Hello,
I tried to find the answer to this in a forum search, but am hoping someone(s) can answer my question. In setting up the PP, I have about 60% of my investable money in tax-deferred places such as traditional IRAs. I have about 25% in Roth IRAs, and the remainder 15% in taxable accounts.
What's the best way to build the portfolio? I expect that in the future, the vast majority of my purchases will be made with either Roth IRA money or non-tax-deferred money. I'm 15+ years away from beginning to withdraw from the IRA's.
On a somewhat-related note, what's the advice on converting some money that's in traditional IRAs to a Roth, assuming I have the cash to do it?
Thanks so much! Looking forward to replies.
Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
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Figuring It Out
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Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
This is all a swirling drain of complicated considerations, but I'll try to break it down as simply as possible:
I'd suggest having your 15% in taxable split between 6-12 months of living expenses in cash (some in greenbacks), and the rest in gold bullion.
I'd suggest your Roth and IRA both contain a mix of the rest, putting cash in the traditional IRA... if it's easy enough for you to manage these investments, it seems to me that we don't really know which will happen first: gold will hit $2,500? LT treasuries will hit 2.2%? Stocks will go up 50%? It helps to have rebalancing options when you're accepting that it could be any asset that takes you to the moon.
Now I know you're a ways off, but it helps to consider your social security situation, your current tax bracket, and your desired income in retirement.
Social security has been taxed in an odd way for a LONG time, and I don't see it stopping. If you earn $20k+ in SS, it effectively will keep you in a 0% tax bracket for much higher in AGI than you normally would be with wage income, and you'll be able to realize a nice chunk in IRA distributions (or Roth conversions) before anything becomes taxable (my dad & mom will take about $22k in SS income and $20k in IRA distributions & rollovers without paying tax)... but then, if you need more income, you very quickly end up in a 30% federal effective marginal tax rate as you earn more income in a given bracket (15%), and more SS becomes taxable. You also want to see if RMD's are going to force you to take IRA distributions before you want to. There's also tricks with spousal benefits in SS that make it reasonable for a spouse of the higher income earner to take those benefits as early as possible (50% of the higher earner benefits), while the bread-winner waits until as late as possible to take SS... the breadwinner's SS benefits will then switch to the spouse at death of breadwinner, leaving SS income maximized. This can cause a delay in taking SS, which means there is more to sneak out of your IRA while your SS benefits grow.
As a general rule, I'd say a 75/25 allocation between IRA/Roth, respectively, is pretty safe as you are in those high-earning years, saving Roth conversions for retirement-time when you can get more income without paying taxes (due to SS taxation). What's really important is that you don't end up over-funding IRA vs Roth if you are going to need enough income in retirement to push you well into the 30% federal tax rate (plus state) at low income levels... so this general rule has a lot of exceptions.
As you approach retirement, the future tax code becomes more in-stone, and you'll be able to see the bracketology of current income vs future distributions and SS income. Look at that every year and try to understand it, as you can be socking a ton of money away and getting deductions but possibly never paying tax on that income.
I'd suggest having your 15% in taxable split between 6-12 months of living expenses in cash (some in greenbacks), and the rest in gold bullion.
I'd suggest your Roth and IRA both contain a mix of the rest, putting cash in the traditional IRA... if it's easy enough for you to manage these investments, it seems to me that we don't really know which will happen first: gold will hit $2,500? LT treasuries will hit 2.2%? Stocks will go up 50%? It helps to have rebalancing options when you're accepting that it could be any asset that takes you to the moon.
Now I know you're a ways off, but it helps to consider your social security situation, your current tax bracket, and your desired income in retirement.
Social security has been taxed in an odd way for a LONG time, and I don't see it stopping. If you earn $20k+ in SS, it effectively will keep you in a 0% tax bracket for much higher in AGI than you normally would be with wage income, and you'll be able to realize a nice chunk in IRA distributions (or Roth conversions) before anything becomes taxable (my dad & mom will take about $22k in SS income and $20k in IRA distributions & rollovers without paying tax)... but then, if you need more income, you very quickly end up in a 30% federal effective marginal tax rate as you earn more income in a given bracket (15%), and more SS becomes taxable. You also want to see if RMD's are going to force you to take IRA distributions before you want to. There's also tricks with spousal benefits in SS that make it reasonable for a spouse of the higher income earner to take those benefits as early as possible (50% of the higher earner benefits), while the bread-winner waits until as late as possible to take SS... the breadwinner's SS benefits will then switch to the spouse at death of breadwinner, leaving SS income maximized. This can cause a delay in taking SS, which means there is more to sneak out of your IRA while your SS benefits grow.
