Author Topic: Portfolio Allocation between Multiple Accounts for Tax-efficiency - any tips?  (Read 3801 times)

toga62

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I've been researching and researching and feel my plan coming together, but I am hoping to get some tips on portfolio allocation using multiple accounts so I can officially get started.

I am 27, Annual income 75K+ (aiming for 100K by next year), and annual expenses under 20k.  I'm planning on increasing my savings rate, and decreasing my spending as much as possible with a goal of FI in 10 years.

Accounts:
Simple IRA - Scottrade (8,800 contributed in 2013)
Roth IRA (5,500 for 2013)
Taxable Account (36,000)
Emergency Savings Account (12,000)

So I want to allocate 90% stocks, 10% bonds. (at least until interest rates go up, may go 95/5?)
I wanted to break up the 90% in:
70% - Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
20% - International Market (ideas??? VBTLX??)

For Bonds, I might keep it simple with Vanguard's Total Bond Market Fund (VBTLX), although I was looking at REIT in place until Interest Rates go up a bit more.

So for tax-efficiency what suggestions if any?
I've read through the wiki on the subject, looking for extra insight.
http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

Thanks everyone! Love these forums!

soccerluvof4

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Those are 2 of the 4 funds I use. I also I also have VGSLA for exposure to REits and VTIAX for international exposure. I am a little bitter higher on the bond side .


What about a 401k?


grantmeaname

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So for tax-efficiency what suggestions if any?
I've read through the wiki on the subject, looking for extra insight.
http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
This is the article you're looking for.

dragoncar

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I'd personally put the bonds in the simple IRA, since they throw off interest.  Not in the Roth, because I'd expect the stocks to grow the most.  But I guess we can't predict the future.

Sometimes after rebalancing it gets a bit messy anyways.

TreeTired

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This is an important topic.   Now that I am 60  (and have no restrictions on IRA withdrawals)  I see all of my financial assets as one portfolio.   I didn't look at it this way when I was 27.   Back then I had my financial assets, and I had my retirement account.   I considered diversification in my retirement portfolio only in terms of risk and return without much thought to taxes,  mainly because those taxes seemed so far in the future I didn't feel I needed to worry about it.

Now I see I have one portfolio, but different tax treatment depending on the account.   Keep in mind that the traditional IRA converts everything into ordinary income.  The most obvious dumb thing would be to own muni bonds in a traditional IRA.   It made sense to me to buy zero coupon bonds in my IRA because in a nontaxable account you owe taxes on interest income every year but you don't receive the cash interest payments.  Zeros are great for an IRA, but I bought US Treasury zeros, so I received income that was exempt from state taxes and converted it into income that will be subject to state taxes.  Think I might sell those and buy something else. 

I do own stocks in my traditional IRA,  and some of those stocks have healthy capital gains. It does seem wasteful to convert those long term capital gains into ordinary taxable income.



I have recently purchased some preferred stock and exchange traded debt.   The issues that do not get the 15% tax rate go into the Roth IRA or traditional IRA.  The ones that do get the 15% tax rate on qualified dividends are in my regular brokerage account. 

That is the general rule for me going forward.   Anything subject to ordinary income tax goes in an IRA account.  Anything with favored tax treatment goes in the non-retirement account.

Joel

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I look at all of my accounts together as one portfolio. 401k, IRA, Roth IRA, pension, brokerage, and bank account.

For bonds, I keep half my age as my percentage. (ie at 25 I keep 12.5% in bonds). This leaves 87.5% in stocks. Of that stock allocation, I keep 70% in the us stock market index and 30% in the international stock market index. My bond allocation includes all of my "safe" investments: my checking account, pension, and and my investments in the total bond market index fund. My checking account earns 1.5% on the first 10k and I keep at least 10k in that account regardless. My "pension" is more like a profit sharing plan in that it is guaranteed a 5% return annually, and is only funded by company (a big four accounting firm with little risk of defaulting on its pension liabilities). Note: this is a fairly aggressive allocation, but I am young and have secure income opportunities with low expenses.

