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Help make my investments more tax efficient
Old 12-12-2020, 04:20 PM   #1
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Help make my investments more tax efficient

I'm not sure if I should even try. But here it goes.

A few stats:

52 years old. Retiring. Married no kids, DW also 52 years old.

Investments in 3 fund portfolio with 10% cash
45% stock (10% international, the rest VTSAX) and 45% bonds (divided intermediate treasury and VBTLX).

My wifes investments are 500k (60/40 low cost fund fidelity) in 401K and 50K in Roth.

Overall assets equal 4.8million

The rest all in taxable through me. I plan on reducing overall asset allocation to 40/60.

So most of our money are in taxable. Currently a large amount in taxable are high basis assets.

Other than Roth conversion in 401K,how can I Or should I do anything else to make it more tax efficient?
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Old 12-12-2020, 04:45 PM   #2
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Read this: https://www.bogleheads.org/wiki/Tax-...fund_placement

Generally you want bonds in tax-deferred, international equities in taxable (to take bondsadvantage of the foreign tax credit, which goes to waste in a tax-deferred or tax-free account) and equities in taxable and tax-free.

So in your case I think that your tax deferred... mostly you wife's 401k?... will be 100% fixed. Then your 10% of international solely in taxable accounts. For fixed income in your taxable accounts you might consider substituting a muni-bond/ETF for a bond fund/ETF.

I'd suggest that you do an analysis of where you are, where you would like to be with no constraints and then adjust as necessary of how you get from A to B after considering tax ramifications of the changes that you woudl want to make. Depending on the tax ramifications, you may need to do the change over a number of years.
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Old 12-12-2020, 05:00 PM   #3
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While it’s wise to consider taxes with your investments, be careful to not let the tax tail wag the dog.
Some simple things to do are to keep equities taxed at capital gains rates in your taxable account, and bonds, REITs and other things taxed at ordinary rates in tax deferred accounts. Of course, all bets are off if capital gains rates go up. Municipal bonds are wasted in anything other than a taxable account.
Roth conversions depend on a lot of variables. If you’re keeping your income low for ACA subsidies, you need to watch that. If you’re like me, which I suspect based on your numbers you may be, consider that the current tax rates expire in 2026. I’m converting heavily into Roth accounts before the rates go back up. The other concern should one of you pass away, is the survivor will be paying taxes at the single rate. RMDs are 8 years away for us, but time flies. Our tIRA/401k accounts are larger than when we started rollovers to Roth. So we’re taking a tax hit now because with SS starting at 70 and RMDs two years later and tax rates likely to go up it will hit us hard.
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Old 12-12-2020, 05:01 PM   #4
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Originally Posted by pb4uski View Post
Read this: https://www.bogleheads.org/wiki/Tax-...fund_placement

Generally you want bonds in tax-deferred, international equities in taxable (to take bondsadvantage of the foreign tax credit, which goes to waste in a tax-deferred or tax-free account) and equities in taxable and tax-free.

So in your case I think that your tax deferred... mostly you wife's 401k?... will be 100% fixed. Then your 10% of international solely in taxable accounts. For fixed income in your taxable accounts you might consider substituting a muni-bond/ETF for a bond fund/ETF.

I'd suggest that you do an analysis of where you are, where you would like to be with no constraints and then adjust as necessary of how you get from A to B after considering tax ramifications of the changes that you woudl want to make. Depending on the tax ramifications, you may need to do the change over a number of years.
The problem with I see with muni funds is low interest payments. I can sell some VBTLX bonds since it has a high basis value and put them in munis.

One problem I see with my wife moving all her 401K into bonds is when we withdraw money it will be from cash and taxable until we have to do RMD. So What happens when the markets drop? If we have money in bonds (taxable) we could use some of that until the markets recover.
The only way I see it working is to have a large cash reserve to outlast the market downturn and get to the recovery. So that would mean around 7 to 10 years of holding cash.
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Old 12-12-2020, 05:04 PM   #5
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Some more or less random thoughts on your situation.

First, I agree with the above suggested to make your wife's tax deferred fund all fixed. No tax hit to sell equities in there, and that fixed income is usually regular income that you don't want in taxable.

