Author Topic: Tax efficiency illustrations?  (Read 1383 times)

obstinate

  • Pencil Stache
  • ****
  • Posts: 916
Tax efficiency illustrations?
« on: January 14, 2017, 04:19:39 PM »
I'm considering switching all my retirement accounts to use target retirement funds, rather than rebalancing between them and my non-retirement accounts. Then I would simply balance the content of my post-tax accounts. I understand this is less tax efficient than keeping certain classes of funds in retirement and other classes in post-tax accounts. What I'm looking for is an illustration of how much I'm leaving on the table, so I can judge whether it's worth it. Could you please link me to one if you have it?

MDM

  • Walrus Stache
  • *******
  • Posts: 9715
Re: Tax efficiency illustrations?
« Reply #1 on: January 14, 2017, 08:16:18 PM »
See Wealthment/Betterfront Nail In The Coffin Article.  Despite the title of the thread, and the first several posts, keep reading....

ETA: Sorry, that answer applies to fee efficiency.  For tax efficiency, see Tax-efficient fund placement - Bogleheads.
« Last Edit: January 14, 2017, 08:18:22 PM by MDM »

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1428
Re: Tax efficiency illustrations?
« Reply #2 on: January 15, 2017, 05:11:15 AM »
According to Vanguard whitepapers, asset location(tax efficient investing) can add as much as 0.75% in terms of long term after-tax performance.

That is looking at a split portfolio invested perfectly tax efficiently VS the exact opposite.

What you are describing doesn't sound bad at all. Let me make sure I'm seeing it right though.

IRAs/401k:  Target Retirement funds.
Taxable: Stock index funds.
Make it all match to accomplish desired AA.

Example: target AA 90/10.
401k: 500k in TR 2040
Taxable: 100k split 60/40 between Total Stock and Total International Stock.
AA = 89/11. Success.

That is tax efficient. The important thing is keeping tax inefficient investments(ex. bonds) in the IRA/401ks and keeping tax efficient investments(ex. stocks) in the taxable. You are doing that. You are also keeping all of the rebalancing in the IRA/401ks.

There are 2 disadvantages to this, and right now neither might matter.
1. Roth VS pre-tax: If you have both, and you have already put all of your bonds in the pre-tax then it makes sense to make the Roth extra aggressive. If you are using a pretty aggressive TR fund then this shouldn't make a big difference. If your pre-tax account and your Roth were both 60/40 that would be a bigger issue.
2. It works right now. One day it might not. As your AA changes and your accounts grow you might eventually get to the point where, in order to achieve AA, you can't use a TR fund just in the IRA/401ks. 

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1508
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Tax efficiency illustrations?
« Reply #3 on: January 16, 2017, 05:07:47 PM »
Just an off the cuff comment...

You might be able to shortcut your work if you just move the target retirement fund "date" up a decade or two.

E.g., maybe you should use a 2050 fund... but because you've got a chunk in taxable in (say) a total stock market index, maybe you use the 2040 or 2030 fund.

P.S. I love target retirement funds. I recommend them to my kids and to my parents. Oh, and anyone else who asks about a smart simple way to not screw around with picking an AA formula and then manually rebalancing.

obstinate

  • Pencil Stache
  • ****
  • Posts: 916
Re: Tax efficiency illustrations?
« Reply #4 on: January 20, 2017, 10:44:27 PM »
I ended up moving my bonds into the 401k and moving some domestic ETFs out into my taxable accounts.