Balancing when Asset Classes are across tax bounds

[Telly]

The majority of my Stock Mutual Funds are in a regular IRA.

All the Bond Funds and TIPS fund are in a Taxable account.

I do not plan on tapping either of these for any income for at least five years, probably more.

When it comes time to balance, it seems like I will have to create some Bond Funds in the IRA, and some Stock Funds in the Taxable account. So I can balance within the IRA, Stocks vs. Bonds, and also separately balance within the Taxable account, Stocks vs. Bonds. As I cannot move money between the IRA and Taxable accounts, and vice-versa.

So I could end up with sort of a repeated funds scheme across IRA and Taxable. Does this make sense? Is there any other way to do it?

 

[unclemick]

Re: Balancing when Asset Classes are across tax bo

Hey Telly
Good question - we have never solved the problem - I cheat by calling my 'hobby stocks' as pension like since the dividends are taxable income. The rest we have in balance index funds within his and her IRA plus a taxable balanced index fund - and a little 401k from temp jobs in the mid 90's and some excess cash resevre converted to Hi-Yield corporate .

CAN YOU SAY 'MISH MASH'

all this since 1993 - now that I've hit the big 60 - planned to get serious and get an income stream from my 'portfolio' - AS I said - good question - any suggestions out there?

 

[blazerjeremy]

Re: Balancing when Asset Classes are across tax bo

Well you can move from Taxable to the IRA but just $3000 per year. That eliminates one repeation. Unless your bonds and TIPS out earn your stocks by more than $3000 per year.

 

[unclemick]

Re: Balancing when Asset Classes are across tax bo

During your accumulation phase you can redirect income streams but in ER?

look at this:

income stream
pension 1
pension 2
taxable dividends


'FIREcalc portfolio'
taxable-
corporate bond fund
balanced index fund
IRA/401K-
rollover IRA 1-balanced
rollover IRA 2-balanced
trad. IRA -REIT
401k - bond
The 'FIREcalc portfolio' comes out roughly 50/50 stocks/bonds counting REIT's as stock. I think I can only move within the 'buckets' above and then add to get my asset allocation.

 

[Ted]

Re: Balancing when Asset Classes are across tax bo

In response to Telly's original question....

Taxes on investment income are more of an issue before retirement than after, because as I said elsewhere the taxes before are effectively at your marginal tax rate, whereas the taxes after are effectively at your average tax rate.

But in either case, it makes sense to concentrate your interest-paying investments (bonds, high yield bonds, TIPs, REITs) in a tax advantaged account, and to concentrate your stocks (especially, growth stocks) in your taxable account.  To get spending money from your taxable account, there is nothing conceptually wrong with periodically selling some stocks -- as opposed to attempting to live entirely off of interest/dividend payments.

 

[Mr._johngalt]

Re: Balancing when Asset Classes are across tax bo

Hello Ted! Agree there "is nothing conceptually wrong with periodically selling some stocks" to provide
cash flow. Of course, if the values are down when you
need to sell, this is not so appealing. In addition
to living mostly on my dividend/interest income, I go out
very long term on CDs, bonds, corporate notes etc.
with the theory that I will never need to sell, so that
this money will still be throwing off income when I die.
If I am satisfied with my rate and no one defaults, then
I have highly valued predictability. This is important for ERs. But, being a cautious sort, I have a back up plan
in case it all goes to hell in a handbasket.

 

[Ted]

Re: Balancing when Asset Classes are across tax bo

 Agree there "is nothing conceptually wrong with periodically selling some stocks" to provide cash flow.  Of course, if the values are down when you need to sell, this is not so appealing.  

That's right! That is why a person should maintain cash equivalents and, perhaps, some money in a longer term bond fund, in their taxable account.

 

[Telly]

Re: Balancing when Asset Classes are across tax bo

Well Ted, it sounds like my asset classes are in the wrong accounts tax-wise. All inverted.
It's not my fault, it was those Financial Planners... I'm a victim, a victim...

Seriously, it has put the brakes on me picking up some REIT fund in the near future, due to the churn I hear they have. Need to be in an IRA, and I am out of IRA space, so to speak.

 

[bongo2]

Re: Balancing when Asset Classes are across tax bo

Ted said: "...it makes sense to concentrate your interest-paying investments (bonds, high yield bonds, TIPs, REITs) in a tax advantaged account, and to concentrate your stocks (especially, growth stocks) in your taxable account."

I've always agreed with this, but have lately read that there is some debate, and this caused me to re-think things. If you just compare simple assumptions (say: 8% growth for stocks -- 2% taxed immediately and 6% deferred, and 5% growth for bonds; 35% tax rate income, 15% cap gains) then you come out ahead putting Roth money in stocks. I think my analysis is a little simplistic, do you know of any definitive anlalysis of this topic?

 

[Ted]

Re: Balancing when Asset Classes are across tax bo

I have seen arguments to the effect that it is better to put stocks in tax-advantaged accounts, but these arguments assumed two things that are not necessarily true: (1) that stocks would appreciate at the double digit rates that prevailed in the 1990's and (2) that the stocks were held in actively managed mutual funds having a fairly high turnover that subjected the capital gains to immediate taxes if they were held in taxable accounts.

If a person holds the bulk of their stocks either directly, or in tax-efficient funds, and does not trade them actively, then the tax bite associated with holding them in taxable accounts will be greatly mitigated. Even the dividends from dividend-paying stocks are now taxed at a lower rate, whereas bond interest (other than from muni bonds) and dividends from REITs are still taxed as ordinary income. So there is still a big tax savings from holding bonds and REITs in tax-advantaged accounts (especially for people who are still working).