What to do once you have maxed out tax advantaged space?

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What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Sun Aug 25, 2013 5:33 am

What to do once I have exhausted tax advantage space?
I have maxed out my 457b, 403b, 539, I-bonds and my AA will be going out of balance by increase in the taxable investments. Meaning there are more stocks than bonds and the ratios is not matching my AA of 60:40.
What are my options?
1. Pay off debt - only debt I have is mortgage at 1.99% over 4 (remaining) years, which I do not mind paying off. At current rate of savings, I can pay it off in 18 months or less.
2. Keep investing in stocks and ride it out. That means, increase stocks in AA and increase risk taking.
3. Buy CDs - which are sometimes an option to bonds and thus the AA remains intact.

Am I missing anything?
Pardon me for restating this question which I had asked earlier along with other questions in a prior post, but was likely missed.
Thanks for reading and responding.
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Re: What to do once you have maxed out tax advantaged space?

Postby ks289 » Sun Aug 25, 2013 5:55 am

Consider option #4
Buy stocks in taxable accounts and keep same AA by selling some stocks in tax advantaged accounts to purchase bonds.
When you have 100% bonds in the tax advantaged accounts (and 100% stocks in taxable) , then revisit this question and depending on your tax rate consider munis in the taxable account as well.
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Sun Aug 25, 2013 6:05 am

ks289 wrote:Consider option #4
Buy stocks in taxable accounts and keep same AA by selling some stocks in tax advantaged accounts to purchase bonds.
When you have 100% bonds in the tax advantaged accounts (and 100% stocks in taxable) , then revisit this question and depending on your tax rate consider munis in the taxable account as well.


Thanks for the reply.
Question - Most of my bonds are from my 457 and 403b allocations and are maxed out. That is I do not know how to buy more bonds in the tax advantaged accounts any more as they are maxed out (am I correctly explaining this?).
ks289 wrote:When you have 100% bonds in the tax advantaged accounts (and 100% stocks in taxable) , then revisit this question and depending on your tax rate consider munis in the taxable account as well.

So your second line is already true. My tax rate is 35% federal, 6.45%state. So which munis to consider?
Thanks
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Re: What to do once you have maxed out tax advantaged space?

Postby VictoriaF » Sun Aug 25, 2013 7:23 am

You have listed "457b, 403b, 539, I-bonds" but not IRAs. (Does "539" mean a 529 college savings plan?)
Some suggestions:
- If you don't have an IRA you can open it and use it as a bond container.
- You can get $10k worth of I-Bonds for every Social Security Number in your family, every year.
- Consider EE Bonds, if you can hold them for 20 years. They are also $10k for every Social Security Number in your family, every year.
- If you choose a high deductible health plan (HDHP) with a health savings account (HSA), the HSA is evan better than an IRA. You would put pre-tax money into an HSA, the funds would be tax-deferred while accumulating, and (eventually) you would use these funds tax-free for qualified expenses.
- Converting a traditional IRA to a Roth IRA would use up some of your taxable money to increase your portion of the IRA funds by removing the IRS's portion. This probably won't work for you with 35% federal and 6.45% state tax brackets, but I am adding this as a consideration if you have a low-income year.

Good luck,

Victoria
Last edited by VictoriaF on Sun Aug 25, 2013 7:44 am, edited 2 times in total.
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Re: What to do once you have maxed out tax advantaged space?

Postby midareff » Sun Aug 25, 2013 7:27 am

Mrxyz wrote:
ks289 wrote:Consider option #4
Buy stocks in taxable accounts and keep same AA by selling some stocks in tax advantaged accounts to purchase bonds.
When you have 100% bonds in the tax advantaged accounts (and 100% stocks in taxable) , then revisit this question and depending on your tax rate consider munis in the taxable account as well.


Thanks for the reply.
Question - Most of my bonds are from my 457 and 403b allocations and are maxed out. That is I do not know how to buy more bonds in the tax advantaged accounts any more as they are maxed out (am I correctly explaining this?).
ks289 wrote:When you have 100% bonds in the tax advantaged accounts (and 100% stocks in taxable) , then revisit this question and depending on your tax rate consider munis in the taxable account as well.

So your second line is already true. My tax rate is 35% federal, 6.45%state. So which munis to consider?
Thanks


Vanguard has several Muni funds worth considering. VWITX, VWIUX, VMLTX, VMLUX as well as Long and Short Term Muni Funds, + Munis from California, New York, New Jersey, Ohio and Pennsylvania. There is lots of fruit on the tree.
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Re: What to do once you have maxed out tax advantaged space?

Postby JW Nearly Retired » Sun Aug 25, 2013 11:43 am

Mrxyz wrote: I have maxed out my 457b, 403b, 539, I-bonds and my AA will be going out of balance by increase in the taxable investments. Meaning there are more stocks than bonds and the ratios is not matching my AA of 60:40.
What are my options?

Am I missing anything?

