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AA & withdrawals between taxable and non taxable accounts.
Old 05-14-2007, 09:28 PM   #1
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AA & withdrawals between taxable and non taxable accounts.

DW and I will be FIREing in about 7 weeks. We have approx. $1.4M in investments. Approx. 800k in IRA's and a 401K. And & 600k in a taxable brokerage account. We need approx. 50k/year. If our AA is 40% US stocks, 40% International stocks and 20% cash and bonds, do we need to have identical portfolios in taxable and tax advantage accounts since we will be withdrawing money from both? Also, we own about 150 acres of land (95% timber) worth approx. 300k, do we count that as part of our portfolio even tough it doesn't produce income and we can't sell a portion each year like stocks or bonds? The reason I am asking, is that the 300k would increase our safe withdrawal rate( and ease our minds a little). Sorry if these subjects have already been covered. I am only able to read this board occasionally. DW and I both gave notice last week and we are either deliriously happy that we won't be working anymore and fearful that we are making a huge mistake. Somehow, after years of saving and feeling comfortable about our financial situation, I feel the ER is like living paycheck to paycheck.

Thanks, ronc
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-14-2007, 09:30 PM   #2
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Re: AA & withdrawals between taxable and non taxable accounts.

What is the average annual distributions from the taxable accounts? Presumably you are taking distributions in cash and not reinvesting them. How will that affect what you wrote?
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-14-2007, 09:52 PM   #3
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Re: AA & withdrawals between taxable and non taxable accounts.

LOL!

Thanks for the response. The current distributions are approx. 8k/year. But that brings up another issue we have. Currently our portfolio ( both taxable and non taxable) is approx. 80% individual stocks. I want to eventually be in mutual funds or ETF's. I want a portfolio that's not too complicated and my DW can manage if something happens to me. She has no interest in investing. Although she did tell me to sell around the peak of the dotcom bubble, oops. FYI, my DW is much more intelligent than me and I'm not suggesting that lack of intelligence is the reason I am worried about her managing our portfolio, it's the lack of interest.

ronc.
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-14-2007, 10:08 PM   #4
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Re: AA & withdrawals between taxable and non taxable accounts.

The short answer to your question is in general, you want your higher tax assets in your IRAs and your lower taxed assets in your taxable accounts.

This means that your IRA should have bonds, CDs, REITs, and actively managed mutual funds with a high turn over. Index funds, and individual growth stocks in your taxable account. Dividend stocks are fine in either.

You certainly should count your land as part of your investments, and I would lighten up on an REITs to compensate for it. Also if you sell it would be an excellent source of money to use to buy an index fund. Now while I am a big fan of individual stocks 80% of your assets seems excessive, am I correct that you have virtually no mutual funds or ETFs? . I'd start selling the individual security in my IRA first, along with tax harvesting any losers you may have in your taxable accounts.
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-14-2007, 10:42 PM   #5
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Re: AA & withdrawals between taxable and non taxable accounts.

clifp

We have some Mutual funds and ETF's. In our taxable accounts we have VGHCX (41k) and VISVX (26k). In our IRA's, EEM (21k), VIEIX (162k), DODBX (53k). I agree with what your saying about fixed income in IRA's, but when we have to liquidate a certain amount each year, it will be difficult to maintain a consistent AA. The 150 acres of land is adjacent to our 60 acre retirement property and we would only sell it if we had to. We do not own any REITs at this time.
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-15-2007, 03:58 AM   #6
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Originally Posted by ron244
... Also, we own about 150 acres of land (95% timber) worth approx. 300k, do we count that as part of our portfolio even tough it doesn't produce income and we can't sell a portion each year like stocks or bonds? The reason I am asking, is that the 300k would increase our safe withdrawal rate( and ease our minds a little). ...

Yes it is an investment. It is not as liquid as securities. In fact, you might not be able to sell it when you need it (except at a reduced amount...). Often land sales need to be anticipated in advance or taken when the opportunity presents itself (which might mean 10s of years)... it depends on prospects of the investment... and it is an investment (speculation).

Since it is not liquid... you need to view it in a very conservative way. Only use the rock bottom value for retirement portfolio planning purposes. That way you will not get blind sided. If you sell if for more... you are better of than the conservative view.

