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Where do you put your growth and income funds?
Old 04-20-2019, 08:51 PM   #1
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Where do you put your growth and income funds?

Years ago, I somehow learned that it is more tax efficient to put bond funds/income generation funds such as BIV, a bond index fund in the tax free account (ROTH) or tax deferred account (Traditional IRA) and put growth funds such as VOO, Vanguard version of the S&P 500 index fund in the taxable account.

However, a very financial savvy friend recently told me that he is doing just the opposite in his retirement. I am curious what approach is really correct or is it dependent on individual situation? If it depends, could you please provide your rationale for each approach?

In our case, we estimate that in our retirement, our tax bracket is going to be either 22% or 24%, but our effective tax rate has been anywhere between 17-19%. We are also in our early 50s and very close to ER but about 13 years away from being able to access income to be generated from our IRA accounts.
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Old 04-20-2019, 09:05 PM   #2
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It depends.
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Old 04-20-2019, 09:07 PM   #3
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Traditional IRA: Fixed Income because all withdrawals taxed as ordinary income and slowest growth of RMDs.
Roth IRA: Equity because not taxed so I want the potential for maximum growth.
Taxable: Equity Index funds because qualified dividends and capital gains are taxed at lower rates than ordinary income and basis is stepped up when I die.


Edited to fix typo and add more detail.
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Old 04-20-2019, 09:12 PM   #4
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Most of my growth is in my IRA accounts
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Old 04-20-2019, 09:49 PM   #5
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Could you please elaborate on your reasons of putting growth in IRAs instead of taxable account? Thanks!
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Old 04-20-2019, 10:03 PM   #6
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Quote:
Originally Posted by Prague View Post
Could you please elaborate on your reasons of putting growth in IRAs instead of taxable account? Thanks!
When I retired, I rolled over my 401K with T. Rowe into a self directed IRA. i felt that even with the RMD, the funds will still grow more in a non taxable fund. I did it in 2009, right after the big drop in 2008. By pure dumb luck, I selected some investments that are worth 5X what I rolled over in 2009.
That being said, at this point I am about 50/50 between taxable and non taxable funds.
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Old 04-20-2019, 10:50 PM   #7
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Originally Posted by N02L84ER View Post
Traditional IRA: Fixed Income because all withdrawals taxed as ordinary income.
Roth IRA: Equity because not taxed so I want the potential for maximum growth.
Traditional: Equity because qualified dividends and capital gains are taxed at lower rates than ordinary income and basis is stepped up when I die.
+1 and it depends lots to read here so can't summarize.

This is from boglehead Wiki:
https://www.bogleheads.org/wiki/Tax-...fund_placement
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Old 04-20-2019, 10:54 PM   #8
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Quote:
Originally Posted by Souschef View Post
When I retired, I rolled over my 401K with T. Rowe into a self directed IRA. i felt that even with the RMD, the funds will still grow more in a non taxable fund. I did it in 2009, right after the big drop in 2008. By pure dumb luck, I selected some investments that are worth 5X what I rolled over in 2009.
That being said, at this point I am about 50/50 between taxable and non taxable funds.

Do you have any Roth IRAs?
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Old 04-20-2019, 11:03 PM   #9
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Originally Posted by capjak View Post
+1 and it depends lots to read here so can't summarize.

This is from boglehead Wiki:
https://www.bogleheads.org/wiki/Tax-...fund_placement
+1.
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Old 04-20-2019, 11:11 PM   #10
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Quote:
Originally Posted by N02L84ER View Post
Traditional IRA: Fixed Income because all withdrawals taxed as ordinary income and slowest growth of RMDs.
Roth IRA: Equity because not taxed so I want the potential for maximum growth.
Taxable: Equity Index funds because qualified dividends and capital gains are taxed at lower rates than ordinary income and basis is stepped up when I die.


Edited to fix typo and add more detail.
+1 Other than a 2% online savings account for liquidity all fixed income is in tax-deferred. Taxable is international equities to utilize foreign tax credit and domestic equities... both provide qualified dividends and LTCG that are taxed at preferential rates... generally 0% or 15% depending on one's taxable income. Roths and HSAs are all domestic equities.

So tax-deferred is fixed income and equities as needed to balance to desired target AA.
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Old 04-20-2019, 11:24 PM   #11
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My IRA is 100% equities. The growth is excellent.

So I'll pay more taxes because I made more dough. But I still get more dough that way eh? It's not like taxes are 50%?
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Old 04-21-2019, 08:41 AM   #12
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I follow the Bogleheads Wiki that capjak posted. I have a CD ladder in my taxable account for living expenses up to age 65, which helps me manage MAGI for the ACA subsidy with a predictable amount of income. Otherwise the taxable account has index funds, including international so I can take the FTC.

tIRA is where I keep bonds.

My Roth has some bonds, some funds that throw more income or have unpredictable distributions, or might make my taxes more complicated if in taxable (like REITs). If I were a trader I'd be doing it in my Roth so I wouldn't have to worry about holding for a year to avoid STCGs. It seems to be a place to put your highest gainers because you don't pay tax on the gains, but with big gains comes risk, and you get no tax advantage with losses in a Roth. But I'm not a trader and don't have any very risky investments anymore so that's not a factor to me.

The majority of my money is in taxable so your situation may be different. I think whether or not you want to manage MAGI makes a big difference too.

Quote:
Originally Posted by Prague View Post
However, a very financial savvy friend recently told me that he is doing just the opposite in his retirement. I am curious what approach is really correct or is it dependent on individual situation? If it depends, could you please provide your rationale for each approach?
Have you asked your very financial savvy friend why he's doing it this way? Could you share it? If he's really savvy, maybe we could learn something, if his case isn't too special. Or maybe he's not so savvy in personal finances especially wrt to taxes.
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Old 04-21-2019, 08:49 AM   #13
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Same thought, from different sources - tax-efficiency of investments.
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Old 04-21-2019, 09:00 AM   #14
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Taxable: cash, st bonds, munis, low-beta dividend stocks.

tIRA: growth stocks, bond funds.

Roth: long term growth equities.
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Old 04-21-2019, 09:51 AM   #15
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Yes, very small amounts as we were not eligible to contribute to roth except one year in our careers.
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Old 04-21-2019, 10:33 AM   #16
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Quote:
Originally Posted by RobbieB View Post
My IRA is 100% equities. The growth is excellent.

So I'll pay more taxes because I made more dough. But I still get more dough that way eh? It's not like taxes are 50%?
What is your AA? Are you 100% equities?

If your AA includes fixed income, what kind of account do you keep them in (taxable, tax-deferred or tax-free)?.... and why?
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Old 04-21-2019, 11:38 AM   #17
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https://www.bogleheads.org/wiki/Tax-...fund_placement
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