I've been thinking a lot about Account Allocation lately, and making decisions about the value of Taxable vs Traditional IRA investments, whether or not to do Roth conversions, etc.I'd like to get some opinions on this...let's say you're the average saver and have just retired at age 60 with one of the four following portfolios. Which would you prefer? Assume a tax rate of 30%. One Taxable 700,000 Two Taxable 500,000 TIRA 250,000 Three Taxable 100,000 TIRA 750,000 Four Taxable 200,000 TIRA 200,000 Roth 250,000 Thanks,Nick
The real question comes down to, do you need income from these accounts to support your retirement, or is this just extra funds.At age 60, you can remove funds from your T-IRA any time you like without paying penalties. The question then comes, when do you want to pay taxes on them. At age 70-1/2 you will be forced to take distributions. So then you will have to pay.I do not agree with your flat 30% tax statement. If you convert a 750K T-IRA to a Roth, I would be surprised if your tax rate remains 30%.So begin by noting that the real value of your TIRA accounts is 30% less than you have shown.When will your lowest tax rate occur. You can probably arrange an artificially low tax rate if you wanted to. Put all your taxables into tax free investments. Then take T-IRA distributions or Roth conversions on how ever much you want to pay taxes on.A key question is whether to put your T-IRA distributions into a Roth or keep them in a Taxable LTBH account. Taxable can be OK especially if you need the money. Roth ties up your funds for 5 years, but then no further taxes are due.The right answer to your question requires a detailed retirement plan.
I would prefer portfolio One.Gup
>>The real question comes down to, do you need income from these accounts to support your retirement, or is this just extra funds.I was thinking of this as your retirement portfolio. You have this and Social Security and that's it.>>At age 70-1/2 you will be forced to take distributions. So then you will have to payYep, a point against TIRAs....as I recall at age 71 you have to take 4%-5% or so each year, and by age 80 it's around 8%/year. That can be a serious issue. If you save just $5K per year in a 401k from age 25 to 60, and the investment grows at 10%, by age 70 you'll have to take out around $200K/year, and by age 80, $300K/year from the account. >>I do not agree with your flat 30% tax statementThat's true...I just assumed this rate to make the comparison simple. I suppose it would be lower if your income is Social Security and a 4%/year withdrawal from a $700,000 portfolio.>>So begin by noting that the real value of your TIRA accounts is 30% less than you have shownRight, that's the key, and why I made the TIRAs start with a somewhat larger value than the All Taxable option.Maybe it just doesn't matter how you save- Roth or IRA, taxable or 401k, etc. But I'm wondering if there's an ideal distribution of account types to shoot for- if you have 100% of your savings in your 401k, for example, you can never realize a capital loss against your regular income. If you don't have a goal,(eg 60% IRA, 30% taxable, 10% Roth), it's hard to come up with a savings plan. Nick
"If you don't have a goal,(eg 60% IRA, 30% taxable, 10% Roth), it's hard to come up with a savings plan."Agreed, and if you gaze into your crystal ball and accurately predict a few future events: the date of death of yourself and your spouse, future return on assets, future tax rates, inflation, future expenditures, its is probably not difficult to arrive at a right answer.The real question is if you are wrong on any of these, do the numbers till work well enough to cover your actual needs.Essentially if your needs are well covered, you need not take any risks. If not, then you must take some risks or suffer the consequences.No one can make these choices for you.
Hi Paul,So it's sounds like you're saying "Cannot be determined from the information given." The problem is we still have to make a decision. Also, I don't think people's situations are too unique to have general goals for their long term (retirement) investments. For example, if you assume the investor meets these goals:-Is employed-Can contribute to a 401k or similar-Can contribute to a Roth, or at least in future years will be eligible for a conversion -Is going to have a period of work, then a period of retirementYou're capturing a good portion of investors. And what do most of them do? Put a random amount, usually 5%-20% of their income in a 401k without really being sure why, and investing in or converting to Roth IRAs if they read about them in the paper, also without being sure why. I'd like to have a set account allocation goal to shoot for.Nick
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