Comments on: Should Roth IRA & Traditional IRA Asset Allocations Be the Same? http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/ Moving beyond the basics Fri, 25 Jul 2008 18:33:55 +0000 http://wordpress.org/?v=2.2.2 By: KMC http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20642 KMC Fri, 14 Mar 2008 11:40:12 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20642 @ EJD - You make a good point. I can't speak to DR's example numbers, since it's not my place to do so. I will say, however, that fundamentally, asset allocation seeks to balance risk and return (as you say). It's predicated on the investor's goals and time horizon. I'm coming around to think that a Roth will likely have a slightly different time horizon than a traditional, assuming you take the convention wisdom advice on drawing down assets. @ EJD - You make a good point. I can’t speak to DR’s example numbers, since it’s not my place to do so. I will say, however, that fundamentally, asset allocation seeks to balance risk and return (as you say). It’s predicated on the investor’s goals and time horizon. I’m coming around to think that a Roth will likely have a slightly different time horizon than a traditional, assuming you take the convention wisdom advice on drawing down assets.

]]> By: EJD http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20602 EJD Fri, 14 Mar 2008 04:44:09 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20602 I'm confused..... It seems like there are two fundamentally different concepts that are getting intertwined here... Asset Allocation (how your investment dollar is distributed among types of investments, i.e. stocks vs bonds) and what I'll call Asset Distribution (which type of accounts those investments are held in, i.e. Roth vs Traditional). The example in Dough Roller has $100k invested in bonds in a Roth accounts and $100k invested in stocks in traditional accounts, and basically shows that it should be "Allocated" differently.. $87,500 in bonds and $112,500 in stocks. If one were to reverse the roles of the accounts... 100k in stocks in the Roth and 100k in Bonds in the traditional, then wouldn't it result in an allocation of $112,500 in bonds and $87,500 in stocks? An entirely different result! Also, consider what happens if the tax rate is different... and take it to an extreme... say 75%. Now it says that you should have your investments split $37,500 and $162,500 between stocks and bonds in order to have a "50/50" asset allocation. The whole process does not maintain consistency over variations, and in the extreme becomes totally nonsensical. The after tax asset allocation strategy is essentially re-allocating the assets based on the future net value of the invested (contributed) dollar which is determined by the distribution of those dollars, after you have had it invested for many years and then withdraw it (i.e. after it has done all the work it is ever going to do for you). If the value of the dollar when you withdraw it were important in "Asset Allocation", then shouldn't we be allocated our assets based on not only the tax status at withdrawal, but also on the expected net returns over the life of the investments themselves? I don't think anyone would buy into that. Isn't the whole "Asset Allocation" thing designed to balance risk/growth versus capital preservation in one's investment portfolio? If that's the case, then shouldn't the allocation be based on the current dollars invested rather than any "future value" or tax treatment at withdrawal time? I’m confused….. It seems like there are two fundamentally different concepts that are getting intertwined here… Asset Allocation (how your investment dollar is distributed among types of investments, i.e. stocks vs bonds) and what I’ll call Asset Distribution (which type of accounts those investments are held in, i.e. Roth vs Traditional).

The example in Dough Roller has $100k invested in bonds in a Roth accounts and $100k invested in stocks in traditional accounts, and basically shows that it should be “Allocated” differently.. $87,500 in bonds and $112,500 in stocks. If one were to reverse the roles of the accounts…
100k in stocks in the Roth and 100k in Bonds in the traditional, then wouldn’t it result in an allocation of $112,500 in bonds and $87,500 in stocks? An entirely different result! Also, consider what happens if the tax rate is different… and take it to an extreme… say 75%. Now it says that you should have your investments split $37,500 and $162,500 between stocks and bonds in order to have a “50/50″ asset allocation. The whole process does not maintain consistency over variations, and in the extreme becomes totally nonsensical.

The after tax asset allocation strategy is essentially re-allocating the assets based on the future net value of the invested (contributed) dollar which is determined by the distribution of those dollars, after you have had it invested for many years and then withdraw it (i.e. after it has done all the work it is ever going to do for you). If the value of the dollar when you withdraw it were important in “Asset Allocation”, then shouldn’t we be allocated our assets based on not only the tax status at withdrawal, but also on the expected net returns over the life of the investments themselves? I don’t think anyone would buy into that.

