Author Topic: Where to invest Roth IRA Ladder Rungs  (Read 461 times)

FIRE 20/20

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Where to invest Roth IRA Ladder Rungs
« on: December 05, 2020, 12:25:06 PM »
I FIREd in April 2019, and because I am 44 years old I am using a Roth Ladder to convert my 401(k) (with Fidelity) to a Roth (also with Fidelity).  I have completed the initial rung by transferring some of my 401(k) money to a new Roth with Fidelity.  The money is now in SPAXX (Fidelity Government Money Market).  The expense ratio is 0.42% (!!!!), and doesn't create any significant growth, of course.  The initial investment (not growth) will be available to me to spend in January, 2025.  While I probably won't need to use it for living expenses quite that early, I do expect to need it sometime in the next 5-8 years.  I would like to keep that money relatively safe.  By "relatively safe" I mean I would like to have a very high likelihood of having the full initial investment available when I need to pull it out.  I do not need to generate any growth with this, although keeping up with inflation would be nice.  I oversaved and have significantly more than I need overall (specifically in my pre-tax accounts), but the post-tax accounts will be a little constrained until I'm 59 1/2 which is 15 years from now.  I would like to keep this money with Fidelity because I have a lot of accounts there including my 401(k) so it's the easiest one for me to work with. 

My IPS currently has me in an overall 60/40 equities/bonds ratio, but following a rising equities glidepath to reduce SORR while maintaining growth potential.  I expect to hit 80/20 in about a decade unless I update my IPS. 

My question is:  Where should I invest this money?  With essentially zero growth potential and a 0.42% expense ratio, I want to get it out of SPAXX as soon as possible.  I was thinking of something like the following funds:

FIPDX - Fidelity Inflation-Protected Bond Index Fund - 0.05% expense ratio
FNBGX - Fidelity Long-Term Treasury Index Fund - 0.03% expense ratio

Should I be looking at something else, or does one of those two seem like an appropriate place for this money?  Any other comments welcome.


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Re: Where to invest Roth IRA Ladder Rungs
« Reply #1 on: December 05, 2020, 01:38:00 PM »
Do you have any other Roth or are these conversion it? How close is your expected spending in 5 years to the amount you've converted?

If you don't have any other Roth and you expect to need to spend most/all of what you've converted then I can see an argument for investing it all in the conservative (bond/cash) parts of your portfolio.

If you've converted more than you expect to need to spend or you already have money in Roth then I would invest it in stocks since it's tax free forever and put your bonds in the 401(k) as per the recommendations at (step 4). All Roths are considered as one so you don't need to withdraw the conversion from this Roth specifically, you you just need to keep all withdrawals under the amount contributed plus the amount converted 5 or more years ago across all Roth accounts.

If you have a hard time getting your head around the concept that the account you withdraw from first can be different than the account that holds the conservative investments (thanks to the fungibility of money, which means all money is the same no matter where it is) and prefer a strict bucketing approach, then it certainly wouldn't be the end of the world to put the Roth money in bonds. It might not be totally optimal, but behavioral finance has it's place, so if it makes you feel better to know THIS money will be always be there, then that's fine too.

FIRE 20/20

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Re: Where to invest Roth IRA Ladder Rungs
« Reply #2 on: December 05, 2020, 02:17:04 PM »
Thanks!  I hadn't realized that the money could be taken out of any Roth - that's great to know.

I'll try to answer the questions you asked - hopefully I understand well enough to give you the information you need.  I have approximately 2 years of spending in a savings account with Ally.  After that runs out, I'll need to tap into either old Roths that have all of their contributions from more than 5 years ago or non-tax advantaged investment accounts.  I have a little over 3 years (3.3) of planned expenses in Roths that are old.  I have about 2.4 years of expenses in other (non-tax advantaged) investment accounts.  So, in total, I have about 7.7 (2 savings + 3.3 old Roths + 2.4 brokerage accounts) years of planned expenses already taken care of.  That's why I don't plan to touch the new Roth Ladder money for 5-8 years. 

I am converting close to but less than 1 year's expenses into my Roths from my 401(k) to keep my taxable income low both for tax reasons and for ACA reasons.  I hope to be able to glide into age 59 1/2 as my brokerage account and Roths are spent down to zero.  One way to look at it is that I have 5 years of spending saved up plus 2.7 years of expenses saved up in accessible accounts.  I'm going to spread the extra 2.7 years of spending over the 15 years left until I turn 59 1/2.  Thus, I can make ladder rungs that are a little less than planned spending and make it up with the 2.7 years of extra.  When I turn 59 1/2 I'll be able to access my 401(k) and traditional IRA without penalty. 

I do want to know that THIS money will be there in 5-8 years because if it's declined due to a market downturn then I will be short on accessible money when I need it.  Because I saved more than I need in my 401(k) I'm willing to be less that optimal overall to maintain accessible funds prior to 59 1/2.
Does that make sense and answer the questions you asked?


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Re: Where to invest Roth IRA Ladder Rungs
« Reply #3 on: December 05, 2020, 04:20:43 PM »
The issue you're talking about occurred to me as I was FIREing at age 46 in 2016 with perhaps 6-7 years in my Roth ladder.  My Roth ladder was all in VTSAX.

What I chose to do, which wasn't really very strategic or smart, was to leave it in VTSAX and offhandedly figure that either (a) SORR would not hit me during the applicable time frame, or (b) I could earn some side gig income, or (c) I could just pay the 10% penalty and access my traditional IRA early.

What happened over the past 4-5 years is that (a) SORR did not hit me; in fact, VTSAX has done very well since I retired, (b) I earned some side gig income that has cut my WR in half and extended my Roth ladder quite a bit, (c) I had time and energy and lower stress levels so I could optimize and reduce my spending even more, which also extended my Roth ladder quite a bit, and (d) my Mom passed away and I received some life insurance, which deferred my Roth ladder for a while.

You could say I got lucky financially, and I wouldn't argue with you.  But it has also occurred to me over the years since I retired that my FIRE plan assumed the worst outcome for pretty much everything, so it wasn't really surprising that the absolute worst didn't happen.  On average, results are average, not worst case.

Based on the way you're writing about it, it sounds like you want to keep the money at Fidelity and relatively safe.  If I were in your shoes, I'd figure out what the Fidelity equivalent of VBTLX is and put it in there.  Some might argue that bond funds may not do well in a rising interest rate environment; I would argue that nobody knows if we are or will be in a rising interest rate environment over the next 5-8 years.  About two years ago the Fed was on a march to raise their target rates to 4%.  If you did something like that then you'd just consider that part of your 40 bond allocation.

One minor note:  from the IRS' point of view, you have one logical Roth IRA, even if you have multiple Roth IRA accounts.  Any withdrawals from any Roth account will be your contributions (oldest first), then conversions (oldest first), then earnings.  From a tax point of view, the IRS doesn't care in the slightest which Roth you withdraw from, nor what you sell inside the Roth when doing so.  So for example, if you withdrew funds today from your new Fidelity Roth IRA, the IRS would consider that withdrawal to be from your first contribution to your oldest Roth IRA.  You don't have to think about it that way if you don't want to, but that's how the IRS looks at it and how your taxes will turn out.