Not to probe too much... but I am curious. 300 acres of timber... how do you intend to cash in? Sell the timber then the land? What are your plans? How are you valuing the investment and potential payoff? Or are you speculating a little?
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-15-2007, 07:36 AM   #7
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Originally Posted by ron244
clifp

We have some Mutual funds and ETF's. In our taxable accounts we have VGHCX (41k) and VISVX (26k). In our IRA's, EEM (21k), VIEIX (162k), DODBX (53k). I agree with what your saying about fixed income in IRA's, but when we have to liquidate a certain amount each year, it will be difficult to maintain a consistent AA. The 150 acres of land is adjacent to our 60 acre retirement property and we would only sell it if we had to. We do not own any REITs at this time.
Rebalancing shouldn't be all that hard. Just sell and/or buy stocks/bonds/cash in your tax deferred [IRAs] to even things out. So, for example if you sell US stocks in your taxable account and need more US stocks to get back to 40/40/20, just sell int'l or bonds in the tax deferred acounts to buy US stocks.

- Alec
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-15-2007, 08:06 AM   #8
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Originally Posted by ron244
DW and I will be FIREing in about 7 weeks. We have approx. $1.4M in investments. Approx. 800k in IRA's and a 401K. And & 600k in a taxable brokerage account. We need approx. 50k/year. If our AA is 40% US stocks, 40% International stocks and 20% cash and bonds, do we need to have identical portfolios in taxable and tax advantage accounts since we will be withdrawing money from both? Also, we own about 150 acres of land (95% timber) worth approx. 300k, do we count that as part of our portfolio even tough it doesn't produce income and we can't sell a portion each year like stocks or bonds? The reason I am asking, is that the 300k would increase our safe withdrawal rate( and ease our minds a little). Sorry if these subjects have already been covered. I am only able to read this board occasionally. DW and I both gave notice last week and we are either deliriously happy that we won't be working anymore and fearful that we are making a huge mistake. Somehow, after years of saving and feeling comfortable about our financial situation, I feel the ER is like living paycheck to paycheck.

Thanks, ronc
I would not consider the land as part of asset allocation- you suggested the reason already- you cannot sell it to rebalance, and if you sold other assets, the land would become a much larger part of portfolio, making you take on risks which are not needed.

The land is part of your net worth, it is NOT part of asset allocation, IMO. If market tanks I am not going to sell my house to rebalance and buy more equities, and I see your land in the same view.

I keep all my accounts with same asset allocation. I have my reasons for my wife's 401k, my 401k and our Roth IRA to be allocated the same.

How old are you? Will the IRA withdraws be subject to a 10% penalty (if under age 59.5)?

3% of $1.4M is around $42,000... you might be able to invest primarily in dividend paying stocks to get income needed, and this would lower tax bite considerably (dividends are currently taxed much lower than withdraws from IRA).

Conventional wisdom suggests sell off taxable accounts first, (letting IRAs grow tax free). This "pays taxes later" is a strategy I remember reading when I first started investing 10 years ago.

I have read some recent articles which suggest using dividends and long term capital gains can keep a person in the 10% or 15% tax brackets, even when "income needed" is closer to 25 or 28% tax bracket.
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-15-2007, 07:01 PM   #9
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Not to probe too much... but I am curious. 300 acres of timber... how do you intend to cash in? Sell the timber then the land? What are your plans? How are you valuing the investment and potential payoff? Or are you speculating a little?
Chinaco,
We have about 15k worth of timber that we may harvest later this year. After that, we are checking into entering the DNR's forestry management program. This would freeze our taxes for 10 years(currently less than $100.00/year). I am not sure how it would affect future harvesting. There are also mining leases on the properties. We are fighting now to change the terms of the leases. Under the current leases, we would receive approx. 4k per year. We purchased the land because it borders our original property and we wanted more room for horses, atv's, hiking etc. We purchased the land for just under 1k per acre a couple years ago and similar land is now going for around 2k per acre. We would not sell unless we were moving or needed the money.

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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-15-2007, 07:10 PM   #10
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Rebalancing shouldn't be all that hard. Just sell and/or buy stocks/bonds/cash in your tax deferred [IRAs] to even things out. So, for example if you sell US stocks in your taxable account and need more US stocks to get back to 40/40/20, just sell int'l or bonds in the tax deferred acounts to buy US stocks.
ats5g,
The problem is that my taxable account is almost all individual stocks and they are mostly large cap value. In fact my current AA isn't even close to the 40/40/20 that I want. I will probably slowly get to my target AA in the first year of ER.

ronc
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-15-2007, 07:33 PM   #11
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
I would not consider the land as part of asset allocation- you suggested the reason already- you cannot sell it to rebalance, and if you sold other assets, the land would become a much larger part of portfolio, making you take on risks which are not needed.

