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  • Asset location advice...

    Hi all:

    Just want some opinions from the beehive borg brain:

    Background:

    So, I just fired my financial advisor after 10 years.  I have an overall financial (allocation) plan that overall consists of 55% US stocks (small cap tilted), 20% international stocks (which includes 5% emerging markets), 20% fixed/bonds, and 5% REIT (all in index funds of course).

    I am mid-career (in mid 40s), with 2 young kids.  We have a taxable brokerage account (about 1.5 million), 2 Roth IRAs (my wife and I, total about $250k), and a tax deferred account (money pension plan, about $500k).    (...plus HSA, custodial and 529s for kids, but I am mainly focused on the 4 aforementioned accounts)

    I have liquidated all assets in Roths and deferred accounts, and many of them in the brokerage account (if feasible based on taxes and expense ratios...), and am in the process of transferring the cash and funds to Vanguard where I will then redistribute the funds to fit my allocation plan.

    Question:

    So, I am planning to put the REIT into the Roths 100%.  I plan to use muni bonds (intermed term index) in the taxable brokerage account.

    Beyond that, I have read some things about asset location that seem conflicting...what would your strategy be beyond what I have done so far?

    What should I do with the remaining Roth after REIT is in? The rest stocks?  Maybe small cap stocks?

    What should I do with bonds? Put the overall 20% portfolio allocation in brokerage account as munis?  Or should I put some in tax deferred as well?

    Any other tips (no pun intended)?

     

    Thanks so much!!

    Dean

  • #2
    2.25MM


    I plan to use muni bonds (intermed term index) in the taxable brokerage account.
    Click to expand...


    20% FI 450K. so can all fit in your tax deferred accounts. no need for munis yet.


    What should I do with the remaining Roth after REIT is in? The rest stocks?  Maybe small cap stocks?
    Click to expand...


    the rest of rIRA should be all stocks. whatever you need to fill your gaps.


    Any other tips (no pun intended)?
    Click to expand...


    no TIPS needed as you are 80% stock.

    Comment


    • #3




      What should I do with the remaining Roth after REIT is in? The rest stocks?  Maybe small cap stocks?




      Your plan looks good. Yes to stocks or small cap in the Roths.





      What should I do with bonds? Put the overall 20% portfolio allocation in brokerage account as munis?  Or should I put some in tax deferred as well?




      I'd put as much of your bond allocation in tax deferred space as possible. With 2.25MM in funds, 20% would fit into the MPP.

      Comment


      • #4
        Bonds in tax deferred

        REITs in Roth or Tax deferred

        Stocks wherever.

        Comment


        • #5




          I have an overall financial (allocation) plan that overall consists of 55% US stocks (small cap tilted), 20% international stocks (which includes 5% emerging markets), 20% fixed/bonds, and 5% REIT (all in index funds of course).
          Click to expand...


          List your mutual funds/ETfs by Tax Efficiency and go from least tax efficient to most efficient as Roth --> Tax Deferred --> Taxable. Once you've placed your tax-inefficient holdings, the rest can go wherever there is room.

          Tax Inefficient:

          REITs

          Bond funds

          Moderately Efficient:

          Small caps

          Emerging Market

          Tax Efficient:

          Total Intl

          Total Stock Market

          Muni bonds

          -Small caps may not be very tax efficient but the frequent gyrations do lend themselves to TLH

          -One reason to place TISM in taxable is the Foreign Tax Credit

          Comment


          • #6
            I really appreciate the feedback so far!!

            There seems to be a general consensus, regarding bond funds, to locate them in tax deferred.. This is interesting to me.  I have seen other sources to suggest doing this strategy as well.

            However, I believe that WCI had a blog that suggested the best approach was to place bonds into taxable brokerage account (as municipals), 100%.  I had a feeling that many would suggest this - but it seems that, on the contrary, many think that placing them into tax protected accounts is more advantageous.

            At the end of the day, it is probably splitting hairs anyway - I do appreciate the input nonetheless!

            Dean

            Comment


            • #7
              I disagree with the whole "location matters" strategy, and feel it is backwards thinking, esp. in the setting of low interest rates. Each invested account  (qualified retirement, HSA, 529, taxable for retirement, etc.) should have an appropriate AA depending upon duration and tax efficiency.  The location matters strategy worked in the 1980s when interest rates were 12%---> 6%.   I'll tell you what happens when low rate bonds fill a qualified retirement account:  nothing.  In my 40s I turned over my deferred retirement account to an investment advisor, who put low rate bonds into it. 8 years later its value was flat.  At your age you don't need any retirement bonds, but if you must, use munis in a taxable retirement account. Fill your qualified  retirement accounts with stocks, both US, foreign,  and emerging market. (Low rate) bonds belong in taxable.