This is confusing to me and only got a little less confusing in your later post where you implied you have 100% bonds in all of the above tax advantaged accounts. Can you clarify by repeating the percentages of stocks/bonds you have in (1) your tax advantaged accounts, and (2) in your taxable accounts?
thanks,
JW
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Sun Aug 25, 2013 2:51 pm

VictoriaF wrote:You have listed "457b, 403b, 539, I-bonds" but not IRAs. (Does "539" mean a 529 college savings plan?)
Some suggestions:
- If you don't have an IRA you can open it and use it as a bond container.
- You can get $10k worth of I-Bonds for every Social Security Number in your family, every year.
- Consider EE Bonds, if you can hold them for 20 years. They are also $10k for every Social Security Number in your family, every year.
- If you choose a high deductible health plan (HDHP) with a health savings account (HSA), the HSA is evan better than an IRA. You would put pre-tax money into an HSA, the funds would be tax-deferred while accumulating, and (eventually) you would use these funds tax-free for qualified expenses.
- Converting a traditional IRA to a Roth IRA would use up some of your taxable money to increase your portion of the IRA funds by removing the IRS's portion. This probably won't work for you with 35% federal and 6.45% state tax brackets, but I am adding this as a consideration if you have a low-income year.

Good luck,

Victoria
[/quote][/quote]

Thanks for your reply.
Yes, 539 is actually 529 (sorry)
Is IRA different than 457b, and 403b? (feel pretty stupid asking this). But my AGI is too high to allow IRA deductions.
I do buy I bonds every year and will do so for the next 5 years at least which forms the bulk of my Efund
I am not sure about EE funds - having to keep them untouched for 20 years.
I do participate in a HSA
I do not think I can convert from traditional IRA to Roth IRA.


midareff wrote:
Mrxyz wrote:
ks289 wrote:Consider option #4


Vanguard has several Muni funds worth considering. VWITX, VWIUX, VMLTX, VMLUX as well as Long and Short Term Muni Funds, + Munis from California, New York, New Jersey, Ohio and Pennsylvania. There is lots of fruit on the tree.


Thanks.
I do not reside in the states listed but could use the others. Is it worth investing in them as compared to paying off mortgage of 1.99% over 4 years?

JW Nearly Retired wrote:
Mrxyz wrote: I have maxed out my 457b, 403b, 539, I-bonds and my AA will be going out of balance by increase in the taxable investments. Meaning there are more stocks than bonds and the ratios is not matching my AA of 60:40.
What are my options?

Am I missing anything?

This is confusing to me and only got a little less confusing in your later post where you implied you have 100% bonds in all of the above tax advantaged accounts. Can you clarify by repeating the percentages of stocks/bonds you have in (1) your tax advantaged accounts, and (2) in your taxable accounts?
thanks,
JW


Thanks for your reply. I made a mistake. No, I do not have all bonds in tax advantaged accounts. I presumed new money going in/new contributions as I do have a mix of stocks and bonds in each taxable and tax advantage accounts.

My portfolio summary is;

Tax filing status – married filing jointly
Tax rate = 35% Federal and 6.45% State
Age 47 yrs
AA – 60% Stock, 40% Bond

Total portfolio – mid six figures (100%)

Taxable Stock 37%
His IRA Stock 9%
Bonds 20%
Her IRA Stock 13%
Bonds 21%

Total stock = 59%
Total Bonds = 41%

Emergency fund=45G
529 = 80G
Bank = 35G
Mortgage = 150 G over 4 years at 1.99%

Going forward –

Projected annual contributions will be;

Taxable contributions
120G divided equally in US total stock and US total bond markets.

His IRA contributions
His employee contribution 403b 17.5G
His employer contribution 403b 17.5G
His employee contribution 457b 17.5G

No new contributions for her IRA as she will not work.

Kids 529 contributions –
18G /total 3 kids

Question - How do I move the stocks in taxable to bonds? I am not sure, but I am not sure I can move funds within my wife's IRA.

Thanks once again.
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Re: What to do once you have maxed out tax advantaged space?

Postby VictoriaF » Sun Aug 25, 2013 4:04 pm

Mrxyz wrote:
VictoriaF wrote:You have listed "457b, 403b, 539, I-bonds" but not IRAs.
- If you don't have an IRA you can open it and use it as a bond container.


Is IRA different than 457b, and 403b? (feel pretty stupid asking this). But my AGI is too high to allow IRA deductions.


Mrxyz,

IRA is, in fact, different from 457b, and 403b. And you are right that you cannot take a deduction for it. But you can put into an IRA money after it's been taxed, and it will grow tax-deferred. Even better, you can do Backdoor Roth IRA Conversions, and this money will never be taxed. As you don't have an existing IRA, these conversions will be painless.

The essence of the backdoor Roth IRA is that you put money into an IRA, and a few days later you convert it into Roth IRA. While the tax law limits the income at which you can contribute to a Roth IRA, there is no income limit for converting a traditional IRA into Roth. You have to pay tax on the conversion, but as your money will sit in a traditional IRA for just a few days (e.g., in a money market account), there will be no income to tax you upon. Search this board for backdoor Roth IRA conversions to get more details.

[EDIT] The statement I cited above seems to indicate that you thought that IRA is the same thing as 457b or 403b. But your later comments and Duckie's response indicate that you may already have an IRA. If you do, then Roth conversions are probably not a good idea because of your high tax bracket.

