The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Captain Cactus on April 27, 2016, 03:59:14 PM
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For the following investment products, which retirement account is the best fit?
1) REITs:
A. ROTH IRA
B. Traditional IRA
C. Non-retirement, taxable account
D. Doesn't make any difference
2) Total bond index funds:
A. ROTH IRA
B. Traditional IRA
C. Non-retirement, taxable account
D. Doesn't make any difference
3) Total stock market funds/Total international market funds:
A. ROTH IRA
B. Traditional IRA
C. Non-retirement, taxable account
D. Doesn't make any difference
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https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
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D, D, and D. It doesn't matter at all. The retirement accounts are essentially the same for these purposes.
Edit: Somehow missed option C. Not sure how that happened. Please ignore.
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D, D, and D. It doesn't matter at all. The retirement accounts are essentially the same for these purposes.
Well you want tax inefficient holdings in retirement accounts and tax efficient accounts in your taxable accounts.
So realistically if you are picking between AB and C there is sometimes a significant difference, depending on the tax implications of your investments.
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D, D, and D. It doesn't matter at all. The retirement accounts are essentially the same for these purposes.
Well you want tax inefficient holdings in retirement accounts and tax efficient accounts in your taxable accounts.
OP only asked about retirement accounts, not taxable accounts. But if taxable accounts are in the mix, yes, you are right.
So realistically if you are picking between AB and C there is sometimes a significant difference, depending on the tax implications of your investments.
No, I don't think there is a difference between A, B, and C. If you are going to buy the funds and you are deciding which retirement account to put them in, it doesn't matter. If you have the option of doing taxable instead, then it would matter, but that's not what the OP asked about.
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Option C in all three cases is non retirement, taxable... ?
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Consider equal sized Roth and Trad IRA accounts. Over longer spans of time, stocks are expected to grow faster than bonds. So if the stocks go in Trad IRA, you expect to have a larger balance than if you put bonds in Trad IRA. You only owe tax on the Trad IRA, not the Roth IRA. So placing bonds in the Trad IRA, with slower expected growth, should result in paying less tax.
When comparing taxable v.s. Trad IRA, you need to consider the time frame. The article referenced earlier mentions the tradeoff: in taxable the stock dividends result in tax each year. But cashing in the gains can be done at a lower tax rate. Over short periods stocks do better in taxable than Trad IRA. Over longer periods, deferring tax on stock dividends tilts the balance towards Trad IRA.
forummm - You ignored (C), taxable non-retirement.
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Option C in all three cases is non retirement, taxable... ?
Wow, not sure how I missed that. Sorry.