Author Topic: Adjusting my asset allocation - questions about retirement vs taxable accounts  (Read 4815 times)

RetireAbroadAt35

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Howdy folks,

I'm adjusting my asset allocation but have a question before I pull the trigger.

How should I split my allocation between tax-advantaged retirement and taxable accounts?  REITs, for example, I've read are best held in tax-advantaged retirement accounts.  Are there similar considerations for other asset classes, such as US domestic bonds or stock funds?  If I were 80% stock and 20% bonds, would my retirement & taxable accounts each mirror that 80/20 split?  Or is there an advantage to weighting one account or the other with the bonds, like one would do with REITs?

Specifically, I want to divest from the only individual stock I own and buy more index funds.  Simultaneously I wish to diversify to include more US domestic bonds in my overall allocation.

Should I:
  • Sell stock and buy VTBLX in my taxable vanguard account until the overall asset allocation is correct?
  • Sell stock and buy VTSAX in my taxable vanguard account and simultaneously adjust my 401k to include more bonds until the overall asset allocation is correct?

Eric

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Your taxable and tax advantaged accounts should not be mirrors of each other.  You maintain your desired AA overall, but place your stocks, bonds, REITs, strategically to optimize taxes.  Check this out if you haven't seen it:

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

RetireAbroadAt35

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Tax-efficient fund placement - that's exactly what I was looking for.  Thank you.

milesdividendmd

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The classic advice for asset placement within tax-advantaged and nontax advantaged accounts id well described above.

In essence you preferentially put the least tax efficient funds in your tax-advantaged account.

An inefficient fund from a tax standpoint is one with lots of turnover(Often found with an active Mutual funds), stocks that play lots of dividends(Like Dividend funds or value funds) and non-municipal bonds.

But the white coat investor makes a very strong case for putting The assets with the most expected growth into your tax-advantaged accounts.

This would mean that  value funds, small-cap value funds, reit's , etcetera would be preferentially placed in the tax sheltered accounts. With municipal bonds held in your taxable accounts (since they're not expected to grow as fast)

Here is a link to one of his articles which I think is worth considering when you do your rebalancing.

http://whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

Enjoy.

RetireAbroadAt35

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What about tax-efficient withdrawals?   It seems that the Boglehead asset allocation strategy will have my 401k/IRA heavily weighted towards REIT and bond funds while my taxable investments will be weighted towards stock funds. 

Given that the tax-free/deferred accounts will be withdrawn more slowly than the taxable accounts, is it a good idea to have it weighted towards funds that have lower growth potential?

How does one do tax-efficient allocation during the draw-down phase?

matchewed

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What about tax-efficient withdrawals?   It seems that the Boglehead asset allocation strategy will have my 401k/IRA heavily weighted towards REIT and bond funds while my taxable investments will be weighted towards stock funds. 

Given that the tax-free/deferred accounts will be withdrawn more slowly than the taxable accounts, is it a good idea to have it weighted towards funds that have lower growth potential?

How does one do tax-efficient allocation during the draw-down phase?

Tax efficiency doesn't change depending on accumulation or draw-down. Where your assets are distributed amongst different tax treated accounts won't change depending on that. How you withdraw will change based on taxes. Ideally you'll withdraw from your various accounts in a manner which reduces your tax payments.

foobar

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I disagree to some extend. When your spending money in retirement, bonds in taxable are OK if you are spending the money. There is little (state taxes can differ. I don't think you pay ACA surtax if your high income on iras) tax difference from a 20k ira withdrawal or 20k of divs from a bond fund.  What you don't want is 40k of bond income and you only need to spend 20k of it.

The question though is are you better off with stocks growing in an IRA or in taxable. Without the tax deduction benefit, you are probably better off in taxable. Yes you have to pay taxes on the dividends every year. On the other hand those gains are going to be taxed at 0% or 15% instead of 15% or 25%. You need to run your numbers to see what makes sense for you.



What about tax-efficient withdrawals?   It seems that the Boglehead asset allocation strategy will have my 401k/IRA heavily weighted towards REIT and bond funds while my taxable investments will be weighted towards stock funds. 

Given that the tax-free/deferred accounts will be withdrawn more slowly than the taxable accounts, is it a good idea to have it weighted towards funds that have lower growth potential?

How does one do tax-efficient allocation during the draw-down phase?

Tax efficiency doesn't change depending on accumulation or draw-down. Where your assets are distributed amongst different tax treated accounts won't change depending on that. How you withdraw will change based on taxes. Ideally you'll withdraw from your various accounts in a manner which reduces your tax payments.

matchewed

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What about tax-efficient withdrawals?   It seems that the Boglehead asset allocation strategy will have my 401k/IRA heavily weighted towards REIT and bond funds while my taxable investments will be weighted towards stock funds. 

Given that the tax-free/deferred accounts will be withdrawn more slowly than the taxable accounts, is it a good idea to have it weighted towards funds that have lower growth potential?

How does one do tax-efficient allocation during the draw-down phase?

Tax efficiency doesn't change depending on accumulation or draw-down. Where your assets are distributed amongst different tax treated accounts won't change depending on that. How you withdraw will change based on taxes. Ideally you'll withdraw from your various accounts in a manner which reduces your tax payments.

I disagree to some extend. When your spending money in retirement, bonds in taxable are OK if you are spending the money. There is little (state taxes can differ. I don't think you pay ACA surtax if your high income on iras) tax difference from a 20k ira withdrawal or 20k of divs from a bond fund.  What you don't want is 40k of bond income and you only need to spend 20k of it.

The question though is are you better off with stocks growing in an IRA or in taxable. Without the tax deduction benefit, you are probably better off in taxable. Yes you have to pay taxes on the dividends every year. On the other hand those gains are going to be taxed at 0% or 15% instead of 15% or 25%. You need to run your numbers to see what makes sense for you.

So what, you'd recommend shifting your taxable accounts to bonds when you get to the draw-down stage just so you can get some income from them, thereby having a fairly large tax event for selling whatever assets were in your taxable account? Or are you saying that setting up your assets to be tax efficient to begin with is wrong? Either way I'm not sure how you can disagree with
Quote
Ideally you'll withdraw from your various accounts in a manner which reduces your tax payments.
Also if you follow the link for the tax efficiency of your funds short term bond funds are just fine in a taxable account. Maybe you should be a bit more specific with what you mean by bonds.

foobar

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 I said 20k in income from a bond fund is no different than 20k of an ira distribution. Nothing more. Nothing less.

I definitely don't disagree with being tax efficient.  But depending on his situation bonds in taxable may or may not matter. That article is a bit vague about it but the reason why short term bonds are ok in taxable these days is because they are paying <1%. Go back to the 90s rates of 4%, and they drop down into that moderately inefficient category.

That being said, my goal in retirement is going to be to liquidate 90% of my tax deferred space before 70 by moving it into a ROTH over 20 or so years. I am not sure what advantage there is to growing it in retirement other than ease of rebalancing.




So what, you'd recommend shifting your taxable accounts to bonds when you get to the draw-down stage just so you can get some income from them, thereby having a fairly large tax event for selling whatever assets were in your taxable account? Or are you saying that setting up your assets to be tax efficient to begin with is wrong? Either way I'm not sure how you can disagree with
Quote
Ideally you'll withdraw from your various accounts in a manner which reduces your tax payments.
Also if you follow the link for the tax efficiency of your funds short term bond funds are just fine in a taxable account. Maybe you should be a bit more specific with what you mean by bonds.