Need help choosing funds

**Petunia 100** · 08-10-2013, 09:06 AM

Hi Jen,

Your proposed asset allocation plan is a reasonable choice. Vanguard recommends that international equities should be between 20 - 40% of equities. So you are a bit light on international according to Vanguard.

You say you would like your US stocks to be 70/20/10 large/mid/small. The US stock market breaks down just that way, so a total US stock market index fund will accomplish that quite nicely.

You say you would like your international stocks to be 70/30 developed/emerging. Vanguard's Total International Index fund is about 75/25, so it comes very close. I am less familiar with Fidelity and T. Rowe Price funds.

If one is investing for a single goal (retirement) with both tax-advantaged and taxable accounts, then the standard advice is to keep tax-inefficient holdings inside tax-advantaged accounts. Bonds throw off dividends every month, which are taxed at ordinary income tax rates. For this reason, bonds are considered tax-inefficient and should be kept inside tax-advantaged accounts. The exception to this rule is muni-bonds, which should always be kept in taxable accounts.

**MonkeyMama** · 08-10-2013, 03:13 PM

I agree with petunia.

All of your accounts are tax-deferred (or just plain tax free, in case of ROTH) so I don't know that it matters much on the bonds and cash. I personally put more aggressive stocks in our ROTHs (since expect to grow more for the long run and never be taxed again) while keeping bonds in regular IRA (don't expect them to grow so much for the long run, and will eventually be taxed in the future).

When you max out all your retirement accounts and invest outside of them, I have seen that people sometime go to great lengths to keep all their cash and bonds in their retirement accounts (because otherwise taxed at ordinary rates) and keep more tax efficient investments, like mutual funds, in their taxable accounts (long term capital gains and qualified dividends are taxed more favorably). We haven't really bothered with this strategy with a small cash sum and piddly interest rates. Just to say, something you won't have to worry about too much until you max out all your retirement funds and start to build substantial sums in taxable accounts.

One other thought: Have you considered converting your regular IRAs into ROTH IRAs? I can't say if this it the best choice given your personal situation. But, if you aren't adding to them, I'd probably just convert them and pay the tax now, to consolidate a bit and get those growing tax-free for eternity. I could easily argue the flip side that it's also good to have tax diversification. Just don't know if you had thought about it at all. Another strategy, which we 100% use, is to convert to ROTHs when unemployed or in times of low income. And/or when stock market dives. {If you do decide to convert, may want to convert a fraction every year as to limit tax consequences. Just to be clear I wouldn't necessarily do it all in on year}.

**Snydley** · 08-14-2013, 05:58 AM

Thanks for the replies.

"I personally put more aggressive stocks in our ROTHs (since expect to grow more for the long run and never be taxed again) while keeping bonds in regular IRA (don't expect them to grow so much for the long run, and will eventually be taxed in the future)."

Why would ROTHs grow more? Because I put riskier stocks there, so there will eventually be more money in them compared with IRAs (= more tax free cash at retirement). Is this what you mean?

"One other thought: Have you considered converting your regular IRAs into ROTH IRAs? I can't say if this it the best choice given your personal situation. But, if you aren't adding to them, I'd probably just convert them and pay the tax now, to consolidate a bit and get those growing tax-free for eternity. I could easily argue the flip side that it's also good to have tax diversification."

We make ~180K combined right now, and we really don't know if we will be making considerably more in the future. I don't know if converting our ROTHs makes sense or not. If we do, do we then max out the amount of ROTH contributions we can make this year? I assume no?

thanks
Jen

**MonkeyMama** · 08-14-2013, 06:40 AM

Originally posted by Snydley View Post

"I personally put more aggressive stocks in our ROTHs (since expect to grow more for the long run and never be taxed again) while keeping bonds in regular IRA (don't expect them to grow so much for the long run, and will eventually be taxed in the future)."

Why would ROTHs grow more? Because I put riskier stocks there, so there will eventually be more money in them compared with IRAs (= more tax free cash at retirement). Is this what you mean?

Yes, that is what I mean. Stocks historically have much higher returns than cash and bonds, so you'd expect those accounts to have more growth over the long run. & I want to have the most growth in my tax-free accounts.

Originally posted by Snydley View Post

"One other thought: Have you considered converting your regular IRAs into ROTH IRAs? I can't say if this it the best choice given your personal situation. But, if you aren't adding to them, I'd probably just convert them and pay the tax now, to consolidate a bit and get those growing tax-free for eternity. I could easily argue the flip side that it's also good to have tax diversification."

We make ~180K combined right now, and we really don't know if we will be making considerably more in the future. I don't know if converting our ROTHs makes sense or not. If we do, do we then max out the amount of ROTH contributions we can make this year? I assume no?

No, I would not convert the ROTHs given your income tax rate. I may consider it for the $8500 ROTH, just to simplify things. But overall, would just keep in back of mind if stock market dives and/or you find yourself in temporary lower income situation. I'd still max out when you convert. (You'd probably not convert all at once).

Need help choosing funds