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Recently I was reading a finance article and it mentioned occasionally utilizing Roth funds to stay within a targeted maximum tax bracket. Also I believe someone recently commented about having a small amount of bonds in a Roth account to limit to some degree the volatility. If everything in the future goes as hoped the Roth funds will be inherited by our children decades from now
Both of these points got be thinking (maybe perseverating) on what to do with my wife’s Roth account. I have been slowly converting all of my wife’s traditional IRA into a Roth in order that RMDs will only have to be taken from my 20% greater portfolio percentage. At this point 60% of my wife’s retirement accounts are in the Roth. The goal is to have her account 100% Roth in 2-3 years. At this time 10% of her total retirement funds are in an intermediate bond fund in her traditional account.
Now for some crowd sourcing questions:
1) If this were you by the time all the conversions are completed what would you consider the ideal percentage in bonds based on the fact that these funds may be inherited decades from now, the goal to reduce the volatility of the funds somewhat, as well as to preserve some funds for potential occasional control of our tax rate
2) What type of bond fund would you recommend? Treasuries, core bond, TIPS?
3) What length of time for a bond fund do you think would be ideal? I would only consider intermediate or shorter term.
People worry too much about being in a high tax bracket. If you’re in a high tax bracket, then you have a high income. My buddy who has been retired for 20 years has an income of $750K, and pays $250K in tax. As he says, would you rather have an income of $75K and pay no tax?
It’s the effective tax rate that is all that matters and for most people that pretty low.
I think what Ormode is saying is what matters is what you keep after paying taxes.
My situation is somewhat unique, I guess that’s why it is called PERSONAL finance. Our 2 big concerns are inflation and taxation. Please allow me to explain. Due to my spouse’s family & her own medical history; and my family longevity, (my mom is still alive at 101 this August). We may most likely be a single taxpayer sooner rather later. I am 73 this year & she will be 73 next year. Our 2 SS & other income sources are more than enough to cover all our expenses,so that we will not need to touch our investment for years to come. In order to address our taxation & inflation problems, we invested our bond portion with 30 yrs Tips ladder to the amount equal or up to the lesser SS benefits to cover the loss of one’s spouse. The bond ladder is about 10% of our total allocation and it is within our Roth to avoid any taxation. We have allocated 76% domestic stocks/ETFs & 10% Foreign ETF;.& about 4% ST as in cash. Since we are not going to touch our Roth for legacy purposes, we will have converted all of our t-IRA into Roth by this year. We will not have any RMD worries. Because our Roth will be about 58% of our total asset, that means we have a much larger (about 42%) are in taxable growth stocks ETFs, of which 1/3 is earmarked for long term care, & the rest are not touch if necessary so that they can be step up on their basis when they pass on to our heirs. I know this may be SO different from some traditional thinking but it is the best problem to have when you have the biggest bowl you could have to weather any storm.
“…we invested our bond portion with 30 yrs Tips ladder to the amount equal or up to the lesser SS benefits to cover the loss of one’s spouse.”
That is a very interesting plan. Has anyone read about this?
I learnt of this approach and implemented this plan according to this article from the following link here.
https://humbledollar.com/2024/09/laying-down-a-floor/
There was also another interesting article about this topic here.
https://humbledollar.com/forum/the-only-other-spending-rule-article-you-will-ever-need/
David,
https://www.financialplanningassociation.org/learning/publications/journal/SEP24-net-present-value-analysis-roth-conversions-OPEN
I found the above discussion on Roth conversions interesting in that the author presents a case when looking at the savings of a Roth conversion, you should factor in the net present value of those savings compared to the up-front tax hit of the conversion.
Since we plan to pass our Roth’s to our children in hopefully 10+ years and will not be withdrawing we are 100% in the Vanguard Total World Stock ETF.
for our IRA’s we are fortunate to have 80% equity, (45% domestic & 35% foreign) 20% bonds split evenly in ST tip etf, intermediate corporate etc, intermediate treasury etf and foreign bond index etf. All with vanguard.
not sure if that helps your analysis, we do keep 3-4 years of annual living expenses in the bonds and at least one year of RMD in the ST Tips.
as Mike said below, depending on your current tax bracket utilizing a traditional IRA can save income tax currently.
good luck
Thanks for the advice Robert. It sounds like our thoughts are pretty aligned. Regarding inheritance per the present rules, which are always at risk of the whims of congress, those that inherit Roths don’t have to withdraw for another 10 years, thus longer tax free accumulation.
I know I’m not answering your original question but here is my take.
