Tax defered vs taxable account make up of your buckets

[nun]

Do you hold your cash/CD ladder in taxable or tax deferred accounts? I'm organizing my portfolio for retirement income rather than growth and thought that I might keep one year of cash in a regular checking account, and another four years of expenses in a CD ladder held in my tax deferred account.

 

[jebmke]

I hold no cash. My deferred accounts are 100% bonds - mix of nominals and TIPS. Taxable is part equity and part muni bonds.

 

[LOL!]

I hold no cash for the most part. Taxable is mostly international ETFs such as VEU, VSS, SCZ, with some US small-cap value: VBR.

Tax-advantaged has all fixed income such as bonds as well as the rest of the portfolio which includes some international & US equities (including the same things held in taxable).

I use this method to get cash out of my tax-advantaged portfolio:
Placing Cash Needs in a Tax-Advantaged Account - Bogleheads

I recently had to sell some ETF that had dropped 15% from recent highs to pay for a big ticket item. You may think, "Uh-oh, he sold his stocks at a loss." That's not quite true. I sold the ETF (at a profit) in my taxable account and almost immediately bought the same ETF in my tax-advantaged account. To get the money to buy the ETF in tax-advantaged, I used money from a short-term bond fund. It turns out I bought the replacement shares of the ETF at a lower price than I sold them for and they have gone up about 5% since.

Bottom line: The method in the link really works.

 

[nun]

I hold no cash for the most part. Taxable is mostly international ETFs such as VEU, VSS, SCZ, with some US small-cap value: VBR.

Tax-advantaged has all fixed income such as bonds as well as the rest of the portfolio which includes some international & US equities (including the same things held in taxable).

I use this method to get cash out of my tax-advantaged portfolio:
Placing Cash Needs in a Tax-Advantaged Account - Bogleheads

I recently had to sell some ETF that had dropped 15% from recent highs to pay for a big ticket item. You may think, "Uh-oh, he sold his stocks at a loss." That's not quite true. I sold the ETF (at a profit) in my taxable account and almost immediately bought the same ETF in my tax-advantaged account. To get the money to buy the ETF in tax-advantaged, I used money from a short-term bond fund. It turns out I bought the replacement shares of the ETF at a lower price than I sold them for and they have gone up about 5% since.

Bottom line: The method in the link really works.

Yes that's what I was thinking with the caveat that I like to have a year's worth of cash in my bank account. Years two through five would be in CD/MM/short term bonds etc in tax-advantage accounts.

 

[LOL!]

How would you feel with 6 months worth of cash instead of 12 months worth of cash?

Or 6 months cash in checking and 6 months cash in tax-advantaged?

Interest rates on cash in taxable are so low that you won't be paying much in the way of additional taxes. But rates are too low for me, so I would rather have my money in a short-term bond fund than in cash.

 

[nun]

How would you feel with 6 months worth of cash instead of 12 months worth of cash?

Or 6 months cash in checking and 6 months cash in tax-advantaged?

Interest rates on cash in taxable are so low that you won't be paying much in the way of additional taxes. But rates are too low for me, so I would rather have my money in a short-term bond fund than in cash.

Yes I could do that, but a year's worth of cash for me won't be much, maybe $20k so it's not really a big deal.

 

[teejayevans]

How would you feel with 6 months worth of cash instead of 12 months worth of cash?

Or 6 months cash in checking and 6 months cash in tax-advantaged?

Interest rates on cash in taxable are so low that you won't be paying much in the way of additional taxes. But rates are too low for me, so I would rather have my money in a short-term bond fund than in cash.

1st, it's short term, how much can you make off just 1 years worth of expenses?, 2nd you have to weigh the risk of a drop of whatever investment you choose. STB are probably pretty low risk, but aren't they paying <1% anyway?
TJ

 

[LOL!]

1st, it's short term, how much can you make off just 1 years worth of expenses?, 2nd you have to weigh the risk of a drop of whatever investment you choose. STB are probably pretty low risk, but aren't they paying <1% anyway?
TJ

Returns are much better than their yields.
YTD returns (that's last 8 months) of some short-term bond funds:

2.85% VBIRX
1.86% VFSUX
2.89% VCSH

 

[Alan]

Returns are much better than their yields.
YTD returns (that's last 8 months) of some short-term bond funds:

2.85% VBIRX
1.86% VFSUX
2.89% VCSH

FWIW, I have used VBIRX this last couple of years instead of a bank savings account for my short term savings/spending.

 

[teejayevans]

FWIW, I have used VBIRX this last couple of years instead of a bank savings account for my short term savings/spending.

