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

[haha]

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

 

[chinaco]

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...

 

[walkinwood]

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.

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.

 

[Lakedog]

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.

 

[grasshopper]

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

 

[73ss454]

Interesting thread Ha. Can I ask if ROTH's are subject to RMD's.

 

[FUEGO]

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.

 

[REWahoo]

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.

 

[REWahoo]

10% taxable
10% tax free
80% tax deferred

 

[FinanceDude]

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.........

 

[WilliamG]

3% Taxable
15% Tax Free (Roths)
82% Tax Deferred (Rollover IRA and IBonds)

Currently keeping the Taxable account floating with IRA withdrawals.

 

[ziggy29]

Currently:

16% Roth
8% taxable
76% tax-deferred

 

[MichaelB]

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.

 

[kaneohe]

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.

 

[FIREd]

85% Taxable
15% Tax-Deferred
0% Tax Free

Currently in too high a tax bracket to consider a Roth conversion.

 

[ronocnikral]

approximately:

50% roth
35% tax deferred
15% taxable

sometimes i wonder if our roth $ are too much...of only my crystal ball was working.

 

[FUEGO]

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.

 

[DblDoc]

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

 

[MasterBlaster]

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.

 

[MasterBlaster]

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.

 

[Rich_by_the_Bay]

Ha, I'm about 75% tax sheltered. I'll take my first substantial income drop next year and the following year due to a fade-out rather than a cold-turkey retirement strategy.

My initial thought for then was to fill up the 15% bracket with Roth conversions but as I think it through I might even take my chances on filling the 25% bracket. As Finance Dude points out it's a bit of risk management choice, dependent on future tax brackets.

I figure that even in a bad case scenario, withdrawing at 25% tax rate won't kill me and is, in fact, a very nice way to shore up the inheritance for the heirs. So I'll probably lean toward heavier Roth conversions once the income allows.

 

[REWahoo]

...due to a fade-out rather than a cold-turkey retirement strategy.

We all thought it was a "cold feet" retirement strategy...

 

[lowflyer]

Interesting topic. We are:

70% Tax deferred
30% Taxable
Considering starting Roth conversion this year

 

[rescueme]

88% Tax Deferred (e.g. TIRA's).
11% Tax Free (Roth's)
1% Taxable

This is the curent breakdown of those monies considerd for retirement only - not funds outside of that classification nor other assets held.

Since we expect most of our Tax Deferred accounts to go to our named non-profit charities upon our passing and assuming tax laws remain the same, there is no reason to worry about converting them. I would rather they use the $$$ upon our passing, rather than the tax man ...

 

[Rustward]

51% Tax Deferred
48% Taxable
1% Tax Free