Roth IRA investment

[wanaberetiree]

I am planning to open our first IRA accounts (one for me and one for my DW).

I'd like to get an advice what position(s) people typically invest in Roth accounts. It feels that Roth investments somewhat different as compare to traditional IRAs/401-Ks.

Thanks

 

[FinanceDude]

Whatever you want. Are you going to fund it with lump sums or systematic investment?

 

[wanaberetiree]

I understand that I can do "whatever I want", I was wondering about other people's thoughts on the subject. My income this year will be smaller and I plan on putting $6K ($5K + $1K) before April 15th 2011.

 

[Free To Canoe]

I invested in my Roth today. I will not have tax liability this year so it is almost pointless (no tax benefit) to invest in my traditional IRA when the Roth is available. It has been at least 10 years since I added to my Roth.

It is usually better to max out your 401ks 1st before going to a self governed IRA or Roth.

Free to canoe

 

[wanaberetiree]

I invested in my Roth today.

What position(s) did you invest in?

 

[walkinwood]

Are you asking us for advice on what kind of investments to make in a ROTH account?
Here's an article in Forbes by Laura Hutton from the bogleheads forum
The Key To Tax-Efficient Investing: Asset Location - Forbes.com

Her recommendation:
- Most tax in-efficient in traditional IRAs & 401-ks
- Next most tax in-efficient in ROTH IRAs
- Then taxable. ie. place tax efficient investments in taxable accounts
So, you need to take your overall asset allocation into account first, then start placing the asset classes in the most tax advantageous location.

Google "Asset Location" for more articles.

 

[wanaberetiree]

Are you asking us for advice on what kind of investments to make in a ROTH account?
Here's an article in Forbes by Laura Hutton from the bogleheads forum
The Key To Tax-Efficient Investing: Asset Location - Forbes.com

Her recommendation:
- Most tax in-efficient in traditional IRAs & 401-ks
- Next most tax in-efficient in ROTH IRAs
- Then taxable. ie. place tax efficient investments in taxable accounts
So, you need to take your overall asset allocation into account first, then start placing the asset classes in the most tax advantageous location.

Google "Asset Location" for more articles.

Thank you. I will read this. I am looking for examples of "most tax in-efficient" positions.

 

[walkinwood]

Taxable bonds are probably the most tax-inefficient since all dividends are taxed as income.

Equity funds with regular, large dividend & capital gain distributions are probably next. REITS definitely fall in here.

Look at historical distributions to determine behaviour. Actively managed funds typically have more distributions than index funds.

You can take a tax credit for foreign taxes paid, so international funds would typically be in a taxable account.

Here's another article I liked
http://spwfe.fpanet.org:10005/publi...eric Framework for Maximizing After-Tax W.pdf

 

[haha]

Another very good Roth position when real rates are ok would be TIPS. There is no other way to hold them and get the expected, after tax, after inflation return-even when inflation is very high.

Right now though they are very expensive. This could be permanent but few things are.

Ha

 

[LOL!]

Since all gains in a Roth are tax-free, but no losses can be deducted, a Roth is a special place. You don't want to have losses in your Roth, but you want to have big gains. You should know that only the riskiest investments have a chance of big gains, but those same investments have a chance of big losses as well.

The solution is to put bonds in your Roth when you believe stocks are not going up so much or are going down. Then when stocks are not going to drop, put something risky and volatile in your Roth like an emerging markets small-cap value fund.

So you can have a 401(k) or traditional IRA holding bonds now and your Roth holding emerging markets small cap. Then the day before North Korea decides to nuke South Korea, Vietnam, China, et al., you move your Roth into bonds. It should be obvious that you cannot do this the same day as the nukes start falling, but that you have to do this the day before.

The only problem is figuring out what the future is.

Another volatile fund to put in a Roth is a REIT fund.

 

[JohnDoe]

Thank you. I will read this. I am looking for examples of "most tax in-efficient" positions.

From my old archives...

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Balanced Funds
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds

 

[JustCurious]

It feels that Roth investments somewhat different as compare to traditional IRAs/401-Ks.

How is the feeling different?

 

[haha]

I think the problem of what to put into a Roth can be pretty subtle. Would you want to put all or mostly bonds, since they are "tax inefficient", even though the look ahead returns seem almost sure to be poor? There are those who suggest rates will just keep going down, but for me this is a hard one to accept.

How about foreign securities? It would appear that these should be poor Roth choices, because you cannot get taxes refunded. But I have high yield Canandian securities bought and put into my TIRA when I felt that the 15% tax witholding would be less onerous than paying the regular US tax as I went along, even after allowing for the foreign tax credit.

Now I am trying to decide of I should convert these to my Roth, or to just wait and take them out in kind, over time as RMDs.

I have looked at ORP, but to me it seems too generic.

Ha

 

[wanaberetiree]

But I have high yield Canandian securities bought and put into my TIRA when I felt that the 15% tax witholding would be less onerous than paying the regular US tax as I went along, even after allowing for the foreign tax credit.

That's interesting. Are those ETFs? How can one buy them?

"One man loves the priest, another the priest's wife".-Russian proverb

BTW, Russian is my 1st language, but I never heard a prover like this. Where did you get it from?

 

[haha]

That's interesting. Are those ETFs? How can one buy them?



BTW, Russian is my 1st language, but I never heard a prover like this. Where did you get it from?

Nikolai Gogol's Dead Souls.

With regard to the securities, not ETF, but a single company. For most people, likely more trouble than they are worth. Bought on pink sheets, although for a non-retirement account one can just buy directly on the TSE.

Ha