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AA and withdrawal strategy in taxable accounts
Old 03-05-2016, 08:58 AM   #1
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AA and withdrawal strategy in taxable accounts

Hey y'all!

So I'm one year out from early retirement. I'm 52, wife 49. College expenses for our 2 daughters are set and not included in the below assets. Asset allocation is an aggressive 85/15 but looking for 70/30 (with 1 year expenses in savings) this time next year. Here's my current setup:

800K Vanguard taxable. 630K equity slice & dice, 170K bonds incl 60K in tax exempt. Tax rate now 15% so no longer need t/e bonds in this account.

550K Fidelity taxable. 350K indiv stocks, 40K each VTI and VHT, 120K cash ready to invest.

750K 401k. 90% equity (S&P and American Funds), 10% bond. Will rollover to IRA next year and will convert 50K or so each year to Roth.

110K my Roth. Mainly bonds with some VYM (Vanguard High Div ETF).

180K her Roth. 1/3 NKE, 2/3 BND and VNQ (REIT).

So more than 50% taxable, plenty to last til SS and RMDs. My question:

To get to 70/30, that equates to almost 700K of bonds. I'm at 350K now. Easiest way to do this is to add 350K when I rollover my 401K. This will obviously keep my taxes lower than to have bonds in taxable. But since I hope to convert most of this rollover to Roth before age 70 (and won't need to touch these assets for about 17 years), I'm tempted to keep this more equity heavy than this proposed 50/50. Thoughts?

Or I can keep my rollover equity heavy, maybe 75/25, and use my Vanguard account to do some tax gain harvesting by selling some equity and simplify things by changing from slice and dice to a 3-4 fund portfolio. I like the idea of fewer funds. But I'd obviously increase my tax bill by adding 250K or so of bonds in taxable. The monthly bond dividends would aid my cash flow and would mean fewer equity sales for my expenses. I'd love some advice on selling bonds vs stocks for my expenses as well.

I am looking to sell some of my individual stocks in ER to live on, but I will probably contribute some to a donor advised fund to minimize my taxable gains. I am satisfied with our current Roths but am open to some changes as well.

Thanks in advance.
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Old 03-05-2016, 09:13 AM   #2
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Welcome. Does your 401k offer a stable value fund? If so and if it pays a decent interest rate then it might be worth keeping it.

Not enough info to go on be it seems that you might be able to do bigger Roth conversions.

Conventional tax efficiency would be to put your bonds all in tax deferred and put tax efficient domestic equity funds and international in taxable and put the remainder in Roths (which would also be equities in your situation).

Also see https://www.bogleheads.org/wiki/Tax-...fund_placement

The other advantage of keeping bonds in taxable is that it will likely allow for more Roth conversions and lower taxes on those Roth conversions.
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Old 03-05-2016, 09:37 AM   #3
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INVESCO Stable Value Fund, ER of .98 and a 1.18 return over 5 years. Think I'll pass.


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Old 03-05-2016, 09:38 AM   #4
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Originally Posted by duckcalldan View Post
Hey y'all!

So I'm one year out from early retirement. I'm 52, wife 49. College expenses for our 2 daughters are set and not included in the below assets. Asset allocation is an aggressive 85/15 but looking for 70/30 (with 1 year expenses in savings) this time next year. Here's my current setup:

800K Vanguard taxable. 630K equity slice & dice, 170K bonds incl 60K in tax exempt. Tax rate now 15% so no longer need t/e bonds in this account.

550K Fidelity taxable. 350K indiv stocks, 40K each VTI and VHT, 120K cash ready to invest.

750K 401k. 90% equity (S&P and American Funds), 10% bond. Will rollover to IRA next year and will convert 50K or so each year to Roth.

110K my Roth. Mainly bonds with some VYM (Vanguard High Div ETF).

180K her Roth. 1/3 NKE, 2/3 BND and VNQ (REIT).

So more than 50% taxable, plenty to last til SS and RMDs. My question:

To get to 70/30, that equates to almost 700K of bonds. I'm at 350K now. Easiest way to do this is to add 350K when I rollover my 401K. This will obviously keep my taxes lower than to have bonds in taxable. But since I hope to convert most of this rollover to Roth before age 70 (and won't need to touch these assets for about 17 years), I'm tempted to keep this more equity heavy than this proposed 50/50. Thoughts?

Or I can keep my rollover equity heavy, maybe 75/25, and use my Vanguard account to do some tax gain harvesting by selling some equity and simplify things by changing from slice and dice to a 3-4 fund portfolio. I like the idea of fewer funds. But I'd obviously increase my tax bill by adding 250K or so of bonds in taxable. The monthly bond dividends would aid my cash flow and would mean fewer equity sales for my expenses. I'd love some advice on selling bonds vs stocks for my expenses as well.

