Asset Location Help

[Okoboji]

Over the years, my investment portfolio has become rather messy. I am very interested in learning how to make my portfolio more tax efficient. Even though I am happy with it’s overall allocation strategy, many of the assets are in the wrong “location”. For example, some of my REITs and Bonds are in my taxable accounts. On the other hand, some of my growths ETFs (therefore low dividends) are in my tax advantaged accounts. Has anyone been through this or know of any resources on how might I learn how to clean things up without initiating a large taxable event? I have talked to my CPA without much success. Plus the financial planners I have interviewed want more control than I am willing to give up (and seem more like salesmen that true planners). Any thoughts are appreciated. Thanks…

Please note that I have also posted this topic in the “Taxes” section.

[GGNoob]

See this link for proper fund placement: https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

The best way to do it is to just make sure your sales in your taxable accounts are long term gains and not short term, so that the tax is lower. If you are or can get yourself into the 15% federal tax bracket, long term gains are taxed at 0%.

[DaveR]

As far as I know, tax advantaged accounts: cash in, cash out. Internal Revenue Code Section 219(e)(1) specifies cash...which means those REITs, bonds, etc need to be sold in your taxable and bought in your tax advantaged. There isn't a magic way to do an in-kind transfer.

Depending on the amounts, unrealized gains, time to retirement, etc, etc it may or may not make sense to sell+buy to "optimize" your accounts. It really depends on the specifics of your situation.

[MustacheAndaHalf]

...which means those REITs, bonds, etc need to be sold in your taxable and bought in your tax advantaged.

Selling in taxable and buying the same thing in a retirement account triggers a very nasty version of the wash sale rule.  Your wash sale loss transfers to the new location - which in this case means it gets lost forever.  You can't have taxable gains/losses in retirement accounts, so make sure you avoid a wash sale in moving assets there.

Better would be to sell them in taxable, and buy something "close enough" and wait 30 days.  Close enough means anything that doesn't violate the IRS "substantially identical" phrasing (which they conveniently don't define).  So for Vanguard Total Stock Market, you might switch to S&P 500.  It's not the same (~73% overlap), but it's close and it won't trigger the IRS wash sale rule.

One thing to add to the Bogleheads guide - they don't cover the situation more common here, of having lower/no income later in life.  If you plan to take a Traditional IRA and convert it to a Roth IRA later, you want something with lower expected growth - like bond funds.  No tax is paid on the Traditional IRA until you pull money out or convert to a Roth IRA.  Everything inside it will eventually get taxed at ordinary income tax rates - which is the same situation for bonds.  That's what makes bonds a good fit for the Traditional IRA.

[DaveR]

Selling in taxable and buying the same thing in a retirement account triggers a very nasty version of the wash sale rule.  Your wash sale loss transfers to the new location - which in this case means it gets lost forever.  You can't have taxable gains/losses in retirement accounts, so make sure you avoid a wash sale in moving assets there.

Good point (see IRS Revenue Ruling 2008-5). It's an issue if there are losses, since the stepped up basis disappears into the void of an IRA. If there are gains, the IRS happily collects your tax dollars.