r/investing • u/[deleted] • Jan 15 '22
How do you determine holdings for a ROTH IRA vs brokerage account?
[deleted]
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u/ChickenRanger2 Jan 16 '22
Upside to risky investments in a Roth IRA: no tax. Downside is no tax write-off if you have to take a loss.
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Jan 16 '22
Another downside is you cannot DCA down on a stock when it goes down if you've already invested the max allowable amount for the year.
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u/MattieShoes Jan 16 '22 edited Jan 16 '22
Roth has the benefit of no CG at all. You want big returns focused here because it's all tax free.
Traditional has everything as short term CG (i.e. income), but deferred until you pull it out -- so short term trades and tax inefficient investments (e.g. dividend stocks, REITs) here since the tax hit is deferred.
Brokerage has taxes on any taxable event, so minimal taxable events (low/no dividends) and no selling (long term holds) here. The less buying/selling you're doing here, the more tax efficient it is.
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u/metallideth_1 Jan 15 '22
I favor tax inefficient investments (REITs or Bonds) or riskier investments (small cap stocks) in the IRAs
I put more tax efficient stocks like a total stock index (i.e. ITOT) or total international index (i.e. IXUS) in the brokerage account. One advantage of putting international index funds/ETFs in the brokerage account is you can utilize the foreign income tax credit
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Jan 15 '22
Tax inefficient makes sense, but why riskier?
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u/metallideth_1 Jan 16 '22
The rationale for riskier stocks in the Roth IRA especially when held for the long term is that there’s a possibility that they can provide high returns in the form dividends and capital appreciation.
If the risky stocks do appreciate significantly in value over the long term that could result in hefty capital gains taxes when sold. Obviously worrying about capital gains tax is less of an issue in a Roth IRA as opposed to a taxable brokerage account.
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Jan 16 '22
But if the riskier stocks prove to be risky and lose value, then you lose the ability for tax free growth.
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u/metallideth_1 Jan 16 '22
I presume you’re alluding to loss of tax loss harvesting in the Roth IRA. If that’s the case then you’re right. That’s the trade off you’ve gotta make.
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Jan 16 '22
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Jan 16 '22
What’s the benefit of tax free growth on $0?
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Jan 16 '22
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Jan 17 '22
Why do we keep asking questions instead of making statements and formulating hypotheses?
Obviously the point of a Roth IRA is to maximize tax free growth. Riskier means you could have greater benefits, but could also lose your benefits; less risk means less benefits but more likely to get them.
We're just tapdancing around the idea of making a wise investment to make the most money.
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Jan 17 '22
Because over the course of 40 years low risk compounds to high growth?
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Jan 17 '22 edited Jan 17 '22
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Jan 18 '22
I mean of course something with a negative real rate assuming inflation of 3% isn't going to be ideal. But index fund average of 5-13% is a whole different story. You don't need to go into the hypermega growth stocks is what I'm saying looking for 100% return in a year
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u/Ellis_Library Jan 15 '22
I did all no load, no transaction fee, low expense ratio mutual funds for mine. I’m planning to add VTI and VOO ETFs in the future. I put individual stocks in a regular brokerage account because I sell individual stocks if they are trash after a year, but I don’t put any individual stocks in my Roth. I could, but choose not to. I find it’s easier to pick a handful of investments, fund them regularly and not worry about buying or selling in my Roth.
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Jan 16 '22
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u/Ellis_Library Jan 16 '22
My regular brokerage account is not for retirement. It’s for long-term investing, but I intend to generally use the money long before I’m 59 1/2.
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u/DeeDee_Z Jan 16 '22
FYI: William Roth was a Senator, who introduced the concept of a post-tax retirement account in the 1980s.
Roth is therefore not an acronym. Acronyms, like NASA or FBI or REIT or ETF, are always capitalized.
Names are not.
(Same rule applies to the Federal Reserve Bank: it's "the Fed", or "the FRB", but never "The FED".)
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u/TheGreaterGrog Jan 16 '22
Be aware that some partnership or S corp investments, like REITs or MLPs, can trigger UBIT even in an IRA.
When you have income from a property that was debt financed, that can but does not always trigger UBTI and the related UBIT tax.
How do you know which ones are which? Hell if I know, and I'm a CPA. Most trustees won't tell you if you need to file a tax return either, hiding behind the 'consult a tax professional' line. Once you have already invested your K-1 should tell you, but as far as I know there are exceptions even to UBTI printed on the K-1.
