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Hi Fools,
I have a dilemma that I hope you can help me with. I have a 401k, Roth, and Brokerage account all containing funds which I would like to include in my retirement portfolio my mix is currently 100% equities. I'm looking to move to a more moderate portfolio using ETF's. My total holdings are currently split like this with no option of moving them.

401k - Tax Deferred - 62%
Roth - Tax Free - 10%
Brokerage - Taxable - 28%

The Rule Your Retirement section of TMF suggests.

BND 15%
DBC 4%
IJR 6%
IJS 4%
VEU 7%
VIG 10%
VNQ 4%
VO 12%
VOO 10%
VSS 3%
VTIP 10%
VTV 5%
VUG 5%
VWO 5%

My problem is deciding where to land these holdings among my 3 account types for the most tax efficiency and with withdrawals for retirement income in mind?
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The Rule Your Retirement section of TMF suggests....

There's no reason to pay for generic advice. But go ahead, TMF needs to make money so they can keep these free message board in operation.


My problem is deciding where to land these holdings among my 3 account types for the most tax efficiency and with withdrawals for retirement income in mind?

I long ago came to the conclusion that it doesn't really matter much. At best, setting the "optimal" location for your various holdings is a trival improvement, after all is said and done.

As for withdrawals, plenty has been written about this.

Vanguard had a classic paper on optimal sequence of withdrawals from multiple account. From Morningstar is "OptimalWithdrawlStrategyRetirementIncomePortfolios.pdf". Just taking a quick look, I have 36 papers & articles on this subject in my "financial papers" directory.

EVENTUALLY you will be withdrawing money from every one of your accounts. When you make said withdrawal you will have to pay the required income tax on that withdrawal. The only question is *when* you will face the tax.

It's amusing on certain message boards to hear people moaning about having to take a very large RMD from their IRA -- and face the high effective tax due to increased Medicare premium, more SS being taxed, being bumped up to a higher tax bracket, etc. -- because they arranged things so that the IRA grew and grew while they made their withdrawals from other accounts while they were younger. Or they exhausted all their other account and now had *only* the IRA to draw from.

</soapbox>
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without further info on your age, years to retirement, expected SS and when will you take it.....

any other pensions or income sources when you retire.....

whether you are married or single......

mortgage or other debt now.....

- ---

As far as a bump in Medicare premiums........ it's all about AGI.....and of course, that doesn't apply until you are over 65.

Slicing and dicing to 3% in this fund and 4% in that fund is just splitting hairs....unless you have millions, it's not worth the effort.....and keeping track of the paper work.

You can do anything you want in a IRA/401/Roth......and not pay transactions costs or can take short term gains with no tax implications.

You said you can't 'move' your 401K - does that mean you are still employed and can only select from the plans choices?


If you rely on MF for your total financial input, you are, in the true sense of the word, a fool.

I'm sure you've already read the Millionaire Next Door, Boggles book on mutual funds? If not, do so.

There is no magic bullet, or magic allocation.

t
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My problem is deciding where to land these holdings among my 3 account types for the most tax efficiency and with withdrawals for retirement income in mind?

The first thing that I would suggest is confirming if you have any options in your 401(k) that are on the suggested list, or are very similar with low expense ratios. After you leave your job and roll the 401(k) into an IRA, you can change the investments without any tax consequences to be ones on the specific list. But until then, you are stuck with the choices your 401(k) offers.*

From a tax efficiency standpoint, putting things that will be throwing off income that will be taxed at ordinary income rates (interest, ordinary dividends, etc.) into Traditional accounts is probably more tax efficient, since everything coming out of those will be taxed at ordinary income rates, anyway. Into your taxable account, things that will be taxed at long term capital gains rates will minimize taxes on that account. If your taxable account will provide dividends, you should try to ensure they will be qualified dividends, in order to minimize your annual tax bill. If you are going to hold anything that provides tax-free income (muni bonds, for instance), that should probably also be in your taxable account. In your Roth account, you want the things that you expect will provide higher growth than what you have in your taxable account.

As Rayvt indicated, it probably won't be a huge savings one way or the other, but why give any more to the government than you have to, if it's relatively easy to structure it so that you can give less?