FWIW, so do I, but not for < 1 year. The risk seems to outweigh the reward, IMHO.
TJ

 

[Alan]

FWIW, so do I, but not for < 1 year. The risk seems to outweigh the reward, IMHO.
TJ

+1

It's good for saving for a car, or other major expense.

 

[LOL!]

FWIW, so do I, but not for < 1 year. The risk seems to outweigh the reward, IMHO.
TJ

I guess I am beyond thinking about anything as short-term. If the rest of my portfolio is going up and down by 20% a year, then a 4% marked for one year of expenses is practically something to be ignored. When the whole portfolio goes up or down in one day (see early August) by an entire year's worth of expenses, it no longer makes much sense to me to keep something in cash unless I keep everything in cash which ain't gonna happen.

In other words, I would be fooling myself to be thinking "At least my cash didn't drop in value even though the rest of my portfolio lost 5%." Instead my thinking is "OK my portfolio lost 5% in value in one day, so what!"

 

[teejayevans]

I guess I am beyond thinking about anything as short-term. If the rest of my portfolio is going up and down by 20% a year, then a 4% marked for one year of expenses is practically something to be ignored. When the whole portfolio goes up or down in one day (see early August) by an entire year's worth of expenses, it no longer makes much sense to me to keep something in cash unless I keep everything in cash which ain't gonna happen.

In other words, I would be fooling myself to be thinking "At least my cash didn't drop in value even though the rest of my portfolio lost 5%." Instead my thinking is "OK my portfolio lost 5% in value in one day, so what!"

You are assuming it goes UP and down.
Jan 2008 - you are taking 4% out
Jan 2009 - now you are taking out 7%
Jan 2010 - back to 5%, but still higher than most would feel comfortable.

You are telling me that having a couple of years short term investments (CDs,STB, etc) where you can pull money from while your other investments are in the tank is not beneficial from both a mathematical viewpoint as well as psychological viewpoint?
TJ

 

[LOL!]

You are telling me that having a couple of years short term investments (CDs,STB, etc) where you can pull money from while your other investments are in the tank is not beneficial from both a mathematical viewpoint as well as psychological viewpoint?
TJ

No. I am telling you that having any money in cash is a fake-a-roo. I have a few years of expenses in short-term bonds, but none in cash.

If you say that "Well, at least my cash is risk-free", but then turn around and load up on beaver cheese futures in the rest of your portfolio then you are fooling yourself. If I take some risk in the rest of my portfolio by owning equities, then I have no problem with mild risk by not owning cash and owning short-term bonds instead.

 

[JmfromTx]

When I retired in March I had about 20% of my portfolio in taxable accounts that I plan to use to carry me into my sixties. I had 1 year in cash, in bank accounts, and the rest in VG MM and short term corporate. I set it up that way because I was completely burned out by six months of cramming for retirement and it was the easy way out. I'm now considering going to 3 months in the bank in a checking account, one year in MM and moving the balance to the bond fund and doing automatic withdrawals each month. I don't feel comfortable without a good cushion in the bank in case I need a hunk of cash fast.

 

[LOL!]

Or perhaps one can dial in the same risk-level different ways:
70% equity and 30% cash might be the same as
60% equity and 40% bonds might be the same as
65% equity and 35% short-term bonds " " "
50% equity, 20% high-yield bonds and 30% cash
etc.

 

[jebmke]

No. I am telling you that having any money in cash is a fake-a-roo. I have a few years of expenses in short-term bonds, but none in cash.

If you say that "Well, at least my cash is risk-free", but then turn around and load up on beaver cheese futures in the rest of your portfolio then you are fooling yourself. If I take some risk in the rest of my portfolio by owning equities, then I have no problem with mild risk by not owning cash and owning short-term bonds instead.

Me too. High quality bonds, if you stay off the real long end are just not that volatile. By holding bonds instead of cash (in quantity) I can lower my equity since the expected return on bonds is higher than cash.

 

[jdw_fire]

Do you hold your cash/CD ladder in taxable or tax deferred accounts? I'm organizing my portfolio for retirement income rather than growth and thought that I might keep one year of cash in a regular checking account, and another four years of expenses in a CD ladder held in my tax deferred account.

it appears to me that you are organizing your portfolio into time buckets and therefore i wonder if the answers you got really apply to your situation. i would think your near term bucket (because of low interest rates on cash eqvs. and short term bonds) is better placed in taxable and the intermediate term bucket (because it should be throwing off more income than the near term bucket) would go into the tax deferred accounts. if your tax deferred account is bigger than the intermediate term bucket than also put some of your near term bucket into it but now your age has something to do with it (you dont want to be paying a penalty to use your short term funds). however if you hold some high interest paying bonds in your long term bucket then those bonds should be in your tax deferred accounts.