AA: Stocks in Taxable/Bonds in IRA or Everything in Both?

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AA: Stocks in Taxable/Bonds in IRA or Everything in Both?

Postby Statch » Mon Jul 15, 2013 7:45 pm

Years ago I decided (for the most part) to keep stock funds in my taxable accounts and bond funds in my tax-advantaged accounts, rather than trying to replicate my asset allocation in each type of account. There were persuasive arguments on both sides, but in the end it seemed simplest and more tax-efficient to do it this way. Along the way I moved the stocks funds in the taxable account into Vanguard Tax-Managed accounts to further minimize throwing off taxable income, which it has done very well.

Now I'm getting close to the withdrawal stage...and I've read that I should take withdrawals from my taxable accounts first, then my tax-advantaged accounts. I haven't decided yet how to do the withdrawals but it seems to me that I might have more options now if I had chosen the other strategy (replicated AA in each type of account), so that I could take from either equities or bonds in taxable, or if I had transitioned to that over the last five years or so. And if I hadn't been so concerned about being tax-efficient in my taxable accounts, I'd also have the option now of not reinvesting dividends and using those for some income.

I know there's a lot of theory around all of this, but I'm curious to hear from people who have gotten to retirement using either strategy and how it's worked out for you? Would you have done anything differently? Seems like it might be a useful discussion too for younger people as they're trying to decide this.

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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby FNK » Mon Jul 15, 2013 7:50 pm

You still have the flexibility! Read http://www.bogleheads.org/wiki/Placing_ ... ed_Account
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby Statch » Mon Jul 15, 2013 7:56 pm

Agreed! I was thinking more though that stock funds tend to have more dramatic dips so someone who wants to have some regular retirement income might prefer to be able to pull from a more mixed portfolio in taxable and choose whether to take from a bond or stock fund. I don't think it's going to be a problem for me because I'll have a pension that should cover expenses so if I want to take income from my accounts for extras, I can defer that if we're in the middle of a dip, but if I were in a different situation, I think it would really bother me. Is it not different for people in retirement than for those who are still accumulating and can ride out the dips a bit more easily?
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby FNK » Tue Jul 16, 2013 9:17 am

Dips don't matter in this case. If you need to pull money out, sell stocks funds in the taxable account and buy them back in the tax-deferred account.
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby YDNAL » Tue Jul 16, 2013 10:03 am

FNK wrote:
Statch wrote:I don't think it's going to be a problem for me because I'll have a pension that should cover expenses so if I want to take income from my accounts for extras, I can defer that if we're in the middle of a dip, but if I were in a different situation, I think it would really bother me.

Dips don't matter in this case. If you need to pull money out, sell stocks funds in the taxable account and buy them back in the tax-deferred account.

:thumbsup

Unless tax efficiency is not an issue, keep those Vanguard Tax-Managed funds in Taxable. Money is fungible.
Statch wrote:Along the way I moved the stocks funds in the taxable account into Vanguard Tax-Managed accounts to further minimize throwing off taxable income, which it has done very well.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby feh » Tue Jul 16, 2013 12:06 pm

FNK wrote:Dips don't matter in this case. If you need to pull money out, sell stocks funds in the taxable account and buy them back in the tax-deferred account.


Yup, this ^^^^^^ is the answer.

I just asked this same question a couple weeks ago; whatever you sell in taxable you turn around and buy in tax-advantaged.
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby Statch » Tue Jul 16, 2013 8:12 pm

I really appreciate the answers. Are any of you retired and doing it this way? I think I get this for the accumulation phase, but for some reason I'm still having trouble with the idea of using it as a method for making regular (monthly) withdrawals in retirement. Don't people normally maintain their AA by disciplined rebalancing based on what happens to their asset allocation because of what's happening in the market, not because they want to take money out of a particular type of account (based on tax privileges or not)? I see that it's more tax efficient to have things the way I've had them, and that those tax savings are real money and have compounded for me over the years, but it seems like I might have been better off to hold both stocks/bonds in each type of account, to have the flexibility to choose whether to take stocks or bonds in any particular month as I work my way through taxable first, then tax-advantaged.

I really am asking because I'm having trouble thinking about this, not to challenge anyone. I don't know enough to challenge anyone, as I'm sure you can tell :) .
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby feh » Tue Jul 16, 2013 9:34 pm

Statch wrote:I really appreciate the answers. Are any of you retired and doing it this way? I think I get this for the accumulation phase, but for some reason I'm still having trouble with the idea of using it as a method for making regular (monthly) withdrawals in retirement. Don't people normally maintain their AA by disciplined rebalancing based on what happens to their asset allocation because of what's happening in the market, not because they want to take money out of a particular type of account (based on tax privileges or not)? I see that it's more tax efficient to have things the way I've had them, and that those tax savings are real money and have compounded for me over the years, but it seems like I might have been better off to hold both stocks/bonds in each type of account, to have the flexibility to choose whether to take stocks or bonds in any particular month as I work my way through taxable first, then tax-advantaged.

I really am asking because I'm having trouble thinking about this, not to challenge anyone. I don't know enough to challenge anyone, as I'm sure you can tell :) .


Perhaps reading the thread where I asked the same question will help:

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=119101
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby FNK » Wed Jul 17, 2013 1:15 pm

Statch wrote:I think I get this for the accumulation phase, but for some reason I'm still having trouble with the idea of using it as a method for making regular (monthly) withdrawals in retirement. Don't people normally maintain their AA by disciplined rebalancing based on what happens to their asset allocation because of what's happening in the market, not because they want to take money out of a particular type of account (based on tax privileges or not)? I see that it's more tax efficient to have things the way I've had them, and that those tax savings are real money and have compounded for me over the years, but it seems like I might have been better off to hold both stocks/bonds in each type of account, to have the flexibility to choose whether to take stocks or bonds in any particular month as I work my way through taxable first, then tax-advantaged.

Maybe it would be helpful to work this out on a piece of paper to make it more palpable to yourself. Start with a suitable AA across accounts; sell stocks here; convert bonds to stocks there; end with a suitable AA across accounts. AA maintenance is controlling your risk regardless of where the risk comes from: market movements, changes in your life, tax complications. If at the end of the operations you have your investments they way they should be, you're good.

However, there's a deeper subject here. Dollar cost averaging during accumulation is beneficial because you buy more shares when the market is down and fewer when it's up. During withdrawal it's the other way around, so DCA is harmful. I've been thinking about a reasonable strategy for that, and so far the best I've come up with is that I will maintain a cash buffer (maybe 1-2 years of expenses) and sell an equal portion of the portfolio each year regardless of valuation (the way that works is: sell 1/40 in year 1, 1/39 in year 2 and so on). If the buffer goes below 1 year of expenses, adjust lifestyle.
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Re: AA: Stocks in Taxable/Bonds in IRA or Everything in Both

Postby Statch » Wed Jul 17, 2013 4:02 pm

I know that I do need to work it out on paper. Thanks very much for the explanation -- it's very helpful.

What you said in the last paragraph is exactly what I'm thinking about doing. I have what I hope is a 5-year cash buffer set up right now, but will reduce that sometime in the first year of retirement after we get a real-world handle on what our expenses will be. Then I want to figure out a method to use to keep that buffer going without having to take a monthly amount out of current investments. Ideally I'd like to let our current investments ride as long as I can without taking much from them.

Thanks again for the help!
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