AJ

*If your 401(k) offers a brokerage option, then you can disregard this paragraph, since you should be able to purchase all of those suggestions in your brokerage option.
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It's amusing on certain message boards to hear people moaning about having to take a very large RMD from their IRA -- and face the high effective tax due to increased Medicare premium, more SS being taxed, being bumped up to a higher tax bracket, etc. -- because they arranged things so that the IRA grew and grew while they made their withdrawals from other accounts while they were younger. Or they exhausted all their other account and now had *only* the IRA to draw from.

If you were never eligible to open or participate in a Roth account and retired late in life is there really an optimum withdrawal strategy?

I didn't get around to retiring until January 2013 when I was 68. I had been paying income taxes since I had started working in 1959 at age 14. My immediate retirement goal was to experience one year of no tax liability before I had to start taking RMD. I didn't quite achieve this goal and had to pay the IRS $134 for the 2014 tax year.

What I hadn't anticipated when I retired was my IRA doubling in value by 31 December 2014. In 2015, I was required to make an RMD withdrawal of $80,000 instead of the $40,000 I had anticipated.

Since then I've looked at converting my traditional IRA to a Roth IRA. To stay in my current marginal tax bracket, I couldn't convert enough of my traditional IRA to a Roth IRA to make a significant difference in my annual RMD withdrawal. As a result, I've decided just to moan about my income taxes, forget about Roth conversions, and defer paying income taxes until they are required by RMD withdrawals. I just transfer the RMD to a taxable investment account where it is invested for the future.
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As a result, I've decided just to moan about my income taxes, forget about Roth conversions - MCCrockett

------------

There are good reason to do Roth conversions besides reducing your RMD. Such as insulation from future tax rate increases, leaving tax free Roth money to your heirs, ongoing gains on amounts converted will not put upward pressure on your RMD's.

Of course, with an $80K RMD, you may not have much headroom in your tax bracket.
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The Rule Your Retirement section of TMF suggests....

T was right on with his comment about the 3% & 4% allocations being too small to bother with. Even if a 3% allocation doubles (which it won't), two times almost nothing is still almost nothing.

I didn't bother to look at the allocations in the OP, but now that I have, I very much disagree with them.
For example, if you have VOO (S&P500), why do you also need VTV & VUG? VTV+VUG essentially _is_ VOO. Instead of 10/5/5, why not just have 20% in VOO?


There is no need to slice-and-dice your allocations that fine, with 14 ETFs. Something like VASGX pretty much covers all the bases.
1 Vanguard Total Stock Market Index Fund Investor Shares 48.6%
2 Vanguard Total International Stock Index Fund Investor Shares 32.1%
3 Vanguard Total Bond Market II Index Fund** 13.5%
4 Vanguard Total International Bond Index Fund 5.8%

VTI
VXUS
BND
BNDX

That covers US & non-US stocks and US & non-US bonds.
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"The Rule Your Retirement section of TMF suggests."

*****************************************************

The key word in the above sentence is "suggests".

Diversification and risk are issues that really cannot be
"suggested" - and retirement funding has much more to do
with cash flow - i.e. how you choose to pull funds from accounts
than how those accounts are diversified.

Howie52
Just saying that deciding to restructure accounts really should be aimed at
withdrawal.
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Thanks. I agree no reason to pay for generic advice. I cancelled after free trial.
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Thanks
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"What I hadn't anticipated when I retired was my IRA doubling in value by 31 December 2014. In 2015, I was required to make an RMD withdrawal of $80,000 instead of the $40,000 I had anticipated."


---

I'm sure a lot of folks would quickly trade places with you.

Be thankful your portfolio did so well and happily pay the tax on $80,000 a year RMD income. That's probably 2 million plus bucks in the IRA.

Along with your SS, you're doing fine.

Now you have to figure out how to SPEND all the money you are getting each year...


t.
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Thanks,
Yes a brokerage option is what I'm using. I plan to utilize the 55 rule and leave my money in the 401k until reaching an age where I can move it.
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Thanks, hope you are enjoying retirement.
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Rayvt writes,

Something like VASGX pretty much covers all the bases.

</snip>


That's true, but once your portfolio is large enough to qualify for the Admiral funds with lower expense ratios, it may make sense to buy the underlying component funds directly.

