Question on re-allocation strategy

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Question on re-allocation strategy

Post by koala52 » Sat May 18, 2013 11:23 am

My wife and I are both 61 and retired. I have Pensions that total $137,000 (gross) a year. I am currently doing part time consulting work that grosses another $100,000 a year. Our expenses (not including taxes) are approximately $82,000 a year. We have recently transferred all our investments to Vanguard. All our retirement accounts are Roth accounts.

Our current allocations are:
Roth: Vanguard Target Retirement-VTXVX-4%
Vanguard Total Bond Mkt- VBTLX-20%
Vanguard Total Stock Mkt- VTSAX-22%

Taxable: Individual Munis- 15% (as they mature we are transferring them to VWIUX)
Vanguard Int. Term Tax Exempt- VWIUX-22%
Vanguard Total Stock Mkt-VTSAX- 17%

This is an overall allocation of 60% bonds/40% stocks.

We are getting very concerned about the new and proposed taxes on capital gains and dividends.

We are thinking of re-allocating our funds. We would take the Bonds (VBTLX) in the Roth and move them to Stocks (VTSAX). We would then move our stocks (VTSAX)from our taxable account into the Int. Term Tax Exempt Fund (VWIUX). It will no longer be a perfect 60/40 split, but that can be easily corrected over time.

This would allow us to have any further capital gains and dividends be in a tax-sheltered fund going forward. We have $100K of long-term gains in the taxable account, but we should still fall within the 15% capital gains tax this year. We can afford these taxes, and pay them from non-investment sources. Is this a reasonable strategy, given that the stock market is high, and we can ‘lock in’ $85K of after-tax earnings while at the same time protect ourselves from future taxes on our capital gains and dividends?

Thank you for your help and suggestions.

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Re: Question on re-allocation strategy

Post by archbish99 » Sat May 18, 2013 4:55 pm

If you believe that your capital gains rate will be lower this year than in the future, there's certainly nothing wrong with tax-gain harvesting. (See the wiki article by that title.) However, it's generally not a good plan to make investment decisions for tax reasons. Pick the right investments, then place them for maximum tax-efficiency as a secondary concern. Unless your marginal tax rate exceeds 100%, it's always better to make more, even if it means you also pay more in taxes.
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Re: Question on re-allocation strategy

Post by livesoft » Sat May 18, 2013 5:01 pm

Have you actually done your own taxes to see if you are even affected by whatever you think you will be affected by? Or are you just going by hearsay?

You should be able to put a big chunk of your consulting income in a solo 401(k), so that your AGI and taxable income wouldn't be that high. You should be able to donate quite a bit to charity and get those Schedule A deductions quite large, too. Someone with your income could be in the 25% marginal income tax bracket with the right budget. See, for example,

But I see no problem making your taxable investments muni bonds, so that you have no Schedule B income.
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Re: Question on re-allocation strategy

Post by stan1 » Sat May 18, 2013 5:25 pm

Since you can easily live off your pensions it sounds like there is a reasonable chance most of your taxable account and IRAs will be left to your heirs. Let them inherit the taxable account and take the stepped up cost basis. Net is no capital gains taxes owed.

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Re: Question on re-allocation strategy

Post by Laura » Sat May 18, 2013 7:54 pm

One question about your roth, why are you investing in a Target Retirement fund in addition to the Total Bond Market and the Total Stock Market? These two funds are included in the Target Retirement fund along with Total Intl Stock Market. You have overlap with no other benefit. I recommend you either use only the Target Retirement fund or get rid of it entirely.

I also notice that you don't have any international other than what is inside the Target Retirement fund. Was that on purpose?

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Re: Question on re-allocation strategy

Post by koala52 » Sat May 18, 2013 9:25 pm

My thanks to everyone for all the helpful responses.

The Target Fund was left over from a previous employer. We are going to re-allocate it in the near future.

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