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Allocating stocks in tax-deferred accounts.
Old 02-20-2019, 09:03 AM   #1
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Allocating stocks in tax-deferred accounts.

I was presented with a theory that for a mid-age family, say mid-50th, it would make sense to allocate bonds in taxable accounts and stocks into tax-deferred accounts.

The idea is that stocks will grow faster and that will be beneficial in long run, RMD, taxes etc.

It feels against common logic and wrong to me, but I don't know all cons about this idea.

One can be that bonds paying dividends in taxable accounts, will be taxed and that's it's not a good idea?

Anyone care to add pros/cons ?
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Allocating stocks in tax-deferred accounts.
Old 02-20-2019, 09:09 AM   #2
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Allocating stocks in tax-deferred accounts.

It would make more sense to me in the context of tax-favored (retirement) accounts: bonds in a traditional (tax-deferred) account, stocks in tax-free (Roth).
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Old 02-20-2019, 09:12 AM   #3
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Let's try to over simplify.
Two positions - Total Stocks and Total Bonds
Two accounts - IRA and taxable
AA 50/50

Does Total Bonds in taxable account and Total Stocks in IRA make sense ?
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Old 02-20-2019, 09:12 AM   #4
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Quote:
Originally Posted by wanaberetiree View Post
I was presented with a theory that for a mid-age family, say mid-50th, it would make sense to allocate bonds in taxable accounts and stocks into tax-deferred accounts.

The idea is that stocks will grow faster and that will be beneficial in long run, RMD, taxes etc.

It feels against common logic and wrong to me, but I don't know all cons about this idea.

One can be that bonds paying dividends in taxable accounts, will be taxed and that's it's not a good idea?

Anyone care to add pros/cons ?
The devil is in the details. What is your tax rate? What kind of bonds? There isn't one generic "bond". So returns will vary and taxability will vary. Stocks held long term will be taxed at 0%, 15% or 20%. Income from deferred accounts will be taxed at your income rate which may be different than your cap gains rate.
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Old 02-20-2019, 09:18 AM   #5
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Originally Posted by steelyman View Post
It would make more sense to me in the context of tax-favored (e.g., retirement) accounts: bonds in a traditional (tax-deferred) account, stocks in tax-free (Roth).
Correct... I think there have been threads on the "how to's" of this subject both here and on Bogleheads. Google "tax efficient investing" and you will see many articles on the subject. Beyond the basics noted by Steelyman, qualified dividends versus unqualified dividends is also a part of tax efficient investments. VG and others offer "tax advantaged" funds which have a lower rate of turnover vs. traditional funds.

For me, my AA is more important than the tax consideration. However, in selecting an investment, I do consider tax efficiency but hardly as my #1 criteria.
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Old 02-20-2019, 09:30 AM   #6
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Quote:
Originally Posted by wanaberetiree View Post
Let's try to over simplify.
Two positions - Total Stocks and Total Bonds
Two accounts - IRA and taxable
AA 50/50

Does Total Bonds in taxable account and Total Stocks in IRA make sense ?
Certainly not always for example a couple with $50K work income.

Have stocks in taxable account, earn 10K dividends -> 0% tax.
Sell $40K per year of stocks in taxable account ---------> 0% tax.

How much lower than 0% can you get
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Old 02-20-2019, 09:41 AM   #7
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This is the best guide I’ve read on asset location. You’ll see that it’s not black & white for every situation; one must account for his/her particular circumstances. But, the general guidance will work for almost everyone.

https://www.bogleheads.org/wiki/Tax-...erent_accounts

ETA: When you read the guidance at this link, one of the (very important IMO) things you’ll see is the value of having enough assets located in tax-advantaged accounts to rebalance without immediate tax consequences. As your assets grow & you near FIRE, you’ll realize just how important it is to have this flexibility.
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Old 02-20-2019, 10:08 AM   #8
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The main reason for stocks in taxable for most people is the favorable tax treatment of capital gains and qualified dividends. You lose that tax treatment in an tIRA. When you withdraw, it is regular income which may be at a higher rate.

Bond income generally is taxed at the regular rate, so there's no loss to put them in a tIRA.

I'm sure there are cases for doing it differently, but without very specific details I'd suggest long-term stocks in taxable, bonds in tIRA. Don't alter your AA to fit this. Just overflow one way or another as needed.
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Old 02-21-2019, 07:04 AM   #9
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Quote:
Originally Posted by wanaberetiree View Post
Let's try to over simplify.
Two positions - Total Stocks and Total Bonds
Two accounts - IRA and taxable
AA 50/50

Does Total Bonds in taxable account and Total Stocks in IRA make sense ?
The traditional advice is to do the opposite. More year to year taxable income on the bond side so keep it in the IRA. Dividends on the stocks are taxed at a lower rate. Of course, this all depends on your tax bracket.
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Old 02-21-2019, 07:35 AM   #10
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The traditional advice is to do the opposite. More year to year taxable income on the bond side so keep it in the IRA. Dividends on the stocks are taxed at a lower rate. Of course, this all depends on your tax bracket.
Actually I think stocks are taxed at a lower rate in a taxable account ALL the time.

Example: you earn less than $100K total income as a couple:
Dividends from stocks are: 0%
Capital gains from stocks are: 0%
Regular income is 12%

Earn over $100K total income as couple:
Dividends from stocks are: 15%
Capital gains from stocks are 15%
Regular income is: 22% or higher..

Of course it's early and I'm on my 1st coffee
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Old 02-21-2019, 07:53 AM   #11
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Good clarification Sunset. I’m permanently in a high enough bracket that I never learn much about stuff like that and Roth conversions
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