A 5 or 10 basis point savings over a 50 year investing horizon will probably be enough to pay cash for a Lexus. Compounding is funny that way.

intercst
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I like your idea, like stated in the OP the suggested allocation was from TMF model portfolio and did seem redundant. I'm just sick of tracking 50+ equities, but the average 30% return has been worth it. Guess as retirement gets closer I'm getting a lot more conservative.

Thanks
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good point. Thanks
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I plan to utilize the 55 rule

Be sure you understand what your plan's specific rules about making withdrawals are when you leave the company in or after the year you turn 55. Plans can require you, for instance, to set up a series of specific withdrawals (monthly or quarterly) for a specific number of years in order to access the money. Or they may require you to take all of the money out within a specific timeframe. On the other hand, they may allow you to take out however much you want, whenever you want.

Additionally, if you have employer stock in the 401(k), be sure you understand if the NUA rules will give you a tax advantage.

AJ
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Additionally, if you have employer stock in the 401(k), be sure you understand if the NUA rules will give you a tax advantage.

One caution with an NUA is that it must be taken in the same calendar year as you terminate your employment. I used an NUA to empty my 401(k) account when I retired. It wasn't as beneficial as I thought it would be because I failed to keep track of all the monies that I would receive when I retired.
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One caution with an NUA is that it must be taken in the same calendar year as you terminate your employment.

No, it doesn't. It has to be taken after a 'triggering event'. Triggering events are:
- Death
- Disability
- Separation from Service
- Reaching age 59 1/2

Since the OP is separating from service in the year they turn 55, they will be able to wait until the year that they turn 59 1/2 in order to take an NUA distribution.

There's a good article from Kitces that goes through the details, advantages and possible disadvantages of NUA: https://www.kitces.com/blog/net-unrealized-appreciation-irs-...

AJ
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One caution with an NUA is that it must be taken in the same calendar year as you terminate your employment.

Are you sure about that? I'm no expert but I remember surviving for several years by cashing in company stock using NUA. I don't recall having to do it all in the same calendar year.
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Are you sure about that? I'm no expert but I remember surviving for several years by cashing in company stock using NUA. I don't recall having to do it all in the same calendar year.

There are 2 parts to an NUA - taking the company stock out of the retirement plan, and then selling the stock that you have removed.

For the first part, all assets in the retirement plan, including the stock, must be removed from the plan in a single year following a trigger event (see prior post). The stock is moved to a taxable account, and generally, any other assets are rolled over to an IRA or another employer's retirement plan.

Once the company stock is in the taxable account, the owner can sell it whenever they want - over time, or all at once. Whenever it is sold, even if it's the day after it was placed in the taxable account, it will be taxed at the long term capital gains rate.

AJ
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Be thankful your portfolio did so well and happily pay the tax on $80,000 a year RMD income. That's probably 2 million plus bucks in the IRA.

Along with your SS, you're doing fine.

Now you have to figure out how to SPEND all the money you are getting each year.


That SPEND bit can be a major problem when your parents were raised during the Twenties and Thirties and taught you the value of being frugal. Social Security and two small pensions provide enough income to cover all the typical annual living expenses plus all Federal and state income taxes that are triggered by RMD withdrawals.

Yea, I'm doing better than I had expected in retirement. For the time being, RMD withdrawals are simply transferred to a taxable investment account and invested.
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That SPEND bit can be a major problem when your parents were raised during the Twenties and Thirties and taught you the value of being frugal.

Agree, as I was also raised by Depression-era parents with Mom born in 1919 and Dad born in 1920. They had that same problem with having saved all their lives and being frugal from their Depression-ingrained habits. My mother, however, finally found a way to get them to spend more on themselves during their retirement. She always used to say that they were saving for a rainy day, so after they retired, if she wanted to do something, she'd look at my Dad, and she'd announce that it was raining and that this was their Rainy Day.

That actually worked, and so now that I am retired, DH and I are also using that same philosophy. I did one thing differently, however. I wanted to be sure that we were saving enough, so we had about 4 or 5 "practice" years where we started to spend more money as though we were retired. Things like going out to dinner more, and maybe doing that twice a week instead of once a week. And playing more golf and choosing to ride in a cart instead of walk and carry our clubs. This was to make sure that I had enough money allocated in our planning budget so that we'd have enough saved.

