Investing in Roth Accounts and Some 401k Info

As a follow up to the previous blog about investing in IRA and 401k accounts, I believe that for most people Roth IRAs and Roth 401k accounts should be invested totally in the larger stock market index or exchange-traded funds without any fixed income component.

Roth accounts will never be taxed and are not subject to forced required minimum distributions. The tax-free nature of these accounts means that they would either be the last source of distributions to the account owners or would be left to heirs. Asset growth should be the goal and I believe it would come best from a well-diversified stock portfolio which the index funds provide.

For those with very large account balances, investments could be somewhat different, and perhaps riskier. I do not recommend this, but some of the methods to consider could be private equity or venture capital funds, trading options, riskier index funds or possibly real estate.

I would not recommend any fixed-income investments in Roth accounts. With Roth accounts, playing it safe could be playing it wrong. Keep in mind we are dealing with very long time periods.

For the charitable minded, traditional accounts can be left to charities bypassing the taxation that individual beneficiaries would be subject to. Roth accounts should never be used for this. While the distributions from the Roth accounts will always be fully tax-free it will be subject to estate taxes for those that are fortunate to have estates that will be subject to estate taxes.

I have been asked about 401k contributions by young workers. Obviously, it will depend on their circumstances, but a minimum contribution to consider should be the maximum amount that the company will provide its match for. The match amount becomes “free money” giving an immediate boost to portfolios. If there is no salary match I think somewhere from 6% to 10% of their salary would be a reasonable way to start. I suggest contributing to a Roth 401k so the funds will always be tax-free. Even small amounts, sensibly invested in the market, can grow substantially over time since it would start the wheels of compounding grinding and would not unduly reduce current take-home pay.

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