Advanced Personal Finance

Several months ago, I wrote about how I was dividing up the money I’d put into ETFs in my rollover IRA after I left my previous job.  While I wasn’t positive at the time, I’m now a strong believer in diversification including bonds - even at my relatively young age.

When I settled my allocation, I put 50% in a US total market index ETF; 40% in a World index ETF; 10% in a bond index ETF.  At the time, a commenter wrote that he would cut out the bond portion.  I couldn’t disagree. I’d wrestled with the idea myself.  With hopefully about 25 to 30 years until retirement, I ’should’ have the great majority of my retirement assets in equities (and, at 90%, I do).  So the inclusion of the bonds was just me following the standard advice, which I thought sensible if not optimum.

So how’d that work out?

Well, I’m now even more of a believer in diversification.  While the total market ETF has returned -14.5% YTD, the international stock -14% and the bonds?  Year to date almost 2%!  Woohoo!  Let’s hear it for not losing money!

Who would have thought earning not quite 2% would elicit a cheer?  Go figure.

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If you’re sued and lose, can they take your IRA?

That was the question a reader posed on one of my older posts, Who Needs an Umbrella, about umbrella insurance policies.  Here’s the question from J. Brown:

“The majority of my assets are in retirement accounts (IRA’s, specifically). I used to have an umbrella policy, but was told that if I were sued, the money in my IRA could not be looked at to satisfy any judgment. Is this true? Where can I go to find additional info on this?”

What’s an umbrella policy?

Before I get to the answer, let me quickly review what an umbrella policy is.  An umbrella policy is an insurance policy that provides liability protection beyond that offered by other policies.  The ‘other policies’ are usually homeowners and auto insurance.  If you look at your auto policy, you’ll see a maximum liability amount.  If a judgment is entered against you beyond that amount, you’re on the hook for it (assuming you have that level of assets).

That’s kind of confusing, so let me use an example.  Let’s say I have $100/$300 coverage through my auto policy and don’t own a house.  I have assets of $150,000 and cause a serious accident that results in a lawsuit.  I lose and the plaintiff is awarded damages of $140,000.  My insurance company pays $100,000 of that award and I’m on the hook for the rest.

Now if I had an umbrella policy, I wouldn’t be writing that $40,000 check.  For a few hundred bucks a year, an umbrella ups your liability coverage to $500,000 and up.  You can get millions of dollars of coverage if you want.  But remember you only need an umbrella if you have a lot of assets - enough to warrant the coverage.

So can they get my IRA?

So this brings us to the question.  Is your IRA included in your assets?  In my example, what if all of my $150,000 in assets is in an IRA.  Can it be seized?

The answer, as with everything law, is “it depends.”

It depends on where you live.  State law determines whether these assets are included or not.  That’s not very helpful, so here’s a great resource that gives the answer for all 50 states and DC.  Look for ‘IRA and Pension Plans.’ 

I didn’t look at all 50 states, but in every case I checked, the answer was, No - IRAs are not counted and cannot be taken in a lawsuit.  If you live in California, hire an attorney - I couldn’t figure out the answer.

Now let’s all hope this never comes up for us.

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How’s that for a thrilling title?  Anyway, that’s what I’m going to write about. 

I quit a job recently and rolled over my 401(k) into an IRA.  I’d been hesitating on how to invest the money, so for the past couple of weeks, it was in a money market.  I wanted to do a reallocation of everything related to retirement savings but I wasn’t sure if different types of accounts (Roth and Traditional IRAs) should have different asset allocations.  Just a couple of days ago, I finally decided and invested the money.

Asset allocation - different accounts get different treatment?

So on the question of whether a Roth IRA gets a different asset allocation than a Traditional IRA, I came to conclusion that for my time horizon and risk tolerance (medium-long and high, respectively), they can be the same.  As I get closer to retirement, I imagine they’ll diverge, since you’re supposed to tap Roth funds last.

