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Diversification of Accounts Between Taxable, Tax Deferred, and Tax Free
Old 10-12-2010, 12:09 AM   #1
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Diversification of Accounts Between Taxable, Tax Deferred, and Tax Free

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.

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
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Old 10-12-2010, 04:41 AM   #2
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Not counting our house (paid off), SS or my pension.

We have 65% in Tax Deferred Accounts (Trad 401k, Trad IRA, Other qualified holdings), 2% Roth IRA and 33% taxable (the taxable securities have a fairly large tax basis for several reasons too complicated to explain).

We will FIRE at 55. I intend to and utilize our taxable assets to roll tax deferred assets into our Roth IRAs from 55 - 70 while managing our marginal tax bracket (as much as I can)... to minimize income tax... and our tax bracket.

I think a number of rules for Roth or how withdrawals are accounted could change because of new legislation related to the federal budget and debt. It would not surprise me if the the federal govt begins accounting for Roth IRA/401 withdrawals (in a given year) to calculate to federal entitlement burden on retired individuals (like medicare premium and perhaps tax rate on SS income). We will see what happens...
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Old 10-12-2010, 07:53 AM   #3
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We couldn't fund a ROTH in our working days so we're doing it now by converting from a T-IRA. Right now, the ROTH is about 1% of our investments (not counting the house)

Taxable is 57% and T-IRAs are 42%.

At 50 & 47 years of age, I feel we have time on our side to move money from a T-IRA to a ROTH and plan to do it only in years when we're in the lowest tax brackets.

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It would not surprise me if the the federal govt begins accounting for Roth IRA/401 withdrawals (in a given year) to calculate to federal entitlement burden on retired individuals (like medicare premium and perhaps tax rate on SS income).
Chinaco, Isn't that the case today? 401K / T-IRA withdrawals count as income, so don't they affect how much of SS is taxed? I'm years away from getting SS, so haven't paid a lot of attention to it.
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Old 10-12-2010, 08:08 AM   #4
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49% taxable, 38% tax deferred, 13% tax free -- have not done any conversions (yet) as they would be subject to at least 25% fed tax. I'm not sure that I would gain a lot by converting at those rates but am considering topping off the 25% bracket.
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Old 10-12-2010, 08:15 AM   #5
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No RE included
54% taxable
4% tax free
42% tax deferred

Was a little early for the Roth IRA, conversion charts say don't bother. Either income was too high or too low. Go figure.

I paid no Federal taxes the last 2 years
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Old 10-12-2010, 08:25 AM   #6
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Interesting thread Ha. Can I ask if ROTH's are subject to RMD's.
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Old 10-12-2010, 09:09 AM   #7
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38% taxable
12% tax free (Roth IRA's, HSA, 529 college savings)
50% tax deferred (401k's Trad IRA's)

Probably a little over half way to FIRE, and we plan to pull the plug sometime in our 30's (next 5-7 years).

Most new money is going into tax deferred accounts. We did max out the Roth IRA's this year to get a little tax diversity.

I'm ashamed to say that I have given tax diversity very little analysis or thought other than it is probably a good idea. I just hate giving a dollar away today (to the tax man) when I don't know what tomorrow holds. But I have done enough math to know that you can essentially save more per year in a roth than in a traditional account (by putting in 10,000 plus the prepayment of taxes).

I think our FIRE withdrawals will be low enough to appease the tax gods and stay comfortably within the 15% bracket or whatever the rates/brackets end up being.

One consideration to me for not wanting to do Roths too much is a currently high state income tax burden of 7%. We have no plans to change states by moving, but you never know. FL or TX (or other tax havens) aren't that far away and present nicer winter weather than the current home.
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Old 10-12-2010, 09:11 AM   #8
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Can I ask if ROTH's are subject to RMD's.
Nope. The purpose behind the RMD is to force you to take distributions from your tax deferred accounts so the govt can get tax revenue. Since you've already paid your taxes on a ROTH, the govt has nothing to gain from forcing you to take distributions.
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Old 10-12-2010, 09:13 AM   #9
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10% taxable
10% tax free
80% tax deferred
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Old 10-12-2010, 09:20 AM   #10
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Interesting thread Ha. Can I ask if ROTH's are subject to RMD's.
No, they are not. With the income limit gone, more folks are looking to convert, thinking that future tax rates will be higher, and will stay higher, and that there is a reasonable chance that when they retire and go into a "lower tax bracket", it will not be much lower than the lower tax rates today.........
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Old 10-12-2010, 09:27 AM   #11
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3% Taxable
15% Tax Free (Roths)
82% Tax Deferred (Rollover IRA and IBonds)

