Author Topic: What does everyone have in their roth?  (Read 6630 times)

Driko

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What does everyone have in their roth?
« on: October 06, 2015, 09:18:17 PM »
I am starting my roth and I am trying to figure out what funds to invest in to take best advantage of it being tax deferred. Since I will only be able to put 5500 in and I will have such a low starting amount I would like something that has fairly good growth potential. So what did you start with and what do you have now? :)

I should add my 401k has all shares in VIIX

MoonShadow

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Re: What does everyone have in their roth?
« Reply #1 on: October 06, 2015, 10:23:16 PM »
What is your time to FIRE?

seattlecyclone

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Re: What does everyone have in their roth?
« Reply #2 on: October 06, 2015, 10:31:20 PM »
I am starting my roth and I am trying to figure out what funds to invest in to take best advantage of it being tax deferred. Since I will only be able to put 5500 in and I will have such a low starting amount I would like something that has fairly good growth potential. So what did you start with and what do you have now? :)

I should add my 401k has all shares in VIIX

Nitpick: "tax deferred" means you're paying the tax later instead of now. A traditional IRA is tax deferred. With a Roth IRA you're paying the tax now and never again.

As to what you should put in there, start by deciding what your overall asset allocation should be. What percentage of stocks, what percentage of bonds? How much in international assets? Do you want some REITs as well? Once you have decided on that, https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement can help you optimize which things should go in which accounts, but the most important thing is to pick an asset allocation and stick with it.

Driko

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Re: What does everyone have in their roth?
« Reply #3 on: October 07, 2015, 03:54:22 AM »
To the FIRE time I am not 100% sure because my salary can vary a lot depending on how much extra I work. my base salary is like 40k and I have made 60k so far this year and my goal for next year is 90k and I have almost zero expenses and I am 31. I dont mind working and I am pretty much a workaholic, but the idea of being free is something that is really appealing, but I doubt I will retire within 10 years even if I have the funds to do so

I have no funds in bonds because I wanted a higher payout regardless of risk due to the fact that I enjoy my job and even if I had to work an extra 5 to 10 years due to market fluctuations I don't think that I would mind.

I have looked and considered the REIT funds for my ROTH. Originally I was considering VNQ and VYM because of the dividends and it being in a tax FREE account (thanks for that correction) Sector funds like the VDE and some other specific funds seem interesting to me, but I wanted to know what most mustacians do as far as their specific funds. like 70% VTI 30% international and 10% random sector for amusement?

For my taxable account I was preparing to invest most in VTI maybe 10% in international, but I never really considered bonds. Am I crazy for being against bonds?

Pooplips

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Re: What does everyone have in their roth?
« Reply #4 on: October 07, 2015, 06:03:47 AM »
If you want to invest in REITS, thats the account to do it.

nereo

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Re: What does everyone have in their roth?
« Reply #5 on: October 07, 2015, 06:10:52 AM »
I have my roth entirely in VFIAX.  Ditto for my t-IRA (i have both, and contribute to one or the other depending on my tax status for that year).  It's what I started with and likely what I'll stay with.

I like owning the 500 largest US companies (that also have good international exposure).  there's the most long-term data ont he SP500 and they pay out a decent (but not fantastic) dividend.  Since I plan on not touching the IRAs for a few decades it's the ideal investment vehicle for me. 

2Birds1Stone

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Re: What does everyone have in their roth?
« Reply #6 on: October 07, 2015, 06:13:30 AM »
I have VTSAX and VBTLX in there.

jwilliams0215

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Re: What does everyone have in their roth?
« Reply #7 on: October 07, 2015, 06:53:00 AM »
REITS - VGSLX

GGNoob

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Re: What does everyone have in their roth?
« Reply #8 on: October 07, 2015, 07:05:20 AM »
You should be picking an overall asset allocation and investing according to that. Vanguard IRAs and taxable accounts are a great place to purchase the funds you need but don't have in your 401k.

Our Roth IRAs are just invested according to our asset allocation and just happen to have mostly VNQ (US REITs), VSS (International Small-Cap) and VWO (Emerging Markets).

Gone Fishing

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Re: What does everyone have in their roth?
« Reply #9 on: October 07, 2015, 07:56:18 AM »
For most pursuing FIRE, Traditional IRA's (and 401(k)s, 403(b)s, etc.), aka deductible contributions are more advantageous than ROTHs.  Read the links in my signature below for explanations and real life examples of tax returns from people who have done a good job deferring taxes during their working years then dropped into a much lower tax bracket once retired, minimizing their overall tax payments.
 

Civex

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Re: What does everyone have in their roth?
« Reply #10 on: October 07, 2015, 09:00:28 AM »
I had this same question earlier this year; I would recommend reading https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement.