I am looking to sell some of my individual stocks in ER to live on, but I will probably contribute some to a donor advised fund to minimize my taxable gains. I am satisfied with our current Roths but am open to some changes as well.

Thanks in advance.
So... your going to be in the 15% bracket.... but shift assets to donor advised fund. To do this you have to exceed $12.6k before it makes any sense to itemize.

If you put $250k in a taxable bond... maybe $5k of added income unless you get into HY?

If you really stay in the 15% bracket, your qualified dividends and LTCG are taxed a 0%. So... what is the need to offset the capital gain ... unless you need to shift stuff to keep you in the 15% bracket.
Most of my taxable investments are in Q-divy and LTCG producing investments. I harvest losses to help with minimizing the CG from other sales of equities. Most of my bonds are in IRA accounts.

Tax planning changes when you retire. I would expect that you'll find your taxes will be lower than you thought after placing investments in the most tax efficient places.

Also, look at where you are going to get health insurance and how your income will affect rates.
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Old 03-05-2016, 10:48 AM   #5
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One thing to watch out for is unexpected high CG distributions from mutual funds in taxable accounts. This can happen with a change in managers or other occasions where positions held for a long time are sold, as well as when there are a lot of redemptions. This has happened to in the past 2 years and really messed up our tax planning, because the distributions were only projected late in the year.
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Old 03-05-2016, 12:18 PM   #6
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One thing to watch out for is unexpected high CG distributions from mutual funds in taxable accounts. This can happen with a change in managers or other occasions where positions held for a long time are sold, as well as when there are a lot of redemptions. This has happened to in the past 2 years and really messed up our tax planning, because the distributions were only projected late in the year.
Personally I do not hold any MF in taxable accounts just for that reason... and the "unexpected distribution" may not only be LTCG. STCG would come out as Non-qualified dividends -- can't be offset with capital losses from other assets.
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Old 03-05-2016, 01:16 PM   #7
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Old 03-06-2016, 12:24 AM   #8
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Originally Posted by MBAustin View Post
One thing to watch out for is unexpected high CG distributions from mutual funds in taxable accounts. This can happen with a change in managers or other occasions where positions held for a long time are sold, as well as when there are a lot of redemptions. This has happened to in the past 2 years and really messed up our tax planning, because the distributions were only projected late in the year.
Yes, this is a real PIA.... it blew me away this year and was a complete surprise.
It will make our income possibly higher than it's been in the past 10 years (and you don't actually get that cash in hand), plus the IRS is going to say time for a penalty as withholding was too small.
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Old 03-06-2016, 07:21 AM   #9
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Be aware that non-qualified dividend income is not only not taxed at 0%, but will also increase your taxable income. This can be deadly for folks expecting to stay in the 15% marginal income tax bracket who wish to keep getting the 0% tax rate on qualified dividend income and realized long-term capital gains.

That also means avoiding distributions from mutual funds especially non-qualified dividend income and both short-term and long-term capital gains. One should be in control and not the fund manager.

I prefer to have no bond funds in taxable for just that reason. One can easily see (and it has been discussed many times) that if one adds some income that bumps QDI and LTCG up out of the 15% marginal income tax bracket, that because of stacking rules it makes it look like that additional income is taxed at 30%. Ouch!

Roth conversion space at 15% is reduced by having taxable bond income, interest income, and other such non-special income.

Sometimes it is hard to see unintended consequences. You pull a string here and something happens way over there.
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Old 03-06-2016, 07:39 AM   #10
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There are a couple solutions to the surprise capital gain distribution issue.

One would be to focus taxable accounts on tax-efficient funds or individual stocks (that pay little or no dividends, like Berkshire Hathaway) to try to minimize and manage the income. However, it is hard to reposition a large portfolio if one has substantial unrealized gains.

The other approach, which I practice, it to simply recharacterize any excess Roth conversion when I do my tax return... but it obviously reduces the amount of that year's conversion.
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Old 03-06-2016, 09:08 AM   #11
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There are a couple solutions to the surprise capital gain distribution issue.

One would be to focus taxable accounts on tax-efficient funds or individual stocks (that pay little or no dividends, like Berkshire Hathaway) to try to minimize and manage the income. However, it is hard to reposition a large portfolio if one has substantial unrealized gains.

The other approach, which I practice, it to simply recharacterize any excess Roth conversion when I do my tax return... but it obviously reduces the amount of that year's conversion.
Nearly all of my dividends LY were qualified, either indiv stocks or Vanguard funds/ETFs. And yes, Berkshire is one of my long term holdings. So that helps.

