Advice on retirement accounts: tax efficiency

[Lusitan]

Right now, essentially all of our retirement savings are in various tax-advantaged plans, the usual mix of 401(k), Roth, IRAs, etc.

Overall, I'm comfortable with my asset allocation between stocks/bonds, and within my stocks I'm comfortable with my asset allocation between U.S./International. I know I maybe have some tweaks to make with respect to value/small-cap/etc., but basically at this time I'm cool with the asset allocation.

What I'm wondering is whether there is a better way to spread out the same asset allocation among the 401(k)/IRA/Roth. E.g. does it make more sense to concentrate my bond fund holdings in a Roth, or in a traditional IRA, rather than spreading it out among the different accounts? (Leaving aside the potential benefits of consolidating to obtain lower expense ratios via Admiral Shares ... I know that's one factor, but I'm trying to see if there are any other considerations before I make any adjustments for that reason.

Below is how my retirement accounts are currently allocated. Does anything jump out at you in terms of a better way to structure things (again, setting aside for now the potential benefits of consolidating different funds in different accounts to reach a higher balance and reap the reward of lower fees from Admiral Shares).

My 401(k) (roughly 15% overall retirement assets)
Total Bond Mkt Index Inv = 22%
Total Int'l Stock Index = 42%
Total Stock Mkt Idx Inv = 36%

My Rollover Traditional IRA (roughly 65% overall retirement assets)
Total Bond Mkt Index Inv = 16%
Target Retirement 2040 = 48%
Total Int'l Stock Index = 16%
REIT Index Fund Inv = 7%
Total Stock Mkt Idx Inv = 13%

My Traditional IRA (roughly 2% overall retirement assets)
Target Retirement 2040 = 100%

Spouse Traditional IRA (roughly 4% overall retirement assets)
Target Retirement 2040 = 100%

Spouse SEP-IRA (roughly 4% overall retirement assets)
Target Retirement 2040 = 100%

My Roth IRA (roughly 5% overall retirement assets)
Target Retirement 2040 = 100%

Spouse Roth IRA (roughly 5% overall retirement assets)
Target Retirement 2040 = 100%

Taxable Accounts Dedicated to Retirement
(none at this time)

 

[CitricAcid]

Generally, I would give the funds with the largest potential for growth in the Roth. That is because the growth in a 401k or IRA are eventually taxed as regular income, where any growth at all in the Roth is given completely tax-free. Any high-dividends or yield producing funds/investment vehicles I would suggest being put in other tax-deferred accounts, but you don't have any taxable accounts, so it isn't too important. This is because you can reinvest the dividends back into the funds tax-free by the way.

 

[MichaelB]

Below is how my retirement accounts are currently allocated. Does anything jump out at you in terms of a better way to structure things (again, setting aside for now the potential benefits of consolidating different funds in different accounts to reach a higher balance and reap the reward of lower fees from Admiral Shares).

Roth is not subject to RMD and IRA/401(K) are. I think you would want your most volatile investments (equities) in the Roth - so you can redeem and withdraw when you choose to and avoid having to redeem during a market decline (if possible).

Michael

 

[Lusitan]

Good points - thanks guys!

 

[Independent]

I haven't thought about this before, but this is the way it looks right now. I'd say that a dollar currently in a Traditional qualified account will make a smaller contribution to your after-tax spending than a dollar currently in a Roth account.

So if you reposition the Roth one way (e.g. away from bonds toward stocks) and reposition the Traditional in the other way, you've essentially changed your after-tax asset allocation. For the case in the parentheses, you would have shifted your total after tax allocation toward stocks.

 

[ziggy29]

I haven't thought about this before, but this is the way it looks right now. I'd say that a dollar currently in a Traditional qualified account will make a smaller contribution to your after-tax spending than a dollar currently in a Roth account.

This is one reason why some people prefer a Roth 401K over a traditional 401K, even if there is no tax difference if you expect identical tax rates now and in retirement.

In addition to the lack or RMDs, you are able to put away $15,500 in after-tax dollars instead of $15,500 in pre-tax dollars -- which gives a larger after-tax balance in the Roth. Of course, you have to be willing to give up the current tax deduction. That's not available to me, but even if it were I probably wouldn't do it because the loss of a $15,500 tax deduction would probably kick us into the 28% bracket.

 

[Independent]

I didn't intend my comment about a "dollar currently in" a Roth to be a comment on where to put your money while you are working. It seems that you give up more in current consumption to get $1 of assets in a Roth than to get $1 of assets in a Traditional.

There's a list of pros and cons, your comments about RMDs and about maxing out contributions seem to be a couple of the pros for Roth to me. The big con is the possibility that you're in a higher tax bracket when you are putting money in than when you are taking money out.

 

[Lusitan]

The big con is the possibility that you're in a higher tax bracket when you are putting money in than when you are taking money out.

Yeah ... considering that we live on about half of our net income right now, and only plan on saving up a FIRE stash to produce that portion of our income at a SWR, there's a good chance that our tax rate now is higher than it will be once we start tapping the retirement accounts.

Then again, tax rates overall might go up, so who knows. I try to hedge my bets and go with a Roth, at least I used to when I was eligible, because I was always doing the tax-deferred investing in my 401(K). Nowadays, the 401(k) is pretty much the only game I can play, except for the non-deductible IRA contribution which I'll also fund (even though it's not as "fun").