Isn’t the whole “Asset Allocation” thing designed to balance risk/growth versus capital preservation in one’s investment portfolio? If that’s the case, then shouldn’t the allocation be based on the current dollars invested rather than any “future value” or tax treatment at withdrawal time?

]]> By: Dough Roller http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20574 Dough Roller Thu, 13 Mar 2008 23:35:09 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20574 I appreciate the link to my article. I found the concept of after-tax asset allocation a bit mind-numbing at first, but it really is an important concept if you have a lot invested in both Roth and traditional retirement accounts. And allocating your investments on an after-tax basis isn't as difficult as it may first appear. I appreciate the link to my article. I found the concept of after-tax asset allocation a bit mind-numbing at first, but it really is an important concept if you have a lot invested in both Roth and traditional retirement accounts. And allocating your investments on an after-tax basis isn’t as difficult as it may first appear.

]]> By: Nancy http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20501 Nancy Thu, 13 Mar 2008 10:01:20 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20501 Unlike a traditional IRA or 401k plan the Roth IRA does not require MRD's at age 70 1/2..so it can be invested more aggressively if you'd like. The Roth may be the last pool of money you use for retirement. Unlike a traditional IRA or 401k plan the Roth IRA does not require MRD’s at age 70 1/2..so it can be invested more aggressively if you’d like. The Roth may be the last pool of money you use for retirement.

]]> By: Jonathan http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20491 Jonathan Thu, 13 Mar 2008 08:45:40 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20491 There was also a topic talking about this on Diehards forum, but I can't remember the specific arguments. I do remember walking away from it saying that I was just going to treat them all the same. I would just rebalance as needed. When you withdraw money later in retirement, you can always rebalance then as well. There was also a topic talking about this on Diehards forum, but I can’t remember the specific arguments. I do remember walking away from it saying that I was just going to treat them all the same. I would just rebalance as needed.

When you withdraw money later in retirement, you can always rebalance then as well.

]]> By: Around the PF Blogosphere: March 13, 2008 | The Suns Financial Diary | A Personal Finance Blog on Saving and Investing http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20456 Around the PF Blogosphere: March 13, 2008 | The Suns Financial Diary | A Personal Finance Blog on Saving and Investing Thu, 13 Mar 2008 02:22:44 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20456 [...] Personal Finance discussed whether Traditional IRA and Roth IRA should have same asset allocation. I never thought about that, though I treat my taxable accounts and retirement accounts differently [...] […] Personal Finance discussed whether Traditional IRA and Roth IRA should have same asset allocation. I never thought about that, though I treat my taxable accounts and retirement accounts differently […]

]]> By: KMC http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20415 KMC Wed, 12 Mar 2008 19:43:22 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20415 Thanks Lily. That Dough Roller article is just what I've been looking for. I've added it to my post. I'll have to read through all the articles he links to, too. Thanks Lily. That Dough Roller article is just what I’ve been looking for. I’ve added it to my post. I’ll have to read through all the articles he links to, too.

]]> By: Lily http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20402 Lily Wed, 12 Mar 2008 17:40:00 +0000 http://advancedpersonalfinance.com/should-roth-ira-traditional-ira-asset-allocations-be-the-same/#comment-20402 I just read a great article about this <a>from The Dough Roller</a> (http://www.doughroller.net/2008/02/27/after-tax-asset-allocation-is-there-a-gremlin-lurking-in-your-401k/). It took me a couple of read-throughs to get what DR was really saying, but he points out that your overall asset allocation may be different than what you think it is if you allocate different types of assets between Roth and non-Roth accounts. I just read a great article about this from The Dough Roller (http://www.doughroller.net/2008/02/27/after-tax-asset-allocation-is-there-a-gremlin-lurking-in-your-401k/). It took me a couple of read-throughs to get what DR was really saying, but he points out that your overall asset allocation may be different than what you think it is if you allocate different types of assets between Roth and non-Roth accounts.

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