I would read this and then decide; I personally went with VTSAX in Roth, bonds in 401k, and will eventually move foreign investments to taxable when I begin taxable investing.

It comes down to trade offs between tax efficiency, hypothetical growth, and what type of investment vehicles you have available.


capitalninja

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Re: What does everyone have in their roth?
« Reply #11 on: October 07, 2015, 11:39:44 AM »
While maxing out tax deferred accounts is great (saves you on taxes now and potentially better compounding), keep in mind that you're essentially locking the money up until 59.5. If your income allows you to contribute to a ROTH, you absolutely want to do that for as long as possible.

If FIRE is a major goal (and the RE part is before you're 60), then I'd suggest that you also invest a significant amount of your disposable income into a traditional brokerage account. When you RE, you're going to need income from somewhere so building up a big enough post-tax pile that throws off income (by way of returns and dividends) is a sound strategy.  I personally have a 50/50 split between tax deferred investments (401k SEP, HSA) and post-tax investments.

I use the same mix of stocks, etfs, REITs, and mutual funds in the SEP and post-tax account. Is this the 100% most tax efficient way to go? No. But my purpose for investing is to:

1. Meet my short and long term goals within my desired timeframes
2. Be as tax efficient as possible while doing so.

Hope this helps.

Gone Fishing

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Re: What does everyone have in their roth?
« Reply #12 on: October 07, 2015, 11:42:38 AM »

MoonShadow

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Re: What does everyone have in their roth?
« Reply #13 on: October 07, 2015, 11:55:27 AM »
While maxing out tax deferred accounts is great (saves you on taxes now and potentially better compounding), keep in mind that you're essentially locking the money up until 59.5. If your income allows you to contribute to a ROTH, you absolutely want to do that for as long as possible.


+1 here.

If nothing else, it's a good idea to have a Roth IRA just for the account diversity.  The many other options of getting funds out of a Roth IRA (as well as an HSA, but under different circumstances) without penalties means that just about everyone that can do so should endeavor to have $50K or so in contributions as quickly as they can, which amounts to the annual max for 9 years or so.  More if your expenses are particularly high.  Also, keep in mind that a Roth IRA that is already 5+ years old & well funded is a necessary early retirement tool for FIRE under 55, as you need it for the Traditional to Roth ladder plan.

capitalninja

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Re: What does everyone have in their roth?
« Reply #14 on: October 07, 2015, 11:59:55 AM »
...keep in mind that you're essentially locking the money up until 59.5. ...

Might want to read this:

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Familiar with the process. I just tend to err on the side of keeping things simple. There's nothing that says that the fed can't close that loophole (or make it more difficult to execute) in the future.

Having 2 piles (tax deferred and traditional) is clean and frankly a more robust strategy because it doesn't require that you forecast your financial requirements in the next 5 years. Life often happens so it's unlikely that your calculations will be anywhere close to spot on.

2 piles of money; one for now, one for the future.

MoonShadow

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Re: What does everyone have in their roth?
« Reply #15 on: October 07, 2015, 12:14:12 PM »
Familiar with the process. I just tend to err on the side of keeping things simple. There's nothing that says that the fed can't close that loophole (or make it more difficult to execute) in the future.

Well, congress can pretty much do anything, but not all of those methods of early withdrawal are actually 'loopholes'.  Some are just exceptions that congress intended to put in to the tax code, that are not particularly well known; such as the 55-and-out rule for 401K's.  That said, having multiple sets of savings in different types of accounts can somewhat protect you from this kind of legal risk, because congress moves too slowly to cut off every option available to you at once.

nereo

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Re: What does everyone have in their roth?
« Reply #16 on: October 07, 2015, 12:56:33 PM »
Familiar with the process. I just tend to err on the side of keeping things simple. There's nothing that says that the fed can't close that loophole (or make it more difficult to execute) in the future.

Well, congress can pretty much do anything, but not all of those methods of early withdrawal are actually 'loopholes'.  Some are just exceptions that congress intended to put in to the tax code, that are not particularly well known; such as the 55-and-out rule for 401K's.  That said, having multiple sets of savings in different types of accounts can somewhat protect you from this kind of legal risk, because congress moves too slowly to cut off every option available to you at once.
"tax break": when it benefits you.
"loop hole": when it benefits someone else.

a country's tax code is an organic manifesto about what programs and ideas it's lawmakers have wanted to promote.  Left alone (i.e. not rigorously and periodically updated) it becomes a horribly complex quagmire of personal and corporate exemptions, previous initiatives and special interests.  Everyone wants to close loop holes but (almost) no one wants to give up their tax breaks.

Gone Fishing

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Re: What does everyone have in their roth?
« Reply #17 on: October 07, 2015, 03:10:24 PM »
...keep in mind that you're essentially locking the money up until 59.5. ...