Victoria
Last edited by VictoriaF on Sun Aug 25, 2013 8:16 pm, edited 1 time in total.
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Re: What to do once you have maxed out tax advantaged space?

Postby Duckie » Sun Aug 25, 2013 7:56 pm

Mrxyz wrote:What to do once I have exhausted tax advantage space?

Well, you haven't maxed it yet but when you do, your two best taxable options for bonds are 
I Savings Bonds through Treasury Direct some of which you already have and a muni fund like (VWIUX) Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (0.12%).

Taxable Stock 37%
His IRA Stock 9%
Bonds 20%
Her IRA Stock 13%
Bonds 21%

You want an AA of 60% stock and 40% bonds. You currently have 37% in taxable and 63% in tax-sheltered accounts. At this time you can put all your bonds in tax-sheltered accounts (assuming the bond fund options are decent).

You're mixing up the terminology. An IRA is a tax-sheltered account but it is not a 457b or 403b plan. Right now what do you have for retirement purposes?

Taxable at brokerage -- 37%
What stocks do you hold here?

Taxable at Treasury Direct -- ??% <-- List this only if some of the I-bonds are for retirement.

His 403b -- ??%

His 457b -- ??%

Her 401k/403b/457b plan -- ??% <-- Does she have any old plans from former employment?

His Traditional IRA -- ??%

Her Traditional IRA -- ??%

His Roth IRA -- ??%

Her Roth IRA -- ??%

You should list the stocks/funds you currently hold in your accounts with percentages and list the funds you could hold in the employer plans. (IRAs can be moved if bad, employer plans can't.) We need names, ticker symbols if possible, and most importantly the expense ratios. Bogleheads always look the costs first.

No new contributions for her IRA as she will not work.

As long as you have enough earned income and file MFJ she can contribute to a spousal IRA. See here.

How do I move the stocks in taxable to bonds?

In taxable you don't want bonds unless you have no more room in tax-sheltered. When it comes to the point you need to put bonds in taxable you just buy the bonds/bond fund. You don't have to sell the stocks.

I am not sure, but I am not sure I can move funds within my wife's IRA.

She can always sell and buy inside an IRA without tax consequences. She can also move an IRA from one custodian to another.

Didn't we already cover some of this last month? See your previous post.
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Re: What to do once you have maxed out tax advantaged space?

Postby littlebird » Sun Aug 25, 2013 8:16 pm

Not popular here, but after I maxed out all my tax advantaged space and wanted some more for fixed income, I used
Vanguard's Variable Annuity for the purpose. I've also used it for opportunistic re-balancing into stock on occasion, later exchanging back to fixed income tax free. I've been very happy with this product; have owned it for 13 years now.
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Re: What to do once you have maxed out tax advantaged space?

Postby JW Nearly Retired » Sun Aug 25, 2013 8:24 pm

Mrxyz wrote:My portfolio summary is;

Tax filing status – married filing jointly
Tax rate = 35% Federal and 6.45% State
Age 47 yrs
AA – 60% Stock, 40% Bond

Total portfolio – mid six figures (100%)

Taxable Stock 37%
His IRA Stock 9%
Bonds 20%
Her IRA Stock 13%
Bonds 21%

Total stock = 59%
Total Bonds = 41%

Going forward –
Projected annual contributions will be;

Taxable contributions
120G divided equally in US total stock and US total bond markets.

His IRA contributions
His employee contribution 403b 17.5G
His employer contribution 403b 17.5G
His employee contribution 457b 17.5G

No new contributions for her IRA as she will not work.

Kids 529 contributions –
18G /total 3 kids

Question - How do I move the stocks in taxable to bonds? I am not sure, but I am not sure I can move funds within my wife's IRA.

You should not want to "move the stocks in taxable to bonds". The tax favorable places for stocks is in the taxable account, and for bonds it is in the tax advantaged account. See the wiki on tax-efficient fund placement. http://www.bogleheads.org/wiki/Principl ... _Placement
You don't want taxable bonds in your taxable account because the income is taxed each year at your full marginal tax rate. In your case at about 40%. The taxable stock income consisting of qualified stock dividends and any realized long term (>1 year) capital gains will get taxed at only about half that rate. Moreover, gains in stocks are not taxed until they are sold (realized), so you can defer selling stocks for gains and paying taxes as long as you wish.
It appears your taxable account is 100% stock, which is fine.

The 403b/457b accounts and any future IRAs should hold all the bonds you need to reach your desired 60/40 overall AA. Right now it appears you have all your bonds and some stocks in the tax-advantaged accounts giving an overall AA of 59/41. Most people would say that is plenty close enough to 60/40 right now.

