advantages of the Roth IRA over the Traditional IRA:
1) Roth IRA money can be passed on to heirs tax-free.
2) No required withdrawals from Roth after age 70.5
3) Ability to better manage total taxable income each year of retirement by timing Roth withdrawals.
4) In a Roth, we can place the assets with higher expected returns (yes, higher risk, too) and not share the high returns with the government that is your 'partner' in the Traditional IRA.
5) When money is converted from tIRA to Roth, and taxes paid with taxable investments, we effectively are increasing the amount of tax-advantaged investments that we get to keep.
jerry to add 6.
6) Convert to Roth with a gain and pay 0.00$ tax on the gain. Leave it in a tIRA and that gain and its growth shows up in the RMD.

Doc: in my FIDO analysis I did not change AA, and tax rates were both the same for today and +20yrs. ( Fido takes the taxes out of a taxable account, subtracts this from the actual conversion, futher reduces the conversion due to the opportunity loss of the taxable account. )

Additional gain is not considered so the model gain is even higher. ex: converted 50K$, value 60K$, paid tax 50K$ --so the conversion effective tax rate is lowered. I use this to control the tax bracket on the conversion. A Jan. conversion gives you till Oct of the next year to grow the conversion.

When I evaluated my IRA , I was looking at 10 yrs with one bracket increase and 10+yrs with a two bracket jump. I am coverting and playing the rechar=two step, and will continuue converting to reduce the RMDs. A secondary reason I delayed my SS to 70 was to provide 4-5 years for the ability to do Roth conversions.

jerry

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Re: RMDs

Post by Bob's not my name » Tue Jan 25, 2011 2:50 pm

jidina80 wrote:4) In a Roth, we can place the assets with higher expected returns (yes, higher risk, too) and not share the high returns with the government that is your 'partner' in the Traditional IRA.
xerty24 wrote:We've recently beat nearly to death the point about how it doesn't matter for your after-tax returns how you divide up assets between a Roth IRA and a tIRA, as long as you perform the appropriate tax adjustment to your AA (assumed henceforth). If you don't understand this, please read the Wiki and consider posting in this thread instead.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Re: RMDs

Post by jidina80 » Tue Jan 25, 2011 3:33 pm

"Bob's not my name", I only included #4 because a larger Roth IRA, from higher returns, provides us more flexibility to reap some of the other advantages of the Roth, such as taxable income planning.

Just.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc » Tue Jan 25, 2011 6:39 pm

Les wrote:Doc, maybe I'm not following you. I'll use us as an example of what I mean. When we put in the Roth money for earnings we payed at TaxRate1 = 30% (just a guess). Maybe we use a little of the Roth money to stay in the current lower rate this year. We take a distribution from our tIRA this year at TaxRate2 = 20% (another guess, wife taking SS but not at RMD age yet).

So the Roth tax rate did not equal the tIRA rate for that money spent. The spent Roth and tIRA dollars experienced slightly different outcomes:

ROTH = PreTax$Invested x (1-TaxRate1) x (1+Growth)

tIRA = PreTax$Invested x (1+Growth) x (1-TaxRate2)

In this example the tIRA dollar did better because TaxRate2 < TaxRate1.

To continue the example, we are spending many more tIRA dollars now so as to reduce the amount of tIRA's we'll have to take in RMD's at age 70.5 . But eventually we might have to draw out at a higher tax rate TaxRate3 of 35% and then TaxRate3 > TaxRate1 so the Roth dollar would do slightly better in that case.

This is getting very complex and the differences may be pretty small for many taxpayers. However, it is unlikely to hurt a lot should one make the wrong strategy choices. The main point is to fund both tIRA's and Roth's.
Les, you are not wrong but it is not the correct question. The OP is asking about asset location - which asset class to put in which account. First, if the tax rate doesn't change it makes no difference which asset goes where. So the only thing we need to consider is does the asset placement in and by itself affect the tax rate. It can only affect the tax rate if the RMD puts you in a higher bracket. That's a secondary factor which only matters in some special cases and then may have very little meaning. Going from 25% to 28% is a non-event in this context. In your example the ROTH is better because your tax rate went up not because the tIRA was filled with fixed income. (The fact that FI in the tIRA may make the tax rate less likely to go up because your RMD is smaller. Again this is the secondary effect.)

