Fund placement for US expat

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Fund placement for US expat

Postby jefmafnl » Fri Dec 28, 2012 2:27 pm

Due to my tax situation, the challenge of fund placement can't automatically be met with the normal Boglehead recommendations.

I am a US citizen. I have worked in the Netherlands since 1999, and probably will continue to do so until my retirement around the end of 2020. (My wife retired early.)

During my first 10 years in the Netherlands I paid reduced taxes on earned income in the Netherlands and was not subject to wealth tax. However, since mid-2009, we have been subject to the
"wealth tax" (1.2% of all assets, wherever they are held, with only a small exemption) in lieu of income tax on interest, dividends, etc. We still file US tax returns every year;
the high taxes (top bracket of 52%, applies from about EUR 60,000) in the Netherlands reduce our US taxes, although not to zero.

At one point my wife and I opened Roth IRA's, but after a certain point (partly due to the strong Euro) we were above the income limits. Then we opened "traditional" (tax-deferred) IRA's, hoping to convert them to Roth IRA's, but later my Dutch tax adviser cautioned that we would have to pay Dutch tax on the amount converted, so we did not convert. The traditional IRA's are not subject to the Dutch wealth tax, but the Roth IRA's are. But since most of our US tax liability is wiped out by the foreign tax credit, there's no real tax advantage to putting more money into the traditional IRA's.

The IRA's are about 42% of our total retirement fund assets now, but they will be a smaller portion at retirement, since we are adding to only the taxable account. I'm trying to establish a goal for which funds to hold in which accounts at the time I retire. Assuming that capital gains and dividends are taxed at lower rates than ordinary income, even if the difference in rates narrows in the coming years (PLEASE, NO POLITICAL DISCUSSIONS HERE), my draft plan is to hold

--in taxable account: mostly stock index funds;
--in our Roth IRA's: the Vanguard REIT Index Fund and perhaps the Vanguard Small Cap Value Index Fund, and some Vanguard Total Stock Market Index Fund to enable rebalancing without tax consequences in bull markets; plus a small amount in bond funds;
--in our traditional IRA's: primarily bond funds.

Disadvantage is that income from treasury bond funds in the traditional IRA's will eventually be withdrawn as normal income (no state tax benefit). Advantage is that stock funds (which I expect to grow faster than bond funds in the long run) can grow tax-free in the Roth IRA's.

Does this seem like the right way to go?

J
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Re: Fund placement for US expat

Postby jefmafnl » Sun Dec 30, 2012 8:26 am

(Bump) Any suggestions?

J
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Re: Fund placement for US expat

Postby DaveS » Sun Dec 30, 2012 9:54 pm

I have a feeling your not getting responses because of the foreign tax angle. I don't have a problem with what you say your doing. but I don't know too much about taxes on ex-pats. Dave
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