Target retirement fund in 401k or Roth IRA?

[socalretirement]

Hi. I have both a Roth IRA and a 401k account. Is there any preference on where to invest target retirement funds in (i.e., Fidelity 2050)? I am not sure if I'll get the most out of my money investing a target retirement account into one or the other. I've been reading discussions leaning more on on the 401k, but I don't know why that is the case.

FYI, I want to use one account for the target retirement fund, and the other one to create my own portfolio. Thanks in advance!

[sweeps]

The investment options for a 401k are limited... You can only buy what your 401k provider offers you. I would suggest investing in the Fidelity 2050 fund with your 401k, and use the Roth IRA for your self-managed portfolio.

[jIM_Ohio]

You could put the same fund in both the 401k and the Roth. Pick your target date fund and put it in one or both. In general you want the fastest growing investments to be in the Roth IRA (so if you are making an aggressive decision, put that decision into the Roth).

If in a taxable account, I would suggest a different mutual fund choice for tax reasons.

[disneysteve]

I want to use one account for the target retirement fund, and the other one to create my own portfolio.

I agree with sweeps. If you want one account to build a portfolio, that would need to be the Roth. In the 401k, you won't have nearly as many investment options. So the target fund needs to be in the 401K.

[atomicrc11]

If you're just starting stick to just one fund in you accounts. For the Roth, there is generally a minimum to invest in each mutual fund, so until you have $20k or more invested in the Roth, just go with the Target Date fund. Once you get that much in there, you can hold multiple funds without worrying about low balance fees.

For the 401k, you can diversify however you want right away as there will no minimums on the funds you invest in.

[socalretirement]

Thanks everyone for their input! I agree with everyone that my most agressive porfolio should be in the Roth IRA. I will go with Atom's comment for now since my Roth hasn't accumulated $20k just yet. For now, I will just do the target in the Roth, and diversify my 401k. When the time comes, I'll reverse that if needed. My choices in my 401k plan is limited, but the returns are not that bad. I'm doing better than the "model plans" that the 401k offers, so it seems like it's working for now. -socal

[Broken Arrow]

Er, just so it's clear, it isn't technically more advantageous to have a more aggressive portfolio in one retirement account type over another. The key here is that IRAs are usually more versatile than 401ks. So, you want to reserve that versatility for your own custom portfolio whenever you can. But perhaps your custom portfolio will be more aggressive as well, so maybe I misunderstood.

[jIM_Ohio]

Er, just so it's clear, it isn't technically more advantageous to have a more aggressive portfolio in one retirement account type over another. The key here is that IRAs are usually more versatile than 401ks. So, you want to reserve that versatility for your own custom portfolio whenever you can. But perhaps your custom portfolio will be more aggressive as well, so maybe I misunderstood.

BA- disagree- the Roth will not be taxed, so if you have $1.5 M spread pver 3 accounts:

$500k in Roth
$500k in taxable
$500k in 401k

the Roth money will last longer because it is "denser"- taxes are already paid.
the 401k money will go fastest because no taxes have been paid on that money.
the taxable account is somewhere in the middle.

Using this logic, it would then make sense to have as much in Roths as possible. The issue is making tax bracket decisions (for example I could have more in Roths than I do now, but then I would be taxed at 25% come April 1 and not 15%).

If the 401k contributions do not change a person's tax bracket, they should use the Roth as much as possible (but get the 401k match first). If putting more in 401k lowers current tax bracket, that should be priority before the Roth.

[Broken Arrow]

Ok, help me understand this part, but how will the aggressiveness of the portfolio be more advantageous inside the 401k over the Roth IRA or vice versa? The taxable account makes sense, but with the other two, both money should grow equally tax-free while incubating inside the account.

I absolutely agree about watching out for income tax brackets, but that's a separate matter that has nothing to do with the aggressiveness of the portfolio.

[jIM_Ohio]

You invest aggressively to make more money-

so if you had to pick a place to put bonds, choose the 401k and if you had to pick a place to put stocks, choose the roth.

If there is an investment expected to grow at a higher rate, put it in roth. If there is an investment which you expect lower returns from, put it in 401k.

[simpletron]

You invest aggressively to make more money-

so if you had to pick a place to put bonds, choose the 401k and if you had to pick a place to put stocks, choose the roth.

If there is an investment expected to grow at a higher rate, put it in roth. If there is an investment which you expect lower returns from, put it in 401k.

Jim, this sounds like my mom saying "because I said so".

imagine if the government change the tax rate to zero for everyone(very, very unlikely, i know). then you will want all your money in a 401k or do the opposite of what your suggesting and invest more aggressively in a 401k.

the difference between a roth and 401k is whether it gets tax going in or going out. with a roth, you want to invest at a low tax bracket and take it out at a higher tax bracket. you do this by have a lot of 401K. with a 401K, you want to invest at a high tax bracket and take it out at a lower tax bracket. you do this by have a lot of roth. so end in the you want a lot of the other and there is no best strategy.

when making the decision between a roth and 401k, you should use your knowledge of the current tax rate versus your expectation of the tax rate the money will be withdrawn at. which ever one is lower is how you want the money to be tax.

if you think that you are saving a lot of money and tax rates are at historic low(and have only one way to go, up) then you think you are going to be taxed at a higher rate in the future. then you should follow jim's advice of being more aggressive in a roth.

