Author Topic: Taxable vs Non-Taxable Asset Allocation  (Read 3117 times)

Brokefuturedoctor

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Taxable vs Non-Taxable Asset Allocation
« on: April 19, 2016, 08:14:14 AM »
Hello all,

I am pretty new to MMM and investing in general, so I have what may be a silly question. Does it matter which of my assets are in a taxable or non-taxable account?

For example, let's say I have a 50/50 (stocks/bonds) portfolio. Does it matter if all the bonds are in an IRA and all the stocks are in a taxable account? Or does it make more sense to have 50/50 in each of the accounts?


Edit: What do y'all think about one of the Vanguard Target Funds for a Roth versus just having VTI, VTSMX, or VTSAX (currently not an option for me). My thinking in just having stocks in a Roth is mostly from WCI who ran the numbers and figured out that you get greater returns with stocks in a Roth and Municipal bonds in a taxable account.
« Last Edit: April 28, 2016, 10:49:36 AM by Brokefuturedoctor »

Gin1984

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Re: Taxable vs Non-Taxable Asset Allocation
« Reply #1 on: April 19, 2016, 08:22:34 AM »
Since stocks are taxed at capital gains rates and bonds at "normal" rates, I personally put all bonds in my Roth and HSA. 

NoStacheOhio

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Re: Taxable vs Non-Taxable Asset Allocation
« Reply #2 on: April 19, 2016, 08:26:30 AM »
http://whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

Do the accounts all have the same savings objective?

PhysicianOnFIRE

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Re: Taxable vs Non-Taxable Asset Allocation
« Reply #3 on: April 19, 2016, 08:34:50 AM »
Hello all,

I am pretty new to MMM and investing in general, so I have what may be a silly question. Does it matter which of my assets are in a taxable or non-taxable account?

For example, let's say I have a 50/50 (stocks/bonds) portfolio. Does it matter if all the bonds are in an IRA and all the stocks are in a taxable account? Or does it make more sense to have 50/50 in each of the accounts?

Apply your desired allocation across all accounts. It's OK to have most or all bonds in one location (I vote tax deferred) and most or all stocks in taxable. Or vice versa if you desire. Look into tax efficiency for stocks, international stocks, bonds, REIT, etc... at the link below. The rest of my reply is a carbon copy from a similar thread, but it applies. I like to be efficient. :)

I like the Bogleheads tax efficiency page on the Wiki.  To quote:

ďMunicipal bond funds have a hidden cost; while their interest incomes are not subject to federal tax, they usually earn less than corporate or treasury bond funds of comparable risk. (The risk may be of a different type; intermediate-term municipal bonds have more credit risk than long-term treasury bonds, but less interest-rate risk, and thus may have a similar after-tax yield.) There are special rules regarding the taxation of Social Security benefits Ė municipal bond interest in a taxable account may result in additional Social Security benefits being taxable. [note 4] Ē

WCIís comparison (at least what I read, but I have not read extensively on it) is between bonds in Roth and bonds in taxable.  My bond money goes in neither.  I put it in the 401(k), and I use the Vanguard Total Bond fund, because it is available at Institutional ER in my 401(k). I might go with Intermediate if it were easily available.  When I [early] retire, Iíll likely  be transferring the 401(k) to a Vanguard IRA, and then I can choose the bond fund I want at that point.  Iím not saying WCI is wrong; itís just not where I choose to put my bond fund dollars, and Iíll admit he has clearly researched it more than I have.

To me, the benefit of bond funds in the 401(k) are threefold.  1. Likely lower long-term returns.  Might as well be in an account that the government is going to tax the heaviest. 2. Likely lower long-term returns.  Keeping the bond fund in the tax deferred space will likely keep my RMDís lower. 3. No need to accept lower returns and less diversification by having to be invested in the tax-free versions, as opposed to total bond or intermediate bond fund.

Best,
-PoF

Brokefuturedoctor

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Re: Taxable vs Non-Taxable Asset Allocation
« Reply #4 on: April 19, 2016, 09:10:57 AM »
http://whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

Do the accounts all have the same savings objective?

My goal for now is just to save as much as I can for retirement. I won't even be able to invest in earnest for at least 7 years, so really this is all just hypothetical for now. Thank you all for the input!

dandarc

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Re: Taxable vs Non-Taxable Asset Allocation
« Reply #5 on: April 19, 2016, 09:15:30 AM »
http://whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

Do the accounts all have the same savings objective?

My goal for now is just to save as much as I can for retirement. I won't even be able to invest in earnest for at least 7 years, so really this is all just hypothetical for now. Thank you all for the input!
Just starting med-school?  I'd say start saving in earnest once in residency - if you can learn to live on half of $40 or 50K or whatever the resident salary is, imagine how easy it will be once you're making many times that!

Brokefuturedoctor

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Re: Taxable vs Non-Taxable Asset Allocation
« Reply #6 on: April 19, 2016, 09:32:25 AM »
Yes, I will be starting in the fall. My current plan is to begin paying off loans when I start residency depending on how much I need to end up taking out. I still haven't decided if I will pursue some sort of service contract after my first year. I already know that I can live on $20-25k because right now I live on less. My goal is to not increase my spending as my income increases. That way I can just have a very high saving percentage. I just have to make sure I balance that with all my other life goals!