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What to put into Roth IRAs?

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  • What to put into Roth IRAs?

    I'm currently young and at 100% stocks and hope to be that way for a while. What' would you guys consider putting into both myself and my wife's Roth IRAs? We currently have REIT index funds there but we're considering either small cap value or Berkshire Hathaway. Any advice would be appreciated.

  • #2
    Funds that are NOT tax efficient should go into your tax protected accounts such as a ROTH.  Other than that, you can put whatever you want in there according to your target asset allocation.

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    • #3
      Whatever minimizes your tax due by the most.  This means that higher-return, but tax-inefficient funds are best placed there.  This includes anything that pays high dividends or has high turnover.

      • REIT is probably the common one thrown around that goes best in there because it's both high-return and tax-inefficient due to non-qualified dividends.

      • Equities like S&P 500, total stock, etc can go decently well in there because they're high-return, but as index funds, they have low turnover and relatively low dividends (balanced growth/value) and as such are fairly tax-efficient.

      • Bond funds, while tax-inefficient, have lower return and as such would have slightly less advantage in a Roth.

      • If you happen to have any actively-managed funds, then they would have higher turnover, creating capital gains and therefore taxes due, meaning they would go better in Roth.


      This wiki article from Bogleheads about tax-efficient fund placement explains a bit better.

       

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      • #4




        I’m currently young and at 100% stocks and hope to be that way for a while. What’ would you guys consider putting into both myself and my wife’s Roth IRAs? We currently have REIT index funds there but we’re considering either small cap value or Berkshire Hathaway. Any advice would be appreciated.
        Click to expand...


        Whatever has the optimal opportunity for overall long-term growth, which, in my book, is an appropriately diversified portfolio of equity mutual funds and/or ETFs. #1 priority is always growth of wealth. That is the dog. #2 priority is always taxes. That is the tail. Once you achieve optimum growth, your second goal should be to minimize taxes on that growth of wealth. I am referring to your overall portfolio, whether it be Roth, taxable account, 401k, and so forth.

        100% stocks does not fit my definition of having the optimal opportunity for overall long-term growth.

        Read the most recent version of Simple Wealth, Inevitable Wealth.
        Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          I like the idea of 100% stocks in Roths and diversifying among high expected return, low correlation factors.

          For examples:
          1) His Roth: 50% small cap value (VSIAX), 50% momentum (MTUM) or emerging markets (VEMAX)

          2). Her Roth: 50% International Small (VSS), 50% US REIT (VGSLX)

          Play around with an online tool that provides correlation data among factors, and look for good low correlation pairs (i.e. Small value & momentum). There are other good low cost candidates (i.e. International REIT).

          This gives high long term growth potential and protects against the possibility of a decade or more of underperformance of a single factor were you say to stick with 100% REITs, or a decade plus of underperformance of US vs international. Roth space IMO is too valuable not to diversify.  If we're talking a 20+ year time horizon, this will matter less, but I still like the concept and also gives you some potential rebalancing bonus.

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          • #6
            Have small value, emerging markets and REIT index in Roth space. It's all part of the overall allocation and investing plan though.

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            • #7
              I'm not sure if I copied DoubleMDs or vice versa, or if we're all just Bogleheads, but I have the same asset classes in Roth.

              Berkshire Hathaway is the perfect stock to own in taxable. Zero dividend, so it will act no differently outside of a Roth until you sell. Even then, it can be tax-free if you're in the 15% federal income tax bracket or you pass it along to heirs and they get a stepped up cost basis.

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