Multiple Retirement Account Strategies...

[ChemEng]

Are there any strategies for how to balance a retirement portfolio that includes different types of retirement account with different taxation rules? I am trying to figure out is some strategy for how to work my accounts to maximize these differences.

For instance, my Roth has tax free withdrawals for contributions and growth in retirement. That would lead me to think that it would not be advantageous to use it to invest in tax advantaged funds as that would defeat the tax free benefit of the Roth. (Munis as well.)

I think that the primary consideration should be how I invest my Roth simply because it has soooooo many more options to invest with (including options). But then there is the secondary effect of where to park my TSP based on my Roth allocation.

Are there any other resources that talk about this online? How does everyone else work this issue? Looking forward to the discussion.

(*sighs* Im still confused about dryer sheets.)

 

[2B]

First of all, money is money. When you have different accounts with different options, you still want the total to come out with your target asset allocation.

The basic "rules" are more related to the tax implication of the account.

You will eventually pay ordinary income tax rates on the money that comes out of an IRA or 401k. That means you would have a bias towards your fixed income component being in these types of accounts. Also, you can't take any tax losses which means these aren't for speculating.

Your Roth is a tax nothing. That means it's a great place for getting solid, longterm growth.

Your taxable accounts can take advantage of favorable dividend and longterm capital gains tax rates. If things go down, you can harvest tax losses.

The "uber-rules" apply to all accounts which are to minimize fees (buy low cost index funds), maintain an appropriate asset allocation and don't try to time the market.

Welcome to the forum.

 

[ChemEng]

First of all, money is money. When you have different accounts with different options, you still want the total to come out with your target asset allocation.

Exactly my question. Having 10% in Small Cap in my 401k is worth much less than having 10% in the same Small Cap for my Roth. The difference is strictly the tax preference given Roth.

The basic "rules" are more related to the tax implication of the account.

Basic rules?

You will eventually pay ordinary income tax rates on the money that comes out of an IRA or 401k. That means you would have a bias towards your fixed income component being in these types of accounts. Also, you can't take any tax losses which means these aren't for speculating.

Not much room to speculate with my 401k. I work for the government and the TSP has 5 funds to choose between. Government securities, Lehman AGG, S&P500, Wilshire4500, and EAFE. There is room to jump out before particular important triple witching days however.

Your Roth is a tax nothing. That means it's a great place for getting solid, longterm growth.

Is this code for Large Cap Growth funds? Or am I missing something between the lines here.

Your taxable accounts can take advantage of favorable dividend and longterm capital gains tax rates. If things go down, you can harvest tax losses.

None of these right now, but moving in this direction.

The "uber-rules" apply to all accounts which are to minimize fees (buy low cost index funds), maintain an appropriate asset allocation and don't try to time the market.

Again, uber rules? Why limit only to index funds? ETFs, DRIPs, rolling LEAPs, et al seem like good long term options as well.

Welcome to the forum.

Thanks for the welcome. Looking forward to learning a lot here.

 

[LOL!]

Here ya go: Bogleheads :: View topic - Investment Planning

 

[maddythebeagle]

Some ideas that might be addressed already....Reit and bond allocation probably dont want in taxable port....other than that...I dont think it really matters...

 

[ziggy29]

Some ideas that might be addressed already....Reit and bond allocation probably dont want in taxable port....other than that...I dont think it really matters...

And you don't want munis in an IRA. What is tax-free (assuming no AMT issues) in a taxable account will be taxed on withdrawal in a traditional IRA. And in Roth they won't be taxed, but you take an interest penalty with munis so they are a bad deal there, too.

 

[ats5g]

I think that the primary consideration should be how I invest my Roth simply because it has soooooo many more options to invest with (including options). But then there is the secondary effect of where to park my TSP based on my Roth allocation.

I think you have that backwards. IMO, you to choose what to put in your Roth based on what is in the TSP, the more restrictive retiremenet account. For example, if you want TIPS, or a valuetilt, or EM, or CCF's you're going to have to get them in your Roth. You can get US large, mid/small, Int'l large, and high quality bonds in the TSP extremely cheap, so there's no sense in holding those assets classes in your Roth unless you have to.

How does everyone else work this issue?

