However, that isn't really the issue, because investing is a trade-off between risk and return.Some would be wrong then, at least in the long-run. No asset class has historically higher total return than stocks:This is overly simplistic.
You are ignoring that all the dividends/interest are also free of taxes in a Roth. Since interest is taxed at a greater rate than cap gains, some would say you want interest earners in Roth.
Suppose you know you will withdraw from your traditional IRA in a 22% bracket. In that case, $10,000 in a traditional IRA and $7800 in a Roth IRA will have the same value if invested the same way, so it doesn't matter which one holds stock and which one holds bonds. An equal dollar amount in the Roth IRA will have a higher expected return, but also a higher risk; you can do the same by replacing bonds with stock in either account. (If all else is equal, it is still better to hold stocks in the Roth and bonds in the traditional IRA, because if the stock market booms with stocks in the traditional IRA, some of the withdrawals may be taxed at a higher rate.)
You can make the same type of comparison for stocks in a taxable account, and I did this: Model and spreadsheet for asset location. Suppose that $X in a taxable account and $Y in a Roth account have the same risk regardless of which one is in stock and which one is in bonds; you should prefer to hold the stock in the account that has the higher expected value at the same risk level. Usually, that turns out to be bonds in the Roth IRA, unless you are in a high tax bracket and use munis, especially from your state.
Statistics: Posted by grabiner — Sat Aug 24, 2024 9:40 pm — Replies 21 — Views 1777