The land is part of your net worth, it is NOT part of asset allocation, IMO. If market tanks I am not going to sell my house to rebalance and buy more equities, and I see your land in the same view.
Makes sense. We think of the land as a cushion that we can use if needed.

Quote:
I keep all my accounts with same asset allocation. I have my reasons for my wife's 401k, my 401k and our Roth IRA to be allocated the same.
I'm kind of thinking that we should have the same balance in taxable and non taxable accounts also.

Quote:
How old are you? Will the IRA withdraws be subject to a 10% penalty (if under age 59.5)?

3% of $1.4M is around $42,000... you might be able to invest primarily in dividend paying stocks to get income needed, and this would lower tax bite considerably (dividends are currently taxed much lower than withdraws from IRA).
I am 47 and DW is 44. I am planing to use the 72(t) rule to withdraw money from our ira's. Right now, we have 2 non roth ira's, 3 simple ira's and 1 401k. I need figure out how many accounts to consolidate in order to withdraw about 20k per year, which adds to the question of AA in these accounts.
I do have quit a few dividend paying stocks and I could add to them to boost the yield. I assume that we will be in a low enough tax bracket that we won't get hurt when dividends are taxed at a higher rate in a couple years. However I am also concerned about things getting too complicated for my DW to handle if something happens to me. Currently we own 23 individual stocks, 3 mutual funds and 1 etf. I need simplify our investments. We should be in etf's or mutual funds with maybe a little left over to "Play" with.

ronc

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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-16-2007, 08:59 AM   #12
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Originally Posted by ron244
Makes sense. We think of the land as a cushion that we can use if needed.

I'm kind of thinking that we should have the same balance in taxable and non taxable accounts also.

I am 47 and DW is 44. I am planing to use the 72(t) rule to withdraw money from our ira's. Right now, we have 2 non roth ira's, 3 simple ira's and 1 401k. I need figure out how many accounts to consolidate in order to withdraw about 20k per year, which adds to the question of AA in these accounts.
I do have quit a few dividend paying stocks and I could add to them to boost the yield. I assume that we will be in a low enough tax bracket that we won't get hurt when dividends are taxed at a higher rate in a couple years. However I am also concerned about things getting too complicated for my DW to handle if something happens to me. Currently we own 23 individual stocks, 3 mutual funds and 1 etf. I need simplify our investments. We should be in etf's or mutual funds with maybe a little left over to "Play" with.

ronc

If I read this right and you need ONLY 20k from the assets, the solution is simple:

1) invest 600k in ONLY dividend paying stocks (buy/sell as needed). The dividend stream should be constant. 3% yield on 600k is 18k.

2) send one IRA to an account where you can 72t the balance to 2k-5k per year.

3) let Roths and other IRAs grow tax deferred in other accounts.

Details:

1)
a)20-40 stocks, IMO, should provide income needed. The goal is a stream of income... even if market tanks 10% (so 600k becomes 540k) the dividend amount of 18k is not going to shrink 10%... so this is "stable" stream of income.
b)300k in 10 stocks of DOW companies (use Dogs of Dow strategy is my suggestion). DOGs strategy usually yields around 3.5%.
c) 150k in 5-10 stocks of utilities and REITs. Again these yield around 2-4%.
d) 150k in 10-20 stocks of small and mid size companies. These may yield less (1-2%) buy can also grow the portfolio more.

2) You have to 72t for 12 years (59-47-12). Make sure the 72t is in your name... if in wife's name, the 72t lasts longer (59-44=15). 12 years*2k=~25k needed in an IRA to meet 20k income needed.

3) make the Roths temper the risk of above.

1 is aggressive (100% equity), and 2) might be a good place for bonds. Then have Roths be same mix as 1 and 2 combined.
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-16-2007, 08:03 PM   #13
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Re: AA & withdrawals between taxable and non taxable accounts.

jIMOh

Quote:
If I read this right and you need ONLY 20k from the assets, the solution is simple:
Sorry, I should have been more clear, we need about 20k to 25k from our IRA's each year and the balance from our taxable account.
Quote:
1) invest 600k in ONLY dividend paying stocks (buy/sell as needed). The dividend stream should be constant. 3% yield on 600k is 18k.
Right now we have only 185k in stocks(ALD,GE,JNJ,KMP,KMR,MRKand PG). The yield is around 4% now. I expect about 200k within 60 days and another 200k when we sell a piece of property. I am considering keeping mainly dividend paying stocks in this account. I know that we should have a better return using a 40/40/20 portfolio, but living off of dividends would make it easier to sleep at night.