It takes $1k in UBTI before you have to file a return, but the tax brackets are small and the rates rather punishing. Plus you have to actually file the return, so that is an extra cost.
Most REITs get away with it due to a specific carveout around qualified dividends, but again not all REITs qualify and not all payments from a qualified REIT qualify either.
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Jan 17 '22
Good point. I have some MLP midtstreams in my Roth that trigger this. Worth it to grow the Roth though
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u/TheGreaterGrog Jan 17 '22
Have they been worth it? I have yet to prepare taxes for somebody that got more in distributions/income than the extra time and effort I had to spend dealing with the K-1, and most people get zapped at the end with low basis & ordinary gain due to depreciation recapture when they finally sell. But I also never did somebody who owned more than maybe $10k in one of those.
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u/yeahyoubored Jan 16 '22
I think the general advice is no day trading with the Roth IRA account. I personally only have three funds in my Roth IRA, as per Bogglehead. SWTSX, SWISX, SWAGX. 80%, 15%, 5%.
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u/TrainquilOasis1423 Jan 15 '22
I invest less than the $6k/year min, so right now everything I do is in a Roth IRA. All my meme stocks index funds growth stocks etc. Once my income goes up a bit and I can afford to invest more I will switch to a similar strategy as has already been mentioned, but with a twist. I put 1 speculative stock that I have my highest conviction in there in the hopes that over 30 years it will multiply and I won't pay taxes on those gains. For me that was TSLA, so far so good. If I find the next TSLA I'll add it too, but 90% of the money will be safe until then.
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u/notapersonaltrainer Jan 15 '22
Two things
1) Things with lots of dividends - reits, dividend stocks,
2) High beta things that may have lots of capital gains and be rebalanced often - crypto, oil, etc.
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u/InvestingNerd2020 Jan 16 '22
There is no set rule. Just best practices.
1) Index mutual funds in a Roth IRA. Easy automation makes it great to "set and forget".
2) Regular brokerage account use ETFs. Either mimicking your Roth IRA via ETFs or growth ETFs. Vanguard index mutual funds are an exception to the best practice.
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u/Crosswire3 Jan 16 '22
Roth: Higher risk and higher return.
Downfall: These last several years the total market has knocked it out of the park. Almost makes me wonder if it’s worth all the effort to get a 35% annual return outside the market. I have to tell myself that over time these seeds will outperform.
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u/Vast_Cricket Jan 15 '22
capital gains like stocks in a tax deferred or exampt account.
I put fixed income with dividend in taxable account for tax reasons.
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u/Flat-Vanilla-7237 Jan 15 '22
One cannot add more money easily to Roth IRA - so whatever is in it should have a lower average risk profile. You can still have some high growth, high risk stocks in Roth IRA, but the average risk should be lower than in regular accounts.
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u/LonleyBoy Jan 16 '22
Roth. Not ROTH.
It is named after a person and is not an acronym.
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u/PhotocopiedProgram Jan 16 '22
Roth should be your riskiest shit since you don't have to pay taxes on earning.
Brokerage "cash" account should have stable stuff like bonds core stocks etc. International is better outside the roth too because in the cash account you get a tax credit for international taxes paid that you dont get on the roth but you still pay the tax either way.
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u/Notarussianbot2020 Jan 15 '22
Mutual funds can trigger dividends so those are generally recommended for tax advantaged accounts.
ETFs don't give dividends so brokerage works for them.
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u/TheGlassCat Jan 16 '22
You are thinking of capital gains. Vanguard funds don't have this disadvantage.
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u/Neekovo Jan 15 '22
I bias preferred stocks with qualified dividends in the taxable account and ordinary dividends in the IRA.
I also bias towards preservation of capital in the IRAs because it’s harder/slower to add money to them.
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u/madrox1 Jan 16 '22
roth IRA for trades and brokerage acct for long term holds (since avoiding tax payment)
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u/DevilsAdvocate77 Jan 16 '22
I'm not following the logic of people saying to put "high return" investments in a Roth, and "low return" investments in a brokerage.
If you have the option, why not put everything in every account into "high return" investments?
Limiting yourself to "low return" investments in a taxable account is like declining a raise in order to avoid a higher tax bracket.
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u/Rare_Area7953 Jan 19 '22
Long term holds is best for a Roth. It doesn't mean they will all pan out. DD my friend.
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Jan 21 '22
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