What to put in a Roth IRA?

[Druid]

I am planning to start a Roth IRA, because I will probably be in the phase out income bracket of the traditional IRA in three years. Feel free to comment if you think it would be worth doing traditional for 3 years and then transferring, but I still want to know what people are putting in Roths. I am wondering what the consensus is on what kind of funds to put in the Roth IRA. My intuition says to invest my most risky high growth part of my portfolio in the Roth IRA, perhaps a small-cap like VSMAX? I am considering Vanguard Retirement 2060 for my maxed out 401k plan(this is a new job).

[thedayisbrave]

Yes, general consensus is high growth in the Roth IRA.  I have mine in VGSLX - Vanguard's REIT index, which is probably the best place for a REIT fund if you want to go with that tilt to your portfolio.  Same goes for small cap/small cap value. 

[Joel]

High growth in roth.

I keep my international stocks in my taxable account for the foreign tax credit. I keep my bonds in my 401k and IRA to prevent paying ordinary tax rates on the dividends. Stocks everywhere else.

[GardenFun]

Look at all your retirement fund options together, then pick the most advantageous in each location. 

DH has a great large cap index fund and bond fund available for 401k so his money goes in those options.  We use our IRAs for small/mid cap and international index funds. 

If you want to invest in Bonds or REITs, keep them in retirement funds to avoid paying income tax on the dividend payments. 

[Trey]

How do y'all handle rebalancing in these situations? If the Roth is all Small cap or REITs or whatever, it seems the only way to 'rebalance' would be to add another allocation or switch it to another allocation in the IRA.

[Druid]

For me the rebalancing would be with my 401k, but someone more advanced might give you a more detailed answer. I don't plan to retire soon, so if my small cap investment grows to more than 25% of my portfolio it wouldn't matter,

[sol]

Your Roth is usually the one place where you truly have freedom to invest in anything.  Your 401k probably has limited options.  You don't want to hold bond funds that throw off income in your taxable account.  The best investments in your Roth are whatever your chosen asset allocation needs that you can't hold anywhere else.  It's the catch-all container for stuff that didn't fit, especially stuff that generates lots of interest or dividend payments that you don't want in your taxable account.

[skyrefuge]

I am planning to start a Roth IRA, because I will probably be in the phase out income bracket of the traditional IRA in three years. Feel free to comment if you think it would be worth doing traditional for 3 years and then transferring

I'll take this part of the question since no one else is. Generally for Mustachians, it's more optimal to use tax-deferred ("traditional") vehicles rather than Roth vehicles. So if you have the opportunity to contribute to a Traditional IRA, it might be worth it. Be aware that the phase-out income level increases each year with inflation, so depending on how your salary-increases relate to the inflation level, you might have even more than 3 years in which you can contribute to a Traditional IRA. And it doesn't really matter if it's 1 year or 3 years or 10 years that you have the opportunity available to you. You never have to "transfer" anything from a Traditional to a Roth, you just stop contributing to the Traditional and contribute to the Roth instead.

The only reasons I can think of to not do a Traditional: 1) if your salary is increasing so quickly that you'll soon blow by the Roth income phase-out as well, and will want to do "Backdoor Roth" contributions; in that case it helps if you have no money in a Traditional IRA (given how high the Roth limit is, this scenario seems unlikely). 2) Your income is currently so low that your marginal tax rate is 15% or lower.

[BooksAreNerdy]

We keep our REIT in the Roth ira. Tax managed bond fund in a taxable acct. Stocks in 401k and trad IRA.

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

[Druid]

@BooksAreNerdy your link states that the bonds should be in your 401k or traditional IRA.

I guess I will do the traditional IRA, because I don't know for sure when I will make it completely out of the phaseout. I was trying to avoid the phaseout calculations, which is ironic because I am studying to become a tax accountant:)

[BooksAreNerdy]

VWAHX with vanguard is a tax exempt bond fund made up of municipal bonds.
http://bonds.about.com/od/munibonds/fl/Municipal-Bonds-Belong-in-a-Taxable-Account-Not-an-IRA-or-401k.htm

[BooksAreNerdy]

Also, here is a link that does the Roth vs trad math for you.
http://www.calcxml.com/calculators/ira-calculator

[GardenFun]

How do y'all handle rebalancing in these situations? If the Roth is all Small cap or REITs or whatever, it seems the only way to 'rebalance' would be to add another allocation or switch it to another allocation in the IRA.

Balance what you can among your current choices, but if needed, open another IRA.  If you keep the IRA's at the same fund company, it is extremely easy to move the money among the different options.