This past spring would've been a great time to reposition. I found that some of my gains became losses, and could easily be harvested. So watch for another opportunity like this. OTOH, it would work out better to just sell the equities you want and take the tax hit rather than have the value drop and then sell. For me it wasn't really an issue because I traded one equity fund for another, but you'd be looking to replace it with bonds. Of course, you can't know whether that drop is coming or not.

If you still have dividend reinvestment turn on, turn it off. Invest the cash where it helps get the new AA you want, or use it for spending.

Think about a Roth conversion strategy for your wife's tax deferred money. You could spread the conversion over 15-18 years to get it all done and have no RMDs before you start SS. Or maybe save some for QCDs (charitable giving).
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Old 12-12-2020, 05:07 PM   #6
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One more thing, try to use SpecID as the basis for selling mutual funds in your taxable. You can do this as long as you haven't already sold some using average cost. This will let you pick which shares to sell, so you can choose shares with losses or fewer gains than the big gainers.
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Old 12-12-2020, 05:10 PM   #7
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Originally Posted by viking111 View Post
One problem I see with my wife moving all her 401K into bonds is when we withdraw money it will be from cash and taxable until we have to do RMD. So What happens when the markets drop? If we have money in bonds (taxable) we could use some of that until the markets recover.
The only way I see it working is to have a large cash reserve to outlast the market downturn and get to the recovery. So that would mean around 7 to 10 years of holding cash.
If equities drop you can sell what you need from taxable, and if that has your asset allocation lower in equities than you want, you just buy them in the Roth first, then the tax deferred account.
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Old 12-12-2020, 05:23 PM   #8
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If equities drop you can sell what you need from taxable, and if that has your asset allocation lower in equities than you want, you just buy them in the Roth first, then the tax deferred account.
Can I still buy in roth if I'm retired and not getting any income?

This is all getting complicated. I wonder if my wife can do all of this if something happens to me.

The big questions is, is it worth it and how much really can one save in taxes by doing all of it? I can see doing the roth conversion.

If I move my wifes 401K all in to bonds, then I have to adjust for it in taxable with stocks. The stocks would then create dividends and interest that would also be taxed. Except more than the bonds because bonds would not have a higher interest or dividends than stocks.

So it seems like I would just be paying more taxes if I did that because of the higher returns in stocks.
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Old 12-12-2020, 05:49 PM   #9
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What's your healthcare plan and managing income for ACA subsidies if necessary? Thought I would add to the confusion as that is my hardest modeling aspect I am working through.
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Old 12-12-2020, 06:13 PM   #10
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Quote:
Originally Posted by viking111 View Post
Can I still buy in roth if I'm retired and not getting any income?

This is all getting complicated. I wonder if my wife can do all of this if something happens to me.

The big questions is, is it worth it and how much really can one save in taxes by doing all of it? I can see doing the roth conversion.

If I move my wifes 401K all in to bonds, then I have to adjust for it in taxable with stocks. The stocks would then create dividends and interest that would also be taxed. Except more than the bonds because bonds would not have a higher interest or dividends than stocks.

So it seems like I would just be paying more taxes if I did that because of the higher returns in stocks.
You can't make contributions to a Roth unless you have earned income, but you can convert as much as you want from tax-deferred to Roth, but the amount converted will be taxable income in the year it is converted.

It isn't too complicated once you get used to it. In fact; its really pretty simple... fixed into tax-deferred, international equities into taxable and then domestic stocks fill in the rest.

Stocks only create dividends (not interest)... and qualifed dividends and long-term capital gains in a taxable account are taxed at preferential rates (0% or 15% for most people, depending on your income, 20% for those really high income). OTOH, interest in a taxable account is taxed at ordinary tax rates (ranging from 10% to 37%, but generally 22% and up for most people). This is why it is recommended to put stocks in taxable or tax-free accounts... stocks in tax-deferred accounts essentially convert preferential income taxed at lower rates to ordinary income taxed at higher rates.