Going forward with contributions of $120k/year in taxable and 3x$17.5k = 52.5k tax-advantaged, if you buy $120k of stocks in taxable and $52.5k bonds in tax-advantaged your AA would drift up very slowly toward 70/30 if you did nothing else. In that case you could exchange some of the tax-advantaged account stocks for bonds periodically to get back to your 60/40 AA.
If you add his/hers back door Roth IRAs into the mix as VictoriaF suggests, then you would change your yearly contribution mix to $109k stocks into taxable and $63.5k bonds into tax-advantaged. That would sustain the 60/40 with just very minor exchanges in the tax-advantaged account. It will likely be a long time before you need to buy muni-bonds in the taxable to stay at your 60/40 AA.
JW
Last edited by JW Nearly Retired on Mon Aug 26, 2013 3:17 pm, edited 1 time in total.
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Re: What to do once you have maxed out tax advantaged space?

Postby jahol000 » Mon Aug 26, 2013 11:41 am

Once you have moved all of your tax-advantaged accounts to bonds, maxed your 529, I-bond bonds, etc., paying off your mortgage is not a bad option. This "negative bond", even at 1.99%, is probably better than most of your bond alternatives.
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Re: What to do once you have maxed out tax advantaged space?

Postby MoonOrb » Mon Aug 26, 2013 12:17 pm

You might want to post this to the Investing-Help with Personal Investments subforum in the recommended forum, because there appears to be some kind of disconnect between how you believe you have arrayed your assets within your various accounts and how they're actually arrayed. If you post in the format recommended in that forum it will go a long way toward helping people better understand your situation so you can get the kind of feedback you're looking for.
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Re: What to do once you have maxed out tax advantaged space?

Postby MooseandBear » Mon Aug 26, 2013 5:02 pm

What goals have you established around college savings? Is 18K total for 3 kids the amount you need to invest annually for that goal? While it is a minor option, would a Coverdell be helpful either for K-12 expenses or for college? There's a 2K / year cap per child.
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Re: What to do once you have maxed out tax advantaged space?

Postby Tigermoose » Mon Aug 26, 2013 5:41 pm

jahol000 wrote:Once you have moved all of your tax-advantaged accounts to bonds, maxed your 529, I-bond bonds, etc., paying off your mortgage is not a bad option. This "negative bond", even at 1.99%, is probably better than most of your bond alternatives.


Bingo. Would you take out a 1.99% loan in order to invest in a 4 year CD right now? The risk of losing money by paying off a loan is zero. That's why I picked a CD as opposed to investing in stocks. You have to match your risk when making this comparison. You said you had 4 years remaining on the mortgage, thus a 4 yr CD.
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Tue Aug 27, 2013 2:28 am

VictoriaF wrote:
Mrxyz wrote:
VictoriaF wrote:You have listed "457b, 403b, 539, I-bonds" but not IRAs.
- If you don't have an IRA you can open it and use it as a bond container.


Is IRA different than 457b, and 403b? (feel pretty stupid asking this). But my AGI is too high to allow IRA deductions.


Mrxyz,

IRA is, in fact, different from 457b, and 403b. And you are right that you cannot take a deduction for it. But you can put into an IRA money after it's been taxed, and it will grow tax-deferred. Even better, you can do Backdoor Roth IRA Conversions, and this money will never be taxed. As you don't have an existing IRA, these conversions will be painless.

The essence of the backdoor Roth IRA is that you put money into an IRA, and a few days later you convert it into Roth IRA. While the tax law limits the income at which you can contribute to a Roth IRA, there is no income limit for converting a traditional IRA into Roth. You have to pay tax on the conversion, but as your money will sit in a traditional IRA for just a few days (e.g., in a money market account), there will be no income to tax you upon. Search this board for backdoor Roth IRA conversions to get more details.

[EDIT] The statement I cited above seems to indicate that you thought that IRA is the same thing as 457b or 403b. But your later comments and Duckie's response indicate that you may already have an IRA. If you do, then Roth conversions are probably not a good idea because of your high tax bracket.

Victoria


Thanks for your reply.

Sorry for the delay in response, there is quite a lot of information I need to read and digest!!

Backdoor Roth IRA - Post tax money growing tax free over years is almost too good to be true. My IRA only has 2,500$ in it (I had to withdraw the rest with penalty in past for a major life event which has now resolved) and thus should use the backdoor Roth IRA for myself as the tax penalty would not be significant.
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Tue Aug 27, 2013 2:52 am

Duckie wrote:
Mrxyz wrote:What to do once I have exhausted tax advantage space?

Well, you haven't maxed it yet but when you do, your two best taxable options for bonds are 
I Savings Bonds through Treasury Direct some of which you already have and a muni fund like (VWIUX) Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (0.12%).

Taxable Stock 37%
His IRA Stock 9%
Bonds 20%
Her IRA Stock 13%
Bonds 21%

You want an AA of 60% stock and 40% bonds. You currently have 37% in taxable and 63% in tax-sheltered accounts. At this time you can put all your bonds in tax-sheltered accounts (assuming the bond fund options are decent).

You're mixing up the terminology. An IRA is a tax-sheltered account but it is not a 457b or 403b plan. Right now what do you have for retirement purposes?

Taxable at brokerage -- 37%
What stocks do you hold here?

Taxable at Treasury Direct -- ??% <-- List this only if some of the I-bonds are for retirement.

His 403b -- ??%

His 457b -- ??%

Her 401k/403b/457b plan -- ??% <-- Does she have any old plans from former employment?

