Diversification of Accounts Between Taxable, Tax Deferred, and Tax Free

[Moemg]

I am at 50% taxable and 50% tax deferred .

 

[Koolau]

I'd rather have most of my money in something I can (legally) pick up and move if taxes start to go up. I can do that with my taxable money. I have no desire to leave the US and become an ex-pat someplace but I also don't see how the upcoming situation can be funded without greatly higher tax rates. I want to be as immune as possible from that.

This has been my "mantra" since ER 5 years ago. Wish I had not deferred so much taxable money, but I did, so now I'm working on converting as much as possible to Roths. Paying the taxes is incredibly painful, but I'm making a bet that it will get more painful down the road. Taxable/Roth money seems more flexible as you suggest and at least somewhat safer from the tax and spend crowd. It may turn out that there is no way to protect oneself from the tax bite to come, but right now, converting seems the best way. We'll see.

Right now, excluding personal residence and "inferred stash" such as pension and SS, I'm at:

Taxable - 21%

Tax deferred - 59%

Roth - 21%

I had to laugh when I realized that converting to Roths, percentage wise, is "aided" by the huge tax bite - because the denominator goes down!!! Gotta look on the bright side.

Another thought: One could make a case for moving to a low tax state during the conversion process. I'm paying as much as 8% state tax on conversion. I can't face giving up paradise to make that 0%, but from a strictly economic standpoint, it would make sense - especially if you could also cut other costs (which I could, in almost any other state!). Dang! Why did I have to fall in love with paradise

 

[DoingHomework]

Another thought: One could make a case for moving to a low tax state during the conversion process. I'm paying as much as 8% state tax on conversion. I can't face giving up paradise to make that 0%, but from a strictly economic standpoint, it would make sense - especially if you could also cut other costs (which I could, in almost any other state!). Dang! Why did I have to fall in love with paradise

Aloha nui! Our second home is on the Big Island. You can bet we will be doing all the taxable conversions before "moving" there and intend to spend enough time in our low tax state to maintain residency even after ER. As much as we love the state of Hawaii, the taxes are too high! I've heard it referred to as teh People's Republic of Hawaii!

 

[Koolau]

As much as we love the state of Hawaii, the taxes are too high! I've heard it referred to as teh People's Republic of Hawaii!

All too true, but at least SS and pension income are exempt from state tax (for now). Also, we pay lower property taxes here than we did in the midwest on property appraising 3 times as much. Oh, and your exemption goes up as you get more "senior".

The real killer is the "stealth" taxes - especially the GET. It's applied without exemption at different levels along the chain and I've heard it's estimated to average 16% by the time the final purchase is made. I can't confirm that, but it wouldn't surprise me.

Still, as in all situations, you learn how to adjust. The trick is to be adaptable.

Aloha!

 

[kyounge1956]

Fidelity recently had an article on their web site about the allocation of balances between taxable, tax deferred (401k, IRA., etc.,) and tax free (Roth IRA, Roth 401k). We also touched on this from time to time on the forum, but I don't remember a recent thread addressing this directly.

I can't think of an unambiguous way to do a poll, so I thought I would try a straight discussion.

Here's a related poll I did back in July. Numbers of people with "mostly taxable", "mostly tax deferred" and "about evenly split" were (very) roughly the same. People with no taxable account were very much in the minority—only 10% of those who responded.

My accounts are 75% taxable, 18% tax deferred, and 7% tax free. The tax free accounts are due to recent conversions to Roths. I plan to go on converting my rollover IRA to Roth, but next year my RMDs and SS pmts will start, so any conversion will mostly be higher bracket. I wish I had more in Roths than I have at present, and that I had awakened to the conversion idea year or so earlier.

I am interested in seeing others %s, as well as any comments.

Ha

I have about four times as much in tax deferred as in tax free, mostly because the contribution limits let me put about four times as much into my tax deferred account as into the Roth. So that's approximately 80% deferred and 20% tax free. I have no taxable account unless you count my savings account at the bank and the pile of Savings Bonds in my safe deposit box.

If I could, I'd put more into my Roth IRA and less into tax-deferred. I will look into converting some of the t-d to Roth after retirement.

 

[chinaco]

Isn't our simple tax system and retirement mechanisms helpful!

Layer that on top of the complexity of trying to understand investing (and actually do a decent job of it to build retirement funds)...

It could be improved and simplified!

Today the only way to simplify it (not learn and DIY) is to give away the (some of the investment growth.. through fees and tax savings) differential to the insurance companies!

 

[Nords]

As much as we love the state of Hawaii, the taxes are too high! I've heard it referred to as teh People's Republic of Hawaii!

The reason your taxes are too high is because Hawaii taxes wages a lot more than they tax cap gains & pensions. And, of course, states love to tax out-of-state property owners.

When "Wealth Management" magazine was run by Bloomberg, their annual "most tax-friendly states" used to break down the rankings by taxes on students, workers, and retirees. Hawaii was consistently in the top ten most tax-friendly states for retirees and near the bottom for workers. Unfortunately Bloomberg moved on from WM in 2005 or so.

I would not whine on this board about Hawaii property taxes. And since you're on the Big Island, you're only paying 4% GET instead of 4.5% GET. That won't get you much sympathy in most of the rest of the USA, either. In fact I'd advise against complaining about car registration fees, too.

If you want to minimize your taxes now, you could spend the money to install a solar water-heating system (if you don't already have one) and a solar photovoltaic net-metering system. You'll get up to 65% state/federal tax credits which can roll forward until consumed. If you do that now while you're more heavily taxed then you won't have to roll them forward for decades of retirement. The value of the photovoltaic installation can also be used to obtain a 25-year exemption on its property taxes.

 

[clifp]

Currently 58% taxable 42% deferred. When I first retired 10 years ago the ratio was roughly 75%, 25%. Part of the drop is do to a modest amount of Roth conversion. The rest is because I've been living on my taxable account which has decreased and been converted into a house

 

[obgyn65]

Same here. The vast majority of my investments are in CDs, municipal bonds or money market. I am not even sure how or when my municipal bonds are taxed...

I'm ashamed to say that I have given tax diversity very little analysis or thought other than it is probably a good idea.

 

[NW-Bound]

3% tax free
30% taxable
67% tax deferred

 

[SVHoper]

About 50% tax deferred
50% tax free (paid)
0% taxable - expect this to grow to possibly match others as during period before retirement (10 years) we will be moving allocation of $ from real estate

 

[Prime]

I've really enjoyed this thread. Great discussion. Currently the tax deferred is the only thing growing right now in terms of contributions. Anything left over for investing in taxable is currently going to payoff debt.

Tax deferred: 75%
Taxable: 25%