Mental Accounting and IRAs

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blackomen

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Say you are a young person with 2 accounts: 1 taxable account you’re using to save money for a downpayment for a house and a 2nd account, an IRA where you’re saving money for retirement (tax deferred.)
Would it be mental accounting to consider the money in the 2 accounts separate and invest each with separate rules? Keep in mind you cannot take the money out of your IRA until you’re 59.5 without penalties. If you treat both accounts as 1 portfolio, you could run into a situation where you suffer a huge loss in your taxable account and get a huge gain in your IRA, but you cannot rebalance by transferring money from your IRA to offset the loss.
 
I wouldn’t consider it mental accounting; they are, as you say, separate accounts, with separate rules.
If the accounts were essentially identical – same rules, same investment opportunities – and you treated them differently (e.g., this is my “safe” retirement account, and this is my “risky” fun account), that’d be mental accounting. I’ve encountered people like that. (The funniest was the one who had three such accounts, “safe”, “moderately risky” and “very risky”; the riskiest of the three turned out to be the “safe” account, while the least risky turned out to be the “very risky” account.)
 
+1 to S2000.
If you had two non-IRA accounts, and one of them were “kid’s education” and the other “retirement”, then that would be mental accounting. But since these two have different rules regarding taxation and withdrawals, then it only makes sense to treat them differently.
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Question to you, BlackOmen: Say your target allocation was 60% stocks and 40% bonds. Would you put 60/40 in the taxable account and 60/40 in the IRA? (After all, it keeps things a lot easier if you have the same allocation in all accounts.)
 
Greenman72 wrote:
+1 to S2000.
If you had two non-IRA accounts, and one of them were “kid’s education” and the other “retirement”, then that would be mental accounting. But since these two have different rules regarding taxation and withdrawals, then it only makes sense to treat them differently.
————————–
Question to you, BlackOmen: Say your target allocation was 60% stocks and 40% bonds. Would you put 60/40 in the taxable account and 60/40 in the IRA? (After all, it keeps things a lot easier if you have the same allocation in all accounts.)
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Thx S2000.
Answer for Greenman:
If I’m using both accounts to save for retirement, then I’d put 40% bonds in the IRA to defer the taxes from dividends while taking care not to realize capital gains on the stocks in the taxable account. But in the situation outlined originally, I’d go with 60/40 in both… otherwise if stocks tank and bonds soar, you’ll be left with little Downpayment money and a crapload of Retirement money that can’t be touched for ages.
 
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