Splitting my portfolio across taxed/non-taxed accounts

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Splitting my portfolio across taxed/non-taxed accounts

Postby mikeportfolio » Fri May 03, 2013 9:26 pm

I am going to invest new funds into an existing taxable account, and for the first time I want to consider my taxable + non-taxables as 1 portfolio for tax efficiency. In the process I want to reduce costs where possible, and have some better control of fund placement (i.e. get out of target retirement funds). This is my first proposed attempt at doing so. Any advice would be greatly appreciated.

Emergency funds: Yes
Debt: $250k left on 30-year fixed @ 4.25%, ~27 years left
Tax Filing Status: Single
Tax Rate: 28% Federal, 6.37% State
State of Residence: NJ
Age: 29
Desired Asset allocation: 80% stocks / 20% bonds (+/- 5% on stocks, still uncertain)
Desired International allocation: 30% of stocks

Total portfolio currently high 5 figures, soon to invest another $50k or so into taxable (not reflected in below percentages)

Current retirement assets

Taxable
10% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) (0.17)
3% Vanguard Total International Stock Index Fund Investor Shares (VGTSX) (0.22)

401k at Mercer (w/ ex-employer)
71% Lifepath Index 2050 (ticker n/a) (0.12)

401k at Fidelity (w/ ex-employer)
9% Fidelity Freedom 2050 (FFFHX ) (0.77)

Roth IRA at Vanguard
6% Vanguard Target Retirement 2050 Fund (VFIFX) (0.18)

Contributions

New annual Contributions
$5500 Roth IRA (via backdoor conversions)
$6000 taxable (for retirement, not short term goals)
No 401k currently

Available funds

Funds available at Mercer 401k (excluding target and high-cost/actively managed funds)
Vanguard Institutional Index Fund Institutional Plus Shares [tracks S&P 500] (VIIIX) (0.02)
Vanguard Extended Market Index Fund Institutional Plus Shares (VEMPX) (0.10)
Vanguard FTSE All-World ex-US Index Fund Institutional Plus Shares (VFWPX) (0.10)
Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX) (0.05)

Funds available at Fidelity 401k (excluding target and high-cost/actively managed funds)
Spartan 500 Index Fund (FUSVX) (0.07)
Spartan Intertional Index Fund (FSIVX) (0.17)
Spartan U.S. Bond Index Fund (FSITX) (0.17)

Other considerations:
1. I have no current 401k so am limited to the Roth contributions (though I do expect to get a 401k within a year or two hopefully).

2. Salary is too high for normal Roth contributions, so I am doing backdoor conversions. I'd prefer to roll over my 401k's into a Vanguard IRA, but am not doing so in order to continue with the backdoor conversions (which I only just started this year).

3. Up until now I've considered the taxable account separate, so the asset allocation of the entire portfolio is wrong until I rebalance. (And the asset balance of the taxable was wrong anyway as I had sold some bonds a while ago before I really knew what I was doing)

4. I'm not totally certain about what stock/bond split I really want. To me it's somewhat arbitrary on such a long time horizon and I am just going off what "experts" say. The 2050 retirement funds are all 90/10, which seems super aggressive to me, but 70/30 seems too conservative for my age, hence why my initial thought is 80/20. Willing to hear some thoughts on that.

My Plan

NOTE: This would be accomplished by also putting in additional 50% of total funds into my taxable account.

1. Put the entire bond allocation (20%) into the Mercer 401k in Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX) (0.05)

2. Put the entire international equity allocation (24%) into the taxable Vanguard account into Total International fund, either admiral or ETF. Note: I would sell the existing Investor shares to move that into Admiral/ETF as there would only be $30 LT tax bill to pay)

3. The remaining 56% into broad U.S stock market split among several funds/locations:
  • Roth IRA completely in Vanguard Total Stock Market ETF (VTI) (0.05)
  • Fidelity 401k completely in Spartan 500 Index Fund (FUSVX) (0.07)
  • Remaining Mercer 401k money being split between the following 2 funds, such that the makeup would be the same as having invested in a single total market fund (also considering that entire Fidelity 401k is only exposed to S&P 500):
    - Vanguard Institutional Index Fund Institutional Plus Shares [tracks S&P 500] (VIIIX) (0.02)
    - Vanguard Extended Market Index Fund Institutional Plus Shares (VEMPX) (0.10)
    (I've yet to determine the appropriate split between S&P 500 + Extended Market to approximate a total market (random guess, 70/30?))
  • Remaining taxable balance in Vanguard Total Stock Market ETF (0.05) and Investor shares (0.17) [investor shares have unrealized gain of a few thousand so figured not wise to exchange for ETF]

Does this plan make sense? Honestly I'd prefer to just consider all the accounts as separate portfolios for mental and practical manageability. But others seem to think the tax advantages are worth the extra effort, so this is my attempt at that.
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Re: Splitting my portfolio across taxed/non-taxed accounts

