I am about to open a Roth IRA for myself and my wife, and at first there won't be much diversification, since I won't have enough to meet the minimums on several funds at once. But that is ok, because you don't need to be diversified in every account, as long as the total of all of your investments matches your asset allocation right?

So I was calculating what my asset allocation would be after opening the Roth IRAs and I had a problem. It's not really fair to compare $3000 in a Roth to $3000 in a traditional IRA, since I will owe taxes on the traditional when I withdraw the money, but I will not on the Roth.

Here is what I did. I assumed that my average tax rate on the IRA withdraws would be 20%. I have no idea if that is correct or not, but here is my thinking. I probably will have a marginal tax rate of 25%. (2007 25% bracket is 63,700 - 128,500) I probably won't have enough earned income + social security (only partly taxed) for all of my IRA withdraws to be taxed at 25%, so I took off 5% and came up with 20%.

So for my asset allocation I took the present value of my IRA - 20% and then added the full present value of my Roth IRA.

Then I am trying to hit an allocation of 10% Vanguard Total Bond Mkt Index, 67.5% Vanguard Total Stock Mkt Index, 22.5% Vanguard Total Int'l Stock Index.

So if I had $2250 in international in my Roth, and $8437.50 in Total Stock Market ($8437.50 - 20% = $6750) and $1250 in bonds ($1250 - 20% = $1000) both in a Traditional IRA; then if you combined the after-tax values of both accounts then I have achieved my desired asset allocation.

I hope that 20% is a good assumption for a retirement tax rate, or else everything else is wrong.