Author Topic: Tax Optimization question  (Read 3808 times)

Tjat

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Tax Optimization question
« on: June 15, 2015, 04:49:20 PM »
My 401k plan recently came out with new options, so I set about trying to optimize my aggregate portfolio. While I'm comfortable with my asset allocation, I'm starting to now think about the optimal location of each asset class. My wife and I are both 30. Here's my summary

401k (~140K)
80% simulating VTSAX
20% simulating VTIAX

Roth IRA (just started contributing in 2014 as I only recently learned about back-door technique)
$8500 in VGSIX (Vanguard REIT Index)

Taxable LendingClub
$5000

Taxable Vanguard
$20000 VTSAX
$14000 VTIAX
$3000 in VGSIX
$10000 in VBTLX (Vanguard Bond Index)

It's also worth mentioning that my wife's retirement vehicle is her pension, which I'm viewing as a fixed annuity (probably 15-20K a year once traditional retirement age). I also have a pension projecting to add about $15K a year, but both aren't accessible until age 55.

Taking a look at my Vanguard account, I'd ideally want all bonds and the REIT solely in my Roth. However, I'm limited by the annual contribution limits. So, my initial thought is to put all the fixed income I want in my 401K and think about selling what's left of the REIT in my taxable account. Does that make sense? Any other thoughts?
« Last Edit: June 15, 2015, 04:54:47 PM by Tjat »

BarkyardBQ

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Re: Tax Optimization question
« Reply #1 on: June 15, 2015, 05:19:14 PM »
You don't want REITs or Bonds in a Taxable Account.

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

With your age it seems like you are trying to invest too much in fixed income funds of bonds/REIT. You might want to consider limiting those contributions to the Roth and using your other accounts to invest in funds that will get you capital gains and pay less taxes on distributions each year.

What are your goals and risk tolerance?
« Last Edit: June 15, 2015, 05:22:32 PM by zdravé »

forummm

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Re: Tax Optimization question
« Reply #2 on: June 15, 2015, 05:42:41 PM »
If you want to have the same bond allocation that you do now, do you have a low-cost bond fund in your 401k? You could swap some of the VTSAX out of the 401k for the bond fund, and vice versa in the taxable.

You can also have an IRA for your wife. You can both contribute $5500/year. That might help you have more tax advantaged room for REITs and bonds.

Tjat

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Re: Tax Optimization question
« Reply #3 on: June 15, 2015, 06:08:01 PM »
Thanks for the replies. Goals are for financial independence as soon as possible, not really sure about working after that point. Risk tolerance in theory is pretty high assuming the returns are there, but I know myself too well to know large swings will be unsettling.

I'm shooting for about 10% in fixed income - is it normal to view REITS in that same class? I figure about 80% equity, 10% Bonds/P2P, 10% REITS is a good balance, but that's assuming REITS are relatively uncorrelated to both equities and bonds.

Later this year I am planning on opening a Roth for my wife and will make sure either REITS or Bonds are in there up to my 10% allocation. A reasonable PIMCO fixed income fund is available in my 401k, so that'll work great.

forummm

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Re: Tax Optimization question
« Reply #4 on: June 15, 2015, 07:59:23 PM »
Why do you care about fixed income? You should care about total returns, and not where they come from. REITs are stocks and behave much more like stocks than bonds.  Use REITs only as a somewhat uncorrelated asset class from the rest of the stock market. 10% is a fine amount of the portfolio to have if you want it.

And I wouldn't think of P2P as being a diversified bond portfolio. It will probably more like junk bonds (i.e. perform like stocks) when the market tanks. When people lose their jobs they stop paying on loans. They aren't the same as Treasuries or investment grade corporate securities.

TomTX

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Re: Tax Optimization question
« Reply #5 on: June 16, 2015, 06:17:37 AM »
WAY too scattered. I would just put all the taxable in VTSAX, if you want bonds put your Roth in bonds. Done.

forummm

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Re: Tax Optimization question
« Reply #6 on: June 16, 2015, 06:30:03 AM »
Vanguard recommends international exposure as well as domestic. I personally am about 60/40 US/intl. Global market cap is about 55/45.

Tjat

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Re: Tax Optimization question
« Reply #7 on: June 16, 2015, 10:51:52 AM »
This all makes sense to me. I'm moving forward with the following

Vanguard Taxable
70/30 split between VTSAX and VTIAX

Roths (my wife opened one)
11,000 in VGSIX

401K
15% Bond Index
50% simulating VTSAX
15% simulating VTIAX

Probably will just leave the small amount in lending club, even though it's very tax inefficient, since it's relatively illiquid and a small $ amount.

Thanks for your help everyone

Mr. McGibblets

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Re: Tax Optimization question
« Reply #8 on: June 16, 2015, 11:32:49 AM »
Thanks for sharing that boglehead link. If I have bonds in a taxable account and I transfer them to my Roth IRA 1/1 next year, will I pay tax on the dividends first?

seattlecyclone

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Re: Tax Optimization question
« Reply #9 on: June 16, 2015, 11:40:34 AM »
Thanks for sharing that boglehead link. If I have bonds in a taxable account and I transfer them to my Roth IRA 1/1 next year, will I pay tax on the dividends first?

You can only transfer cash to an IRA, not bonds. This means that you would need to sell the bonds from your taxable account to transfer your money, which could result in capital gains that you would be taxed on in addition to the interest the bonds will pay between now and then.