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Taxable investment asset allocation for ER
Old 11-22-2014, 07:18 PM   #1
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Taxable investment asset allocation for ER

Hi folks, I have read and understand the guidance (like boglehead wiki) on full-portfolio asset allocation where dividend and other income generating investments should be kept in tax advantaged accounts. Similarly, equity/stock investments can be in the tax disadvantaged accounts because their gains can be taxed lower via long term capital gains.

What I don't understand is, if I want to retire/FI well before 59.5 and thus can't touch my 401k assets (and make too much to contrib to Roth IRA), shouldn't my taxable Vanguard account have its own independent asset allocation? If I follow the full portfolio allocation with tax advantaged awareness, my fledgling Vanguard acct will be full stock fund(s) and nothing to act as the safe bond-type anchor to balance the risk. If I do add a bond fund, i am thinking one of the Vanguard muni-bond funds. Am I thinking about this correctly? Are there other conservative fund types to consider for this type of account?


I posed this question to Rick & Tom (?) on the radio show Talking Real Money today and they gave me the full-portfolio allocation answer and moved on. Hoping you folks can give some additional input on this. For background, my spouse and I both work for a megacorp that has 401ks with matching, max them to the annual limit, max our HSAs for investing, and have 529s for the kids that look on track. We're aggressively adding taxable investments b/c as far as I can tell all that loot we have in our 401ks is basically off limits till 59.5 without penalties. Please correct me if this isn't true.

Thanks for your input!
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Old 11-22-2014, 07:28 PM   #2
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Here's how you get around this. When you want to take a withdrawal just sell whatever equities in taxable that you need to sell. Then sell bond and buy similar (but not exactly the same) equities in your tax advantaged space. Your positions after the event will match whatever you wanted for equity/fixed allocation, as if you had sold fixed even though your taxable account holds only equities.
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Old 11-22-2014, 07:28 PM   #3
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Your taxable account assets will be so large that it won't matter that they are all equities. But if you worry, you can put some tax-exempt bond funds in them.

But say they are all equities. Every time you sell some equities in taxable, you can exchange from bond funds into equity funds in tax-advantaged to keep your asset allocation the same.

Bogleheads has this wiki article too: http://www.bogleheads.org/wiki/Placi...ntaged_account
which describes how to have cash in your IRA or 401(k) and spend it without penalty by using only equities in your taxable account.

This trick was probably more important tax-wise when fixed income was making 5% or more, but now with a cash making 0.01% to 1%, cash is actually very tax-efficient.
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Old 11-22-2014, 07:34 PM   #4
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I do AA over the full portfolio. If I did it on my taxable account independently, meaning I'm putting bonds in that account, I'd have to do AA on my tax advantaged accounts too, and that would defeat the goal of placing investments tax efficiently.

If stocks drop, it doesn't really matter which account they drop in, assuming you don't drain the taxable account.

Some people use buckets of CDs to provide cash for a few years of expenses and take the risk out of stocks dropping in the account you are drawing from. I don't do that, but I typically have anywhere from 3-12 months of expenses in my savings/money market/checking account.

Not sure if that helps explain it to you.
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Old 11-22-2014, 07:38 PM   #5
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I do what growing_older (and others) said. My taxable investments are about 40% of my total assets with tax-deferred 50% and tax-free 10%. My overall AA is 60% equities/40% fixed income. So my entire fixed income allocation is in tax-deferred and taxable is all equities. When I need cash for the year I sell equities for my annual living expenses and then rebalance to my overall AA in my tax-deferred accounts by selling fixed income and buying equities (or vice versa if equities have had a great year and I need more fixed income). Easy.
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Old 11-22-2014, 08:21 PM   #6
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Thanks for the fast responses. This does help and this gave me an idea of how to do the cross-account rebalancing to maintain overall AA targets. The boglehead wiki link as well as your descriptions of how you're handling it.

What was said about shaving off 1-2 years of financial need into a cash-like bucket perhaps addresses my concern: if my taxable account were all stock funds, and it is what I primarily have to live off to get me to 59.5, and if the markets tanked I'd be hosed. However if I had the ~2 years of living expenses already carved off then I could better ride out a drop and not have to sell low out of taxable.

Of course, maybe this is where I need to look at AA diversification in terms of rental income and other post-ER income. Thanks for the inputs, it is helping!
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Old 11-22-2014, 11:32 PM   #7
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You can touch your 401K prior to 59.5 if you retire after 55 (may depend on company rules?) .
Plus you can touch it if you already rolled it into an ira, by transferring a chunk of the money to a second ira, then do a 72t on the second ira (you want to not do it all on 1 ira as that allows you flexibility).
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Old 11-22-2014, 11:36 PM   #8
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What we have done is have ~2 yr worth of living in cash earning 1% interest.
Frankly after considering dividends from the taxable stock, plus very tiny pension, plus having no debts, our ~2 yr worth would probably last 3 years and more if we had to scrimp.
So don't forget about your taxable dividend income.
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Old 11-23-2014, 11:35 AM   #9
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Thanks, Sunset, great point about the 72t/SEPP option. I actually didn't know about the 72t rule until you mentioned it and now have looked it up. Definitely adds another tool to the kit
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