Taxable vs IRA Asset Allocation

[DenverCraig]

Hi There,

Wife and I are 58. I'm looking at ER in the next few months (wife wants to keep working). We have three years of cash in CD's and savings standing by. We also have our 60/40 (Stock/bond) retirement money funded and ready to go.

But I also have this other cash just kind of sitting in a taxable Schwab account not doing anything (I sold a bunch of company stock last year).

At first I was thinking we need to figure out a low-risk, liquid Schwab Money Fund but thinking more about it, our cash position is fine, so I should just go ahead and invest it. So do I just sort of merge it into my existing asset allocation, or do you think about taxable vs retirement (pre-tax) asset allocations differently. Or am I overthinking it.

I feel like this is a dumb question, but so be it.

Thanks!

DC

 

[RunningBum]

Not a dumb question at all. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement is a great resource that covers this topic.

 

[ERD50]

Not a dumb question at all. But I suggest you look at the entire picture. Saying you have 60/40 and 3 year's cash, and then some "other cash" is confusing, and probably not helping you see the big picture.

Many just lump cash with fixed, but you could also do Equities/Fixed/Cash. Even 60/40 is leaning towards the conservative side (and that's fine), but how much cash are we really talking about?

Pick an AA overall, and move towards that. Logic says jump in all at once, but many would feel more comfortable with averaging in over time, probably not a big deal either way. Just remember that historically, being too conservative ( less than ~ 35% Equities) has hurt portfolio survival.

-ERD50

 

[Montecfo]

Pick an AA to cover all assets and make sure you stick with it, at least in the aggregate. Each individual account need not reflect it however.

 

[mrfeh]

Not a dumb question at all. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement is a great resource that covers this topic.

+1

Think of your portfolio in the whole. Place funds in accounts for tax efficiency.

 

[sengsational]

My approach is to only worry about asset allocation on the aggregate, across all tax buckets.


Someone might challenge the idea because a situation could arise where you need cash, and the account you need it from has a price- depressed asset class position. But my solution is to sell the position for cash, while concurrently buying that same position in another tax bucket. Your allocation stays the same, and you didn't "sell low".

 

[Gumby]

I consider asset allocation across the entire portfolio. However, it does make sense to consider the most tax efficient place to hold specific assets. For example, if you hold foreign stocks in an IRA you lose any foreign tax credits.

 

[mountainsoft]

Wife and I are 58. I'm looking at ER in the next few months (wife wants to keep working). We have three years of cash in CD's and savings standing by. We also have our 60/40 (Stock/bond) retirement money funded and ready to go.

But I also have this other cash just kind of sitting in a taxable Schwab account not doing anything (I sold a bunch of company stock last year).

At first I was thinking we need to figure out a low-risk, liquid Schwab Money Fund but thinking more about it, our cash position is fine, so I should just go ahead and invest it. So do I just sort of merge it into my existing asset allocation, or do you think about taxable vs retirement (pre-tax) asset allocations differently. Or am I overthinking it.

I think of our savings/investments as a whole, with each part serving a different purpose.

Our "Tax-Free" savings are our Roth IRA accounts. These are where I have our more volatile stock investments as these are meant for long term retirement and have more time to ride out the ups and downs. Ideally this will be the last money we'll ever spend.

Our "Tax Deferred" savings is my Traditional IRA account. Other's may have 401K's in this group. This is where I have our bond investments as they are less volatile. We will start drawing from my traditional IRA as soon as we retire, so I don't want the balance to rise and fall too dramatically.

Our "Taxable" savings is everything else, including our joint brokerage account, high interest savings account, CD's if you have them, and cash/checking funds.

I keep about $2500 cash in each of our checking accounts. This allows us to avoid any monthly fees and is the fastest emergency money we have access to (other than a credit card). Any income we receive goes into checking. Once all expenses are paid, any extra gets transferred to savings.

I keep about $30K in our online high interest savings account. It has dropped to around 1% in recent months, but that's still much better than my local bank. This is enough to cover about one year of essential expenses if we were to lose one of our jobs right now. It will be enough to cover about two years once we retire with my wife's pension. This is money we keep aside for emergencies. It's FDIC insured and we can count on it being there, even though it can take a few days to transfer. Worst case we can use a credit card and pay it off once the funds are in our checking account.

Any additional taxable savings we have is in our taxable brokerage account. I still consider this emergency money, as we can withdraw it at any time, but it can lose value since it's invested. It's a bit riskier than savings, but does earn a bit more interest. This is where I build up money that I can use to max out our Roth contributions each year.

As far as calculating an asset allocation, I only factor in our investments. This includes our Roth, Traditional IRA, and Brokerage accounts. I do not include Savings, CD's, or other cash. As I mentioned above, riskiest stocks are in my Roth, bonds are in in the tIRA and brokerage account. With our current balances in each account, we are running right around a 50/50 allocation.

 

[PaunchyPirate]

I retired at the end of 2018 with about 3 years of cash set aside to live on. I've used about 1 year of it so far. All of my other money is invested according to my desired asset allocation. I use 55/45. That allocation mix is spread out over my IRA, Roth IRA, and Taxable Account. The Roth IRA is actually empty right now and I won't go into that right now. I try to follow the Bogleheads approach that is linked to in an earlier reply. This approach has worked well for me so far. Once I empty my cash hoard, I probably won't re-fund it to the levels I had in the past. I will turn to taking dividends/interest and selling investments as needed.