Author Topic: Balancing asset allocation across Roth and brokerage?  (Read 1985 times)

kenaces

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Balancing asset allocation across Roth and brokerage?
« on: July 18, 2017, 08:50:41 PM »
I am thinking about how to best position my asset allocation across brokerage and Roth accounts.  I am not sure the tax benefits are worth the complexity, because I am likely to tap the brokerage account for income ~10 years sooner than the funds in the Roth as I am shooting for FI in 10 years time at age 58. 

Anyone have any advice and/or resources on this?

MDM

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #1 on: July 19, 2017, 07:37:44 AM »
There is Tax-efficient fund placement - Bogleheads for some thoughts.

kenaces

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #2 on: July 19, 2017, 08:20:14 PM »
Thanks for the the link. 

I guess I was thinking if it would make sense to -

1)think of all my "retirement" funds as one pool of money - decided on asset allocation plan and then place ETF into either taxable account or Roth based on tax efficiency

2)think of taxable account as main source of funds for early part of retirement(about 10 years away) and use more conservative asset allocation.  Then use more aggressive allocation for the Roth as I am not planning on touching it for 20+ years

#1 might have some tax advantages but sure does add more complexity and I am unclear if it worth the extra time/energy?

I am trying to simplify my investing life to focus more on earnings/savings?  This is in the context of me likely being in low tax bracket in retirement so LT-gains won't be taxed, and in today's low interest rate world where the tax inefficiency of holding some interest producing assets in taxable account is much less than it used to be.

MDM

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #3 on: July 19, 2017, 08:42:54 PM »
Both options #1 and #2 are defensible.

kenaces

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #4 on: July 19, 2017, 08:56:11 PM »
Both options #1 and #2 are defensible.

LOL

Hence my asking for help :)

seattlecyclone

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #5 on: July 19, 2017, 09:03:16 PM »
Suppose you decide (for example) that you want to put 100% of your bonds into a retirement account because they'll be more tax-efficient there. That doesn't stop you from relying on your taxable account at the beginning of your retirement. You'll just want to trade some of the bonds for stocks in that retirement account as you sell stocks in your taxable account to keep your overall asset allocation across all your accounts the way you would like it to be. Does that make things a bit less complicated?

kenaces

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #6 on: July 19, 2017, 09:28:40 PM »
Suppose you decide (for example) that you want to put 100% of your bonds into a retirement account because they'll be more tax-efficient there. That doesn't stop you from relying on your taxable account at the beginning of your retirement. You'll just want to trade some of the bonds for stocks in that retirement account as you sell stocks in your taxable account to keep your overall asset allocation across all your accounts the way you would like it to be. Does that make things a bit less complicated?

Yes that is the jist of option #1 but it is more complicated.  I can't put 100% bonds in Roth as it would be way too much and there are more than two asset classes(bonds/stocks).  I guess I am hoping for some resource on how to really implement option #1 in a reasonable way, and some idea that it is worth the time?

MDM

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #7 on: July 19, 2017, 09:48:09 PM »
Both options #1 and #2 are defensible.

LOL

Hence my asking for help :)
Have coin will flip.

Seriously, my point is that, either may prove better - but you'll need hindsight glasses to tell which.   And even with such glasses, it is arguable whether the extra profit will be worth the extra effort (to you).

kenaces

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #8 on: July 20, 2017, 11:09:59 AM »
I found a few things:

https://www.calcxml.com/calculators/inc07  Playing around with some different assumptions and the outcomes were as you guys said very close as long as I remain in lower tax-brackets.

https://www.betterment.com/tax-coordinated-portfolio/  The calculator on this page and white paper where interesting as it placed some assets in unexpected ways(i.e. bonds in taxable account) due to current low YLD.  I doubt this is for me as any possible small gain in "tax alpha" from their approach would likely be less than just just being smart about doing some TL-harvesting and step up on cost basis swaps from time to time.

seattlecyclone

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Re: Balancing asset allocation across Roth and brokerage?
« Reply #9 on: July 20, 2017, 01:37:52 PM »
Suppose you decide (for example) that you want to put 100% of your bonds into a retirement account because they'll be more tax-efficient there. That doesn't stop you from relying on your taxable account at the beginning of your retirement. You'll just want to trade some of the bonds for stocks in that retirement account as you sell stocks in your taxable account to keep your overall asset allocation across all your accounts the way you would like it to be. Does that make things a bit less complicated?

Yes that is the jist of option #1 but it is more complicated.  I can't put 100% bonds in Roth as it would be way too much and there are more than two asset classes(bonds/stocks).  I guess I am hoping for some resource on how to really implement option #1 in a reasonable way, and some idea that it is worth the time?

I wasn't suggesting to fill your Roth completely with bonds, I was suggesting that you could put all the bonds you want to own in your Roth, along with another asset class or two. If you do this correctly, it can be a bit less work to maintain than trying to keep several asset classes in each account.

Suppose you want to own five asset classes: US stocks, international stocks, US bonds, international bonds, and REITs. If you own each of these asset classes in each account in the correct proportion, any time you add or subtract money from any account you might find yourself buying or selling five different funds. If a market correction spurs you to rebalance, you could be doing five trades per account. Alternatively you could split the asset classes across different accounts based on tax efficiency. Perhaps based on the relative account balances and your desired allocation you might decide to put all your US bonds and half your REITs in the Roth IRA; half your REITs, all the international bonds, and half your US stocks in the traditional IRA; all the international stocks and half the US stocks in the taxable account.

Now when you decide to add money to your taxable account, you'll take a look at your actual vs. ideal asset allocation. If you're a bit short on international or US stocks, you'll buy those and you're done. If you're a bit heavy on those, you'll buy US stocks in taxable, and trade some of your US stocks in your IRA for whatever you're short on. Either way you're not making five separate transactions like you might if you had each asset class in each account.