If you’d like, I can make it shorter, more assertive, or more educational in tone.
Besides, I will only convert 50% of my traditional IRA/401K to Roth if I can because the other 50% is intended for my future Long Term Care expenses.
Thanks for commenting Mike.
I am converting 100% of just my wife’s traditional IRA. I am not converting any of my traditional IRA which is 60% of our total portfolio so there will be plenty of funds along with our eventual Social Security income to take advantage of the deductions you mention. If I were to die first my wife will inherit my traditional account so the benefits will still be available to her.
PS: The portion of the funds paid to a CCRC for medical purposes can be used towards the medical deduction.
Our anticipated outcome with our IRAs would be to leave them to our heirs. I have been making Roth conversions for several years and now have around 50% Roth. My wife’s IRAs are smaller and she is around 50% Roth. Have not focused on hers as she is 3.5 years younger and will not take RMDs until 75. I will be taking SS at 70 and that will slow if not stop conversions.
We are at 90% equities in the IRAs. Balance is 5 &10 year TIPS. I recently turned off dividend reinvestment as the market growth was pushing me >90%. That cash goes into VTIP until enough is available to buy a 5 or 10 year TIPS.
I plan to leave my Roth account to my children so are 100% equity. Don’t forget that the account will, I hope, be mine for about 20 years and they get another 10 years under current law. If you need bonds in the account, go with something low duration like short term bonds of even a senior loan fund so you don’t take a beating if you need the money.
I already answered the OP, but this comment prompts me to share a later thought I had. What if I ran out out space in traditional vehicles and had to hold some bonds in a Roth to maintain my bond allocation? This circumstance wouldn’t change the fact that I expect the Roth to be a long term growth engine. So I would be willing to take some risk here, say with a multi-sector or more aggressive core-plus bond fund.
My bonds consist of Treasurys and TIPS, both individual bonds and Vanguard funds: VBIL, VGSH, VGIT, VTIP & VTP.
I’m actually currently holding about 35% bonds in our family’s Roth accounts until about age 70. The recent years of equity runups have caused this issue due to TIRA totally filled with fixed income, and nowhere else to rebalance to FI. I’m planning to reduce this position in bonds (mostly held in core bond fund) as I increase allocation to stocks at age 70 (3 years away). I feel it’s better to maintain our AA (50/50) for now until I start SS. Every situation is different, but with no pensions, and minimal other regular income- dividends/DW SS are about 25% of annual expenses. We sell appreciated stocks as needed for income from our brokerage.
We are also doing Roth conversions up to about the first IRMAA tier which should help smooth out our expected tax bracket when RMDs start. Much of the Roth balances have 4-5x gains from Roth conversions completed over 15 years ago when the market had corrected after the GFC.
I just responded to Howard’s comment before seeing this one. I agree. While I don’t really want bonds in my Roth, if I had to choose between adhering to this asset location preference or maintaining my asset allocation, I’d also say AA is more important.
For MY Roth IRA that is meant for legacy “decades from now,” bonds have no role
Prof. Scott Cederburg of Eller College of Management has a paper that shows 33% US equity / 67% international equity is the optimal allocation for life cycle investment using 130 years of data from 39 “developed” countries. International stocks (regardless of the investors’ base country) are the diverisifier and inflation protection, better than home country bonds, hence, no bond.
see his Lifecycle Investment Advice here
Thanks for your reply Quan. All of our Roth money is in Vanguard Total World Stock ETF (VT). Your thoughts were the same as mine have been, but now I want to get a touch more volatility smoothing and have something other than a stock fund if I need to tap a small portion for tax rate control.
I’m with Quan. Bonds have no role in my Roth, and I see no need to smooth volatility there.
If I understand correctly, you want to smooth volatility in the Roth so that if you decide to pull from there to keep your overall taxable income low, you’re not obliged to pull from stocks when they’re down. I suspect that in a year in which one would elect to do this, it’s because income from other accounts is on the high side, so stocks are probably not down.
Even so, let’s say stocks are down. I’d sell some stock in the Roth to create cash I can pull out, and simultaneously move an equivalent amount from bonds to stocks in a traditional IRA or 401(k). Same end result in the overall allocation as if I had sold bonds in the Roth. But meanwhile, the Roth has all stocks so remains my engine for tax free growth.
We have the same thinking, but perhaps arrive at different volatility predictions of the equity vs bond markets. I just gave up hope that bonds will have low enough volatility to compensate for the opportunity cost. My taxable account just needs to carry more cash equivalent products to manage potential need to tap Roth, and no effect on my tax rate or MAGI.