Author Topic: Very basic questions about the process to change Asset Allocation  (Read 538 times)

jfer_rose

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I've recently started changing my thoughts about how much longer to stay in the workforce and as part of that I've decided it's time to reduce the percentage of equities in my portfolio.

I think I know what I need to do but don't feel 100% confident, particularly with regard to the tax implications.

My thought is that I will do a transfer within one or more of my tax-deferred retirement accounts. If I understand this correctly, this would have a couple of benefits: 1) I won't trigger capital gains and 2) it's beneficial from a tax perspective. Do I have this right? Is there any reason I shouldn't do this all at once?

Also, one of my retirement accounts is a 457 from a local government agency where I am no longer employed. I assume a trade in that account would have tax consequences-- is that correct?

Thanks for your thoughts!

talltexan

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Re: Very basic questions about the process to change Asset Allocation
« Reply #1 on: May 03, 2019, 08:58:22 AM »
It sounds like you want to buy bonds.

Selling stocks and buying bonds within an IRA should have 0 tax consequence. If you have a taxable investment account, take note that most people advise you own the bonds in an IRA, since they are treated less favorably than equities.

jfer_rose

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Re: Very basic questions about the process to change Asset Allocation
« Reply #2 on: May 03, 2019, 09:08:52 AM »
Oops! Can't believe I typed that many words without explicitly saying I want to buy bonds. Yes, I want to swap out some of my stocks for bonds since I'm now thinking I will leave the workforce earlier than I had planned.

BicycleB

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Re: Very basic questions about the process to change Asset Allocation
« Reply #3 on: May 03, 2019, 02:14:22 PM »
It sounds like a logical move.

My belief is that the 457 works the same as a 401k for this - any sales inside it have no tax effect, the tax effect comes from making "distributions" (withdrawals, aka taking the money out). Learn the rules for sure though.

Consider making a year by year plan for what your expenses and withdrawals would be. Learn the tax and penalty implications of your plan, so that you are calculating the results correctly. Even though your spending and return assumptions might be incorrect, at least you will learn how an example will work. You may learn about cash flow issues you have to solve, as well as the impact of using different accounts at different times.

maizeman

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Re: Very basic questions about the process to change Asset Allocation
« Reply #4 on: May 03, 2019, 03:11:55 PM »
Also, one of my retirement accounts is a 457 from a local government agency where I am no longer employed. I assume a trade in that account would have tax consequences-- is that correct?

As far as I know a 457 should still function like an IRA or a 401k in that you don't have to worry about incurring taxable capital gains from trading into and out of different funds.

But there could be something I don't know. What is the reason you think you would be taxed on trades?
« Last Edit: May 03, 2019, 04:02:54 PM by maizeman »

BicycleB

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Re: Very basic questions about the process to change Asset Allocation
« Reply #5 on: May 03, 2019, 03:50:43 PM »
These articles state that investments in a 457 plan do not cause tax until the money is withdrawn:

https://www.goodfinancialcents.com/457-plan-rules-distributions-successful-retirement/

https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans
(in this second one, the IRS itself states contributions to a 457(b) plan are "tax deferred")

https://www.investor.gov/introduction-investing/retirement-plans/employer-sponsored-plans/403b-457b-plans
(in this one, federal govt says 457b withdrawals cause a tax penalty if they are "early", implying non-early withdrawals don't. This is in a discussion of "Will I Have to Pay Any Penalties if I Change My Investment Choices"...it looks to me like fees depend on the investment and the investment company, but they don't mention taxes here)

Not giving any professional opinion here myself, though, and haven't used a 457 personally.

TomTX

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Re: Very basic questions about the process to change Asset Allocation
« Reply #6 on: May 04, 2019, 06:06:06 AM »
Also, one of my retirement accounts is a 457 from a local government agency where I am no longer employed. I assume a trade in that account would have tax consequences-- is that correct?

As far as I know a 457 should still function like an IRA or a 401k in that you don't have to worry about incurring taxable capital gains from trading into and out of different funds.

From a trading perspective, my governmental 457 works the same as a 401k. No tax consequences for trades within the 457.

The main functional difference is that when I stop working I can withdraw from the 457 with no penalty ("additional tax") without worrying about age requirements.

seattlecyclone

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Re: Very basic questions about the process to change Asset Allocation
« Reply #7 on: May 04, 2019, 10:40:02 AM »
Yep, buying bonds in the retirement accounts can be a good move. More specifically, you could consider preferring the pre-tax retirement accounts for bonds, as Roth accounts have tax-free growth and you expect stocks to grow more than bonds over the long haul.

BeanCounter

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Re: Very basic questions about the process to change Asset Allocation
« Reply #8 on: May 05, 2019, 05:49:09 AM »
Yes, you are correct. You should rebalance in your retirement accounts so thre is no tax impact.
Another thing to consider as you are in your transition year would be to have your dividends in your brokerage (non-retirement accounts) go to cash so you can build up a cash fund to use after you retire. You should also keep an eye on your brokerage account for losses that you can harvest to create a taxable loss. When you sell those for the tax loss then you can move those dollars to bonds or whatever you need to buy to properly weight your portfolio.