As a general rule, I'd say a 75/25 allocation between IRA/Roth, respectively, is pretty safe as you are in those high-earning years, saving Roth conversions for retirement-time when you can get more income without paying taxes (due to SS taxation). What's really important is that you don't end up over-funding IRA vs Roth if you are going to need enough income in retirement to push you well into the 30% federal tax rate (plus state) at low income levels... so this general rule has a lot of exceptions.
As you approach retirement, the future tax code becomes more in-stone, and you'll be able to see the bracketology of current income vs future distributions and SS income. Look at that every year and try to understand it, as you can be socking a ton of money away and getting deductions but possibly never paying tax on that income.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
The categories of investment income, from worst tax treatment to best, are
interest
dividends
capital gains
Based on the above, the PP assets are, from least tax-efficient to most, are
cash (all interest)
bonds (mostly interest and a little capital gains)
stocks (mostly capital gains and a little dividends)
gold (all capital gains)
So usually you want to prioritize tax-sheltering in that order: cash, bonds, stocks, gold.
Right now interest rates are close to 0% so cash is generating very little taxable interest, but that's kind of a temporary anomaly, so I wouldn't structure your portfolio around that.
Between traditional IRAs and Roth IRAs, when I have the option, I try to put the growth assets (stocks and bonds) in the Roth and the reserve assets (cash and gold) in the traditional IRA. Given the choice you'd rather have the after-tax part grow faster than the before-tax part.
Based on that my advice is to allocate
IRAs:
25% cash
25% bond
10% stock
Roth:
15% stock
10% gold
taxable:
10% gold
If there is no separate emergency fund you may want to prioritize holding some of the cash in a taxable account, even though that's not perfectly tax-efficient.
(I see moda beat me to this one, but we answered differently, so I'll publish my post anyway)
interest
dividends
capital gains
Based on the above, the PP assets are, from least tax-efficient to most, are
cash (all interest)
bonds (mostly interest and a little capital gains)
stocks (mostly capital gains and a little dividends)
gold (all capital gains)
So usually you want to prioritize tax-sheltering in that order: cash, bonds, stocks, gold.
Right now interest rates are close to 0% so cash is generating very little taxable interest, but that's kind of a temporary anomaly, so I wouldn't structure your portfolio around that.
Between traditional IRAs and Roth IRAs, when I have the option, I try to put the growth assets (stocks and bonds) in the Roth and the reserve assets (cash and gold) in the traditional IRA. Given the choice you'd rather have the after-tax part grow faster than the before-tax part.
Based on that my advice is to allocate
IRAs:
25% cash
25% bond
10% stock
Roth:
15% stock
10% gold
taxable:
10% gold
If there is no separate emergency fund you may want to prioritize holding some of the cash in a taxable account, even though that's not perfectly tax-efficient.
(I see moda beat me to this one, but we answered differently, so I'll publish my post anyway)
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
Kevin,
Your IRA/Roth/Taxable allocations don't seem to match your description...
Tax-efficiency isn't the only consideration. Especially when dealing with only a fraction (10%-15%) of your total wealth allocation, if emergency fund isn't included, I say get cash and gold into as liquid of form as possible to get you to where you feel comfortable. With cash at near-0%, the tax considerations are almost nil... which makes liquidity a much stronger factor, IMO.
If we get back into high interest rates, keeping cash in taxable accounts or under the mattress starts to look increasingly unattractive. Luckily, at that point you can buy stocks/gold with your emergency fund, and in your IRA sell stocks/gold to buy a treasury MM fund.
Your IRA/Roth/Taxable allocations don't seem to match your description...
Tax-efficiency isn't the only consideration. Especially when dealing with only a fraction (10%-15%) of your total wealth allocation, if emergency fund isn't included, I say get cash and gold into as liquid of form as possible to get you to where you feel comfortable. With cash at near-0%, the tax considerations are almost nil... which makes liquidity a much stronger factor, IMO.