Any remaining bond allocations will go into my 401k or IRA in order to not be taxed on the interest.
International stocks to into my brokerage account as they provide a foreign taxes paid credit.
I do try to keep my Roth IRA all stocks as I expect they will grow the most in the future and receive the largest benefit of tax free growth.

anisotropy

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toga,

for someone your age (27) a 90/10 portfolio makes sense since you have a very long time horizon, however...

in my opinion, if you are planning to be FI in 10 years (I interpreted as take ER in 10 years) your time horizon suddenly becomes very short and a 50/50 might make more sense to reduce to risks.

If you are not planning on ER but just want a big stash then ignore what i just said.

toga62

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toga,

for someone your age (27) a 90/10 portfolio makes sense since you have a very long time horizon, however...

in my opinion, if you are planning to be FI in 10 years (I interpreted as take ER in 10 years) your time horizon suddenly becomes very short and a 50/50 might make more sense to reduce to risks.

If you are not planning on ER but just want a big stash then ignore what i just said.
I plan to reallocate as things progress but a 50/50 seems too conservative to get enough of a return to be able to retire in 10 years.  With bond interest rates so low I'd be lucky to beat inflation, let allow gain any extra real value.  To get close to ER, I need to take a bit more risk initially in an effort to earn a larger return on my investments.  Taking the vanguard recomendation quiz thing put me at a 80/20 split, so I'm not far off.

I've worked out allocations for my accounts and here is what I am doing. Turned out I miscalculated my funds and am waiting on the Roth IRA until later this year.  So my fund are broken up between my Simple IRA (for work) and a Taxable Vanguard investment account.

AccountDom StocksInt StocksBondsTotal
Roth IRA0.00%0.00%0.00%
Simple IRA5.00%5.20%10.00%
Taxable65.00%14.80%0.00%
Total70.00%20.00%10.00%100.00%

I've following the 90/10 split, with the 90 being split 70-20 between Domestic stocks and international.
I'm placing my bonds into my Simple IRA, as well as a portion of International and Domestic stocks.  The majority of my stock holdings are in my taxable account, but the Vanguard index funds i picked have low expense rates and turn overs to help minimize short term gains.  If I ever dabble in more specific categories like Large Gains or REIT I will place those in my Tax-Sheltered IRA's.

Vanguard Total Intl Stock lx InvVGTSXIndex FundInternationalForeign Large Blend0.22% Expense4.90% Turnover15.04% YTD17.1 P/E
Vanguard Total Stock Mkt Idx AdmVTSAXIndex FundDomesticLarge Blend0.05% Expense4.30% Turnover33.52% YTD20.6 P/E

My issue now is finding an alternative Index Fund for Bonds, Domestic Market, and International Market through Scottrade that doesn't require a Load or Transaction Fee. Currently investing into Vanguard Funds costs me $14+ per transaction.  I'm not having a lot of luck navigating their site for reliable alternative information.  Anyone use Scottrade and have any tips?  Alternatively, since work sets up the Simple IRA, am I stuck using Scottrade or can I possibly request my contributions be made to a Vanguard Simple IRA and then roll my account over there?

Does anyone have any good methods for calculating allocations for accounts?  I've built out an excel spreadsheet that allows me to put in Percentages and get Dollar totals, or Dollar Totals to get Percentages but If there are online tools to simplify this I'd be glad to hear about them.

anisotropy

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A 90/10 portfolio might provide higher returns but it also has higher risks. That being said we are guilty of being heavy on stocks too:

Our portfolio currently is about 85/15 but an important difference is that we are still working even though we are at FI. This will surely change as time goes on.

Trading commissions suck, what we do is we buy TD e-series mutual funds regularly (this is a Canadian product but you should have something similar in the States). It's a no commission fund with a catch: you can not sell the fund within 30days of purchase. Once the funds get big enough just sell and buy ETFs. Sure the MERs will be higher but not by much, for every 100k the difference is about 180 dollars per year.