Perhaps you are going astray a by asking the question of which IRA is best. That question is dependent on future tax rates compared to now. Do you do a ROTH conversion or not. But the assets in that account don't matter. Again unless the RMD affects the bracket - a secondary factor.

When you adjust your AA for taxes you do it on the basis of accrued taxes. Those are today's taxes not the taxes in the future. (I am assuming you are keeping you risk constant in terms of variance. There are alternatives that give slightly different results.) If the tax rate goes from 25% to 50% due to legislative action, your interest in that $10k balance in your tIRA drops from $7.5k to only $5k. You lose. Should have done the ROTH conversion last year. But you lose the same amount whether the $10k is equities or FI. The tax man cares not. But don't do this calculation on taxes paid but rather on what you keep after tax or the "forgot to rebalance" error will bite you in the behind.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: RMDs

Post by Doc » Tue Jan 25, 2011 6:45 pm

jidina80 wrote: They are equivalent only if we ignore the other advantages of the Roth IRA over the Traditional IRA:
Right, that's what Xerty asked in the beginning.
Xerty wrote:For more advanced readers, I wanted to start a discussion of the secondary effects that might impact whether you put stocks vs bonds in your Roth vs Traditional IRA. We've recently beat nearly to death the point about how it doesn't matter for your after-tax returns how you divide up assets between a Roth IRA and a tIRA, as long as you perform the appropriate tax adjustment to your AA (assumed henceforth). If you don't understand this, please read the Wiki and consider posting in this thread instead. Thank you.
"Assumed henceforth" does not mean "ignored from here on out".

All I have been trying to do here is get people back on the same track that Xerty wanted to discuss.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
Doc
Posts: 9614
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc » Tue Jan 25, 2011 7:03 pm

2beachcombers wrote: Doc: in my FIDO analysis I did not change AA, and tax rates were both the same for today and +20yrs. ( Fido takes the taxes out of a taxable account, subtracts this from the actual conversion, futher reduces the conversion due to the opportunity loss of the taxable account. )
In a previous thread a poster was making a similar type argument based on calculations from bankrate.com.
http://www.bankrate.com/calculators/ret ... lator.aspx

If you simplify the inputs so you have only one year to retirement and make a single contribution of $10k that has a return of 1% the tIRA loses some $2500 over that one year. OMG. (Turns out the calculator consider pre-tax and after-tax money as equal.)

Don't trust online calculators/analysis without testing them with simple inputs.

(In FIDO's case I would supect the "failed to rebalance error" rather than the "pre-tax = after-rax" error.)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Re: RMDs

Post by jidina80 » Tue Jan 25, 2011 9:57 pm

Xerty wrote:...it doesn't matter for your after-tax returns how you divide up assets between a Roth IRA and a tIRA, as long as you perform the appropriate tax adjustment to your AA
I'm not convinced it is fair to say that "it doesn't matter" if locating assets with higher expected returns (stocks) in a Roth IRA (vs. TIRA) means we will likely have lower RMDs and be better able to manage/minimize income taxes in our retirement years by choosing how much taxable income to recognize. That does affect the after-tax returns of a portfolio, doesn't it?

Just.

Topic Author
xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Re: RMDs

Post by xerty24 » Tue Jan 25, 2011 10:47 pm

jidina80 wrote:
Xerty wrote:...it doesn't matter for your after-tax returns how you divide up assets between a Roth IRA and a tIRA, as long as you perform the appropriate tax adjustment to your AA
I'm not convinced it is fair to say that "it doesn't matter" if locating assets with higher expected returns (stocks) in a Roth IRA (vs. TIRA) means we will likely have lower RMDs and be better able to manage/minimize income taxes in our retirement years by choosing how much taxable income to recognize. That does affect the after-tax returns of a portfolio, doesn't it?
Yes, if the existence of RMDs causes your tax rate at retirement to increase and this happens only depending on which assets you put in the tIRA, then there will be a difference. This is quite similar to the point I made in my OP for item #4 on RMDs.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Post by jidina80 » Wed Jan 26, 2011 12:13 am

In the comparison being discussed, can anyone think of even one advantage of placing bonds, instead of stocks, in a Roth IRA?

