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Short Summary
Main recommendation: Use a three-fund portfolio (U.S. total stock market, total international stock, and total bond funds) as the foundation for a Roth IRA, adding small cap value, emerging markets, or REITs only if you want extra exposure, and keep bonds in a traditional retirement account if you have one. The speaker answers a viewer's question by saying the three, four, five, and six fund portfolios can be ideal for a Roth IRA, with some adjustments depending on circumstances.
Key Points
- A Roth IRA gives no tax deduction on contributions, but qualified distributions in retirement are tax-free, including earnings.
- The contribution limit is stated as currently six thousand dollars, with an extra thousand for those 50 or older, with no year specified.
- Roth IRAs have no required minimum distributions during the owner's lifetime, as stated in the video, which makes them useful for passing money to heirs.
- Qualified distributions require age 59 and a half plus satisfying the five-year rule, which starts from the first tax year a contribution was made to a Roth IRA.
- Each added fund (small cap value, emerging markets, REITs) is presented as extra diversification, not a required part of the portfolio.
Details Worth Noting
- Concrete instructions:
- Start with the three-fund portfolio: a Vanguard Total Stock Market Fund (VTI) for U.S. stocks, Total International Stock ETF (VXUS) for international stocks, and Vanguard Total Bond Fund for bonds.
- Optionally add about 10 percent small cap value (VBR) as the first extra fund, since the speaker says it would be the one he'd add.
- Optionally add emerging markets (five-fund portfolio) or about 10 percent real estate via REITs (six-fund portfolio).
- Set your own allocation percentages; the speaker says the percentages shown are a standard starting point, not a rule.
- Open the Roth IRA early, even with small contributions, so the five-year rule is met sooner.
- If you have a traditional 401(k) or traditional IRA, hold the bond funds there and keep stock funds (U.S., international, REITs) in the Roth.
- Rebalance as often as you like, since no taxes are triggered when rebalancing inside the account; M1 Finance makes this easy, but the portfolios can be implemented at any brokerage such as Vanguard or Fidelity.
- The five-year rule is separate from the age requirement: if you open a Roth late in life, you may need to wait the full five years before distributions count as qualified.
- The speaker notes the Roth IRA contribution limit and rules are sourced from IRS Publication 590-B, which he links below the video.
- The speaker says emerging markets and small cap value have historically performed well, but future performance is uncertain, and international stocks have recently underperformed U.S. stocks.
Bottom Line
Whether these portfolios fit a Roth depends on your other accounts: a beginner with only a Roth can use them directly, while someone with a traditional account should generally place bonds there and keep stocks in the Roth.
