General question about my Roth IRA

arsoisaen · #1 07-24-2006, 08:00 PM

im a little confused on how to allocate for my roth.

i understand how the tax deferral works, but lets say i have equity fund X which i believe will return 10% over the next 50 years and bond fund Y which will return 5%. X is a very tax efficient fund while Y has a lot of taxes to pay.

do i choose fund X to put in my roth because since i believe i will get a much greater return, and therefore the tax benefits will be better? or does this thinking not work and i should just put the least tax efficient (Y) fund in my roth at all times?

JoeyNoOne · #2 07-24-2006, 08:35 PM

Tax efficiency is irrelevent within a Roth IRA. Net Return is all that matters.

arsoisaen · #3 07-25-2006, 01:09 PM

im not sure if i worded this right, so let me see if i understand it completely with this example:

lets say i have VHGEX - world stock and the Lehman Aggregate Bond Index. Do i put VHGEX in my Roth and the AGG in a taxable account, because I think the VHGEX will return a lot more, even though the AGG is less tax efficient?

jthegreat · #4 07-25-2006, 06:07 PM

I doubt its tax-inefficiency will be a greater cost than the tax savings on a fund with a high return. I mean, you're talking at least 15% for it to be a break-even decision, right?

arsoisaen · #5 07-25-2006, 07:50 PM

[ QUOTE ]
I doubt its tax-inefficiency will be a greater cost than the tax savings on a fund with a high return. I mean, you're talking at least 15% for it to be a break-even decision, right?

[/ QUOTE ]

ya im assuming that my tax savings will be a lot more than the tax inefficiency, but what exactly do you mean by at least 15% for it to be a break even decision? a 15% return on bond?

mwgr5 · #6 07-25-2006, 08:20 PM

Generally bonds should be in an IRA because their gain from dividends is taxed at your income tax rate. Also, VHGEX recieves a foreign tax credit. If you were to place VHGEX in the ROTH you would not recieve the foreign tax credit.

prohornblower · #7 07-27-2006, 11:21 PM

I am researching Roth IRA's right now and I just found this strange comment on Vanguard's site:

"For most Vanguard funds, a minimum initial investment of $3,000 per fund to open a Roth IRA. "

OK, the maximum contribution per year for me is $4k. So does this mean if I start up a Roth with Vanguard, I will basically only get to have it in one fund? That seems weird. What can you do with the remaining $1K? Have to allocate it into cash/CD's and stuff like that?

I guess I don't understand why they make you put $3K into a fund upon inception to the program? Is this just how Vanguard can offer load-free funds, because they know initial investments will be large chunks?

mwgr5 · #8 07-27-2006, 11:49 PM

[ QUOTE ]
I am researching Roth IRA's right now and I just found this strange comment on Vanguard's site:

"For most Vanguard funds, a minimum initial investment of $3,000 per fund to open a Roth IRA. "

OK, the maximum contribution per year for me is $4k. So does this mean if I start up a Roth with Vanguard, I will basically only get to have it in one fund? That seems weird. What can you do with the remaining $1K? Have to allocate it into cash/CD's and stuff like that?

I guess I don't understand why they make you put $3K into a fund upon inception to the program? Is this just how Vanguard can offer load-free funds, because they know initial investments will be large chunks?

[/ QUOTE ]

Each new account creates an additional expense for the fund company. The company has to send statements, maintain records, provide support, make trades, and provide other services. Since Vanguard is a low cost fund company, I assume Vanguard's min investment is higher than others so they can pay these fund expenses by charging the client a small percent of the assets (the expense ratio).

Vanguard has target retirement funds that are ideal for an investor with a small amount of assets that is contributing to a Roth. These are funds of funds, which are composed of multiple Vanguard Index funds. The TR funds allow an investor with a small amount of money to be completely diversified.

Cubswin · #9 07-27-2006, 11:54 PM

I am in the process of setting up my Roth as well, with Fidelity though. Fidelity has some 2,500 minimum funds, but yeah, it seems like you are basically stuck in 1 fund for the first year...if funds are the way you want to go. With Fidelity, and I assume this is true elsewhere, you can depo your 4k, put 2500+ into the fund of your choice, and whatever balance is left over goes into a 'core account'. The core account with Fidelity is FDRXX and is earning just shy of 5% and doesnt have a minimum investment requirement, so its not like the money is just sitting there.

Now, if you dont want to depo $2500 (or from what you say, 3k with Vanguard) to start with you can get going with as little as $200, but i think your fund choice will be quite limited.

Opening an IRA - the Easy Way

prohornblower · #10 07-28-2006, 09:06 AM

Thanks Cubs,
I'll take a look at that article when I get home from work. It's just a bit worrisome that you may pick a fund that is a dog for the first year.

Now I know why my buddy said he was researching FUNDS and not COMPANIES.

What do you see in Fidelity? (I haven't researched much yet, I'm just asking).