Postby momar » Fri May 03, 2013 9:45 pm

Refinance your mortgage.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
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Re: Splitting my portfolio across taxed/non-taxed accounts

Postby DaveS » Fri May 03, 2013 10:54 pm

What your proposing makes sense. I don't have a problem with 80/20 either. Since I am a bit more than twice your age I will tell you that the size of a bond holding should be high if you think your the kind of a person who would panic and sell out at a stock market low. If you can stand the volatility of stocks without selling out at a low then you can get by with less bonds. Take a look at a ten year graph for stocks and look at the 3rd quarter of 2008. If that kind of decline would have prompted you to sell out at a low, then you need more bonds. Dave
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Re: Splitting my portfolio across taxed/non-taxed accounts

Postby mikeportfolio » Fri May 03, 2013 11:20 pm

DaveS wrote:What your proposing makes sense. I don't have a problem with 80/20 either. Since I am a bit more than twice your age I will tell you that the size of a bond holding should be high if you think your the kind of a person who would panic and sell out at a stock market low. If you can stand the volatility of stocks without selling out at a low then you can get by with less bonds. Take a look at a ten year graph for stocks and look at the 3rd quarter of 2008. If that kind of decline would have prompted you to sell out at a low, then you need more bonds. Dave


Thanks Dave. I have yet to prove myself in this regard, but if the markets were to dip significantly, I would gladly buy up stocks at a discount rather than lock in a loss by selling. My only concern would be that I'd need to tap into that money for other reasons. But as long as I plan out my cash needs with other sources, I should be fine.
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Re: Splitting my portfolio across taxed/non-taxed accounts

Postby rickmerrill » Fri May 03, 2013 11:44 pm

I think you have a good plan.
To reiterate previous posts, you should be looking for a no cost refinance and 80/20 is well within the ballpark. Just try to decide if you can hold on no matter how bad it gets - it's hard to know until you have to do it! Really, will you be able to rebalance into stocks from bonds during all of the gloom and doom might be a better way to look at asset allocation. I don't think 70/30 or 90/10 is a mistake either, unless it is for you.
At some point, especially if you still don't have a 401k available and your income continues to rise, it might make sense to consider throwing more money into the mortgage (or even refinance for 15 years) instead of contributing to taxable - something to ponder.
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Re: Splitting my portfolio across taxed/non-taxed accounts

Postby Duckie » Sat May 04, 2013 12:26 am

mikeportfolio, your plan makes sense.

Can you roll the old Fidelity 401k into the old Mercer 401k? The options are better and it would simplify things.

Converting from Investor shares to Admiral shares is not a taxable event, so no tax bill.

20% bonds is a little low for age 29 but not unreasonable.
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Re: Splitting my portfolio across taxed/non-taxed accounts

Postby mikeportfolio » Sat May 04, 2013 12:48 am

rickmerrill wrote:I think you have a good plan.
To reiterate previous posts, you should be looking for a no cost refinance and 80/20 is well within the ballpark. Just try to decide if you can hold on no matter how bad it gets - it's hard to know until you have to do it! Really, will you be able to rebalance into stocks from bonds during all of the gloom and doom might be a better way to look at asset allocation. I don't think 70/30 or 90/10 is a mistake either, unless it is for you.
At some point, especially if you still don't have a 401k available and your income continues to rise, it might make sense to consider throwing more money into the mortgage (or even refinance for 15 years) instead of contributing to taxable - something to ponder.


Hi Rick. Thanks for the confirmation and advice. I will look into the possibility of refinancing for sure.
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Re: Splitting my portfolio across taxed/non-taxed accounts

Postby mikeportfolio » Sat May 04, 2013 1:05 am

Duckie wrote:mikeportfolio, your plan makes sense.

Good to hear :happy

Duckie wrote:Can you roll the old Fidelity 401k into the old Mercer 401k? The options are better and it would simplify things.


Unfortunately I can't. I had the exact same thought, but checked with Mercer and they don't accept rollovers since I am no longer active with the company. Whenever I get my next 401k, so long as the options are good, I will try to roll everything together then.

Duckie wrote:Converting from Investor shares to Admiral shares is not a taxable event, so no tax bill.


Ah ok, I was thinking of it as a sale and then purchase, rather than just reclassifying the shares. Makes sense. The only possible hiccup is that I already sold some shares a while ago from it, and used Average Cost (regretting that now of course). I can't find a clear answer on it, but it sounds like once you use Average Cost, you need to keep using it, but I don't know if that means forever, or just the remaining shares at the time I sold. In other words, if I converted those shares to Admiral, and then purchased more, can I use Specific Identification on the new shares? I'll have to dig into that a bit, unless anyone here happens to know.

Thanks for your thoughts.
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