I think we have hit that goal, and I retired last June at 60 years old, so this is actually our first year of me being completely retired, and so we have minimal income from what DH is still doing (he's self-employed and has really been semi-retired for years). Should be interesting to see how I did on our predicted spending plan, but so far, we are just about where I said we'd be.

It's a matter of changing your headset, but it can be done.

DH's favorite saying these days is that someone is going to get a little red sports car with our money, and so it will be him!
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For the first part, all assets in the retirement plan, including the stock, must be removed from the plan in a single year following a trigger event (see prior post).

And this is often the reason why NUAs are less advantageous than they might otherwise appear.

I've always wondered, and AJ you might know, in order to keep the tax hit of the cost basis being taxable as income as low as reasonably possible, can a retiree sell a portion of that stock just prior to exercising a NUA? I assume if so, it is sold at average CB but I don't honestly know.

In nearly every case where I have seen where this would eventually be an option, their cost basis was still too high to make this a very attractive option. Paying tax on $400k to have LTCG on an additional $400k in unrealized gains just isn't worth it.

In the above situation, the same person may be better off selling $600k in stock and using the NUA on the remaining $200k (with $100k CB).
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There is no need to slice-and-dice your allocations that fine, with 14 ETFs. Something like VASGX pretty much covers all the bases.
1 Vanguard Total Stock Market Index Fund Investor Shares 48.6%
2 Vanguard Total International Stock Index Fund Investor Shares 32.1%
3 Vanguard Total Bond Market II Index Fund** 13.5%
4 Vanguard Total International Bond Index Fund 5.8%


Ask 100 people and get 100 answers. To file under the KISS Principle: IVV, EFA, IEF, and IYR (or Vanguard equivalent), 25% each, rebalance yearly. Gives US and non-US stocks, US bonds, and US REITs.

JLC
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I've always wondered, and AJ you might know, in order to keep the tax hit of the cost basis being taxable as income as low as reasonably possible, can a retiree sell a portion of that stock just prior to exercising a NUA? I assume if so, it is sold at average CB but I don't honestly know.

You don't have to pull out the entire amount of company stock for the NUA. Depending on your plan's rules, you can accomplish that by saying that you only want to take out x amount, with x being shares or dollars, or, as you suggest, you can sell part of the stock before doing the NUA.

I'm told that some plans keep track of the basis for stock, so you can pick and choose which stock lots you want to sell or do NUA for, so you can do the NUA for just the stock with the lowest cost basis. Personally, all of the plans I've been in have just kept track of the average cost basis for the stock, so I don't have that opportunity.

In nearly every case where I have seen where this would eventually be an option, their cost basis was still too high to make this a very attractive option. Paying tax on $400k to have LTCG on an additional $400k in unrealized gains just isn't worth it.

In the Kitces article I linked to earlier, there are some graphs that show under what circumstances it can be attractive. It's usually when the stock has increased significantly from the cost basis. Also, keep in mind, as previously mentioned, you don't have to pull all of the stock out for the NUA. You can choose to pull out just enough to keep your ordinary income in, say, the 22% or 24% bracket, instead of bumping yourself into the 33% or higher bracket.

In the above situation, the same person may be better off selling $600k in stock and using the NUA on the remaining $200k (with $100k CB).

Exactly. They would then have $600k to roll over into their IRA, add $100k to their ordinary income for the year, and have $200k in stock with $100k in gains that would be taxed at long term capital gains rates when sold.

AJ
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And playing more golf and choosing to ride in a cart instead of walk and carry our clubs.

Retirement is great ain't it?

ImAGolfer (retired '03)
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Retirement is great ain't it?

So much better than I am imagined!
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Retirement is great ain't it?
---------------------------------
So much better than I am imagined!

=================================
That's my experience, too, strictly from a financial point of view.

Being "an anal-retentive CPA type", as one (or more) of my friends put it, I had done many versions of financial retirement projections, and it looked like retirement should be a pretty easy deal for us. And it's turned out to be equal to my best expectations.