Here’s the allocation I settled on:

50% US stock index

40% Internation stock index

10% Bond index

Specifics of my investment

I had planned on using USAA mutual funds as my investment vehicle, but I ran into a couple of reasons not to.  First, they don’t offer a true bond index fund or an international index fund.  Second, I have a lump sum to invest, so ETFs really make more sense.  I won’t be trading, so commission fees aren’t an issue for me, nor will I be adding additional money.  With an ETF, I take a one-time commission hit, then it’s done.  More importantly for me, though, is that ETFs deliver what I’m looking for (boring, vanilla index funds) with super low expenses - even lower than an index mutual fund charges.

Specifically, I chose the following ETFs for my mix (numbers in parentheses are expenses):

50% Vanguard total market (0.07%)

40% Vanguard FTSE index (0.25%)

10% Vanguard bond index (0.11%)

So now Vanguard has a very substantial portion of my retirement money.  It’s still held through a brokerage account at USAA, incidentally.

Anybody out there have any thoughts/opinions about my allocation or use of ETFs?

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I’ve written a couple of times now how I changed jobs and rolled my 401(k) into existing IRAs.  Right now the great majority of that money is sitting in a money market fund collecting 2% or whatever it is.  But having it there has created, if not a true problem, an annoyance.

My rolled-over 401(k) assets are sitting around for two reasons:

1. I haven’t decided what my asset allocation should be
2. With all the market volatility, I haven’t pulled the trigger.

I have to sheepishly admit that the real reason is more the second than the first.  See, like any reasonable person, I’d hate to invest a great deal of money (six figures, which is a great deal to me) just to watch it immediately lose 3% of its value as has been occasionally happening lately.  Yep, I’m trying to time the market in a manner of speaking.  I could dollar cost average, but as FMF recently wrote, that may not be the greatest move either.

So what’s the problem?

Most days, I log on to USAA and take a look at my bank accounts to make sure everything’s cool.  There’s a section for my mutual funds, which consist of our emergency fund and these IRAs.  Well, some of the IRAs are fully invested.  So on those -3% days, I get to see my retirement assets drop thousands of dollars at a pop.  That’s not a good feeling.

But it’s also a pretty good problem to have, I guess.

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After recently changing jobs, I rolled over my 401(k) into my existing IRAs.  I learned an interesting tax quirk along the way, too.  Now I’m to the point where I need to rebuild the asset allocation I had in the 401(k)…or not.  My question about this is really simple.

Should my Roth IRA asset allocation be the same as my Traditional IRA asset allocation?

I can think of a couple of reasons why and why not.

Yes, the asset allocations should be the same.

1. Since both IRAs are for the same goal (retirement) and the same time frame, asset allocation theory seems to say they should be identical.
2. They should be the same just for simplicity.  Since you’re possibly going to change the asset mix as time passes (to reduce risk, say), keeping both IRA types the same makes it considerably easier.  However, the use of a lifecycle fund might mitigate this factor.

No, the Roth IRA asset allocation should be different than the Traditional IRA.

1. Using both a Roth and Traditional IRA allows you to do tax diversification.  As such, your goals and objectives for the two types of IRAs may be different.  [Thanks to Lily who pointed this post from Dough Roller out to me on this subject.]
2. Since conventional wisdom says there’s a certain order in which you draw down retirement assets, the allocations of those assets should differ.
3. There are some peculiarities about Roth IRAs that may dictate a different asset mix.  Specifically, you can withdraw contributions to your Roth IRA penalty free at any time.  That’s generally not so with a Traditional IRA.  This may mean the two types should hold different assets, especially if you anticipate you might need to take a withdrawal.

Anyone have any thoughts on this? 

I want to take action and set up my asset allocations, but I’m not sure which way to go.  Right now, I’m leaning toward having them a slightly different mix simply because of how I’ll (hopefully) be drawing down the retirement assets.

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