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Asset Allocation and Sheltered Accounts
Old 08-15-2009, 08:44 AM   #1
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Asset Allocation and Sheltered Accounts

Apologies if this has been covered here, but I've struggled with this for years (a post by Audrey1 in another thread is prompting me to ask).

I am underweighted in some asset classes, but it's because my available sheltered accounts are fully invested and the asset classes I am short on are not efficient in taxable accounts. Until this year at least, I was in a high tax bracket so I have let my taxable:sheltered drive my AA to some extent. However I have consiously shifted the line knowing where my holdings fall on the tax efficiency continuum. How do others resolve this dilemma? Details below, although not sure if it's necessary.

ClassTargetActualAcct
US Large23.4%25.7%Taxable
US Small13.4%14.1%Taxable & TIRA (Sm Val)
Intl13.4%13.0%Taxable
Emer Mkts6.7%7.1%Taxable
REIT3.3%2.0%TIRA
VGENX3.3%2.2%TIRA
Bonds32.5%30.2%401k
Cash3.9%5.9%Taxable
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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 08-15-2009, 09:05 AM   #2
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The differences between the actual and targets do not appear big. I would worry about it unless it is more than 5%.
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Old 08-15-2009, 09:19 AM   #3
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For me, asset allocation would take precedence over location (ie. taxable v/s deferred).

Spanky is right - your deviation from plan is too small to worry about right now. I use a 20% tolerance bands for individual asset classes, and a 5% band for bond/equity.
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Old 08-15-2009, 09:34 AM   #4
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Quote:
Originally Posted by walkinwood View Post
For me, asset allocation would take precedence over location (ie. taxable v/s deferred).

Spanky is right - your deviation from plan is too small to worry about right now. I use a 20% tolerance bands for individual asset classes, and a 5% band for bond/equity.
I use 25%/5% myself. You'll note that REIT & VGENX are outside the 25% band.
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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 08-15-2009, 11:06 AM   #5
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I give a larger band to my REIT holdings for a couple of reasons:

First, other stock index funds in my allocation hold REITs. For example, small cap value and mid cap value have significant amount of REITs already. And by definition Total Stock Market has REITs as well.

Second, our REIT holdings are in "set-and-forget" mode, so I don't bother to consider them in rebalancing at the present time. This mode involves a TIAA transfer payout annuity over the next 8 years where I exchange a chunk of TIAA traditional annuity (i.e. fixed income) for a TIAA real estate account shares (i.e. REIT) each year. The TIAA RE account is losing money fast so that buying more each year is not a problem (or is it?).

Third, I since REITs are found elsewhere, if I needed more tax-sheltered space for fixed income, then I would reduce the amount of REITs I had. Same goes for VGENX. There is energy elsewhere in the taxable part of the portfolio anyways.

But I'm not a good example of all this since I have plenty of tax-sheltered space to work with.
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