Withdrawing from taxable accounts to fund 403b/IRA?

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Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Withdrawing from taxable accounts to fund 403b/IRA?

Post by AZK »

Hi all,

First time poster...had a question....

Briefly, I came into a windfall 5 years ago, luckily a friend's dad helped me invest the $. Similar mindset to what is suggested on here. He recommended a # of ishare ETFs at the time... and I have the following Asset allocation...at the time given my age (21), and future earning potential (medicine) he didn't see the need for bonds. I have no debt.

40% US
  • 10% small cap
    15% med cap
    15% large cap
40% INTL
  • 20% Emerging
    20% Developed
20% Commodities
  • 10% GLD
    10% Natural Resources
I rebalance yearly.

I'm now a resident and making $46k a year. I could potentially fully fund a 403b (no match) and IRA, but I think it'd be tight and it might warrant selling some of my taxable account.

1) Is it worth it to fund tax-efficient accounts?

2) For my IRA, I'm thinking of going with vanguard and just doing, for simplicity:
40% VGTSX
20% VBMFX
40% VTSMX

I have an old IRA that I am going to rollover so I hope to be able to fund each of these, if not I guess I'll do one at a time.

Thoughts? Would ETFs be better?

3) The 403b seems less than stellar....a lot of the funds have high expense ratios... here they are as follows:

Stock-Based
Eaton Vance Structured Emerging Mkts 1.36
Harbor Intl Inst. .85
Oppenheimer GLobal A 1.27
Cohen & Steers Realty Shares 1.06
Baron Growth Retail 1.35
Lord Abbett Small Cap Value 1.24
Columbia small cap Value 1.32
Columbia Acorn select 1.24
RS Value A 1.41
Hotchkis and Wiley Mid cap Value 1.40
Calvert Social Investment Equity 1.28
American Funds Growth FUnd of AMer R4 0.7
Vanguard Inst. index 0.05
Hartford Capital Appreciation 0.72
American Funds Washington Mutual 0.69

Bond-based
Principal High Yield 0.95
PIMCO Total Return 0.89

Cash and Stable value investments
Lincoln stable value separate account
Vanguard Prime Money Market Inv 0.25

So far I have split up my 403B accordingly, now that I'm older, decided to add more bonds:

25% Eaton Vance Structured Emerging Mkts 1.36
15% Harbor Intl Inst. .85
15% PIMCO Total Return 0.89
15% Vanguard Inst. index 0.05
15% American Funds Growth FUnd of AMer R4 0.7
10% Lord Abbett Small Cap Value 1.24
5% Principal High Yield 0.95

3) Thoughts on this asset allocation?

Thank you for your time.
livesoft
Posts: 85971
Joined: Thu Mar 01, 2007 7:00 pm

Post by livesoft »

Welcome.

Yes, it is a great idea to max out your 403(b) and Roth IRA contributions even if you have to cash-in taxable accounts. The long-term tax-deferral wins hands-down.

There are some directions around here about asking portfolio questions that folks are gonna ask you to follow. For example, readers cannot figure out the relative sizes of your account because you listed each account as 100%. Maybe your IRA is only 5% of your total portfolio and taxable is only 10%.

Your 403(b) has that index fund with 0.05% expense ratio. That's what you should be using as a core. Perhaps your 403(b) should all be in this fund. You can make your rollover IRA all a single bond fund. Etc.
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 6:40 pm

Think long term

Post by Laura »

AZK,

You want to think long term when investing. You mention being a resident which means your income will jump in the future. You will really value all the tax advantaged space you have so I strongly encourage you to fully utilize the 403b. You might also ask if there is a 457 plan available where you can add another $16.5k.

What worries me about your current allocation is that it is all equities and you have no bonds. Here is a table offered by Larry Swedroe based on the 1970s bear market showing the amount of decline for various stock/bond allocations. These same percentages applied in the 2008 bear market:

Max Equity - Exposure Max loss
20%...............5%
30%..............10%
40%..............15%
50%..............20%
60%..............25%
70%..............30%
80%..............35%
90%..............40%
100%.............50%

Your current portfolio could easily lose about 40% of its value or more so you want to bring in more bonds as quickly as possible.

I assume you won't be with the hospital you are doing your residency at for your entire life. When you leave you can take the money from the 403b and put it in an IRA at Vanguard so these higher costs are only temporary. You really need to bring in some bond funds so consider the PIMCO fund for everything.

Since we don't know the relative size of your portfolio (5 figures, 6 figures, etc) it is hard to know how many bonds you actually need to add in order to reach 20% to 30% of your total portfolio value.

You want to start thinking about all of your accounts together. You don't need to build a separate portfolio in each account. Open up your roth at Vanguard and also use it all for bonds. The Total Bond Market is a great choice. Right now I suspect that your portfolio looks like this:

100% taxable
0% roth
0% 403b
0% 457 (is there one available?)

You want to add 20% to 30% in bonds. Did you know that bonds had a higher return the last 10-years than stocks? Bonds are needed in everyone's portfolio so start bringing them in now.

Contribute all of your salary to tax advantaged accounts if you can then use your taxable money to live. You will appreciate all the tax advantaged space later in life.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Post by AZK »

Laura,

Thanks for your advice. You bring up very good points. I could potentially fully dedicate my 403b and IRA to bonds to help bring up the %. As of now, my 403B is roughly 7% and my taxable account is the other 93%, so even maxing out my 403B and IRA won't bring me close, but I suppose it's better late than never. I suppose it also makes sense to stick Bonds in the IRA and 403B since they are the least tax-efficient, IIRC.

Is there a particular preference for which Bond product to use in my IRA? An ETF vs the Vanguard Total Bond.

For the 403B I'll likely split it between the two Bond products.

I'll ask about the 457 plan too. Thanks.
Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Post by AZK »

Also, when I first set up a taxable account with ishares, I selected reinvest dividends...but after reading a lot of stuff on here I'm under the impression that that is extremely tax-inefficient, and instead, you should pool dividends to help re-balance to your original AA yearly.... am I understanding this correctly?
Default User BR
Posts: 7502
Joined: Mon Dec 17, 2007 6:32 pm

Post by Default User BR »

AZK wrote:Also, when I first set up a taxable account with ishares, I selected reinvest dividends...but after reading a lot of stuff on here I'm under the impression that that is extremely tax-inefficient, and instead, you should pool dividends to help re-balance to your original AA yearly.... am I understanding this correctly?
Not really. What reinvestment does is make accounting somewhat more difficult, as you get a number of small tax lots bought at various times. That can be somewhat difficult to track, as you need to know what you paid (basis) when you sell so that you can figure the capital gains or losses.

Pooling dividends and buying directly provides for larger lots and the opportunity to direct the purchases toward maintaining the asset allocation. If you are using ETFs, it also allows you to buy on your schedule.



Brian
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 6:40 pm

rebalancing

Post by Laura »

AZK,

You are correct. If you reinvest the dividends then need to sell one fund that is overweight to add to another fund that is underweight you incur a taxable event and it may be a short term holding. Instead, if you direct all dividends in your taxable account into a money market fund or something like that you can then chose which fund to direct money to. This allows you to rebalance without any additional tax cost.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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