Wellington replacement for tax efficiency?

[BarbWire]

Hi --

Back when I was younger and more clueless -- and hadn't discovered this forum and learned about tax-efficiency -- I carefully balanced my non-retirement and retirement portfolios separately, each with about 75/25. BTW, the portfolios are about the same size.

The problem is that I put quite a bit of Wellington in my non-tax-advantaged accounts, which because of the bonds triggers income generation. This is now especially not good since, in 2015, I want to qualify for ACA subsidies (not an issue for 2014; I FIRED in 2013 and did not have an ACA policy in 2014.). And I don't need the income for living; I have about 3 years of living expenses in cash.

For 2014 I can harvest about $70K of my Wellington, and still stay in the 15% tax bracket. My intention is to buy equities, and then to eventually replace the Wellington that I've sold by purchases in my IRA funds. This should lead to a more tax-efficient overall portfolio, right?

But what to buy for my non-tax-advantaged account? I've already got a lot of Total Stock Market (MF and ETF) as well as extended (MF and ETF) and about 10% total international stock.

Should I simply buy more -- ETFs, I assume -- of Total Stock Market and Extended? and if so, should I DCA my $70K into those? The market is scary high now -- at least, scary high for purchases.

Or are there other choices that would better mimic the stock holdings of the Wellington that I'm planning to sell?

TIA and cheers,

BarbWire

 

[pb4uski]

You're on the right track. My taxable accounts are all equities and my entire fixed income allocation is in my tax-deferred accounts (IRA to be specific).

Think with the end in mind. Eventually, you want to end up with your fixed income in tax-deferred and more tax efficient investments in taxable accounts. understandably, you don't want to do it all at once because of capital gains taxes, so you can simply plan to do it over a number of years but gains harvesting up to the top of the 15% tax bracket each year.

One thing you might want to consider though is the effect of RMDs later in life. I was initially going to just gains harvest but later decided that it was better for me to do Roth conversions instead. If all goes according to plan, I shoudl be able to stay away from the 25% tax bracket once SS and RMDs start, or at least only be in the 25% bracket for a couple years.

I would go with Total Stock and then sell equities and buy fixed income as needed in your tax-deferred accounts to get to your target AA.

 

[jerome len]

Take a look at Vanguard's tax managed balanced mutual fund. It's done well for me, it's bonds are all muni's and its stock is primarily large cap index......very low taxes and, on an after tax basis does super for me. Good luck.

 

[BarbWire]

Thank you.

Yes, I've thought about doing a Roth conversion (but could only convert $16K before topping out of the 15% tax bracket) instead of harvesting capital gains and rebalancing/getting bonds out of my taxable accounts. I honestly have no idea what my tax bracket will be, say, five years from now, as I have the prospect of an inherited IRA to plan around as well as my own portfolio.

Thus, at 57 I figure I should rebalance/harvest for the next four or so years (but this will be tricky to stay under the ACA threshholds should I decide to do that), and then, when I have a better idea of the inherited IRA situation, start converting to Roth. I won't take SS until 70, so that gives me a few years before RMDs and SS.

So, may we please double check my arithemetic and logic (numbers subject to fine tuning)? I have about $16K to play with -- the difference between my div/int and ST/LTCG for 2014, and the limit of $47,050 for a single filer. My Wellington investments have, to date, accrued about $77,000 in ST and LTCG (from the capital gains page on Vanguard). So if I sell about 20% of my Wellington holdings, I will realize about $16K in capital gains.

Looking forward to 2015, how much will getting some Wellington out of my taxable portfolio garner me in div/int and CG? Well, this year the Wellington paid me $24K in div/int and CG, so my swag is that the sale will reduce my income in 2015 by about $4.8K -- nice for ACA subsidy.

If my logic is right, then I stay in the 15% bracket in 2014, pay no cap gains tax in 2014, and with the proceeds buy Total Stock Market for my taxable portfolio. And then I tweak the holdings in the IRAs to regain my Wellington position.

Is my ciphering OK?

 

[pb4uski]

Yes, I think that makes sense.

If you wanted to do more it would only cost you 15% (plus any state/local tax where applicable).

 

[BarbWire]

Ah, yes. Good point. Maybe I should do more this year at 15% -- and then not endanger my ACA status in 2015 and beyond.

Thanks again!

 

[pb4uski]

It would make the most sense if you think you might be in the 25% bracket once SS and RMDs start.

I found the ACA subsidies wasn't worth the pretzel I would have had to twist our finances into but it seem to vary a lot between states.

 

[clifp]

I think you might want to investigate yo-yoing your income, since ACA subsidies are so progressive. So for instance rather than having 50K income each year for 2 years if you can have $40K one year and $60K the next year, I think you'd generally come out ahead.

 

[BarbWire]

Reviving this thread ....

At the end of December I sold about 25% of my Wellington, and the proceeds have been sitting in the money market fund ever since. Eldercare emergencies put complex action on the back burner. All of a sudden I needed to keep it simple, and just make sure the 2015 income was low, so Roth recharacterization became a non-issue. So I sold Wellington to reduce 2015 income, and thus now: what's next?

I need to reinvest the cash in stocks ('cuz I will shift IRA money into bonds and more Wellington). Total Stock Market is a no-brainer for my domestic stock allocation, but I've got a lot of that and a little (irrational or evil) voice in my head keeps muttering "eggs... one basket...."

I don't think I'll ever have the mental ability to have just a three-index-fund portfolio...

But Welllington has done well, so perhaps I should replicate its equities portion....

 

[JPatrick]

I don't know how this would affect the ACA business, but how about some muni's?
FIDO's FHIGX will generate some nice tax free income for you..

It sure does for me.