Conflicting priorities - lower taxes - asset allocation

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Conflicting priorities - lower taxes - asset allocation

Postby rocket » Wed Feb 13, 2013 9:44 am

Conflicting priorities -- lower taxes -- asset allocation
If a person has income of around $250k per year the typical asset allocation recommends putting a substantial allocation to income generating bonds, but with the high tax rates, this causes an increase in taxes.
How does one allocate and minimize taxes ???
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Re: Conflicting priorities - lower taxes - asset allocation

Postby NYBoglehead » Wed Feb 13, 2013 9:49 am

Not quite sure where you're going with this one. For starters, your AA should be based on your risk tolerance and time horizon, not your income. It makes sense to hold your bonds in tax-advantaged accounts whenever possible, the rules are no different for those on the higher end of the income spectrum. One minimizes taxes by contributing the maximum to their 401k and IRA and then putting the most tax-efficient funds into a taxable account if there is money left over to invest.
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Re: Conflicting priorities - lower taxes - asset allocation

Postby dbr » Wed Feb 13, 2013 9:51 am

rocket wrote:Conflicting priorities -- lower taxes -- asset allocation
If a person has income of around $250k per year the typical asset allocation recommends putting a substantial allocation to income generating bonds, but with the high tax rates, this causes an increase in taxes.
How does one allocate and minimize taxes ???


The conventional advice for high income with relatively little tax deferred space is tax exempt, aka municipal, bonds.

However, the idea that a person with a high income should also have a lot in bonds is not so. Asset allocation depends on many things at various stages is life and does not necessarily dictate a high bond allocation just because one has high income.

There are also situations where a variable annuity is appropriate for tax deferral. This is not common but may apply here.
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Re: Conflicting priorities - lower taxes - asset allocation

Postby Grt2bOutdoors » Wed Feb 13, 2013 9:53 am

rocket wrote:Conflicting priorities -- lower taxes -- asset allocation
If a person has income of around $250k per year the typical asset allocation recommends putting a substantial allocation to income generating bonds, but with the high tax rates, this causes an increase in taxes.
How does one allocate and minimize taxes ???


If in a taxable account - you buy the annual allotment of Series I Bonds (interest is tax-deferred until you cash out) and you utilize municipal bonds. If you don't like your state-specific fund (if available), then consider a well-diversified national muni fund from Vanguard or Baird.

If in a tax-deferred account - the taxable bond funds will be a non-issue, income/gains are not taxed until withdrawn.
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Re: Conflicting priorities - lower taxes - asset allocation

Postby rocket » Wed Feb 13, 2013 10:27 am

[/quote] However, the idea that a person with a high income should also have a lot in bonds is not so. Asset allocation depends on many things at various stages is life and does not necessarily dictate a high bond allocation just because one has high income. [/quote]

Just about any typical recommended portfolio would recommend having arouund 30% to 50% allocation to bonds.
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Re: Conflicting priorities - lower taxes - asset allocation

Postby dbr » Wed Feb 13, 2013 10:41 am

rocket wrote:
However, the idea that a person with a high income should also have a lot in bonds is not so. Asset allocation depends on many things at various stages is life and does not necessarily dictate a high bond allocation just because one has high income. [/quote]

Just about any typical recommended portfolio would recommend having arouund 30% to 50% allocation to bonds.[/quote]

Apparently a different interpretation of language. For me "high" is when bond allocation might be 60%-70%. I call 50% moderate and 30% low.

However, your concern about taxes is still valid and posters have been suggesting solutions.

The point that asset allocation depends on many things other than income is also true. There is no set of typical recommended portfolios that are 30%-50% bonds although it is possible that after you personally have made some estimates of tolerable risk that recommendations for you come back in that range. Investors on this forum follow quite a range, anywhere from 0% to 80% or more in bonds. On this survey of over 65's the range in bonds runs from 30% to 70%.

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Re: Conflicting priorities - lower taxes - asset allocation

Postby grabiner » Wed Feb 13, 2013 8:54 pm

rocket wrote:Conflicting priorities -- lower taxes -- asset allocation
If a person has income of around $250k per year the typical asset allocation recommends putting a substantial allocation to income generating bonds, but with the high tax rates, this causes an increase in taxes.
How does one allocate and minimize taxes ???


Getting the right risk level is much more important. If your risk tolerance dictates that you should only have 60% stock and your tax-deferred accounts can only shelter 20%, it's better to have 20% taxable bonds that cost your portfolio an extra 0.1% in taxes (if the bonds cost an extra 0.5% in taxes compared to stocks), rather than to have 80% stock and lose an extra 10% when the stock market loses half its value.

If the desired allocation requires you to have bonds in your taxable account, you can use municipal bonds. And with an income "around $250K", that is a particularly good idea, as you may be paying 18.8% rather than the usual 15% on qualified stock dividends; munis are exempt from the 3.8% Medicare surtax. Depending on your 401(k) options, you might actually be better off putting all your bonds in your taxable account as munis, particularly if there is a good muni fund for your state.
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