Quote:
2) send one IRA to an account where you can 72t the balance to 2k-5k per year.
Maybe we should rollover the 401k which would provide about 25k/year according to an online 72t calculator. If I am understanding the withdrawal information for the "fixed amortization" method of withdrawal, it seems that the amount stays the same every year. So there is no cost of living increases? Anyway, if we do that, we will have about 500k left in the other IRA's-none of our IRA's are Roths. At some point I will try to figure out if it's worth it to switch some of them to Roths.

I appreciate your response, we are a few weeks away from ER and are trying to make sure we have all of our bases covered. Once we quit working, I'll have more time to think things out. It's kind of an exiting and scary period for us.

I appreciate your responses.

ronc



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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-16-2007, 09:20 PM   #14
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Originally Posted by ron244
jIMOh

Sorry, I should have been more clear, we need about 20k to 25k from our IRA's each year and the balance from our taxable account.
Right now we have only 185k in stocks(ALD,GE,JNJ,KMP,KMR,MRKand PG). The yield is around 4% now. I expect about 200k within 60 days and another 200k when we sell a piece of property. I am considering keeping mainly dividend paying stocks in this account. I know that we should have a better return using a 40/40/20 portfolio, but living off of dividends would make it easier to sleep at night.

Maybe we should rollover the 401k which would provide about 25k/year according to an online 72t calculator. If I am understanding the withdrawal information for the "fixed amortization" method of withdrawal, it seems that the amount stays the same every year. So there is no cost of living increases? Anyway, if we do that, we will have about 500k left in the other IRA's-none of our IRA's are Roths. At some point I will try to figure out if it's worth it to switch some of them to Roths.

I appreciate your response, we are a few weeks away from ER and are trying to make sure we have all of our bases covered. Once we quit working, I'll have more time to think things out. It's kind of an exiting and scary period for us.

I appreciate your responses.

ronc



I reread OP... need 50k in income.

My suggestion would be to get all 600k taxable to be in dividend paying securities... then compliment this dividend income (18k to 24k based on 3-4% yield) with 25k from IRAs. 25k would be 12*25k=300k based on 72t. I would put this in a bond fund (there are penalties for 72t running out of money before 59.5), so something stable like bonds or money markets would be my comment.

This would "draw down" one IRA, maintaining dividends throughout.

Pros to this include about 1/3 to 1/2 of needed income coming from dividends (a solid leg). Dividends tend to outpace inflation as well.

Cons include going against conventional wisdom (CW suggests sell off taxable accounts first). IMO this is outweighed by taxes (24k in dividends is less taxes than 24k taken from IRA).
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Re: AA & withdrawals between taxable and non taxable accounts.
Old 05-18-2007, 06:59 PM   #15
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Re: AA & withdrawals between taxable and non taxable accounts.

Quote:
Originally Posted by clifp
The short answer to your question is in general, you want your higher tax assets in your IRAs and your lower taxed assets in your taxable accounts.

This means that your IRA should have bonds, CDs, REITs, and actively managed mutual funds with a high turn over. Index funds, and individual growth stocks in your taxable account. Dividend stocks are fine in either.

You certainly should count your land as part of your investments, and I would lighten up on an REITs to compensate for it. Also if you sell it would be an excellent source of money to use to buy an index fund. Now while I am a big fan of individual stocks 80% of your assets seems excessive, am I correct that you have virtually no mutual funds or ETFs? . I'd start selling the individual security in my IRA first, along with tax harvesting any losers you may have in your taxable accounts.

Becareful as you get towards retirement with these low turnover tax efficiant funds in your taxable account. when liquidated or re-balanced you can be hit with a whopper of a tax bill and if your border line getting your ss taxed that can do it. at this point most of my taxable acount is of the regular pay as you go type , spinning off some taxable distributions yearly.

even though the last few years some of my funds have had fairly large capital gains distributions id still owe quite a bit of taxes if i sold to change funds and i have been paying a good chunk all along.

i can only imagine the whopper of a tax bill if i wasnt gradually paying thru the years at this point.

im no fan of paying any tax i can delay thru life but if it causes your ss to be taxed you really get burned or as happened to us the capital gains pushed us not only into loosing our amt deduction but we lost the deduction for my wifes college because it thru us over the limit income wise..

alot of times conventional advice sounds great until it applys to you. ha ha
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