If for some reason you think you'll be at a lower tax rate(not saving enough, not going to need as much income in retirement,...), then you want to be more aggressive in a 401K.

only time will tell which was the better choice.

[jIM_Ohio]

Jim, this sounds like my mom saying "because I said so".

imagine if the government change the tax rate to zero for everyone(very, very unlikely, i know). then you will want all your money in a 401k or do the opposite of what your suggesting and invest more aggressively in a 401k.

the difference between a roth and 401k is whether it gets tax going in or going out. with a roth, you want to invest at a low tax bracket and take it out at a higher tax bracket. you do this by have a lot of 401K. with a 401K, you want to invest at a high tax bracket and take it out at a lower tax bracket. you do this by have a lot of roth. so end in the you want a lot of the other and there is no best strategy.

when making the decision between a roth and 401k, you should use your knowledge of the current tax rate versus your expectation of the tax rate the money will be withdrawn at. which ever one is lower is how you want the money to be tax.

if you think that you are saving a lot of money and tax rates are at historic low(and have only one way to go, up) then you think you are going to be taxed at a higher rate in the future. then you should follow jim's advice of being more aggressive in a roth.

If for some reason you think you'll be at a lower tax rate(not saving enough, not going to need as much income in retirement,...), then you want to be more aggressive in a 401K.

only time will tell which was the better choice.

Current tax rates are not the issue with choosing the investments INSIDE the account. You are confusing why you choose the account vs what investments are best put where. It would little sense to put muni bonds in either account, it would not make sense (and is probably illegal) to hold rental properties in either account type as well. Not all investments can or should be considered for Roth, 401k or taxable accounts.

500k in a 401k is NOT equal to 500k inside a Roth (if both are the same amount, the Roth is actually bigger). The 500k in the 401k will get taxed and a person could lose around 10-15% of the balance (50-75k) to taxes on withdraw. You would not lose that same amount from Roth withdraw, so you can take more money from the Roth (relative to 401k).

Whether it makes sense to invest in the Roth (the tax rate issue you pointed out and I pointed out about 4 posts before yours) was NOT the question being discussed (as Broken Arrow also alluded to). Whether your tax rate is higher or lower now still has the Roth withdraws being tax free, meaning you want as much money in that account to withdraw as possible.

If a Roth is being used, you want the best performing assets possible inside that account. Keep cash somewhere else, keep bonds somewhere else- invest the Roth as aggressive as possible during the growth phase. In this regard it might not make sense for target date funds to be inside a Roth because they will hold bonds and slow the growth of the overall portfolio.

FYI- in your example above the 401k is providing very little benefit and I would not choose to use it in the example you are trying to illustrate.
[quote]imagine if the government change the tax rate to zero for everyone(very, very unlikely, i know). then you will want all your money in a 401k or do the opposite of what your suggesting and invest more aggressively in a 401k.[/QUOTE]

If this is the case the money does not need to be sheltered, so therefore don't charactorize it inside the 401k.

This is not something I made up- this technique (get a high Roth balance) is a common financial planning technique.

Another example- suppose a person is in same tax bracket when they work as when they retire- which account is better- the Roth- because they will have fewer restrictions on access to the money.

The best way to "make" money is to do the tax planning mentioned earlier.
The Roth has other features which benefit a person even if they cannot take advantage of the tax rate techniques mentioned, and it is important in both cases for the Roth to have the highest account value possible. I actually started my Roth because it was not subject to RMDs and provided more flexible access to the money inside the account.

Only after further tax planning have I been able to get contributions in at 15%. For the longest time I was contributing at 25%.

[simpletron]

you're right, I was thinking about before you put any money into either account. and it makes sense after you put the money into accounts and what to do with that money. 401k - more growth equals more taxes, roth - more growth still equals zero taxes.

being super aggressive everywhere, i have only been concern with how much into each account and have never really thought about this. thanks

[jIM_Ohio]

My allocations in 401k and Roth are quite similar. The biggest difference is I do not hold a bond position in my Roth, and I keep the bond position slightly higher in my rollover to compensate. I also hold bonds in my 401k.

I also invest my wife's roth much more aggressively than her 401k, even though the xrays show the allocation to be similar in some ways. No bonds in either account for her, though.

[kork13]

The OP's thoughts are exactly what I'm doing... my 401k-like retirement plan (TSP) is just going to be a life-cycle fund set for like.... 2050 or so, and my Roth is the one I manage. I think it allows for alot more options, and more control over what I consider to be my more important savings vehicle (at least at current, since i'm just starting my career).