Asset Allocation Improvements in Various Accounts

[BergLust]

Hi all. I appreciate you taking the time to read this. I'm hoping that some will have some advice/opinions on my portfolio allocations, as I'm wondering if I'm my equities (ETF's) vs bonds distribution could be improved somehow in one or more of my accounts. As you see below I have multiple accounts and each account has a different distribution of securities. My original intent was to set these accounts up with tax efficiency in mind (putting bonds in tax deferred or tax free accounts such as 401K or Roth IRA)…but I'm not sure I have this optimized and I'm not sure if I've overlooked risk management benefits that bonds can offer…specifically in my individual account where I have no bonds. As the market shows some volatility and correction i'm becoming more sensitive to this topic and considering how I can protect the value of the account efficiently.

Some other small notes that may help. I'm 37, have no debt, am not married and have not dependents. I look forward to the comments and discussion. Thanks so much!

 

[RunningBum]

My only thought is that with international funds in your 401K and Roth, you'll be paying foreign income tax on them but not get the foreign tax credit.

Also, why 26% cash in your Roth? It looks like your Roth is small, but if you plan to keep this ratio as it grows, I'm not sure why.

 

[BergLust]

My only thought is that with international funds in your 401K and Roth, you'll be paying foreign income tax on them but not get the foreign tax credit.

Also, why 26% cash in your Roth? It looks like your Roth is small, but if you plan to keep this ratio as it grows, I'm not sure why.

Thanks for the response RunningBum! I didn't consider the foreign tax credit topic. Will have to look into what that is worth overall.

The 26% cash...good question. It's simply because I learned about backdoor roth at the end of last year. So, I did a backdoor roth in December 2017, and did one in January for 2018. So, I'm DCA-ing that money as the year goes along, on a monthly basis. That's the plan anyway...

 

[pb4uski]

Agree with RB... while I have some international equities in my tIRA I am working towards getting rid of them... in my case in mm taxable account the foreign tax credit exceeds the ordinary tax on non-qualified international equity dividends so my effective tax rate on international equities is negative!

Also, I would get rid of bonds in the Roth and make a corresponding adjustment to increase bonds in the 401k.

 

[VanWinkle]

Bonds out of Roth and into the 401K would be preferred. The rest seems fine to me although I also keep my foreign in my brokerage account for the tax benefit.

 

[BergLust]

Agree with RB... while I have some international equities in my tIRA I am working towards getting rid of them... in my case in mm taxable account the foreign tax credit exceeds the ordinary tax on non-qualified international equity dividends so my effective tax rate on international equities is negative!

Also, I would get rid of bonds in the Roth and make a corresponding adjustment to increase bonds in the 401k.

THanks pb4uski. Let me try and make a summary of proposed changes later tonight to make sure I have it right. I understand the thinking now...to make my accounts more tax efficient.

 

[RunningBum]

My thought on that is the equities do better in general than bonds. Since a Roth is never taxed, you'd rather have that be the account that grows faster, and let your tIRA be the conservative safety net. Remember that your tIRA is going to be taxed as ordinary income when withdrawn or converted.

Of course if the market tanks you'd rather it be the other way, but IMO you play the odds.

 

[BergLust]

My thought on that is the equities do better in general than bonds. Since a Roth is never taxed, you'd rather have that be the account that grows faster, and let your tIRA be the conservative safety net. Remember that your tIRA is going to be taxed as ordinary income when withdrawn or converted.

Of course if the market tanks you'd rather it be the other way, but IMO you play the odds.

OK. Got it! Thanks for the help! Let me make a proposal of changes later today. This is really helpful!

 

[pb4uski]

Yeah, in many cases it is pretty easy at the end of the day... bonds in tax-deferred to the extent that they "fit".... international equities in taxable.... domestic equities everywhere else.

Of course, it depends on one's overall AA and tax diversification.

Also, major changes to taxable accounts may be constrained by tax ramifications.

 

[BergLust]

Here are my thoughts for a path forward based on tax efficiency improvement opportunities:

Additionally, for clarity:

• Do not sell any possesions in individual account to rebalance (do not want taxable event). Only rebalance by more heavily weighting international investments in future.
• Lower new investments of international funds in 401K. Put that money more towards domestic total stock market.
• Cash in individual account and in Roth IRA will continue to get dollar cost averaged in to appropriate future holdings (based on this post), on a monthly basis.

Make sense? Again, appreciate the feedback!

 

[Animorph]

Be a little careful of putting all foreign equities in the taxable account. If you need to sell them to rebalance, that would be a taxable event. If you leave a little in the retirement accounts you have a little more flexibility. Taking the foreign fund distributions as cash would also give a little flexibility without adding additional capital gains taxes, though you could always sell reinvested shares immediately with no significant gain.

 

[RunningBum]

Let any advice you get here sink in a day or two before taking action, even if it seems to make perfect sense. Sometimes we don't really know what we're talking about, or someone like Animorph has a good alternative point to make that you should consider.

 

[BergLust]

Thanks Guys...and good advice. I do plan to "chew" on the advice a bit.