His Traditional IRA -- ??%

Her Traditional IRA -- ??%

His Roth IRA -- ??%

Her Roth IRA -- ??%

You should list the stocks/funds you currently hold in your accounts with percentages and list the funds you could hold in the employer plans. (IRAs can be moved if bad, employer plans can't.) We need names, ticker symbols if possible, and most importantly the expense ratios. Bogleheads always look the costs first.

No new contributions for her IRA as she will not work.

As long as you have enough earned income and file MFJ she can contribute to a spousal IRA. See here.

How do I move the stocks in taxable to bonds?

In taxable you don't want bonds unless you have no more room in tax-sheltered. When it comes to the point you need to put bonds in taxable you just buy the bonds/bond fund. You don't have to sell the stocks.

I am not sure, but I am not sure I can move funds within my wife's IRA.

She can always sell and buy inside an IRA without tax consequences. She can also move an IRA from one custodian to another.

Didn't we already cover some of this last month? See your previous post.


Thanks for your reply!
Yes, quite a lot of this was covered last month. I do apologize for asking more questions but I did not understand the process once the tax advantaged accounts were maxed out. In fact, as my AA was tilting towards stocks, I made the mistake of adding REIT to my 3 fund portfolio, changing it to 4 fund as per Wiki, but not realizing that the REIT had to be placed in tax advantaged account. I sold it soon at a small loss. Hence the more specific question was asked.


1. How do I move the stocks in taxable to bonds? Sorry, my mistake. I meant, "how do I convert the stocks in tax advantaged space to bonds?" was the right question.
2. Wife's IRA - Thanks for the link for wife's IRA. And I have to contact her IRA custodian for moving her funds to Vanguard from TIAA Cref if possible.
3. I will post the details of the stocks/funds as soon as possible.
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Tue Aug 27, 2013 3:03 am

JW Nearly Retired wrote:
Mrxyz wrote:My portfolio summary is;

Tax filing status – married filing jointly
Tax rate = 35% Federal and 6.45% State
Age 47 yrs
AA – 60% Stock, 40% Bond

Total portfolio – mid six figures (100%)

Taxable Stock 37%
His IRA Stock 9%
Bonds 20%
Her IRA Stock 13%
Bonds 21%

Total stock = 59%
Total Bonds = 41%

Going forward –
Projected annual contributions will be;

Taxable contributions
120G divided equally in US total stock and US total bond markets.

His IRA contributions
His employee contribution 403b 17.5G
His employer contribution 403b 17.5G
His employee contribution 457b 17.5G

No new contributions for her IRA as she will not work.

Kids 529 contributions –
18G /total 3 kids

Question - How do I move the stocks in taxable to bonds? I am not sure, but I am not sure I can move funds within my wife's IRA.

You should not want to "move the stocks in taxable to bonds". The tax favorable places for stocks is in the taxable account, and for bonds it is in the tax advantaged account. See the wiki on tax-efficient fund placement. http://www.bogleheads.org/wiki/Principl ... _Placement
You don't want taxable bonds in your taxable account because the income is taxed each year at your full marginal tax rate. In your case at about 40%. The taxable stock income consisting of qualified stock dividends and any realized long term (>1 year) capital gains will get taxed at only about half that rate. Moreover, gains in stocks are not taxed until they are sold (realized), so you can defer selling stocks for gains and paying taxes as long as you wish.
It appears your taxable account is 100% stock, which is fine.

The 403b/457b accounts and any future IRAs should hold all the bonds you need to reach your desired 60/40 overall AA. Right now it appears you have all your bonds and some stocks in the tax-advantaged accounts giving an overall AA of 59/41. Most people would say that is plenty close enough to 60/40 right now.

Going forward with contributions of $120k/year in taxable and 3x$17.5k = 52.5k tax-advantaged, if you buy $120k of stocks in taxable and $52.5k bonds in tax-advantaged your AA would drift up very slowly toward 70/30 if you did nothing else. In that case you could exchange some of the tax-advantaged account stocks for bonds periodically to get back to your 60/40 AA.
If you add his/hers back door Roth IRAs into the mix as VictoriaF suggests, then you would change your yearly contribution mix to $109k stocks into taxable and $63.5k bonds into tax-advantaged. That would sustain the 60/40 with just very minor exchanges in the tax-advantaged account. It will likely be a long time before you need to buy muni-bonds in the taxable to stay at your 60/40 AA.
JW


Thanks JW for your detailed reply. I appreciate you running the numbers for me!

Yes, I have bonds in taxadvantaged accounts and stocks in taxables. My mistake in stating otherwise. But like your nice explanation too.
I could exchange the taxadvantaged stocks for bonds until there are only bonds and/or use the back door Roth.
I am so happy with the 3 fund portfolio (as compared to what I had in past!!) that I am in no hurry to look up muni - bonds if I don't have to! I need to read more about the Back door Roth and find it almost too good to be true. Even though the money is post tax ( and I am in high tax bracket), the money grows tax free and over years, that compounding will be substantial, even with bond funds!!

I need to post the portfolio details as per Duckie.

