CBO predicting 38% GDP drop. If it is possible to snap back like pulling a rubber band back and releasing it, like the right wing derp fest is predicting, that will pretty much completely destroy Keynsian economics and classical economic theory once and for all. And I’m not really convinced that is a bad thing.
About 1% of my portfolio is a Roth IRA. Should that be my riskiest growth play since I don’t have to pay taxes on the gains?
I use my Roth IRA for more speculative plays. My remaining portfolio is more conservative and managed for tax efficiency.
I think it probably should be, but at 1% it doesn’t really make a difference.
As it turns out I’ve ended up with almost all of our Roth investments in short and medium term treasuries, but that’s only because of circumstances and it’s not anywhere close to ideal.
Yeah but what if I run that 1% up 100x by nailing my risky investments? Then - no gains tax. BOOM.
BOOM
STONK STONK
Generally, no, IMO. Certainly there are myriad scenarios one can construct that would yield a different answer.
For me, risky stuff is better of in a taxable account so that you can harvest tax losses. Losses in a Roth do you no good.
However, a general answer has little value. There are many factors at play like how “risky” is risky and what else you’re investing in. The only thing I’m sure of is that there are definitely scenarios that exist in which it is better to place your riskier investments in a taxable account than a Roth.
My taxable account is already way up this year due to stonk stonks. So I don’t want to sell anything in there and get hit with short term capital gains tax (while I’m still working).
I’m not sure how exactly that relates to your original question.
I’m roughly 60/40 in tax advantaged accounts and 85/15 in taxable. But I don’t know WTF to do in a world where a total stock market index fund yields more than any decent bond fund.
If I were to sell some of the stocks in my brokerage account to buy say a 3x ETF, then that sale will go down as short term capital gains. I don’t have any cash in the account at the moment. If I hold the stock, then I don’t have to pay short term or long term capital gains tax, until I sell. Unless I have this wrong.
That’s all true. If the stock has dividends, you will pay a small amount of tax annually for those even if you’re just holding it. But I still don’t understand what that has to do with where, as a general rule, you should put your riskiest investments.
Well the thinking is that if my regular IRA explodes - that’s a lot of tax I have to pay when I withdraw. But if the Roth explodes - that money is all mine free and clear.
I think we may be having a terminology problem. I’m thinking of three distinct account types.
- Roth IRA
- Traditional IRA
- Taxable account
Taxable account (#3) is a regular brokerage account that you put in post-tax income and pay capital gains on. At least that’s what I mean. It sounds like when you say taxable, you may be talking about #2. I’m not exactly sure.
Anyway, there is no real difference between Roth and Traditional IRA unless you are able to accurately predict your future tax rate at retirement and act accordingly.
Quick example. Let’s say your tax rate is 30%. Also assume that your tax rate at retirement is 30%.
If you make 10K of income and put it in a Roth, you’ll have to pay 3K in tax first. So that’s 7K in the Roth. Now assume that after 40yrs, the investment goes up 10X. So after 40 yrs, your account is now at 70K.
If you make 10K of income and put it in a Traditional IRA, it’s pre-tax, so the whole 10K goes in. After 40yrs, it goes up 10x, so the acct is at 100K. Now on withdrawal, you pay your 30% tax, and you’re left with the same 70K.
So the bottom line is that if you think your future income tax rate will be less than your current income tax rate (most people), then traditional is better. If the reverse is true, then Roth is better. If you don’t know, or think either outcome is equally likely, then it doesn’t matter much
Above is a bit of an oversimplification and there are some exceptions.
I’m not debating what to put my money in though. I’m debating what to do with a similar chunk of money that’s already in a roth vs. one in my regular IRA.
Let’s say super simple scenario I have $10k in a Roth and $100k in a SEP IRA. I want to invest $10k in super crazy ETFs that might go to near zero, and put the rest in relatively safer index funds.
So lets say I get lucky in my ETFs and turn that $10k into $100k in 5 years, when I hit retirement age. The rest earns a respectable 5% a year which compounds up to $140k or whatever.
If I used the $10k in the Roth - I now have $100k tax free, and $140k in the regular IRA that I have to pay my retirement income taxes on when I withdraw.
If it’s the flip side and I go crazy in the regular IRA, and invest the Roth conservatively, now I have to pay taxes on $230k or w/e ($100k on the $10k + 5% on the remaining $90k) in the SEP IRA, and I have $14k tax fee sitting in the Roth. Right?
Now let’s say I lose most of my ETF money and it’s down to $1k. The difference seems pretty small and I don’t really care which I account I lose the $9k in compared to the difference if I hit it big.
Yeah, that’s all correct. With one small caveat.
I originally assumed one of the accounts was the #3 taxable I was referring to in my last post. In that case, you have tax-loss harvesting opportunities. In the example you describe above, your analysis seems fine.
The only caveat is that you have to account for the probabilities of the risky investment going to 100K and zero (and everything else). If the chance of going to 100K is low enough, then it’s better off in the traditional. Of course, if the probability was actually that low, then you probably wouldn’t invest in it.
So, short answer is that I agree with your analysis.
Right - I don’t want to touch the taxable account right now because if I sell any of the stocks in it I will get taxed at short term cap gains rate, which is basically my regular income tax rate - which is high right now as I still have a good job.
Has anyone looked into using Wealthfront or Betterment for their general banking account?
I am looking at moving out of Citibank. They have been useful to this point since I have an Australian and US Citibank account and can transfer between them without fees.
But now I need to receive international payments from other accounts and Citibank is charging me $15 to receive an international wire transfer. They also have a pretty shitty interest rate on their savings account.
I have looked into some other high interest savings accounts such as Charles Schwab but I can’t create an account yet. I think its because I am still waiting on the IRS to process my first tax return in the US, so Charles Schwab can’t verify me via its automated systems to validate giving me an account.
U.S. stocks rallied to 10 week highs Wednesday, following upbeat quarterly results from retailers Target and Lowe’s, as investors focused on American businesses reopening with the coronavirus pandemic beginning to recede.
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TGT -3.29%
LOW +0.015%
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