How much can one save? Let's say that your taxable income is $200k. At $200k, preferential income is at 15% and ordinary income is at 24%... so that $200k of bonds in your wife's portfolio is costing you $18k a year for something that is very easy to changed, especially since you are already planning changes to go to 40/60 overall... it's easy money.

On Roth conversions, typically early retirees will have a period of time between retiring and when any pensions or SS start where they will be in a low tax bracket compared to the tax bracket that they will be in once pensions and SS start... and that is the ideal time to do Roth conversions. OTOH, is any pensions or SS have negligible effect on your future tax bracket then Roth conversions are less worthwhile but still worth it for more complicated reasons I won't get into right now so your eyes don't glaze over.
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Old 12-12-2020, 06:14 PM   #11
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Originally Posted by viking111 View Post
Can I still buy in roth if I'm retired and not getting any income?
What I mean is, exchange bonds for equities within your Roth, if you are holding any bonds in the Roth. You can't contribute to a Roth without income.

Quote:

This is all getting complicated. I wonder if my wife can do all of this if something happens to me.
Understood. Maybe the goal is to get it as tax efficient as you can now so she doesn't have to do anything later. It might not stay so tax efficient then, but it should be closer.

As long as you make it to 59.5, she can then withdraw from any account, so fixed income in her IRA is accessible. You could just leave her some guidance where she should draw funds from.

Quote:

The big questions is, is it worth it and how much really can one save in taxes by doing all of it? I can see doing the roth conversion.

If I move my wifes 401K all in to bonds, then I have to adjust for it in taxable with stocks. The stocks would then create dividends and interest that would also be taxed. Except more than the bonds because bonds would not have a higher interest or dividends than stocks.

So it seems like I would just be paying more taxes if I did that because of the higher returns in stocks.
Stocks create dividends. Mostly qualified dividends, which are taxed at the favorable LTCG rate.

Bonds have lower rates now, but usually they don't. And bond interest is usually taxed at regular income rates.

So yes, there is likely a benefit to making these kind of changes. Enough of one to matter? Hard to say, and we certainly don't have enough info. It would seem worthwhile to me to get advice from a tax accountant. Presumably they all charge by the hour, unlike a financial advisor who may try to charge a % on assets, but make sure you are paying a fixed hourly fee, and not getting advice from someone trying to sell you something that may be to their benefit, not yours. The tax guy should be able to lay it out more logically for you and your wife than the piecemeal (and free!) advice you are getting here.
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Old 12-12-2020, 06:21 PM   #12
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In case you feel confused by the posts you are getting, I see nothing that pb4 or dash has posted that conflicts with what I've said, or at least tried to say. We may have approached it differently but the message really is the same.

And nothing wrong with npage's post either. If you can limit your income to get an ACA subsidy, you may not be able to rebalance by selling equities in your taxable account, or do Roth conversions. You'll have to figure out which goal nets you more value.
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Old 12-12-2020, 07:16 PM   #13
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I think you'll end up something like this if there were no constraints at all due to tax sales. I assumed that your target of 40% stocks included 10% international and that your target of 60% fixed included 5% cash... to the extent that your thinking differently, then make appropriate adjustments.
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Old 12-12-2020, 07:24 PM   #14
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What's your healthcare plan and managing income for ACA subsidies if necessary? Thought I would add to the confusion as that is my hardest modeling aspect I am working through.
Right now my wife has insurance for the next 2 years. Then ACA.

As it stands now it's around 1000 per month.
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Old 12-12-2020, 07:30 PM   #15
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The problem with I see with muni funds is low interest payments. I can sell some VBTLX bonds since it has a high basis value and put them in munis.

One problem I see with my wife moving all her 401K into bonds is when we withdraw money it will be from cash and taxable until we have to do RMD. So What happens when the markets drop? If we have money in bonds (taxable) we could use some of that until the markets recover.
The only way I see it working is to have a large cash reserve to outlast the market downturn and get to the recovery. So that would mean around 7 to 10 years of holding cash.
You'll have to assess whether substituting munis for taxable bonds are right for you based on available yields and your marginal tax bracket. IME there are times where muni yields are attractive and times when they are not.