If we get back into high interest rates, keeping cash in taxable accounts or under the mattress starts to look increasingly unattractive. Luckily, at that point you can buy stocks/gold with your emergency fund, and in your IRA sell stocks/gold to buy a treasury MM fund.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
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Figuring It Out
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Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
These responses are SO helpful. Thank you! I should have mentioned that I also have six months living expenses plus one year's property taxes that I will be keeping in cash - cash, CDs, and savings bonds (which I'd hate to cash since they're paying quite nice interest!).
Other considerations?
Other considerations?
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
If you have that much cash outside the other investments, maybe it pays to play that 15% taxable a bit different... maybe gold bullion & stocks, at whatever ratio you like.
Not being able to get money into a tax-deferred account is a great excuse to go get some physical gold that will serve as your deep gold reserves.
Not being able to get money into a tax-deferred account is a great excuse to go get some physical gold that will serve as your deep gold reserves.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
You're right, putting gold in Roth isn't consistent with my algorithm. It should be:moda0306 wrote: Your IRA/Roth/Taxable allocations don't seem to match your description...
IRAs:
25% cash
25% bond
10% gold
Roth:
25% stock
taxable:
15% gold
Is that what you meant?
IMO asset placement shouldn't change based on temporary conditions like interest rates. Ripping out and "replanting" large asset chunks in taxable accounts generates capital gains and is a hassle. IMO it's best to set things up in an all-season way and let it ride.moda0306 wrote: With cash at near-0%, the tax considerations are almost nil... which makes liquidity a much stronger factor, IMO.
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
Kevin,
Actually I've analyzed this a bit. If you do cash during low interest times in taxable accounts, and then swap it into Tax-deferred accounts after rates rise, you don't necessarily have to do the opposite when things swing the other way.
But you can if there are losses to harvest, especailly if rates have dropped and you want to do another flip.
In fact, one could wait until there's an inverted yield curve to make the move, hoping that the usual "inverted yield curve means recession is coming" trick comes true, move your stocks to taxable, and harvest whatever losses come about, if any materialize.
If they don't, you haven't really lost anything, as you waited until rates rose to move move cash into retirement accounts, and put more tax-efficient assets where they were going to be anyway.
Actually I've analyzed this a bit. If you do cash during low interest times in taxable accounts, and then swap it into Tax-deferred accounts after rates rise, you don't necessarily have to do the opposite when things swing the other way.
But you can if there are losses to harvest, especailly if rates have dropped and you want to do another flip.
In fact, one could wait until there's an inverted yield curve to make the move, hoping that the usual "inverted yield curve means recession is coming" trick comes true, move your stocks to taxable, and harvest whatever losses come about, if any materialize.
If they don't, you haven't really lost anything, as you waited until rates rose to move move cash into retirement accounts, and put more tax-efficient assets where they were going to be anyway.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
You're right of course. But implementing that would involve monitoring and predicting interest rates all the time, which seems to work at cross purposes with the PP mindset.
I guess the potential tax savings don't seem like a good trade, for me, relative to the cost in terms of time, attention, and emotional energy. A big selling point of the PP for me, is that it doesn't require any of this kind of regular maintenance or analysis. But I could see someone who doesn't mind that sort of thing or has more taxable assets coming to the opposite conclusion.
I guess the potential tax savings don't seem like a good trade, for me, relative to the cost in terms of time, attention, and emotional energy. A big selling point of the PP for me, is that it doesn't require any of this kind of regular maintenance or analysis. But I could see someone who doesn't mind that sort of thing or has more taxable assets coming to the opposite conclusion.
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
Yeah... it's definitely for tax-tinkerers like myself.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
One reason to consider having a little of each PP asset in each pot (traditional IRA, Roth and taxable accounts) is that it gives you the opportunity to buy and sell for maximum tax benefit at rebalancing time (primarily selling out of tax deferred accounts, but conceivably also selling for tax losses in taxable accounts).
You may grow out of the ability to rebalance tax free after doing it a couple of times, but that's 5+ years worth of tax free rebalancing, even for a PP with perhaps 40-50% of its assets in taxable accounts.
You may grow out of the ability to rebalance tax free after doing it a couple of times, but that's 5+ years worth of tax free rebalancing, even for a PP with perhaps 40-50% of its assets in taxable accounts.
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Figuring It Out
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Re: Roth vs. Tax-Deferred vs. Taxable - Where to put each asset class?
Thank you for your comments. Excellent explanations.