              Comment


              • #8




                I disagree with the whole “location matters” strategy, and feel it is backwards thinking, esp. in the setting of low interest rates. Each invested account  (qualified retirement, HSA, 529, taxable for retirement, etc.) should have an appropriate AA depending upon duration and tax efficiency.  The location matters strategy worked in the 1980s when interest rates were 12%—> 6%.   I’ll tell you what happens when low rate bonds fill a qualified retirement account:  nothing.  In my 40s I turned over my deferred retirement account to an investment advisor, who put low rate bonds into it. 8 years later its value was flat.  At your age you don’t need any retirement bonds, but if you must, use munis in a taxable retirement account. Fill your qualified  retirement accounts with stocks, both US, foreign,  and emerging market. (Low rate) bonds belong in taxable.
                Click to expand...


                I basically agree with JZ.  I have significant bond holdings in tax deferred (BND) and Intermediate Munis in taxable.  As your accumulation increases over time you start worrying about RMDs if your tax-deferred gets too large.  I was recently talking with a CFP at Vanguard who suggested (it is a free service for Flagship accounts) that I sell some stock ETFs and buy more bonds in tax-deferred while decreasing Munis in taxable.  I said no.  What JZ says is very true.  There is an argument to make about putting bonds in taxable-deferred to avoid paying taxes on the interest but this comes at the expense of growth in the account (but a smaller RMD one day).  I guess I am splitting the difference.

                Comment


                • #9




                  I really appreciate the feedback so far!!

                  There seems to be a general consensus, regarding bond funds, to locate them in tax deferred.. This is interesting to me.  I have seen other sources to suggest doing this strategy as well.

                  However, I believe that WCI had a blog that suggested the best approach was to place bonds into taxable brokerage account (as municipals), 100%.  I had a feeling that many would suggest this – but it seems that, on the contrary, many think that placing them into tax protected accounts is more advantageous.

                  At the end of the day, it is probably splitting hairs anyway – I do appreciate the input nonetheless!

                  Dean
                  Click to expand...


                  You are correct. If you want to put bonds in taxable (which is fine, if your tax-advantaged space is full or if that's what you choose to do)- make them municipal bond funds to take advantage of the tax-break (for eg., VG Intermediate Term Tax-exempt Bond Fund). If you are putting your bonds in tax advantaged space, stay away from tax-exempt bonds.

                  Comment


                  • #10
                    One thing to consider is the purpose of each account. You won't touch your IRA's for another decade, so they can bear more risk than the readily accessible taxable funds. This allows you to benefit from compounding growth and time while still having comfort in the intermediate years.

                    Comment


                    • #11
                      So, the conventional wisdom of tax location regarding bonds seems to be that they should be favored in a tax deferred account (and of course, if you have bonds in taxable, it should probably be municipals).

                      However, the WCI wrote a blog that argues that bonds should be in taxable account preferentially.

                      https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

                      When I originally posted this, I figured that there would be more people that would support this idea of bonds in taxable because of this blog...

                      Dean

                       

                      Comment


                      • #12


                        I figured that there would be more people that would support this idea of bonds in taxable because of this blog…
                        Click to expand...


                        nope.

                        your situation is already not applicable as that focuses on taxable vs rIRA. not trad 401k/etc.

                        Comment


                        • #13


                          your situation is already not applicable as that focuses on taxable vs rIRA. not trad 401k/etc.
                          Click to expand...


                          I see.  You are absolutely right.  I probably should have read the blog more carefully...

                          Thanks.

                          Comment


                          • #14
                            After 10 years of overpaying an advisor to almost certainly underperform, fixating on your bond allocation, which is basically ballast at best, is interesting.

                            Do you understand the 'why' as to where to put bonds? It's not a philosophical question, it's a math problem. The majority of bond returns come in the form of coupon interest payments. Those may or may not be taxable to you.

                            If you must have bonds, ideally, you'll put them where you'll achieve the highest after tax return for them. Assuming the same risk level of bonds for the sake of argument (that's a big assumption, most people have no idea the risks and duration of the bonds they hold, which may be wildly different), munis often have a lower yield rate, but they aren't subject to federal tax, so if you're in a high federal tax bracket, your effective return is higher because a non-muni bond return in taxable would be reduced by your marginal tax rate on that income. That's why putting tax advantaged munis in a tax deferred account is dumb, the tax benefit is priced in.

                            And liquidating everything instead of transferring in kind was likely a costly move.

                            Comment


                            • #15


                              And liquidating everything instead of transferring in kind was likely a costly move.
                              Click to expand...


                              So, I liquidated all assets in my tax deferred account (to reallocate into index funds), NOT taxable account.  Explain how this is a costly move?

                              Thanks.

                              Comment

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