Currently keeping the Taxable account floating with IRA withdrawals.
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Old 10-12-2010, 09:41 AM   #12
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16% Roth
8% taxable
76% tax-deferred
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Old 10-12-2010, 10:08 AM   #13
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99% taxable
1% tax deferred, including HSA.

Not having a tax deferred account for me means one less worry (future tax obligation), fewer investment options (no TIPS, limited commodities) but also less portfolio complexity (what do I put where).

I would love to have ROTH and feel it is a tremendous option for younger people. If I had tax deferred the choice to convert would not be easy now (I'm 56) and I would be looking very hard at the marginal rate I'd be paying to convert. I'm not at all convinced that tax rates are going to rise substantially or on what income so the ROTH advantage would need to be at current rates. Still, this is a hypothetical for me FWIW.

One clear advantage I see that favors ROTH is no RMD for those fortunate ones with lower withdrawal rates.
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Old 10-12-2010, 10:12 AM   #14
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Interesting thread Ha. Can I ask if ROTH's are subject to RMD's.
not to original owner, but surprisingly (at least to me), for non-spousal beneficiaries they are:

Required Minimum Distributions for Traditional and Roth IRAs

There's a short reference to this in the beginning and then a longer section farther down.
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Old 10-12-2010, 10:37 AM   #15
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85% Taxable
15% Tax-Deferred
0% Tax Free

Currently in too high a tax bracket to consider a Roth conversion.
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Old 10-12-2010, 10:52 AM   #16
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approximately:

50% roth
35% tax deferred
15% taxable

sometimes i wonder if our roth $ are too much...of only my crystal ball was working.
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Old 10-12-2010, 11:04 AM   #17
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50% roth
35% tax deferred
15% taxable

sometimes i wonder if our roth $ are too much...of only my crystal ball was working.
I think it depends on how high on the hog you plan on living during ER.

I personally forecast that there will be a big zero and low tax bracket for lower income folks (they are a huge voting base). I'll be in the lower income category. Particularly while the kiddies are still on the 1040 as dependents.

As a result, my reasoning was that I can craft an income stream from taxable, tax deferred, and tax-free sources to keep me in whatever low bracket I wanted to be in.

Although my ability to tax loss harvest is drying up quickly due to having substantial unrealized gains in most taxable positions. I imagine Mr. Market will be assisting me with this "problem" at some point though. He certainly has in the past.
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Old 10-12-2010, 11:43 AM   #18
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As Fuego has pointed out for the LBYM crowd it shouldn't be too difficult to minimize your tax bill.

I saw this over the weekend in the WSJ comparing the possible outcomes for the 3 scenarios in the near future:




Our breakdown is about 50:50 taxable:tax deferred currently. I have some post-tax contributions in a TIRA I will be converting to a ROTH.

DD
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Old 10-12-2010, 11:46 AM   #19
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Are we to suppose that there is some "Optimal" balance between the accounts ?

Sometimes what gets funded is by no means optimal. But the tax-rules kind of force your allocation.
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Old 10-12-2010, 11:52 AM   #20
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As Fuego has pointed out for the LBYM crowd it shouldn't be too difficult to minimize your tax bill.

I saw this over the weekend in the WSJ comparing the possible outcomes for the 3 scenarios in the near future:




Our breakdown is about 50:50 taxable:tax deferred currently. I have some post-tax contributions in a TIRA I will be converting to a ROTH.

DD
When you first look at your tables one might think... OK - rates are going up 3 or 4 percent... I can handle that.

But then when you add back in the marriage penalty, capital gains and dividend tax giant rate increases. Add in the Obamacare taxes on income and capital gains and the breath of the increases are staggering. They especially dis-incentivize those in the higher income (job-creation) category.

I see stagnation looking forward.
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