And on top of that, we bought a slightly nicer house soon after retiring, which I never planned on, but that's because we needed a one-story house to better care for our oldest daughter who was living with us and suffering from cancer, along with other, older problems. (She died in January 2018, so I spent my first two years of retirement being a caregiver for her.) So that aspect of retirement wasn't so good.

And my obsessive budgeting turned our to be moot, when about 6 months after I retired, my father died and I inherited over $500,000, which I had never factored into my projections. OK, he was 91, and I knew he wouldn't live forever, but he was in a nursing home for 9 years, so I also considered the possibility that he might outlive his money. He never came close. For those who don't believe in LTC insurance, for him it was a goldmine. On the other hand, you can't buy the policy he had anymore.

As for my other kids' reactions, after I retired, we were talking, and they said to me, in mock seriousness, "Dad, now that you're retired, you really need a boat!" (I don't!)

Bill
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My problem is deciding where to land these holdings among my 3 account types for the most tax efficiency and with withdrawals for retirement income in mind?

If you hold stocks in your IRA, you'll pay regular income tax rates on the growth when you cash it out. If you hold stocks in your taxable account, you'll pay more favorable capital gains income tax rates on the growth when you sell the stocks (if they were held for more than a year). Also, stock dividends are treated better than bond interest.

If you hold Index Funds in your taxable account, more of their trading will be long term compared to a frenetically trading fund. If you hold individual stocks, you have even more control over when they're sold.

Looking at it this way, you can see that for minimizing taxes, it's best to hold stocks (or funds) in your taxable account and bonds in your Roth or IRA.

As you choose to withdraw from whichever account, you may need to rebalance your asset allocation in the others. You'll also want to see if you should do any conversions from IRA to Roth if you have "headroom" in a preferable tax bracket. That is, if you're in the 12% bracket and have $25K of room before you hit the 22% marginal rate, you may want to convert that much into Roth.
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T was right on with his comment about the 3% & 4% allocations being too small to bother with. Even if a 3% allocation doubles (which it won't), two times almost nothing is still almost nothing.

...There is no need to slice-and-dice your allocations that fine, with 14 ETFs. Something like VASGX pretty much covers all the bases.
1 Vanguard Total Stock Market Index Fund Investor Shares 48.6%
2 Vanguard Total International Stock Index Fund Investor Shares 32.1%
3 Vanguard Total Bond Market II Index Fund** 13.5%
4 Vanguard Total International Bond Index Fund 5.8%



The hard part is getting paid to provide advice that simple and straightforward, which you and the rest of us here gave for free.
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"Dad, now that you're retired, you really need a boat!"

We didn't need the urging and bought 2, with an eye towards buying more. Kayaks that is. We can kayak right out the back yard.

IP,
definitely not into the higher maintenance type of boat
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Looking at it this way, you can see that for minimizing taxes, it's best to hold stocks (or funds) in your taxable account and bonds in your Roth or IRA.

This is the part where, when I sat down and started to think hard about it, is why I came to the conclusion that "the location of the assets doesn't much matter."


The whole advantage of IRA and Roth is that the gains are not taxed (or tax is deferred).
With bonds, the gains are small. So WHY are you wasting the "no tax on gains" benefit for an asset that DOESN'T have significant gains?

Seems to me that you should have the bonds in your taxable account. Because even a high tax rate on a tiny gain is a small amount of money.
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The whole advantage of IRA and Roth is that the gains are not taxed (or tax is deferred). With bonds, the gains are small. So WHY are you wasting the "no tax on gains" benefit for an asset that DOESN'T have significant gains? Seems to me that you should have the bonds in your taxable account. Because even a high tax rate on a tiny gain is a small amount of money.
-----------------------------------
It isn't just the capital gains from selling bonds, either trading or at maturity. Agreed, those items are nominal. It's paying taxes on the interest as you go, every year in a taxable account. In an IRA, Roth or Traditional, you get more compounding. The same goes for REITs (nonqualified dividends) and various preferred issues also.

