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Asset location advice…

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  • Avatar deanyar 
    Participant
    Status: Physician
    Posts: 26
    Joined: 03/06/2019

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

    Click to expand…

    True – I cannot take back those 10 years…however, I have worked diligently over the last several months to learn as much as I can.  I have read a handful of books, listened to over 100 podcasts, and read many blogs to help prepare myself.  This is not an overnight decision for me.  I also realize that a discussion on asset location is more of a fine tuning one, but at this point I am looking forward, not backward, and I do not see anything wrong with it personally…

    That’s why putting tax advantaged munis in a tax deferred account is dumb, the tax benefit is priced in.

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    Did I suggest putting municipal bonds in a tax deferred account?  If I did, I did so in error.  I understand the tax implications and why it makes sense to choose munis for taxable account.

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

    Click to expand…

    Just to be clear, I liquidated all assets in the tax deferred (as well as Roth) accounts, not my taxable account.  I only chose funds in my taxable brokerage account to liquidate based largely on cap gains and expense ratios.  But is there a reason why liquidating assets in a tax deferred account is “dumb”?  This is a not rhetorical…I really would like to know.

    #234688 Reply
    Andrew Musbach Andrew Musbach 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 39
    Joined: 10/19/2017

    That looks like a well allocated portfolio from a high level.

    A good idea to put your REIT in a qualified account (Roth or Traditional). You want the assets with the highest expected growth in your Roth IRA. Will this be REITs, Emerging Markets, Small-Cap or something else? All are good options, but you may want to hedge your bets with a few assets classes (small cap, em, reits) in the Roth.

    In general, I prefer bonds in a qualified account because it allows you to not pay taxes on the income the bonds/funds generate throughout the year. I’d also want to have my taxable account grow more over time than my IRA because you can take advantage of preferential capital gain tax rates, have a step-up in cost basis if something were to happen to you and the ability to tax loss harvest. Another reason to put bonds in qualified accounts and stocks in your taxable account. In practice though, having some bonds in your taxable account once you retire allows you to have more flexibility with distributing from your portfolio. If the market is down, you can efficiently sell from your bonds in your taxable account to raise cash for monthly distributions and keep your tax bill lower than had you distributed from your IRA.

    Without knowing your situation exactly, and just based on your age/young kids, you are probably are 10+ years away from retiring. Because of that, I’d prefer all of the bonds in a qualified account (unless you had some shorter term goals within the next few years that you’re saving for). As you get closer to retirement, you can start shifting some of your future savings to buy bonds in the taxable account.

    With a lot of things, you’ll hear varying opinions, but you can get pretty far in the weeds with several logical reasons for why you should do x instead of y. And sometimes just splitting the difference (10% in taxable, 10% in qualified) can make you feel better/stick to the plan.

    Andrew Musbach, CFP® | [email protected]
    MD Wealth Management, LLC | http://www.mdwmllc.com

    #234769 Reply
    Avatar borg 
    Participant
    Status: Physician
    Posts: 30
    Joined: 03/21/2019

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

    Click to expand…

    True – I cannot take back those 10 years…however, I have worked diligently over the last several months to learn as much as I can.  I have read a handful of books, listened to over 100 podcasts, and read many blogs to help prepare myself.  This is not an overnight decision for me.  I also realize that a discussion on asset location is more of a fine tuning one, but at this point I am looking forward, not backward, and I do not see anything wrong with it personally…

    That’s why putting tax advantaged munis in a tax deferred account is dumb, the tax benefit is priced in.

    Click to expand…

    Did I suggest putting municipal bonds in a tax deferred account?  If I did, I did so in error.  I understand the tax implications and why it makes sense to choose munis for taxable account.

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

    Click to expand…

    Just to be clear, I liquidated all assets in the tax deferred (as well as Roth) accounts, not my taxable account.  I only chose funds in my taxable brokerage account to liquidate based largely on cap gains and expense ratios.  But is there a reason why liquidating assets in a tax deferred account is “dumb”?  This is a not rhetorical…I really would like to know.

    Click to expand…

    I think he just misread—you’re right, there’s no issues (tax implications) with changing assets in you’re taxed deferred accounts, that’s why they’re great for rebalancing.  FWIW, I have a very similar allocation as you, my bonds are all in tax deferred.  As others mentioned, you may want bonds later in taxable if you’re going to need to use money from that account in the near future.

    #235428 Reply

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