Just.

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Post by Bob's not my name » Wed Jan 26, 2011 4:39 am

jidina80 wrote:In the comparison being discussed, can anyone think of even one advantage of placing bonds, instead of stocks, in a Roth IRA
xerty24 wrote:[Make] sure you pick good, cheap funds wherever they are available
This is the most important consideration and may mean using a low ER stock index fund in your 401k and holding your bonds in a low ER bond fund in your Roth. Or maybe your Roth is the only place you can get TIPS at any ER. I've seen many portfolio posts where this is the case (e.g., TheBob6's only good 401k choice is Wellington, and he completes his bond allocation with TBM in Roth).
xerty24 wrote:2. Tax-Market correlations [Roth Passive]. Politicians seem unwilling to raise taxes shortly after poor stock market performance. As such, your tax rate might be lower than you expected when you picked your AA during a time of poor stock performance. Lower taxes makes your tIRA worth more, so putting stocks in the tIRA reduces your risk (i.e. in the tIRA stocks go down, but taxes go down too, so it's not as bad on an after-tax basis). OTOH, if stocks do really well in your tIRA, but your tax rate is higher than expected, you don't care as much since you're rich and can afford it :D.
Bob's not my name wrote:5. Emergency fund [Roth passive] If you're relying upon your Roth as a back-up emergency fund you want it in short term fixed income.

6. Conversion bets [Roth mixed] If you're playing the convert-double-recharacterize-half game, you might want one converted Roth in stocks, the other in bonds.
In addition to this primary reason and secondary reasons for holding bonds in Roth, secondary reasons for holding stocks in Roth, such as reducing RMDs, are turned on their head if the investor is within a decade of withdrawal stage, because stocks are also riskier, and your stocky Roth may grow less than your bondy tIRA.
Peter Foley wrote:as one is nearing withdrawal stage the Roth aggressive approach does not seem appropriate
livesoft wrote:I'll agree that a Roth should hold the assets with the highest expected return. Unfortunately, those are often the assets with the highest expected losses as well.

Since a Roth is precious tax-free space, I don't think you want to lose money in your Roth, so you probably should compromise or at least market time things. I have suggested that you put bonds in tax-deferred (traditional) and emerging markets small cap in a Roth, but only when you believe EMSC to be undervalued. When overvalued, switch things around.

If you can't figure out the undervalued / overvalued thing, then you have to split the difference.
For similar reasons, I changed a Roth I manage from stocky to bondy:
Bob's not my name wrote:I did a Roth conversion for an elderly person last year. When I started managing this estate, the tIRA was relatively small. I invested it aggressively (while balancing out the AA elsewhere in the estate) so that it might grow above the nuisance threshold after it is divided multiple ways among the heirs. With the bull market and the Roth conversion (taxes paid out of taxable space), the value of the IRA has more than doubled. So now I have it mostly in low risk fixed income, to preserve its particular tax-free income value to heirs in their peak earning years.
So that's five or six reasons. I probably overlooked some.

Bob's not my name
Posts: 7407
Joined: Sun Nov 15, 2009 9:24 am

Post by Bob's not my name » Wed Jan 26, 2011 6:00 am

7. 401k loan feature [Roth passive --> Roth aggressive]. I'm switching the scenario from tIRA/Roth to 401k/Roth, but the latter is a common one for many investors. If your 401k plan has a good loan feature, it is desirable to grow your 401k to $100k so you have access to the maximum 50%, $50k loan. Once the 401k is over $100k this benefit is maxed out, so the incentive for growthiness disappears. I have a 401k with a prior employer that offers low fee, low hassle, low rate (3.25%) loans with no employment condition, which beats, for example, student loan rates or high effective mortgage rates (due to PMI) on the <20% portion of a mortgage. I had the 401k mostly in equities until it exceeded $100k, but now I have it mostly in bonds to make sure a stock market decline doesn't reduce my available cheap credit. I kept my AA constant with complementary changes in my tIRA (I don't have a Roth yet, though I covet them).

