Reverse taxable & tax advantaged holdings?

[tmitchell]

For the early retiree why doesn't it make more sense to be more conservative in taxable accounts and riskier in tax-advantaged ones? The typical advice is to keep stocks in taxable and bonds in tax-advantaged.

Is the reason for this that the tax situation outweighs risk/return?

I see a lot of people here with 3 years cash as a buffer. Why not just reverse the holdings?

 

[Sunset]

Taxable - safe bonds
Tax-Advantage - risky stocks.

Problems:

1. Pay high taxes on interest in taxable account.
2. Cannot deduct losses on the risky stocks when some go bankrupt.
3. In IRA/401K will have to pay high taxes on the millions instead of none/low LTCG.

Advantage:

• Risky stocks grow to lots of money in tax-advantage

BUT the Risky stocks would still grow to lots of money in taxable account, so not any advantage.

 

[pb4uski]

For the early retiree why doesn't it make more sense to be more conservative in taxable accounts and riskier in tax-advantaged ones? The typical advice is to keep stocks in taxable and bonds in tax-advantaged.

Is the reason for this that the tax situation outweighs risk/return?

I see a lot of people here with 3 years cash as a buffer. Why not just reverse the holdings?

It is all about tax efficiency.

Interest is taxed at higher ordinary tax rates. US equity dividends and long-term capital gains are taxed at lower preferenced tax rates (0% if your taxable income is below $40k for a single, $80k for a married couple).

By holding equities in tax-deferred accounts where withdrawls are taxed as ornary income you are effectively converting tax-preferenced dividends and long-term capital gains into ordinary income. Bad.

 

[Animorph]

I think there is also a big difference between two types of tax-advantaged accounts, tIRA and Roth IRA.

I'm putting extra stocks in the Roth, where growth can be realized without LTCG's. I put extra bonds in the tIRA, where slow growth reduces the taxes I pay when I withdraw or convert. All while maintaining my AA for the overall portfolio. I still like to maintain 15% bonds in the Roth to allow some over-balancing in bear markets, and the tIRA ends up with something like 50% bonds. My taxable is 100% stocks, mainly because I'm trying to avoid taking large LTCG's while Roth converting and that's what is left. We have about a year's expenses in cash that I don't count as part of the AA, and 2% cash in the taxable account that is part of the AA just for a little liquidity.

For my DM, who's 90 and thinking more of inheritances than herself, I'm doing something similar, but her taxable account takes the place of a Roth account. Again, about 15% bonds in taxable, the rest in stocks that I try not to sell, with the rest of the bonds in a bond-heavy tIRA. No taxes on the stocks when inherited with a stepped up basis, so it's a little like a Roth when used like that.

I've really liked having at least the 15% bond allocation, which I set to 0% when the market dropped to 30% down. So I'm not sure I'd put all my bonds in any one type of account. The same goes for foreign stocks. I actually have all DM's international stock in her taxable account to take advantage of the foreign tax credit. But now I can't rebalance by selling international shares without generating LTCG taxes that would otherwise be avoided by a stepped up basis. So I'd like about 15% international in tIRA/Roth just for that case.

While I can see the appeal of bonds in taxable for short-term spending, I don't think stocks are a good fit with a tIRA. The sooner stocks and their growth can be placed in a Roth, the better. And if you don't expect them to be sold within your lifetime, a taxable account will work almost as well. Otherwise you're paying regular income tax rates for stock growth.

 

[pb4uski]

+1 as far as stocks in tax free Roth.

 

[Offgrid Organic Farmer]

It has been many years since the last time that I paid income taxes on my salary or investments.

Our primary focus on investments has been to the tax-sheltering that investments can provide.

Even now as a retiree, my pension is taxable and I would be paying taxes on it, if it were not sheltered by my investments.

 

[RunningBum]

Yeah, you really have to tell us what you mean by "tax advantaged".

Bonds interest is generally regular income, so I'd rather not have it in taxable. My first pick for it is a tIRA because the withdrawals out of there are also regular income.

I like stocks in taxable because cap gains are taxed at 0% or 15% for me. I also am unlikely to spend down all of my stocks, but my heirs can get a stepped up basis.

Any kind of investments are good in a Roth, but all things considered I'd like my biggest gainers here because it is never taxed. But given the situation with my taxable not likely being spent down, I don't mind holding some bonds here if I have to, to keep my AA in balance.

I started keeping more cash in my taxable account because I want to limit income to take advantage of the ACA subsidy. Once my Roth can be accessed, I may rethink this. I need to decide if it's better to hold cash in taxable, or withdraw from my Roth.

There are a whole lot of levers in deciding which assets to keep where, and where to withdraw from. I probably haven't even thought through all of the factors in this email. But I think it does answer why I want bonds in a tIRA and stocks in taxable. Others may have other factors or different weights on the same factors.