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I am a 47 year old passive investor (i.e index funds) with 2 investment accounts (401K & IRA). I have 50,000 in my 401K and 20,000 in my IRA for a total of $70,000 to invest.

My proposed investment allocation across accounts is as follows:

35.00%  US Stocks
21.00%  Foreign Stocks
16.00%  Emerging Markets
15.00%  Dividends
5.00%   Real Estate
8.00%   Cash

Should I apply the above asset allocation model across both 401K and IRA? Or should each account contain a copy of the above allocations.

Example 1 $70,000 with asset allocation duplicated in both 401K and IRA.

401K $50,000
    $17,500.00  35.00%  US Stocks
    $10,500.00  21.00%  Foreign Stocks
    $8,000.00   16.00%  Emerging Markets
    $7,500.00   15.00%  Dividends
    $2,500.00   5.00%   Real Estate
    $4,000.00   8.00%   Cash
IRA $20,000
    $7,000.00   35.00%  US Stocks
    $4,200.00   21.00%  Foreign Stocks
    $3,200.00   16.00%  Emerging Markets
    $3,000.00   15.00%  Dividends
    $1,000.00   5.00%   Real Estate
    $1,600.00   8.00%   Cash

Example 2 $70,000 asset allocation spread across both 401K and IRA.

401K $39,200
    $24,500.00  35.00%  US Stocks
    $14,700.00  21.00%  Foreign Stocks
IRA $30,800
    $11,200.00  16.00%  Emerging Markets
    $10,500.00  15.00%  Dividends
    $3,500.00   5.00%   Real Estate
    $5,600.00   8.00%   Cash
  • shouldn't the IRA in example #2 equal 20K? – mhoran_psprep Dec 25 '17 at 16:10
  • Yes you are correct. You just pointed out a flaw in my thinking. In order to do this I would need to adjust the percentages due to the fact that each account has a different amount 50,000 vs 20,000 and I can't transfer money between them. I think this will lead to duplication in the accounts as well. – Ron Skufca Dec 25 '17 at 16:27
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A 401k is limited in its choices to what the plan supports. In particular, it is very rare for a 401k to support real estate investments. As such, it will generally be impossible to make your first example work.

In a comment, you said

In order to do this I would need to adjust the percentages due to the fact that each account has a different amount 50,000 vs 20,000 and I can't transfer money between them. I think this will lead to duplication in the accounts as well.

This isn't as big of a problem as it seems at first. First, presumably you will be adding to both as you go. This allows you to rebalance at each deposit. Most deposit to IRAs annually, as the limits are annual. 401k accounts are deducted by the employer at each paycheck. You may have to split certain classes across both for the percentages to work. So in the end, you may find that you have a hybrid between the two.

Some classes will only be in one. For example, the dividend investment may appear in just the 401k while the real estate is only in the IRA. Others may get split across both.

If you are paying percentage fees, you may find that you pay less if the more profitable investments are in the IRA rather than the 401k. 401k fees are often higher as they are more regulated.

When you leave the job, you can rollover the 401k into the IRA.

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It doesn’t matter much for the financial result, but the effort for you is different. Also, by having larger amounts in one asset/asset class, you might be able to get into a lower fee range (like ‘admirals shares’). So it is easier, and equal or better financially to keep the distribution only overall aligned.
So go with the (corrected) #2, and assign your asset classes by which one the two gives better fee rates for them.

Note that the percentages are guidelines; you shouldn’t bother much about being a percent or so up or down.

2

Opinion only... I'd go with Example #1 since the IRA will/should be your "unchanging base", whereas there's a decent chance you'll have other 401(k) accounts by the time you're retired. Every time you roll a 401(k) into the IRA, it'll already be allocated properly.

EDIT: if your IRA is balanced, then you can apportion the money you rolled over in the same manner as your existing IRA money.

  • You typically cannot keep investments when you roll over; everything gets liquidated and you are buying anew. Exception is possibly if they are with the same provider, but that is nearly impossible, as providers for company 401ks are others than for personal IRAs. – Aganju Dec 25 '17 at 20:18

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