Vanguard Roth IRA strategy

[MustacheCash]

Hello, Mustachians!  I am going to put in the maximum contribution ($5,500) in a Roth IRA with Vanguard and would like some help choosing the fund(s).  I am 30 years old and plan on retiring in 15 years or so.  I will be opening up the account in the next few days and I have three different strategies I am toiling over.  They are as follows:

- Target Retirement 2035 Fund (VTTHX)
- LifeStrategy Growth Fund (VASGX) (this is an 80/20 allocation)
- Three-fund portfolio (VTSMX, VGTSX, VBMFX) (Boglehead strategy)

Any suggestions on these three options or any other fund(s) I should go with?  Any help is appreciated!

[MooseOutFront]

I would suggest the Boglehead strategy, but you'll run into fund minimum issues until you get the Roth funded in year 2.  In light of that I would just go with the 80/20 Lifestrategy for now just to get invested and reevaluate in a year or so.

The other consideration to make is what other investments you have.  If the least expensive fund in your 401k is a S&P 500, you may want to use the Roth for your international portion of your portfolio.  Ideally you end up look at everything you have as 1 asset allocation.  But like I said, it sounds like you may be a step or 2 from that so the 80/20 fund is a fine place to park for the moment.

[GGNoob]

I would suggest the Boglehead strategy, but you'll run into fund minimum issues until you get the Roth funded in year 2.  In light of that I would just go with the 80/20 Lifestrategy for now just to get invested and reevaluate in a year or so.

The other consideration to make is what other investments you have.  If the least expensive fund in your 401k is a S&P 500, you may want to use the Roth for your international portion of your portfolio.  Ideally you end up look at everything you have as 1 asset allocation.  But like I said, it sounds like you may be a step or 2 from that so the 80/20 fund is a fine place to park for the moment.

I agree. Go with the 80/20 Lifestrategy or a Target Retirement that is closest to your desired AA. Then once you have enough in that fund, switch over to a 3-fund portfolio.

[Eric]

I would put 100% in VTSMX as that's likely to have the largest growth, which will all be tax free.  Use your other accounts to round out your desired asset allocation.

Edit -- 100% in VGTSX would work too.  I just wouldn't put bonds in my Roth as it seems like wasted tax-free growth potential.  If I wasn't clear above, your asset allocation should be taken as a whole, you don't need to have each separate bucket with the same allocation.

[MustacheCash]

I would put 100% in VTSMX as that's likely to have the largest growth, which will all be tax free.  Use your other accounts to round out your desired asset allocation.

Edit -- 100% in VGTSX would work too.  I just wouldn't put bonds in my Roth as it seems like wasted tax-free growth potential.  If I wasn't clear above, your asset allocation should be taken as a whole, you don't need to have each separate bucket with the same allocation.

Thank you all for your reply.  In the interest of keeping things brief in my question, I neglected to give all details.  I have VTSMX in a brokerage and have international and bond exposure in my 401(k).  So, I am guessing that negates each other?  Is one fund different from another tax-wise or is it all the same because it is all housed in a Roth IRA?

[Eric]

I would put 100% in VTSMX as that's likely to have the largest growth, which will all be tax free.  Use your other accounts to round out your desired asset allocation.

Edit -- 100% in VGTSX would work too.  I just wouldn't put bonds in my Roth as it seems like wasted tax-free growth potential.  If I wasn't clear above, your asset allocation should be taken as a whole, you don't need to have each separate bucket with the same allocation.

Thank you all for your reply.  In the interest of keeping things brief in my question, I neglected to give all details.  I have VTSMX in a brokerage and have international and bond exposure in my 401(k).  So, I am guessing that negates each other?  Is one fund different from another tax-wise or is it all the same because it is all housed in a Roth IRA?

Any fund in a Roth IRA is treated the same, so it all grows tax free, forever.  (Of course you can't touch the gains above your original contributions until age 59.5, but that's a small price to pay for having zero tax liability)  And since your Roth has a very low contribution limit (comparatively), using any of it for lower growth bonds seems inefficient use of that Roth space. (IMO)

You can use your 401K, Roth, and taxable accounts to set your total asset allocation.  So if you want 80/20, it doesn't matter if the 20% bonds are held in every account or only one account, just that you have 20% of your total invested assets in bonds according to your AA.

That said, there's ways to make your holdings more tax efficient:  http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

[thedayisbrave]

Any fund in a Roth IRA is treated the same, so it all grows tax free, forever.  (Of course you can't touch the gains above your original contributions until age 59.5, but that's a small price to pay for having zero tax liability)  And since your Roth has a very low contribution limit (comparatively), using any of it for lower growth bonds seems inefficient use of that Roth space. (IMO)

You can use your 401K, Roth, and taxable accounts to set your total asset allocation.  So if you want 80/20, it doesn't matter if the 20% bonds are held in every account or only one account, just that you have 20% of your total invested assets in bonds according to your AA.

That said, there's ways to make your holdings more tax efficient:  http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

+1

A Roth IRA & a 401K are both tax-advantaged, yes.  So you don't have to worry about triggering taxes at all with the Roth, and you don't have to worry about taxes until your distributions with the 401K.  But there are ways to optimize the space.  Eric hits on this in his post above. 

When I was a little baby investor hatchling just trying to learn how to use my wings, I only had a Roth IRA.  I was intent on stuffing my Roth IRA space with bonds because I'd read that was the most tax efficient - what I neglected to consider was the expected return of bonds vs. stocks.  Because the money inside of a Roth IRA grows tax free and is not taxed upon withdrawal, it really makes sense to put the most aggressive asset class in there (that fits within your AA).  The potential tax savings of having bonds in the Roth were negated by the fact that I'd likely experience more growth of my principal with the stocks (or VTSAX in my case) in the Roth and paying taxes on the small amount of bonds I held in taxable.  So I put VTSAX in my Roth and then bought a muni bond fund for my taxable bond exposure. 

Let me know if my explanation doesn't make sense... I'm eating dinner at the same time so I may have missed something!

[MustacheCash]

Very good points from @Eric and @thedayisbrave.  I will probably just throw it in 100% VTSMX and be done with it until next year because I would eventually be doing that down the road anyway.  Thanks everyone for the replies!