Roth allocation?

I am wondering how other people handle this situation. All of my investing is done in retirement accounts, 25% Roth (already been taxed), 75% non-Roth (taxed upon withdrawal). It would be in my best interest if I could achieve the highest returns in my Roth account, as I get 100% of the benefit from here on out.

To date however, I’ve haven’t really tried to stack the deck to favor my Roth account. If I sell something in the Roth accounts, I buy something with those funds. But I’m starting to think I’m not being strategic enough. For instance, although SHOP is my highest conviction stock, somehow I’ve not got any of it in my Roth accounts.

So what do you guys do in a similar situation? Load up the Roth accounts with a healthy dose of your top 5 conviction stocks? Something more clever? Trading costs are low enough I don’t mind spending a little to optimize my allocations, and there are no short-term tax implications to worry about.

Thank you all.

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So what do you guys do in a similar situation? Load up the Roth accounts with a healthy dose of your top 5 conviction stocks?

utahchris,
That’s exactly what I do. Top 3 positions in my ROTH are SHOP, ANET & NVDA.
So far :slight_smile:

Kindest Regards,
Steve

Interesting question. In my experience, every time I thought I was doing something clever about allocating to Roth vs. conventional, I found I was overthinking it. I would allocate what I thought were LTBH stocks to my conventional IRA and more aggressive holdings into a Roth. I eventually learned that it’s hard enough to be right about an outcome let alone predict when it would occur.

Just my 2 cents.

Cosmid

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My situation is similar. I hold investments in three accounts: a taxable trust account, a traditional IRA and a Roth IRA. The Trad IRA has about 1/2 the asset value of either of the other two accounts.

First, I’ve made some strategic withdrawals from the taxable trad IRA in order to move funds into the Roth. Of course I had to pay taxes on the withdrawals, but by being careful to avoid bumping up my tax bracket this has worked to me benefit.

As for the investments themselves, all three accounts are similar with respect to investments held and percentage allocation. I do hold some very small (less than 1%) speculative positions in the Roth.

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So what do you guys do in a similar situation? Load up the Roth accounts with a healthy dose of your top 5 conviction stocks? Something more clever? Trading costs are low enough I don’t mind spending a little to optimize my allocations, and there are no short-term tax implications to worry about.

I am a little confused by this question. Isn’t it your goal to maximize profit regardless of account type? If you had SHOP in one, why not in both?

I guess what I am trying to say is, why would you want one account to perform more poorly than the other?

Now if you want to have one account that is conservative, income (dividends or bonds) type of account, and the other more growth oriented because that is your investing style, then yes you should run your growth portion in the ROTH and the income portion in the traditional. But it does not sound like that is the case.

In other words, why would you not want to maximize growth regardless of what type of account it is? Isn’t that the point, profit regardless of account type?

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Hi utahchris.

I had that realization about 5 years ago, and made the adjustment. It felt odd selling out en total certain stocks from both my traditional IRA and Roth accounts, and then buying them in the other account. But I did it, keeping some solid anchors in my Roth and then adding my anticipated fast growers and solid growth stocks. That included FB, which has grown over 300% since tucking it into my Roth. My other top fast growing Roth positions are SHOP and NVDA, both well up since I bought them and therefore tax free when I am ready to use that money in the real world. Hopefully, never. :slight_smile:

I kept big blocks of AAPL, SBUX, and AMZN in my Roth and they are solid medium positions. In my Roth, I also have a few smaller high growth positions that will hopefully grow into larger ones. I feel good knowing that my 3 largest positions, SHOP, NVDA and FB will grow without tax worries. And I feel safe having AAPL, SBUX and AMZN anchoring the account.

As for selling out in one account and buying in the other, don’t pay any attention to price as it’s a wash. My cost basis for the SBUX position in my traditional IRA was $3.54. When I sold it and bought equal shares in my Roth, my cost basis changed to 20something. It is ludicrous that selling those original shares irked me. But it did. An emotional thing, I guess. But I have come to realize over the years, that there is no room for emotion or loyalty in buying stocks. Just cold analysis and common sense. Hopefully, I can continue to keep the emotion out when making future buys and sells!

Best,

Vivienne

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Hi Utahchris,
I have done some thinking along these lines as well. In fact I essentially have 5 accounts. A brokerage account (non-ira, taxable) and 4 ira accounts, two traditional and two Roth, one of each for me and my wife. As to your question, There are a number of ways you can do it, and truthfully I have tried most of them.

You can manage each independently.
You can manage them together as one portfolio matching holdings in each.
You can manage them all together as one portfolio, not worrying about what is in which account.
You can manage them all together as one portfolio, and specifically put the riskier, higher potential stocks in one instead of another.

But honestly in the end, I have decided that there are big differences between the tax exempt and the non-tax exempt in terms of how you treat them, but not really much between the traditional, Roth or 401k accounts.

Here are the important differences between taxed and tax-exempt accounts:

Ordinary High dividend paying stocks should be held in a taxable account since the tax treatment of a dividend is better than ordinary income, i.e. Less advantage to protect that income.

REITs and other non-ordinary dividend stacks should be held in tax protected accounts since they are taxed as ordinary income.

Any stock that could be a short term trade (held less than a year) should be held in a tax protected account.

Any stock that is expected to be held for a very long time, I hold in my taxed account.

So, how do I handle things now…

In my taxed account, I look for long term “buy and forget” type companies. I don’t want to trade stocks in this account. I look for ordinary dividend payers and companies that I think will grow for 10 years or more. If I owned an S&P index fund, I would own it here since these vehicles are very tax efficient.

In my ira type accounts, I hold any REITs, I hold growth companies that I am not sure how long I will hold as well as low dividend high growth companies. If I owned a managed mutual fund, I would own it here as I don’t have to worry about the tax implications of the annual payouts.

Overall, I look at all my iras as one account, with different stocks in different accounts, but I have used individual accounts to try out different investment philosophies to compare to the overall return…

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Hi Chris,

I’m going to disagree with most everyone here. If your goal isn’t to make the maximum profit possible in each account (I agree there are some valid reasons this might be the case) then you should have let us know. Otherwise, there is no difference.

If you can figure out a way to put your range of possible results into a spreadsheet and see the outcomes from both accounts, I promise you you will find out that the real difference is when both accounts are maximized. If you know you are going to have lesser gains in one investment or one account, then sure, make it happen the taxed account. But in that case, I have to ask 2 questions:

  1. Why do you buy something you expect to make less with?
  2. What the hell are you thinking?

If you don’t want to pay taxes, don’t have an income. Or donate your income to me and save those big bucks. I don’t mind paying taxes. :slight_smile:

Dan

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Chris,
I guess risk tolerance and age play a factor. I have experienced enough bear markets to know that I simply do not have the personality to be too heavily concentrated in young, super fast growing stocks. I have felt fear more that once in my investing career so I will probably always have some cash and dividend payers. It helps me sleep better.

All that said, thankfully, I also know the exuberance of hitting a home run with a stock. If I can hit another one I want it to be in my ROTH (no taxes due when funds withdrawn)

If I were younger and still working I would probably be another story…

Kindest Regards,
Steve

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