Thinking about where to put various assets

[haha]

Sometimes I have trouble deciding even how to think about which of my accounts should hold different assets. I have some savings accounts and CDs in taxable accounts, even though this is not tax clever, because I might need some money outside retirement accounts, and anyway my retirement accounts are not all that big that I can put most assets inside them. So even at today's low rates, I might have $5000 or so in taxable interest from savings accounts.

Roth? I really am not sure how best to approach this one. It is a great place to get long or short term gains, and also of course interest. I just put some of each type investment in the Roth. If tax laws stay the same, the Roth will be a security blanket for me and I will not ever withdraw from it. My TIRA is moderate size, larger than the Roth and smaller than taxable. I try to put bonds and REITs in this one. Lately though, if I have some room in this TIRA and not in other accounts, I have been thinking that even taking capital gains in here is not necessarily a bad idea. I pay RMDs true, but only about 4% per year and this increases only very slowly for a good while. So if I realize a $40,000 gain in the TIRA, when I file taxes for that year I will pay ordinary income taxes at 15 or 25% on only 4% of that $40,000 gain. Is this really a very big deal? I am not really clear on this, but it seems to me that I will be getting a big time value of money boost on what I eventually clear from this transactions, as compared to having to pay all the tax the following year, especially if I am getting a decent return in this TIRA account.

Does this make sense, or am I perhaps too sleepy to understand?

Ha

 

[LOL!]

I've arranged asset location to try to pay the minimal taxes. Most of the ideas are from the bogleheads wiki: Principles of tax-efficient fund placement - Bogleheads which has some detractors, but I think is good info.

First start with tax-efficient funds to begin with whenever possible.

Second, put least tax-efficient in tax-advantaged accounts. Bonds can go in tax-deferred IRAs and 401(k) because they are also low return. This means those accounts may not grow as large and thus will have lower RMDs.

Third, put tax-efficient in taxable which are generally broad index funds like total stock market and total int'l stock market. In a twist, large-cap emerging markets are also tax-efficient and yield tax-loss harvesting opportunities.

Roth IRAs are tax-free, so are special. One might think one should put the asset classes that are supposed to go up the most in them. But those asset classes are also the ones that lose the most when things drop. I don't like to lose money in my Roth, so I put a mix of equity and bond funds in my Roth.

Furthermore, I try not to have any interest from CDs or savings accounts because that is taxed the most. Instead, I go for qualified dividends from those broad total market index funds because those dividends are taxed at a favorable rate. If I had CDs (I don't) I would put them in my IRA.

I do have to take some RMD starting next year from an inherited IRA. I have made that IRA 100% total bond index fund. It should not grow at all and the RMDs should remain small.

With more info about your accounts and asset allocation, one could help divvy things up in a reasonably tax-efficient way and give better advice I suppose.

 

[SteveL]

Sometimes I think we are trying to calculate how many angels can dance on the head of a pin. So, while tax planning can be important, optimizing investment returns for age and risk tolerance are most important.

The reason is that tax laws change all the time. Currently, we have more tax brackets and lower rates than has been the case historically. We also have special CG rates, Roth, and many other choices.

However, the Congress can take away all this in a heartbeat. This creates the chance that one could be perfectly aligned for the current law, and then see some major portion change. I remember some advice about putting dividend stocks into the taxable account, and bonds into the tax deferred. This was because of the special reduced tax rates on Qualified Dividends. Suppose you had done this, and then seen the market go up as it has since 2009. You would have, as I do right now, large unrealized gains on every stock fund in my taxable account. Suppose this dividend tax advantage goes away, and such stocks might be better placed then into the tax deferred account. How would one then do such a transition? Further, one might end up paying ordinary tax rates on the Capital Gains that would ensue.

I believe in having some balance in all the accounts with perhaps more equity in the Roth. I too plan to never tap my Roth. So, if there is a correction, recession, etc. those equities will decline for a time. Patience and more time will see them recover and my children, and grandchildren will reap years of tax free income. (I think Roth is a terrible idea for the government. I can't believe they permit conversions. Someday they will awaken, and it will go away.)

In 2007, my DW received one third of an IRA from her dad. The balance was around 190k. With the exception of one year when the RMD was not required we have taken out these every year. At the end of 2013, the account was higher than when she received it. We have now drawn out over 50k in total. Without a significant percentage in equities this would not have have been possible.

Ha Ha, I think you are doing a great job! If you have a reasonable AA, and live conservatively, you will continue to do well. Don't sweat the small stuff.

 

[sailor]

So if I realize a $40,000 gain in the TIRA, when I file taxes for that year I will pay ordinary income taxes at 15 or 25% on only 4% of that $40,000 gain.

Do you have non-zero basis (some after tax money) in your TIRA?
I'm asking because if not, realizing $40k does not generate any taxable event in TIRA.
Withdrawing (distribution) of $40k does, regardless what's "the source" of the money (capital gains, dividends, contributions) and it's taxed at your ordinary income rate.

 

[pb4uski]

....So if I realize a $40,000 gain in the TIRA, when I file taxes for that year I will pay ordinary income taxes at 15 or 25% on only 4% of that $40,000 gain.....

Ha

Ha, with a tIRA you only pay tax on money taken out of the account (withdrawals). Withdrawls are pension income and taxed at ordinary rates.

If the gain stays in the tIRA it is tax deferred until you take it out.

Above assumes that tIRA is pre-tax money from either tax deductible IRA contributions or 401k rollover. If your tIRA has some after-tax money (usually from non-deductible IRA contributions) in it then it get more complicated, but a portion of the withdrawal would not be taxable since it is a return of "principal" that had been previously taxed.