In theory, in an ideal world, I'd agree with the suggested approach that "for minimizing taxes, it's best to hold stocks (or funds) in your taxable account and bonds in your Roth or IRA." But for people whose largest block of holdings is an IRA, which may include a big rollover from a 401(k) or other company plan, it may not be very feasible. If your traditional/rollover IRA is 90% of your assets, you probably don't want to have all of that in bonds. That's the kind of client who should think about a Roth conversion, in incremental annual steps, perhaps, watching their tax bracket levels.

Bill
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Looking at it this way, you can see that for minimizing taxes, it's best to hold stocks (or funds) in your taxable account and bonds in your Roth or IRA.

This is the part where, when I sat down and started to think hard about it, is why I came to the conclusion that "the location of the assets doesn't much matter."


The whole advantage of IRA and Roth is that the gains are not taxed (or tax is deferred).
With bonds, the gains are small. So WHY are you wasting the "no tax on gains" benefit for an asset that DOESN'T have significant gains?

Seems to me that you should have the bonds in your taxable account. Because even a high tax rate on a tiny gain is a small amount of money.



But if you're choosing between regular IRA and taxable, you're going to pay taxes one way or the other. I was looking at someone who had all three kinds of accounts and wanted to balance between them. Of course, if you could pass a magic wand over all the accounts and they'd become Roths with no loss, that'd be ideal. But, in a real example, if you convert your IRA to a Roth, you pay taxes now, and have to use money that would otherwise be available for more investments.

I made a spreadsheet with what I thought were reasonable numbers for returns and tax rates, and the "stocks in the regular account / bonds in the Roth" approach was marginally better than vice versa. But, the difference was small compared to the effect of the assumptions, so different returns/taxes could drive a different conclusion.

Keeping bonds in your regular account means you pay taxes each year on the interest payments, whereas if you hold stocks or stock funds with low turnover, you allow the account to grow without being taxed until you choose to sell. (You have to pay taxes on any stock dividends...but at a favorable rate.)
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Rayvt,

TheBreeze wrote, Looking at it this way, you can see that for minimizing taxes, it's best to hold stocks (or funds) in your taxable account and bonds in your Roth or IRA.

To which you replied, This is the part where, when I sat down and started to think hard about it, is why I came to the conclusion that "the location of the assets doesn't much matter."


The whole advantage of IRA and Roth is that the gains are not taxed (or tax is deferred).
With bonds, the gains are small. So WHY are you wasting the "no tax on gains" benefit for an asset that DOESN'T have significant gains?

Seems to me that you should have the bonds in your taxable account. Because even a high tax rate on a tiny gain is a small amount of money.


First, the normal (Boglehead) advice is to put bonds in your pre-tax accounts where possible - not in a Roth account. The main argument isn't that bonds will experience some major advantage in that account, it's that you want to maximize your potential for growth in the tax-free account. Bonds don't do that.

Second, ideally a taxable account wouldn't be a major part of anyone's investment portfolio if it can be avoided. There are no tax situations where a taxable account actually beats a Roth account, except in the case where Roth distributions are not qualified. This means the Roth account beats every alternative account type when it comes to withdrawals. So rationally you should take every opportunity to put taxable funds into a Roth account that are earmarked for retirement. (That's what I'm doing right now through both backdoor Roth IRA and mega backdoor Roth 401(k) contributions.)

Third, a pre-tax account still beats a taxable account for bonds - at least if you are still accumulating. That's because the taxman doesn't get to take a chunk of your returns each year. For instance, if you were earning only 4% APY and 25% goes to taxes, you only get to reinvest 3%. That's means the pre-tax account has a 1%/year tax friction as compared to the pre-tax account. It's true that in the short-run, this is a minor difference. But in the long-run compounding makes this figure significant. Indeed, the reason this is significant is exactly the same reason lower expense ratios are significant!

Finally if you disdain small advantages like this, why on earth do you have any tax-advantaged accounts at all? At most tax-advantaged accounts have a 2%/year net advantage over taxable accounts. In many cases it's less than that. If you disdain small tweaks so much, why would you care where the money is located?

- Joel
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The whole advantage of IRA and Roth is that the gains are not taxed (or tax is deferred).
With bonds, the gains are small. So WHY are you wasting the "no tax on gains" benefit for an asset that DOESN'T have significant gains?


