e-mail question: Rebalancing between traditional and Roth IRAs

[craigr]

I received this question in e-mail to post here:


"I am preparing to invest in HB 25% x 4 concept. My problem is that 25% of my investable $ is in  a Roth and the other 75% is in Traditional IRA's. I am wondering how much of a problem this will be when I need to rebalance?  For example, suppose gold goes up 35% (containing Roth) and I need to sell 10% of gold and buy short term treasuries (containing Traditional IRA) with the 10% profit? or vice versa? Is this possible? Any answers and/or suggestions will be appreciated."

[moda0306]

As long as you have proper investment options in both accounts (Gold, LT treasuries, cash, stocks), you shouldn't have any problems.  When, for example, the gold in your 25% account goes up to 35%, you would sell 10% of it and buy into whatever appropriate other assets with no tax effect.  It does, though, have to be done within the same type of IRA.  You can't bounce them back and forth, because they have completely different tax attributes.  Roths will never be taxed again, while traditionals IRAs will be taxed someday.

This does, though, have a tendency, long-term, to skew your allocation between Roth & Traditional IRAs.  I don't see this as a huge problem, though.

Roth IRAs, though, do allow tax-free/penalty-free distributions of principal after 5 years of having contributed that amount, and have no required minimum distributions.  Keep that in mind when deciding which type of account to put money into.

[Snowman9000]

The only likely impediment I would see is the availability of gold in the two plans.  If it is only available on one side, and if that position needs to be added to but the space isn't available, then that could be an issue.  But otherwise, I don't see a problem.  He could presumably own the other 3 components in either or both places, as needed to balance out.

[pplooker]

Well, having both a traditional and Roth IRA is in itself a tax diversification strategy, essentially a guess at how those policies are going to turn out (who the devil knows?).

I've heard a lot of arguments about what should go where, but honestly, why not just get as close to a 4x25 split in each account as possible?  KISS

[KevinW]

I've heard a lot of arguments about what should go where, but honestly, why not just get as close to a 4x25 split in each account as possible?  KISS

Often when there are multiple accounts, one of them is a 401(k) that does not have a viable gold or bond fund.  In that case, one-PP-per-account won't work.

Also, a full 4x25 in each account will trigger more transactions, and their attendant expenses, than one big 4x25 spread across multiple accounts.

In the grand scheme of things, it probably doesn't matter much either way.