2beachcombers
Posts: 645
Joined: Sat Jul 31, 2010 5:10 pm
Location: Savannah

Post by 2beachcombers » Wed Jan 26, 2011 8:53 am

Doc, thanks for the reply.
Doc wrote:
2beachcombers wrote: Doc: in my FIDO analysis I did not change AA, and tax rates were both the same for today and +20yrs. ( Fido takes the taxes out of a taxable account, subtracts this from the actual conversion, futher reduces the conversion due to the opportunity loss of the taxable account. )
In a previous thread a poster was making a similar type argument based on calculations from bankrate.com.
http://www.bankrate.com/calculators/ret ... lator.aspx

If you simplify the inputs so you have only one year to retirement and make a single contribution of $10k that has a return of 1% the tIRA loses some $2500 over that one year. OMG. (Turns out the calculator consider pre-tax and after-tax money as equal.)

1) No, the equations are correct as written.

Doc wrote:
It remains a mathematical fact that the future value of a ROTH and a tIRA are exactly the same in the absence of changes in tax rate.

The location question only changes the tax rate if the RMDs from the tIRA put you in a different tax bracket. This is one of the secondary factors that Xerty is addressing in the OP. It is secondary because it requires a "perfect storm" to have much of an effect. The RMDs have to change the bracket. The difference in bracket has to be greatly influenced by the difference in returns. Only the amount of RMDs in higher bracket itself count. Your predictions on returns for the asset classes have to be more or less correct. Some people will be caught in this storm but most will not. (The question of tax rate changes due changes in the code are more applicable to whether you should invest in a ROTH or tIRA or to do a conversion than to asset placement within existing accounts themselves. It is the latter which is the subject of this thread.)

I disagree with the bolded sentence.If equities are put in the IRA, the RMDs will be higher over the long run and therefore you will pay more taxes(at the same tax rate) with or without a bracket change.

Don't trust online calculators/analysis without testing them with simple inputs.

(In FIDO's case I would supect the "failed to rebalance error" rather than the "pre-tax = after-rax" error.)
Doc--correct, the FIDO model does not change AA with time and both the IRA and Roth are equal AA. So now I am even more confused cause this implys the model effectively is constant rebalancing.

Back to Doc's equation:

Doc wrote:
[b
]...It remains a mathematical fact that the future value of a ROTH and a tIRA are exactly the same in the absence of changes in tax rate.
ROTH = PreTax$Invested x (1-TaxRate) x (1+Growth)
tIRA = PreTax$Invested x (1+Growth) x (1-TaxRate[/b])
roth tax rate = known(and can be effectively reduced via growth by Oct 17)
roth growth = unknown
IRA growth rate = roth growth rate = unknown(except over a long period of time we can make a pretty good educated guess)

IRA Tax rate --unknown(but we can make a fairly accurate spread sheet wrt our income, RMDs, bracket changes. etc---). And most of us will be paying higher rates.

My conclusion is I like one unknown better than 2.
And RMDs in the 100k$ range drive higher taxes, with or without bracket changes.
Long time(20yrs) horrizons - equities for ROTH.
Bonds for IRA(to keep RMDs low)

My attempt to provide value on secondary effects

1-6 same as previously mentioned
7. Planned Use of $$ for each case.
Roth + IRA go to heirs or I need to spend the $$

8. Time horrizon
long time horrizons drive one or both to equities

9. SS income,
Delaying SS to 70, yields a TIPS equivalent in the 700-800K$ range, in my case I will invest Roths in equities and IRAs in REITS and maybe a few bonds.

10. LTC Bonds in IRA
IRA RMDs tax can be offset by deductions for med care. 100K$ to nursing home = 50K$-100k deduction
10

Post Reply