As far as my unrealized gains, my indiv stocks will be what we will withdraw from first when we ER. I'll be looking to sell just enough to fill my 0% LTGC bucket which, combined with qual divs, will give us enough to live on. I have had no mutual fund or ETF LTCG for the past 3 years and a very tiny short term CG in a taxable bond fund (like $50 tiny).
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Old 03-06-2016, 09:48 AM   #12
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Perhaps I'm misunderstanding but I think a preferable strategy would be to sell from taxable funds what you need to live on less dividend income which will generate some capital gains but probably not enough to fill you to the top of the 15% tax bracket, and then do Roth conversions for the remainder.
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Old 03-06-2016, 10:09 AM   #13
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There are a couple solutions to the surprise capital gain distribution issue.

One would be to focus taxable accounts on tax-efficient funds or individual stocks (that pay little or no dividends, like Berkshire Hathaway) to try to minimize and manage the income. However, it is hard to reposition a large portfolio if one has substantial unrealized gains.

The other approach, which I practice, it to simply recharacterize any excess Roth conversion when I do my tax return... but it obviously reduces the amount of that year's conversion.
I would add to that some tax loss harvesting in down years, which I know just pushes the gains down the road but can be substantial when some funds are not doing well. International may be a good candidate for that this year, assuming you have a large enough position in taxable. I had enough paper losses a couple of weeks ago to offset about 4 years of cap gain distros but I didn't have enough time in the positions for them to be long-term losses, so I'm waiting another month or so after I get a year in them to see if it will be worth it.
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Old 03-06-2016, 12:11 PM   #14
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Perhaps I'm misunderstanding but I think a preferable strategy would be to sell from taxable funds what you need to live on less dividend income which will generate some capital gains but probably not enough to fill you to the top of the 15% tax bracket, and then do Roth conversions for the remainder.
All things being equal tax-basis wise, why is selling taxable funds more advantageous than individual stocks?
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Old 03-06-2016, 01:14 PM   #15
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They are not any different... taxable funds would include individual stocks held in a brokerage account (or in certificate form) and mutual funds (not held in a tax-deferred or tax-free account like an IRA or Roth IRA or HSA).

What was confusing to me was that in Post #11 you said you planned to sell enough to fill your 0% LTCG bucket and I'm not sure what you mean by that. If you sell enough to fill your 0% LTCG bucket then there would be no room left for Roth conversions since in both cases we are talking about the top of the 15% tax bracket.
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Old 03-06-2016, 02:26 PM   #16
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But a Roth conversion is taxed as ordinary income. So if I took a $40K Roth conversion in 2017, combined with $20K in div income, then subtracted personal exemptions for me & DW + deductions, we'd have around $40K of LTCG room before we'd hit the 15% ceiling. If I have my tax ducks in a row! I ran my numbers through Taxcaster and it seems to work.

I didn't mean to imply that I would have only LCTG as my income to max the 15%.
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Old 03-06-2016, 04:42 PM   #17
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But that is the whole point... to do as much Roth conversions as possible during this period between ER and once SS and any pensions start to take advantage of lower ordinary effective tax rates. You'll probably pay about 10% of the amount converted compared to 25-40% avoided when you deferred that income for a "gain" of 15-30%.

Also see post #48: Roth Conversions. for an example.

Presumably, the opportunity to take 0% capital gains will continue and/or if those assets are inherited they would get a stepped up basis.... but the opportunity to do Roth conversions before SS and any pensions and RMDs start is limited to from when you retire until you start SS or pensions or RMDs kick up into a higher tax bracket. YMMV.
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Old 03-08-2016, 01:32 PM   #18
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Welcome. Does your 401k offer a stable value fund? If so and if it pays a decent interest rate then it might be worth keeping it.

Not enough info to go on be it seems that you might be able to do bigger Roth conversions.

Conventional tax efficiency would be to put your bonds all in tax deferred and put tax efficient domestic equity funds and international in taxable and put the remainder in Roths (which would also be equities in your situation).

Also see https://www.bogleheads.org/wiki/Tax-...fund_placement

The other advantage of keeping bonds in taxable is that it will likely allow for more Roth conversions and lower taxes on those Roth conversions.
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Conventional tax efficiency would be to put your bonds all in tax deferred and put tax efficient domestic equity funds and international in taxable and put the remainder in Roths (which would also be equities in your situation).
I have only read your first post and first response... conventional wisdom I think is put highest growing assets in Roth, and the most tax efficient assets in the tax preferred accounts.

I would add a few other points-

If you are looking to spend the taxable accounts first, consider using dividend payers in taxable accounts as an income source (preferred tax treatment). As you do Roth conversions, this might open up more ordinary income to do more Roth conversions (higher dollar amounts) sooner.
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