I just put all my fixed income in tax-deferred accounts, international stock funds in taxable to take advantage of the foreign tax credit (even though they do generate taxable, non-qualified dividend income) and domestic equities in whatever remains.

 

[Live And Learn]

Wow - great stuff. Does anyone know a reading resource where I can I learn more about tax planning in retirement in more depth ?

 

[RunningBum]

One strategy I've heard is to do a partial Roth conversion into a new Roth account, and do your most risky investment here. If it loses value, recharacterize it, because now you have a lower tax basis for later conversion or withdrawal. If it pays off, keep it in your Roth, and you get the gain tax free. I *think* it works this way. I'm pretty sure if you converted to an existing Roth, you couldn't recharacterize just that last conversion, but I could be wrong.

Once you pass the point of being able to recharacterize, you may want to switch it to a less risky investment.

 

[Lsbcal]

We are somewhat different since most of our money is in retirement accounts. Have some old Ibonds in taxable.

I finally decided a few years back to just keep the stock/bond mix about the same in both tIRA and Roth's. But I'm careful to keep the Roth equities at my or below the max allocation. Since the taxable is in FI, the tIRA is equity rich so that the allocations balance: tIRA + FI = Roth

If I do any tactical asset allocation stuff (reduce equities), it might be in the Roth's to be more conservative there.

 

[kaneohe]

One strategy I've heard is to do a partial Roth conversion into a new Roth account, and do your most risky investment here. If it loses value, recharacterize it, because now you have a lower tax basis for later conversion or withdrawal. If it pays off, keep it in your Roth, and you get the gain tax free. I *think* it works this way. I'm pretty sure if you converted to an existing Roth, you couldn't recharacterize just that last conversion, but I could be wrong.

If you convert to an existing Roth, you can still recharacterize just that last conversion...........the issue is that the performance of the last conversion has to be combined with the performance of the existing Roth which "dilutes" the performance of the conversion itself. Crudely speaking if the existing Roth goes up as much as the conversion goes down, the performance of the conversion is considered to be a wash even tho it actually went down. You'd have to go thru the actual formulas for the calculation. Perhaps that is what you meant to say.

 

[RunningBum]

If you convert to an existing Roth, you can still recharacterize just that last conversion...........the issue is that the performance of the last conversion has to be combined with the performance of the existing Roth which "dilutes" the performance of the conversion itself. Crudely speaking if the existing Roth goes up as much as the conversion goes down, the performance of the conversion is considered to be a wash even tho it actually went down. You'd have to go thru the actual formulas for the calculation. Perhaps that is what you meant to say.

Yes, that's what I meant to say, and didn't. Thanks.

 

[haha]

Ha, with a tIRA you only pay tax on money taken out of the account (withdrawals). Withdrawls are pension income and taxed at ordinary rates.

If the gain stays in the tIRA it is tax deferred until you take it out.

Above assumes that tIRA is pre-tax money from either tax deductible IRA contributions or 401k rollover. If your tIRA has some after-tax money (usually from non-deductible IRA contributions) in it then it get more complicated, but a portion of the withdrawal would not be taxable since it is a return of "principal" that had been previously taxed.

I just put all my fixed income in tax-deferred accounts, international stock funds in taxable to take advantage of the foreign tax credit (even though they do generate taxable, non-qualified dividend income) and domestic equities in whatever remains.

I have no money with any basis other than zero in my TIRA. I was trying to be clear, but either I expressed myself badly or my ideas are cockeyed on this. I realize that there is no tax on any money left in the TIRA, but I am taking RMDs, so every year I will pay some tax on the amount of the RMD. So far that proportion of my account is ~4%. So, in the Year of my $40,000 gain, I will withdraw 4% of the year end value of the TIRA which will include 4% of the capital gain that I would not have had I not invested in capital gain generating securities in that TIRA. In each subsequent year I will repeat, each time with a larger increment of the TIRA withdrawn and subjected to ordinary income tax. But still, even if the treasury is going to get to tax that entire gain at ordinary income rates, it is going to take them a long time to complete the job, which seems to be in my favor.


This may be correct but clumsily expressed, or off the wall.

Ha

 

[walkinwood]

I did a quick spreadsheet assuming constant RMD% and that you reinvest RMDs & the CG itself & never sell again.

Please verify my calculations as I tend to make mistakes. Obviously, there will be added complexities.

 

[haha]

I did a quick spreadsheet assuming constant RMD% and that you reinvest RMDs & the CG itself & never sell again.

Please verify my calculations as I tend to make mistakes. Obviously, there will be added complexities.

walkinwood, I wasn't able to open this. although your link says xls, my browser says a .php. I tried to download a file to help but it hung my computer, and now I have to go out so I'll try again tomorrow. Thanks.

Ha

 

[walkinwood]

walkinwood, I wasn't able to open this. although your link says xls, my browser says a .php. I tried to download a file to help but it hung my computer, and now I have to go out so I'll try again tomorrow. Thanks.

Ha

I downloaded it and it opened in the excel viewer just fine. I used OpenOffice to create it. Hope it works next time - sorry about hanging your computer.

 

[pb4uski]

Wow - great stuff. Does anyone know a reading resource where I can I learn more about tax planning in retirement in more depth ?

Principles of tax-efficient fund placement - Bogleheads

 

[Live And Learn]

Principles of tax-efficient fund placement - Bogleheads

Thanks ! I should have thought of that myself. I need to spend more time on the Bogelheads forum