Author Topic: Location for tax efficiency  (Read 5272 times)


  • Stubble
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Location for tax efficiency
« on: April 09, 2015, 02:30:14 PM »
Vanguard has this article today

Here's a quote

"Location, location, location

The key to optimal tax efficiency is “asset location.” In other words, hold tax-efficient investments in taxable accounts, and tax-inefficient investments in tax-advantaged accounts. Here are a few examples:

    Hold as much of your bond allocation as you can in taxable bond funds and in tax-advantaged accounts, such as IRAs and employer-sponsored retirement plans.
    Keep actively managed stock funds in tax-advantaged accounts (if the bond funds haven’t taken up all the room).
    Use stock index funds in taxable vehicles, such as individual or joint accounts."

I like the holistic approach, especially for someone retiring at 60.  But I wonder how I should convert this into my approach when I plan on being FI by 40. 

For example if I have no bonds in my taxable account because they're all in my ira's, and the market tanks, then my access to funds in my taxable account is much lower than if it had bonds.

Any advice on how to take advantage of the Location focused strategy while maintaining stability of taxable accounts?


  • Walrus Stache
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Re: Location for tax efficiency
« Reply #1 on: April 09, 2015, 02:44:27 PM »
First off, are you aware of the Roth conversion ladder and other strategies to access your IRA funds before age 59˝? (

Secondly, I believe the tax-efficient fund placement strategies work just fine for an early retiree. What happens if your taxable account is all stocks and the market goes down? To keep your portfolio in balance your general strategy would be to sell bonds in this situation because market movements made your stocks be underweight compared to your ideal asset allocation. Even if you're planning to spend only out of your taxable account it's not so hard. Sell some stocks from your taxable account to pay your bills. Then in your IRA, transfer some amount from bonds to stocks as needed to make your overall portfolio match your preferred asset allocation.

Thirdly, tax-efficient fund placement doesn't actually matter all that much if you're retired and don't spend that much money, because your tax bracket won't be that high to begin with. So if you're concerned about your taxable balance swinging a lot, go ahead and put some bonds in a taxable account. The first ~$10k (~$20k if married) is tax free anyway due to the standard deduction and personal exemption. You can have a pretty sizable amount invested in bonds before the interest pushes you past that line.
« Last Edit: April 09, 2015, 02:48:38 PM by seattlecyclone »


  • Stubble
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Re: Location for tax efficiency
« Reply #2 on: April 09, 2015, 02:59:05 PM »

Yes, I'm familiar with the idea of the pipeline from trad to roth.  Thanks for the link for added clarity though.


  • Magnum Stache
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Re: Location for tax efficiency
« Reply #3 on: April 09, 2015, 03:18:00 PM »
I'm not sure what your question is because it has been answered.  You have your stocks in a taxable account, bonds in the IRAs.  Use of the pipeline accounts for access issue, so what is the question exactly?


  • Pencil Stache
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Re: Location for tax efficiency
« Reply #4 on: April 09, 2015, 07:01:54 PM »
Unlike many Mustachians, I trade a some individual stocks as a small percentage of my portfolio (as well as keep a couple individual stocks long-term). For the short-term momentum trades and anything generating a high dividend or coupon payment, I use my Roth IRA due to the tax advantages. Everything and anything long-term stays in my taxable account. But I just started doing this relatively recently. It does make a big difference. A worthy post because this may not be 100% obvious to everyone.


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  • Stubble
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Re: Location for tax efficiency
« Reply #6 on: April 10, 2015, 07:00:37 AM »
I think what you're asking about is the fact that your taxable account will be 100% equities, even though your overall assets have the appropriate proportion of bonds.  Your overall asset balance will be stable, but your taxable account balance will fluctuate wildly with the market.  You're trying to come up with a tax-efficient way to stabilize your taxable account.

Is that it?

The answer depends on your income level in retirement.  If your retirement income is high, or potentially high, you can use municipal bonds in the taxable account.  This counts as tax-efficient bond placement.

A better answer may be the one provided above.  Go ahead and place bonds in the taxable account.  Bond returns are so low that it takes quite a bit of them before they impact your taxes.  You might be able to use just enough to keep your taxable account balance stable, while staying below taxable thresholds.  Keep in mind, though, that while balancing in your tax-advantaged accounts has no tax consequences, attempting to balance in your taxable accounts does.  Specifically, if you sell stocks to buy bonds, you may get capital gains taxes.  (Selling bonds to buy stocks may also incur capital gains as well, but since they move so much slower, they're not as much of a consideration.)


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Re: Location for tax efficiency
« Reply #7 on: April 10, 2015, 08:56:40 PM »
Solution:  Goals based investing.

Money you don't need for a long time can be in an IRA and invested pretty aggressively.  You can take advantage of tax efficiency and it seems like everyone understands that.

If you need the money in a short time period and you are under 59 1/2 it should probably be in a roth or taxable AND it should be invested in something more liquid. 

This is why you keep your emergency fund in cash.  If you are FIRE you should already have  a pretty big stash in Roth or Taxable and anything you are going to need in the next year can be invested more conservatively.  I wouldn't put all your bonds in taxable, but any money I will need in the next couple years I keep in Roth or Taxable and I use a more conservative allocation that includes bonds.

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  • 5 O'Clock Shadow
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Re: Location for tax efficiency
« Reply #8 on: April 14, 2015, 07:25:19 PM »
I'm not fluent with U.S. taxation but here in Canada, bonds (interest income) is taxed at the highest possible rate like employment income.

If that is the case in the U.S., why would you keep bonds in a taxable account?

Wouldn't it make more sense to keep interest bearing assets tax-sheltered and capital gains bearing assets in a taxable account?


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Re: Location for tax efficiency
« Reply #9 on: April 14, 2015, 09:48:13 PM »
When you need the money, just sell whatever you have in taxable, and rebalance in your retirement account.  Even if Stocks had a crash and lost 50%, it doesn't matter.  When you rebalance in your retirement account you'll be able to buy those same Stocks for the same price (50% off!).

If you're more comfortable, you can also fill your taxable space with bonds.  Intermediate Term - Tax Exempt Bonds:

These bonds should theoretically return a little less than normal bonds, but it doesn't really matter.  You gain a bit on the tax front, lose a bit on the returns front, and possibly gain a bit from having more stocks in your retirement accounts, expanding the tax-advantaged portion of your portfolio.  It all pretty much evens out in the end.  If keeping your immediately-available taxable account 100% bonds helps you sleep at night, it won't really affect your portfolio either way.  Indeed, some people actually prefer bonds in taxable!

Really, these decisions just aren't that important.  The important decisions are things like your savings rate, your asset allocation, staying the course, keeping fees low...etc.  If you can keep those in-line, you'll be alright.


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