Thanks once again to Victoria, Duckie and JW for your help ( and many others too). You and others in this wonderful forum have helped me immensely and have literally changed my life!!
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Tue Aug 27, 2013 3:08 am

MooseandBear wrote:What goals have you established around college savings? Is 18K total for 3 kids the amount you need to invest annually for that goal? While it is a minor option, would a Coverdell be helpful either for K-12 expenses or for college? There's a 2K / year cap per child.


I have Utah 529 plans and contribute 6K per kid per year (18k total) which is state tax exempt. I could place more but it would not be state tax exempt. I have to compare placing more money in 529s versus more money in my investments. I buy I bonds (20k per year for at least the next 5 years) also which are my E fund (currently 55k or approx 12-15 months expenses)and can double as educational funds (if needed) in future.
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Tue Aug 27, 2013 3:19 am

Tigermoose wrote:
jahol000 wrote:Once you have moved all of your tax-advantaged accounts to bonds, maxed your 529, I-bond bonds, etc., paying off your mortgage is not a bad option. This "negative bond", even at 1.99%, is probably better than most of your bond alternatives.


Bingo. Would you take out a 1.99% loan in order to invest in a 4 year CD right now? The risk of losing money by paying off a loan is zero. That's why I picked a CD as opposed to investing in stocks. You have to match your risk when making this comparison. You said you had 4 years remaining on the mortgage, thus a 4 yr CD.


Well, my significant other thinks early mortgage pay off (currently mortgage at 1.99% over 4 years) is better than investing. I think investing in 3 fund portfolio is better but I am not sure!! But I will not take out any loans to invest in a CD!
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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Fri Aug 30, 2013 5:39 am

Mrxyz wrote:
Duckie wrote:
Mrxyz wrote:What to do once I have exhausted tax advantage space?

Well, you haven't maxed it yet but when you do, your two best taxable options for bonds are 
I Savings Bonds through Treasury Direct some of which you already have and a muni fund like (VWIUX) Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (0.12%).

Taxable Stock 37%
His IRA Stock 9%
Bonds 20%
Her IRA Stock 13%
Bonds 21%

You want an AA of 60% stock and 40% bonds. You currently have 37% in taxable and 63% in tax-sheltered accounts. At this time you can put all your bonds in tax-sheltered accounts (assuming the bond fund options are decent).

You're mixing up the terminology. An IRA is a tax-sheltered account but it is not a 457b or 403b plan. Right now what do you have for retirement purposes?

Taxable at brokerage -- 37%
What stocks do you hold here?

Taxable at Treasury Direct -- ??% <-- List this only if some of the I-bonds are for retirement.

His 403b -- ??%

His 457b -- ??%

Her 401k/403b/457b plan -- ??% <-- Does she have any old plans from former employment?

His Traditional IRA -- ??%

Her Traditional IRA -- ??%

His Roth IRA -- ??%

Her Roth IRA -- ??%

You should list the stocks/funds you currently hold in your accounts with percentages and list the funds you could hold in the employer plans. (IRAs can be moved if bad, employer plans can't.) We need names, ticker symbols if possible, and most importantly the expense ratios. Bogleheads always look the costs first.

No new contributions for her IRA as she will not work.

As long as you have enough earned income and file MFJ she can contribute to a spousal IRA. See here.

How do I move the stocks in taxable to bonds?

In taxable you don't want bonds unless you have no more room in tax-sheltered. When it comes to the point you need to put bonds in taxable you just buy the bonds/bond fund. You don't have to sell the stocks.

I am not sure, but I am not sure I can move funds within my wife's IRA.

She can always sell and buy inside an IRA without tax consequences. She can also move an IRA from one custodian to another.

Didn't we already cover some of this last month? See your previous post.


Thanks for your reply!
Yes, quite a lot of this was covered last month. I do apologize for asking more questions but I did not understand the process once the tax advantaged accounts were maxed out. In fact, as my AA was tilting towards stocks, I made the mistake of adding REIT to my 3 fund portfolio, changing it to 4 fund as per Wiki, but not realizing that the REIT had to be placed in tax advantaged account. I sold it soon at a small loss. Hence the more specific question was asked.


1. How do I move the stocks in taxable to bonds? Sorry, my mistake. I meant, "how do I convert the stocks in tax advantaged space to bonds?" was the right question.
2. Wife's IRA - Thanks for the link for wife's IRA. And I have to contact her IRA custodian for moving her funds to Vanguard from TIAA Cref if possible.
3. I will post the details of the stocks/funds as soon as possible.



Hi again.

Here are the percentages breakdown;


Taxable = 40%

VTSAX US stocks (0.05%) =20%
VTIAX Inter (0.16%) = 20%

HER

VBTLX bond (0.10%) =21%
VTIAX Inter(0.16%) =8%
VEXAX Ext.(0.14%) = 5%
Capfed CD ira = 0.5%

HIS

IRA Van Target 2030 (0.17%) =0.5%

457b
SP500 Cref (0.32%) =3%
CREF BOND (0.44%) = 3%
403b
SP500 Cref (0.32%) =5%
CREF BOND (0.44%) =14%

I cannot change from Cref accounts as Vanguard is not a choice offered. The Cref expense ratios are too high. I do not know if I can change her employer plans from cref to vanguard as she has stopped working for them.
I have I bonds for E fund but not for retirement. Unless there is no emergency and I use them in (distant) future for retirement.
I hope I did not miss anything important.
Again thanks for reading and responding. I appreciate all feedback.
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Re: What to do once you have maxed out tax advantaged space?

