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Tax deferred and after tax asset allocations
Old 10-19-2008, 09:43 PM   #1
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Tax deferred and after tax asset allocations

Does anyone have opinions whether it's appropriate to have different asset allocations in tax deferred and after tax accounts as you approach retirement, particularly as it affects retirement income? For instance how would you allocate a CD ladder between after tax accounts and tax deferred accounts?
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Old 10-19-2008, 09:47 PM   #2
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I put my most tax efficient in taxable. In tax advantaged I put bonds. Although I do have 2 CDs in my taxable for income.
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Old 10-19-2008, 10:15 PM   #3
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Probably not the main focus of your question, but one consideration for later is that you need to provide for the RMDs on IRAs/401Ks......esp. in a yr like this, it would be useful to have a stable value component in these retirement funds so that you don't need to liquidate equities in a down market. If the stable value component is a CD ladder, you need to consider whether you have to liquidate them before maturity w/ subsequent penalty at many/most? institutions (PenFed excepted).
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Old 10-19-2008, 10:26 PM   #4
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I vote for extreme tax efficiency. I would not have CDs, bonds, stable value, TIPS in a taxable account if there was room for them in a tax-deferred account. If I could not withdraw from my tax-deferred account when stocks were low, I would still sell my stocks at their low price in my taxable account, take any tax losses, then use some of my cash or other fixed income in my tax-deferred accounts to buy similar (but not substantially identical) equities in my tax-deferred account.

If I had all this inside a black box, it would look to someone outside the black box as if I had used my cash in my tax-deferred accounts to raise some cash.
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Old 10-19-2008, 10:30 PM   #5
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Does anyone have opinions whether it's appropriate to have different asset allocations in tax deferred and after tax accounts as you approach retirement, particularly as it affects retirement income? For instance how would you allocate a CD ladder between after tax accounts and tax deferred accounts?
Yes, I think it does, especially if you have a plan for when you will draw on the different accounts. So, my plan is not to access anything in my Roth until all other accounts have been drawn down. So I have more aggressive investments in that account (meaning more stock funds) in that account, but, I take advantage of foreign tax credits by putting my international funds in my brokerage account.

As for income, I'm still working through that. I have CDs in my brokerage account along with short term bond funds, because this is the account I will draw on first.

-- Rita
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Old 10-20-2008, 07:07 AM   #6
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I vote for extreme tax efficiency. I would not have CDs, bonds, stable value, TIPS in a taxable account if there was room for them in a tax-deferred account. If I could not withdraw from my tax-deferred account when stocks were low, I would still sell my stocks at their low price in my taxable account, take any tax losses, then use some of my cash or other fixed income in my tax-deferred accounts to buy similar (but not substantially identical) equities in my tax-deferred account.

If I had all this inside a black box, it would look to someone outside the black box as if I had used my cash in my tax-deferred accounts to raise some cash.
So am I right in thinking you'd have mostly growth equities in your taxable account, probably a MM and a regular checking account for easily accessed cash and most of your income stuff and the CD ladder in tax deferred? Would you then draw down your taxable accounts first until you had to take income form the tax deferred accounts? How many years of expenses would you leave in taxable accounts before you did this?
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Old 10-20-2008, 10:00 AM   #7
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So am I right in thinking you'd have mostly growth equities in your taxable account, probably a MM and a regular checking account for easily accessed cash and most of your income stuff and the CD ladder in tax deferred? Would you then draw down your taxable accounts first until you had to take income form the tax deferred accounts? How many years of expenses would you leave in taxable accounts before you did this?
Our taxable accounts amount to about 50% of our invested assets. We have all equity funds in these accounts such as SPY, MDY, IWM, VBR, VTSMX, VEA, .... except for about 3% of total assets in tax-exempt money market fund. Our tax-advantaged accounts consist mostly of fixed income (bond) funds with some stock funds as well.

We are not withdrawing from our invested assets yet. When we do, I intend to use my taxable investments to pay for expenses as long as possible. Since much of this will be "return of capital" it will be tax-free. At the same time, I intend to convert traditional IRA assets to Roth IRA assets. I will have to pay tax on the conversion, but I expect to be in the 0% to 15% tax bracket when I do these conversions. After conversion, these Roth monies will be tax-free.

As I draw down the taxable investments, I do not see where I would need to leave any money in them at all. I expect that all my tax-advantaged investments will be converted to Roth IRA, so I will pay little to no taxes when I start withdrawing from the Roth for expenses.

With 50% of our invested assets in taxable accounts and a 4% safe-withdrawal rate, we have about 12 years of withdrawals when we start withdrawing from the taxable accounts. That will put us in our early 60s when there will be no penalties or presumably hassles when we start withdrawing from our tax-deferred accounts.
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Old 10-20-2008, 11:41 AM   #8
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I intend to convert traditional IRA assets to Roth IRA assets. I will have to pay tax on the conversion, but I expect to be in the 0% to 15% tax bracket when I do these conversions. After conversion, these Roth monies will be tax-free.
I'm still paying into my ROTH, but when I ER I too intend to do some IRA to ROTH conversions. In retirement I'll start out with $17k a year in taxable income from rent and a small pension. I estimate my annual expenses will be about $30k so I'll make up the difference from my taxable accounts and do an IRA to ROTH conversion up to the 15% tax bracket limit, about $32k this year.

So in my taxable accounts I think I'll have a year's expenses in a tax exempt MM for emergencies and some diverse stock index funds like Vanguard Total Stock Index and International Index. I'll cover my expenses from my $17k in income and get the other $13k by accessing the capital in the index funds. Any difference between my income and the top of the 15% tax bracket I'll use to do an IRA to ROTH conversion.

In my tax deferred accounts I'll setup a 5 year CD ladder that I'll only access if the market is in free fall and cashing in the index funds in my taxable accounts would just consolidate a big loss. The rest of the tax deferred accounts will be stock index and bond index funds and I'll keep my total tax deferred asset allocation to around 50/50.
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Old 10-20-2008, 12:45 PM   #9
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The dividends from total stock market and int'l stock market index funds amount to about 1% to 2% of the fund assets per year, so add that to your income.

If you are in a low tax bracket, then a tax-exempt money market fund may not make sense. You should check the after-tax yield on that. You may decide to that another kind of fund is better to use for your emergency fund.
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Old 10-20-2008, 12:53 PM   #10
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The dividends from total stock market and int'l stock market index funds amount to about 1% to 2% of the fund assets per year, so add that to your income.

If you are in a low tax bracket, then a tax-exempt money market fund may not make sense. You should check the after-tax yield on that. You may decide to that another kind of fund is better to use for your emergency fund.
I'll probably have between $200k and $300k in after tax accounts when I retire so my taxable dividends won't cover the entire $13k I need so I'll have to use some of the capital. I take your point about the MM and my low tax bracket. Part of my ER, and general, philosophy is LBYM and I think the best strategy to save on tax is to keep income below the 15% limit.
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