DW is FERS and we use the S and I fund in the TSP, VFINX + VBMFX in my 401(k), and VIPSX in IRA.

- Alec

 

[walkinwood]

Exactly my question. Having 10% in Small Cap in my 401k is worth much less than having 10% in the same Small Cap for my Roth. The difference is strictly the tax preference given Roth.

I have read of people recommending that you reduce your tax-deferred account (401k, IRA) by your expected tax bracket before valuing your portfolio and allocating between assets.

Personally, I disagree for 2 reasons
a) I don't know what my tax rate will be when I withdraw my tax deferred assets. Hopefully, lower than it is today. I also don't know if I will be in a state that taxes income or not.
b) Your tax-deferred assets grow based on the amount in the account - not the net after taxes, so it makes sense to use the total in asset allocation calculations. (and not the net after taxes).

I treat all my accounts equally in valuation for purposes of asset allocation. ie. a $ in taxable = $ in tax deferred.

That said, any Interest or non-qualified dividend producing investment is better suited for tax deferred accounts as others have already pointed out.

Regards,
ww.

 

[Dude]

Here ya go: Bogleheads :: View topic - Investment Planning

The above link stated the following: "If all else is equal, put funds with higher expected returns in tax-free (Roth) accounts in preference to tax-deferred (traditional 401(k), 403(b), traditional IRA) accounts."

What's the reasoning behind this? Is it because a Roth IRA has no RMD and thus can compound longer with higher return investments?

 

[old woman]

Don't forget what happens if you die with investments.
IRA and 401K is taxable to the heirs
ROTH is tax free to heirs
Taxable has a stepped up basis
I will try to spend my IRA and ROTH more than I spend my taxable if it looks like I will have some leftover when I die so my heirs get the taxable. I won't leave enough to worry about estate taxes.
I will be 59.5 this month but it no longer matters I can get the taxable and ROTH money anytime and can't get the 401K until I quit or get fired.
I have thought for decades that 59.5 would be a special age.

 

[ChemEng]

The above link stated the following: "If all else is equal, put funds with higher expected returns in tax-free (Roth) accounts in preference to tax-deferred (traditional 401(k), 403(b), traditional IRA) accounts."

What's the reasoning behind this? Is it because a Roth IRA has no RMD and thus can compound longer with higher return investments?

It seems to suggest that it has more to do with the fact that the growth isnt taxable once you get to retirement age. I havent run the number to see if thats true though.

 

[LOL!]

I think the reason is simply that if you have more money in tax-free accounts like a Roth, then you are better off. For example, you have to decide where to put a REIT fund and a bond fund. Long term the REIT fund is expected to return more than a bond fund. The REIT fund spews out taxable dividends each year. The dividends are taxed as ordinary income. The bond fund spews out dividends as well that are taxed as ordinary income but is not expected to have as much in the way of capital gains as the bond fund. You want both asset classes. So you put REITs in your Roth and the bond fund in your 401(k).

 

[ats5g]

Bill Bernstein wrote a little snippet on this issue, Do Your Asset Classes Care Where They Are? Point/Counterpoint. See also the W. Reichenstein article linked to in Bill's article, Asset Allocation and Asset Location Decisions Revisited, and two conversations over at the VD Forum, 6946 and 6345.

If you do place the assets with the higher expected return in the Roth, those assets usually have more risk and the risks may show up, so you may end up with more or less. For example, if the REITs have a lower realized return than the bonds in LOL's example.

- Alec

 

[BigMoneyJim]

This probably misses the point of the thread, but it's another angle.

My new company's 401(k) has one low-fee s&p index fund and a bunch of managed funds with fees well on the wrong side of 0.5%. I pondered my situation then realized I'll pile all new contributions into the cheap index fund and shift funds in my IRA (where I have lots of low fee choices) to maintain my overall desired AA.

 

[2B]

This probably misses the point of the thread, but it's another angle.

My new company's 401(k) has one low-fee s&p index fund and a bunch of managed funds with fees well on the wrong side of 0.5%. I pondered my situation then realized I'll pile all new contributions into the cheap index fund and shift funds in my IRA (where I have lots of low fee choices) to maintain my overall desired AA.

I have the same issue and handle it the same way.