Rebalancing Deficit

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AdamA
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Rebalancing Deficit

Post by AdamA »

All--

I have a roth IRA and a 401K.  The 401k has a great low cost S&P index fund, and even a good short term treasury fund, and the roth is good for gold and long bonds. 

Problem is, when one fund outperforms there's no way I can see to move money to the other.  The only thing I can think of is to use a taxable account to balance out these two retirement accounts. 

Just wonder if anyone has any experience doing this, and if they have any tips or warnings for using this method. 

I currently use the roth for the PP, and use a no-brainer 75% stock 25% bond strategy in the 401k.  I like the PP way better, so I'd like to change if I can do it in a practical way. 

Thanks,
Adam
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MediumTex
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Re: Rebalancing Deficit

Post by MediumTex »

Will you be putting new money into your PP?

If so, when it comes time to rebalance your overall account configuration will be different anyway.

Why not worry about it then?

It's kind of like saying you like women with red hair but hate gray hair on women and heard that redheads go gray earlier than other hair colors, and thus you are hesitant to date a redhead you would otherwise really like to go out with.
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KevinW
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Re: Rebalancing Deficit

Post by KevinW »

You can rebalance between two accounts, provided that at least one asset class "straddles" the seam between them.  E.g. hypothetically if you had
401k:
20% cash
10% stock
Roth:
15% stock
25% bond
30% gold

You want to sell 5% gold and buy 5% cash.  You can't do that directly, but what you can do is:
401k: sell 5% stock, buy 5% cash
Roth: sell 5% gold, buy 5% stock

The two stock transactions cancel each other out, leaving you with

401k:
25% cash
5% stock
Roth:
20% stock
25% bond
25% gold

which is balanced.

This works because financial securities are fungible, in other words the stock index shares in the 401k are interchangeable with the shares in the Roth.  You could imagine that your 401k custodian is handing off the assets over to the Roth custodian.

This breaks when the 401(k) is more than 50% of assets.  At that point you have the "problem" of what to do with the 401(k) funds that can't contribute to an orthodox PP.

And MediumTex is right, this may be moot during accumulation.
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MediumTex
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Re: Rebalancing Deficit

Post by MediumTex »

Note, too, that a PP will only need to be rebalanced every two or three years (unless you are making heavy contributions), so it's not something that is going to come up very often.

PRPFX can also be used as a "straddle tool" in some cases.  For example, let's say you have $10,000 in a traditional IRA and $1,000 in a Roth IRA and you like to obsess about small details in your life.  Rather than trying to spread a 4x25% PP across these two accounts, you could set up a 4x25% PP in your $10,000 traditional IRA and buy $1,000 worth of PRPFX in your Roth IRA.
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AdamA
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Re: Rebalancing Deficit

Post by AdamA »

The thing is...I do make pretty heavy contributions (relative to the size of the portfolio)...but I guess you're right...best just to deal with this stuff as best as possible as it comes it up.

Thanks for the info.

Adam
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Re: Rebalancing Deficit

Post by MediumTex »

Adam1226 wrote: The thing is...I do make pretty heavy contributions (relative to the size of the portfolio)...but I guess you're right...best just to deal with this stuff as best as possible as it comes it up.

Thanks for the info.

Adam
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