It's not just 'gains' that are sheltered from taxes, it's 'total returns,' which includes interest and dividends in addition to gains. A 30 year bond with a 4% coupon is going to provide 120% yield over the life of the bond.

Seems to me that you should have the bonds in your taxable account. Because even a high tax rate on a tiny gain is a small amount of money.

Since the taxable bond income is going to be taxed at ordinary income rates, it doesn't make any difference if you hold them in a taxable account vs. a Traditional account. However, long term capital gains in taxable accounts are taxed at (currently lower) capital gains rates, while if they were held in a Traditional account, they would be taxed at (currently higher) ordinary income rates.

AJ
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Second, ideally a taxable account wouldn't be a major part of anyone's investment portfolio if it can be avoided.

When we visited a couple of FA's to have them look over our investment portfolio to verify that we could safely retire, one thing that stuck in my head was when one opened up the meeting with "You have almost all your retirement money in 401K and IRA, right?" We said, "No, we have a significant amount in regular (taxable) accounts." He then said, "Good. That's the right thing to do, but most people don't."





There are no tax situations where a taxable account actually beats a Roth account, except in the case where Roth distributions are not qualified. This means the Roth account beats every alternative account type when it comes to withdrawals.

I have a hard time seeing that--when you look at the entire picture. First of all, of course, is that you can't put much money into IRAs (regular and Roth). The only place you can put in a substantial sum is a 401k. (I didn't have the opportunity to do a Roth 401K, so never bothered to look into them.) In fact, at my last year at work I put close to half my salary into my 401K (max contribution + age 50+ catch-up + employer match.

Okay, here's what I see just tracing out a money flow (25% tax bracket) (not real dollar figures):
Alt 1) Salary amount $10K, deposit $10K (tax deductible) into an IRA, grow at 10% for 10 years = $25,937. Withdraw, pay 25% tax = $19,453 net cash-in-hand.

Alt 2) Salary amount $10K, deposit $7,500 (after paying 25% tax) into a Roth IRA, grow at 10% for 10 years = $19,453. Withdraw, pay no tax = $19,453 net cash-in-hand.

No difference, since multiplication is commutative.

Alt 3) Salary amount $10K, deposit $10K (tax deductible) into an IRA, grow at 10% for 10 years = $25,937. Withdraw, pay 15% tax = $22,047 net cash-in-hand.

Clearly #3 is the best. Better than the Roth, since you are paying 15% instead of 25%.

Taxable:
Alt 4) Salary amount $10K, deposit $7,500 (after paying 25% tax) into a long-term buy&hold index fund, grow at 10% for 10 years = $19,453. (Will actually be a little less, since any dividends along the way will probably be taxed. So....buy BRK.)
4a) Withdraw, you are in 15% bracket, so no capgain tax = $19,453 net cash-in-hand.
4b) Withdraw, you are in >15% bracket, so 15% capgain tax on the gain = $17,660 cash-in-hand.

The advantage of putting your money in a taxable investment account is that you can put MUCH more money into it. The maximum I could put into IRA/Roth was only $2000-$3000 up until I retired. (Plus $500 after age 50.) Your retirement account is not going to be very big if you only put $5000-$6000 a year into it. One year of retirement income withdrawals takes 10 years of contributions.

Also, there is no RMD on your taxable account. Baby-boomers are starting to feel the effect of RMD's on their large-ish 401k/IRA accounts, being forced to take much more money out than they would like to, and having to pay tax on these unwanted withdrawals. A $1M IRA/401K is about $40,000 RMD. That pretty much fills up the lower tax brackets, so everything gets push toward the higher brackets, increased SS tax, etc.


So rationally you should take every opportunity to put taxable funds into a Roth account that are earmarked for retirement. (That's what I'm doing right now through both backdoor Roth IRA and mega backdoor Roth 401(k) contributions.)

The figures I showed above don't support that. Of course, I could have made a mistake in the math. Or forgotten something.

A backdoor Roth just allows you to effectively make a higher contribution (by paying the tax on the converted amount with outside money). But that outside money isn't "free", you had to pay 25% tax on it, so I think that overall it's a wash.

Looks to me that the absolute BEST alternative is to put as much as you can into tax-deductible 401K and tax-deductible regular IRA. 'course, if you have a retirement plan at work you can't contribute to a tax-deductible IRA. And putting after-tax money into a regular IRA is another stinky kettle of fish.


