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Which fund should be in my RothIRA?
Old 06-26-2008, 02:04 PM   #1
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Which fund should be in my RothIRA?

At the end of last year I opened a Roth IRA and funded it with a 60/40 index fund. After doing some research I've found that our AA is 80/17/3. I want it to be more balanced than that so I purchased a bond fund. Now I'm wondering if I should have the balanced index fund in the Roth or the Bond fund? When I do my contributions for next year should I put the bond fund in my Roth or just add to the balanced index fund? Your reasoning behind your answer would be appreciated. (sorry if my wording isn't right...still learning)
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Old 06-26-2008, 02:06 PM   #2
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Wow. How did the stock portion go up so much in such a crummy market?
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Old 06-26-2008, 02:14 PM   #3
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After looking into the other funds that we hold and actually figuring out what our AA is, it is too high in stocks...sorry, the stock portion of the balanced fund didn't go up ....wishful thinking.
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Old 06-26-2008, 04:36 PM   #4
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The Roth priority in order should be:

1 Stocks
2 Balanced
3 Bonds

You want the Roth to grow more than the other accounts because it is tax free on withdraw.
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Old 06-26-2008, 07:26 PM   #5
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I hold a balanced index fund (Vanguard Target Retirement 2035) in my Roth. I don't have much in regular "taxable" accounts, only Roth IRA and 401(k). If you have taxable, then put stocks there, otherwise I don't think it really matters.

By the way, how do we know that stocks will outperform bonds over the next 10 or 20 years?
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Old 06-27-2008, 03:24 AM   #6
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I hold a balanced index fund (Vanguard Target Retirement 2035) in my Roth. I don't have much in regular "taxable" accounts, only Roth IRA and 401(k). If you have taxable, then put stocks there, otherwise I don't think it really matters.

By the way, how do we know that stocks will outperform bonds over the next 10 or 20 years?
Risk/Reward.

Stocks have more risk, and I expect to be compensated for that risk in the form of a higher return.

If bonds were going to return higher, more people would own more of them.

"otherwise I don't think it matters".

I have have $1 M in assets and it was all in one account, I would prefer it be in a Roth, if not Roth, then taxable, if not taxable, then 401k. Why?

Because the purchasing power of a Roth has 25% to 35% more money than a 401k, because taxes need to be paid on the 401k assets. Taxes do not need to be paid on the Roth assets.
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Old 06-27-2008, 07:08 AM   #7
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The growth on a Roth IRA's funds as opposed to the growth in any taxable/401k is preferred simply because none of the gains are ever taxed.

Also, if bonds started to consistently outperform stocks, funds, institutions, individual investors would start buying up bonds to no end, pushing up the price and making the returns and yields less desirable. Such is the nature of risk, return and pricing.
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Old 06-27-2008, 07:17 AM   #8
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Quote:
The Roth priority in order should be:

1 Stocks
2 Balanced
3 Bonds

You want the Roth to grow more than the other accounts because it is tax free on withdraw.
But, would I be better off with the bonds in the Roth since the taxes on that interest would be higher than capital gains taxes? Or doesn't that really matter much?
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Old 06-27-2008, 07:32 AM   #9
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But, would I be better off with the bonds in the Roth since the taxes on that interest would be higher than capital gains taxes? Or doesn't that really matter much?
If it's appropriate for you to own bonds and your only choices are taxable and Roth, I agree.

But in the case you also have a 401K plan, the bonds might be better there. All else being equal, if I had both a 401K/TIRA and a Roth, and my allocation should include bonds (and REITs for that matter), I'd definitely want them in a tax-deferred account but I'd rather maximize my tax-free bucket than my merely tax-deferred bucket. That's why *in that case*, if it's many years before tapping the accounts, I'd put the maximum growth assets in the Roth and some of the other, more "stabilizing" assets into the 401K. Assuming I started with $10,000 in both accounts, after a couple decades I'd rather have $50,000 in the Roth and $30,000 in the TIRA/401K than the other way around -- $50,000 tax-free and $30,000 taxable beats $30,000 tax-free and $50,000 taxable.
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Old 06-27-2008, 01:20 PM   #10
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Ziggy hit it exactly. Dividends in tax-deferred account (for Roth IRA, IRA and 401k) are great because they can be reinvested tax-free, it is just when they are finally taken out that they are taxed. Thus, dividends can grow very well in tax-deferred accounts. The difference is, however, when you finally have to take out your money, you want the funds that have performed the best to be in your Roth as the total return they would have given would not be taxed. In other words, at the end of the day (or when you retire, whichever comes first), you want the most money and best returns in your Roth IRA
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Old 06-30-2008, 11:27 AM   #11
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Thanks for the input everyone.
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