Postby VictoriaF » Fri Aug 30, 2013 7:32 am

Mrxyz wrote:
VictoriaF wrote:
Mrxyz wrote:
VictoriaF wrote:You have listed "457b, 403b, 539, I-bonds" but not IRAs.
- If you don't have an IRA you can open it and use it as a bond container.


Is IRA different than 457b, and 403b? (feel pretty stupid asking this). But my AGI is too high to allow IRA deductions.


Mrxyz,

IRA is, in fact, different from 457b, and 403b. And you are right that you cannot take a deduction for it. But you can put into an IRA money after it's been taxed, and it will grow tax-deferred. Even better, you can do Backdoor Roth IRA Conversions, and this money will never be taxed. As you don't have an existing IRA, these conversions will be painless.

The essence of the backdoor Roth IRA is that you put money into an IRA, and a few days later you convert it into Roth IRA. While the tax law limits the income at which you can contribute to a Roth IRA, there is no income limit for converting a traditional IRA into Roth. You have to pay tax on the conversion, but as your money will sit in a traditional IRA for just a few days (e.g., in a money market account), there will be no income to tax you upon. Search this board for backdoor Roth IRA conversions to get more details.

[EDIT] The statement I cited above seems to indicate that you thought that IRA is the same thing as 457b or 403b. But your later comments and Duckie's response indicate that you may already have an IRA. If you do, then Roth conversions are probably not a good idea because of your high tax bracket.

Victoria


Thanks for your reply.

Sorry for the delay in response, there is quite a lot of information I need to read and digest!!

Backdoor Roth IRA - Post tax money growing tax free over years is almost too good to be true. My IRA only has 2,500$ in it (I had to withdraw the rest with penalty in past for a major life event which has now resolved) and thus should use the backdoor Roth IRA for myself as the tax penalty would not be significant.


The Backdoor Roth IRA is a well-known loophole. People with significant incomes cannot put new money into a Roth IRA, but they can convert an existing traditional IRA into a Roth IRA regardless of their income. However, this loophole is not widely used, and thus the government is not highly motivated to close it. Those with lower incomes can contribute to Roth IRA directly, and for them the loophole is irrelevant. Those with higher incomes have a problem of proportional conversion: If they have significant traditional IRA holdings they have to pay significant taxes on that portion of the conversion and it just does not make sense to convert.

With only $2,500 in an IRA, you do not have that problem. You can contribute $5,500 for 2013 for yourself and your wife (each), and then convert $13,500 into Roth. You will pay taxes on the conversion of $2,500, but that would leave you with a clean slate for the Backdoor Roth in all future years.

Victoria
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Re: What to do once you have maxed out tax advantaged space?

Postby abuss368 » Fri Aug 30, 2013 7:36 am

I would consider stocks in taxable accounts.
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Re: What to do once you have maxed out tax advantaged space?

Postby max12377 » Fri Aug 30, 2013 8:19 am

I don't know if this will help but here's what I did to get stocks in taxable and bonds in tax deferred. It's basically covered in the wiki that was referenced above.

I had an S&P 500 fund in my 403b that was relatively large. I also had a chunk of muni bonds in taxable. By the way, there is a funny psychological component here as well that i'll explain below.

Whenever I got the urge to do something, I would buy, say $10K VTSAX in taxable and sell the equivalent (the S&P 500 fund) in tax deferred into a bond fund. Over time, my bonds in taxable grew smaller to the point where I now have none. I do have emergency fund cash, of course.

I also did the same with International. I had an expensive international fund in my 403b. I bought VTIAX in taxable and sold out of the international fund into a bond fund in my 403b.

So I now have VTIAX and VTSAX in taxable. Simple. I have an S&P 500 and an International Fund (which is not VTIAX) in my 403b that are available to me for re-balancing if I need to do the old 'switch-a-roo' and tax loss harvest.

I recognize the fact that the 403b is technically 'less money' because it's not taxed yet but i chose to ignore that. Technically I think my portfolio became a little more aggressive because of what I did but I was OK with that.

This is where the psychological component came in for me.

Now, if/when the market takes a dump, I can tax loss harvest my portfolio by reversing a portion of what I did above for about 30 days. Otherwise, my inclination is to leave the taxable funds alone because I don't want to pay taxes (although many are now long term capital gains @ 15%).

Also, as I bought more stocks when the market was reaching new highs, I was nervous, but I knew I was selling them in my 403b. So overall I was not substantially changing my AA.

My portfolio is now pretty tax efficient. And it's nice to see dividends drop into my taxable money market rather than be tied up in my 403b. I reinvest them from time to time. I also have about a 50/50 stock bond AA in my 403B which I use to re-balance with no tax consequences.

I found that as a rookie I started with complexity and as I became a veteran I moved toward simplicity by undoing the mess I made at the start.. :oops: .