But in the long-run compounding makes this figure significant. Indeed, the reason this is significant is exactly the same reason lower expense ratios are significant!

Yes. If you do much trading in a taxable account or get a lot of dividends, the continual tax bite has the same bad effect as a large expense ratio. And the compounding works against you bigly. That's why you should do your trading in a tax-advantaged account and do buy&hold of no/low dividend stocks in your taxable account. Or buy&hold Berkshire Hathaway. ;-)

===============
Finally if you disdain small advantages like this, why on earth do you have any tax-advantaged accounts at all?

Don't make it personal. This isn't about me.

If you disdain small tweaks so much, why would you care where the money is located?
Aside from the "it's not about me" aspect, what I mainly said is that it hardly matters where the money is located.

This discussion started out with the topic of what the best locations of stocks vs. bonds is. Somehow it drifted to a discussion of taxable vs. tax-advantaged accounts per-se. Maybe in the morning I'll try to work out some math of that original topic.
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When we visited a couple of FA's to have them look over our investment portfolio to verify that we could safely retire, one thing that stuck in my head was when one opened up the meeting with "You have almost all your retirement money in 401K and IRA, right?" We said, "No, we have a significant amount in regular (taxable) accounts." He then said, "Good. That's the right thing to do, but most people don't."

You have a savings rate high enough, that's going to happen. We have more in taxable accounts than in pre-tax.
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Also, there is no RMD on your taxable account. Baby-boomers are starting to feel the effect of RMD's on their large-ish 401k/IRA accounts, being forced to take much more money out than they would like to, and having to pay tax on these unwanted withdrawals. A $1M IRA/401K is about $40,000 RMD. That pretty much fills up the lower tax brackets, so everything gets push toward the higher brackets, increased SS tax, etc.

I will be one of those people with a large-ish 401k account. For me, even if the RMD fills up some lower tax brackets, the marginal rate should still be lower on the RMD than the money that went into the account assuming there isn't another change in tax rates.

PSU
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Rayvt wrote: A $1M IRA/401K is about $40,000 RMD. That pretty much fills up the lower tax brackets, so everything gets push toward the higher brackets, increased SS tax, etc.

I'm all for taxable investing as a portion of a household risk portfolio, but it is down the list a ways before other priorities have been taken advantage of to build wealth via the power of compounding and time.

Let's not forget about the employer match we all receive(d) over the years in our 401k/403b accounts.

https://www.bogleheads.org/wiki/Prioritizing_investments

Funding priority

Here is a general account funding priority that often works well for many people (not all points will apply to everyone):

•Contribute to the work-based plan (401(k), 403b,) enough to get the full employer match (the match is like free money, your best possible investment),

•Pay off high interest debt (a guaranteed high return, the next best thing to free money),

•Contribute to a Health Savings Account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA),[1][note 1]

•Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique[note 2]), depending on eligibility and personal circumstances,

•Contribute the remainder of the maximum employee contribution to the work-based plan,

•Contribute to a taxable investing account,

•Contribute to non-deductible IRAs (may be better than taxable in certain circumstances) or annuities.
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For ninth year in a row index funds outperformed managed funds. Period.

https://www.cnbc.com/2019/03/15/active-fund-managers-trail-t...

How can you even keep track of this mess? The fees?

Use the Boglehead 3 fund portfolio in Vanguard for low fees.
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StockGoddess posts,

For ninth year in a row index funds outperformed managed funds. Period.

https://www.cnbc.com/2019/03/15/active-fund-managers-trail-t...

</snip>


Yep. If you gave me the opportunity to go to a competitive college, never crack a book, and then get a higher salary than 90% of my peers, I'd take that bet in a minute.

intercst
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"And playing more golf and choosing to ride in a cart instead of walk and carry our clubs.

Retirement is great ain't it?

ImAGolfer (retired '03) "

To each their own,I like to walk when I golf. Helps me focus more on keeping the ball in the fairway. Seems like when I golf and ride, end up playing military golf ( left-right left-right, lol ). Some courses aren't made for walking, the tee boxes are too far apart, and carts are required.
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