On the last part, you will have enough in fixed in taxable accounts that it won't be a problem... your total assets would need to be less than a million before her $550 would ever be your total bond allocation at 60%... and if you go from $4.8m to less than $1m then AA will likely be the least of your worries.
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Old 12-12-2020, 07:48 PM   #16
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I have a large chunk of my taxable in VWAHX a "high yield" tax exempt muni fund. I am in at a decent cost basis and have room for it to go down. I've been following this one for some time. I could sell right now at a gain of almost 1 year's worth of interest. Problem, I would not see a better alternative for me right now. It suits some time horizon and risk/return goals. They call it high yield but it is sort of somewhere in between. Vanguard is very transparent about holdings. I would say the "high yield" plays in it are good calculated risks, others may disagree. It moves around a bit but payments have been rock steady month after month through it all. So if you can stand it moving around and just want the monthly tax exempt income it can have a place. Each situation is different.

For this one, really depends on where you bought in, around $11, great, $11.50 OK, current price approaching $12 and 3% yield less so but again 3% tax exempt in this market. Pretty good.

Over recent history anytime it seems to get closer to $11 money flows in and up it goes. It is basically right now almost back to where it was before the big March drop. Expect 5% 10% swings occassionally though.
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Old 12-12-2020, 08:08 PM   #17
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If equities drop you can sell what you need from taxable, and if that has your asset allocation lower in equities than you want, you just buy them in the Roth first, then the tax deferred account.
So lets say I'm 40/60. With bonds in 401K or roth due to conversion. Now equities drop in value by 20% and don't recover for 3 to 4 years.

You are saying to sell stock to live on. Then use the cash to buy stock later in roth? How much can you buy in roth?
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Old 12-12-2020, 08:19 PM   #18
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So lets say I'm 40/60. With bonds in 401K or roth due to conversion. Now equities drop in value by 20% and don't recover for 3 to 4 years.

You are saying to sell stock to live on. Then use the cash to buy stock later in roth? How much can you buy in roth?
If you follow pb4's chart, you would have $50K in bonds in the Roth. You could sell that and buy $50K in equities, all within the Roth. At most places (Vanguard for sure), you can do it as an exchange.

If $50K is not enough, then move on to the tIRA to exchanged fixed income or cash to equities.

And I didn't say to buy the stock later, you can buy it right away* in those accounts when you sell from taxable.

*IMPORTANT CAVEAT: If you are taking a loss in taxable on the stock sales, wait at least 31 days before buying the same (or substantially the same) fund in your Roth or tIRA. Otherwise you get hit with the worst of Roth rules. You can't take a capital loss on the stock sale because you bought it back too quickly, and you can never recover the loss because you bought it in an IRA.
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Old 12-12-2020, 09:18 PM   #19
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So lets say I'm 40/60. With bonds in 401K or roth due to conversion. Now equities drop in value by 20% and don't recover for 3 to 4 years.

You are saying to sell stock to live on. Then use the cash to buy stock later in roth? How much can you buy in roth?
Yes, you could do that... let's say you wanted $100k... sell $100k of stock in taxable account and in tax-deferred sell $100k of bonds and buy $100k of stock.

Taxable............... sell $100k of stock
Tax-deferred*...... buy $100k of stock and sell $100k of bonds
Net..................... nil..............................sell $100k of bonds

* or tax-free or combination thereof

As RB said if the sale of stock was a loss you would make the buy sufficiently dissimilar so that you don't violate the wash sale rules... then after the 31 days flip the stock for what you originally had... VFIAX would be dissimilar enough from VTSAX to do it.
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Old 12-13-2020, 09:03 AM   #20
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Keep in mind that placing international equities in taxable, thus capturing the foreign tax credit is not a total win. I started the process of moving international from our IRA's in 2019 and continued the process in 2020. At tax time last year, I was disappointed to find that of the 3 international funds we owned, VEA, SCZ and VWO, only 78%, 60% and 47% respectively, were Qualified divys. The remainder are regular income. The foreign tax credit appeared to be roughly 7% of the total dividend. We are in the 24% marginal tax bracket and the 15% tax bracket for qualified dividends. So VEA works pretty well, at 78% Qualified, but the SCZ and VWO, not so much.
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