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Re: What to do once you have maxed out tax advantaged space?

Postby Mrxyz » Sat Aug 31, 2013 10:41 am

VictoriaF wrote:
Mrxyz wrote:
VictoriaF wrote:
Mrxyz wrote:
VictoriaF wrote:You have listed "457b, 403b, 539, I-bonds" but not IRAs.
- If you don't have an IRA you can open it and use it as a bond container.


Is IRA different than 457b, and 403b? (feel pretty stupid asking this). But my AGI is too high to allow IRA deductions.


Mrxyz,

IRA is, in fact, different from 457b, and 403b. And you are right that you cannot take a deduction for it. But you can put into an IRA money after it's been taxed, and it will grow tax-deferred. Even better, you can do Backdoor Roth IRA Conversions, and this money will never be taxed. As you don't have an existing IRA, these conversions will be painless.

The essence of the backdoor Roth IRA is that you put money into an IRA, and a few days later you convert it into Roth IRA. While the tax law limits the income at which you can contribute to a Roth IRA, there is no income limit for converting a traditional IRA into Roth. You have to pay tax on the conversion, but as your money will sit in a traditional IRA for just a few days (e.g., in a money market account), there will be no income to tax you upon. Search this board for backdoor Roth IRA conversions to get more details.

[EDIT] The statement I cited above seems to indicate that you thought that IRA is the same thing as 457b or 403b. But your later comments and Duckie's response indicate that you may already have an IRA. If you do, then Roth conversions are probably not a good idea because of your high tax bracket.

Victoria


Thanks for your reply.

Sorry for the delay in response, there is quite a lot of information I need to read and digest!!

Backdoor Roth IRA - Post tax money growing tax free over years is almost too good to be true. My IRA only has 2,500$ in it (I had to withdraw the rest with penalty in past for a major life event which has now resolved) and thus should use the backdoor Roth IRA for myself as the tax penalty would not be significant.


The Backdoor Roth IRA is a well-known loophole. People with significant incomes cannot put new money into a Roth IRA, but they can convert an existing traditional IRA into a Roth IRA regardless of their income. However, this loophole is not widely used, and thus the government is not highly motivated to close it. Those with lower incomes can contribute to Roth IRA directly, and for them the loophole is irrelevant. Those with higher incomes have a problem of proportional conversion: If they have significant traditional IRA holdings they have to pay significant taxes on that portion of the conversion and it just does not make sense to convert.

With only $2,500 in an IRA, you do not have that problem. You can contribute $5,500 for 2013 for yourself and your wife (each), and then convert $13,500 into Roth. You will pay taxes on the conversion of $2,500, but that would leave you with a clean slate for the Backdoor Roth in all future years.

Victoria


THANKS!!!

Okay, I got it now! Wow, this loophole was not well known to me for sure! But better late than never...........
Easy phone call to Vanguard and the roth was created and money soon will be transferred......... Will do the same with my wife's account.

Question --- What fund to place the roth in ?

My AA calls for mainly bonds in tax advantaged spaces. So should I place the roth money in TBM? or REIT(probably not)? I was told that roth IRS is considered to be the last retirement asset to draw on after others like 457 etc and thus you can be more 'aggressive' with it. Perhaps I am wrong about this but I need to know what are the recommendations.

Thanks once again.
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Re: What to do once you have maxed out tax advantaged space?

Postby blastoff » Sat Aug 31, 2013 10:53 am

If you have your own business (doctor, dentist, etc), you could call up an actuary and have them make you a plan so you can shovel away tons of money tax free. I doubt it makes sense in your case, but it could be an option.
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Re: What to do once you have maxed out tax advantaged space?

Postby gerntz » Sun Sep 01, 2013 7:48 pm

What am I missing. What's wrong with muni bond (funds) for taxable account(s)?
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Re: What to do once you have maxed out tax advantaged space?

Postby dhodson » Sun Sep 01, 2013 7:52 pm

blastoff wrote:If you have your own business (doctor, dentist, etc), you could call up an actuary and have them make you a plan so you can shovel away tons of money tax free. I doubt it makes sense in your case, but it could be an option.



you cant shovel tons of money away tax free. If you are talking about having a defined benefit plan then that is tax deferred.
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Re: What to do once you have maxed out tax advantaged space?

Postby The Wizard » Sun Sep 01, 2013 8:09 pm

Another option is to step up your projected retirement date by several years.
Once you get to this point, it's all good...
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Re: What to do once you have maxed out tax advantaged space?

Postby grabiner » Sun Sep 01, 2013 9:11 pm

gerntz wrote:What am I missing. What's wrong with muni bond (funds) for taxable account(s)?


Nothing is wrong with munis in taxable, but it may be better for after-tax returns to hold corporate bonds in your IRA or 401(k) and stocks in your taxable account. (This depends on several factors, most important the relative quality of the stock and bond options in your 401(k). For example, if you work for the US Government, the G fund in the TSP is better than anything you can buy at retail, so you should hold bonds there and stocks in taxable; if the only good fund in your 401(k) is an S&P index fund, you may need to hold bonds in taxable.)
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