Might want to read this:

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Familiar with the process. I just tend to err on the side of keeping things simple. There's nothing that says that the fed can't close that loophole (or make it more difficult to execute) in the future.

Having 2 piles (tax deferred and traditional) is clean and frankly a more robust strategy because it doesn't require that you forecast your financial requirements in the next 5 years. Life often happens so it's unlikely that your calculations will be anywhere close to spot on.

2 piles of money; one for now, one for the future.

That's fine if that is your strategy, I just don't want the OP to get the idea that retirement accounts are "locked up" because, as of now, they aren't.   Even if the "loophole" is closed, or an unexpected event occurs, it can still make sense in some cases to pay penalties on the withdrawals vs. paying the taxes during your working years. 


capitalninja

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Re: What does everyone have in their roth?
« Reply #18 on: October 07, 2015, 03:19:05 PM »
Even if the "loophole" is closed, or an unexpected event occurs, it can still make sense in some cases to pay penalties on the withdrawals vs. paying the taxes during your working years.

I disagree with this. Knowingly putting yourself in a position where there's a strong possibility that you'd take a guaranteed 10% hit to your investment is unacceptable; at least to me. Having a significant post-tax position prevents having to deal with that.

2 piles of investment money has served me well.

To each his own.

seattlecyclone

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Re: What does everyone have in their roth?
« Reply #19 on: October 07, 2015, 04:12:24 PM »
Even if the "loophole" is closed, or an unexpected event occurs, it can still make sense in some cases to pay penalties on the withdrawals vs. paying the taxes during your working years.

I disagree with this. Knowingly putting yourself in a position where there's a strong possibility that you'd take a guaranteed 10% hit to your investment is unacceptable; at least to me. Having a significant post-tax position prevents having to deal with that.

Sure, if the choice is between paying 10% or paying 0%, go with the 0%. However that's rarely the choice people have to make. There are taxes involved with Roth contributions and traditional brokerage accounts as well. Choose the option that will leave you with the most money after tax. Sometimes that might involve paying 10% early withdrawal penalties! Suppose you're in the 28% tax bracket right now and plan to be in the 15% bracket when you retire. You could pay 28% to save in a Roth IRA, or 15+10% to make early withdrawals from a traditional IRA. 25% is less than 28%. If the Roth pipeline remains a legal option, 15% is even less than 25%.

sirdoug007

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Re: What does everyone have in their roth?
« Reply #20 on: October 08, 2015, 11:37:49 AM »
Even if the "loophole" is closed, or an unexpected event occurs, it can still make sense in some cases to pay penalties on the withdrawals vs. paying the taxes during your working years.

I disagree with this. Knowingly putting yourself in a position where there's a strong possibility that you'd take a guaranteed 10% hit to your investment is unacceptable; at least to me. Having a significant post-tax position prevents having to deal with that.

2 piles of investment money has served me well.

To each his own.

There are definitely cases where paying the penalty still puts you ahead of putting your money in a taxable account so don't be so quick to dismiss this.

Here is a whole thread on this subject that I started a while ago: http://forum.mrmoneymustache.com/investor-alley/breaking-the-taboo-of-the-10-early-withdrawal-penalty/msg700255/#msg700255

PathtoFIRE

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Re: What does everyone have in their roth?
« Reply #21 on: October 08, 2015, 11:59:38 AM »
2/3 VTSAX (Total US Stock)
1/3 VTIAX (Total World Stock ex-US)

At least, that's what we contribute to our [backdoor] Roths each year, I don't pay attention to what the asset allocation is after that except to track my complete portfolio AA. I know that there are different strategies for what to put in the Roth, and we went with the "keep your bonds and other tax-generating assets in pretax 401k/TSP accounts" and "put your assets with the greatest potential growth in Roth" view of things.

rugorak

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Re: What does everyone have in their roth?
« Reply #22 on: October 08, 2015, 12:17:48 PM »
Plus the OP said a Roth, and all Roth contributions can be withdrawn at any time penalty free. You just can't pull out any earnings. Most people here will suggest and rightly so that you take advantage of every tax advantage available to you. So max out your retirement accounts first. Then the excess put into taxable. If you aren't going to FIRE it clearly makes sense and even with FIRE there are so many options for you to get to that money that it isn't a big deal. Plus you typically will have some in taxable accounts too.

thedayisbrave

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Re: What does everyone have in their roth?
« Reply #23 on: October 08, 2015, 12:52:25 PM »
REITs and Small Cap Index.


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Re: What does everyone have in their roth?
« Reply #24 on: October 08, 2015, 09:59:24 PM »
I have 100% VTSAX in my Roth.  Then I have a target date retirement fund with the TSP for more diversification.