Rebalance in Taxable or in IRA after receipt of Lump Sum

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OffGridder
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Joined: Thu Jul 23, 2015 8:03 am
Location: Eastern WA.

Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by OffGridder » Thu Jul 23, 2015 9:15 am

Hello again fellow Bogleheads. On suggestion of Lafder, I am resubmitting my questions in the accepted format and with the detail necessary for you to provide constructive feedback. --Thanks, Dave



Emergency funds: 12 months of expenses
Debt: Zero including paid for house
Tax Filing Status: Married Filing Jointly
Marginal Tax Rate (in Retirement): 15% Federal, No State Income Tax
State of Residence: Washington
Age: 58
Desired Asset allocation: 65% stocks / 35% fixed income (Bonds / Cash) with glide path down to 40$ stocks at age 70, then maintain that level.
Desired International allocation: 25% of stocks
Retirement: Planned within 12 months
Withdrawal Rate in Retirement: 3% of total starting portfolio value adjusted for inflation to support combined basic expenses and discretionary spend.

Size of current total portfolio: Well over $1M but less than $2M.

Current retirement assets:

Taxable
33% Cash
2% Vanguard Total Stock Market Fund (Admiral shares)


His 401k (will rollover to Vanguard IRA upon retirement)
2% Vanguard Total Stock Market Index Fund
1% Vanguard Total International Stock Market Index Fund
13% Vanguard Total Bond Market Index Fund
Maxing out contributions at $23.5K per year
Company match: 7K per year

His Roth IRA at Vanguard (all Admiral Shares)
3% Total Stock Market Index Fund
1% Total International Stock Market Index Fund
3% Total Bond Market Index Fund

His Rollover IRA at Vanguard (all Admiral Shares)
26% Total Stock Market Index Fund
8% Total International Stock Market Index Fund

Her 401K (will rollover to Vanguard IRA upon retirement)
1% Vanguard Total Stock Market Index Fund
1% Vanguard Total Bond Market Index Fund
Maxing out contributions
Employer Match: None

Her Roth IRA at Vanguard (all Admiral Shares)
3% Total Stock Market Index Fund
1% Total International Stock Market Index Fund
1% Total Bond Market Index Fund

Her Traditional IRA at Vanguard (all Admiral Shares)
1% Total Bond Market Index Fund

Contributions
Maxing out contributions to both 401K’s
Maxing out contributions to both Roth IRA’s


Questions:
1. How should we deploy recent lump sum cash proceeds from real estate sale to bring total portfolio asset allocation back to desired levels

2.Given question #1, open to suggestions on reallocation of all funds between taxable account and each tax deferred and tax free accounts.

3. Request recommendations on which accounts to withdraw from first. My plan was to draw down my taxable account to zero before tapping traditional IRA and then Roth IRA's last (if needed),

Last edited by OffGridder on Tue Jul 28, 2015 11:02 pm, edited 5 times in total.
"Goodness is the only investment that never fails." | H.D. Thoreau

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grabiner
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Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by grabiner » Thu Jul 23, 2015 8:25 pm

It is more tax-efficient to hold stock in your taxable account, particularly in the 15% tax bracket in which you pay no taxes on qualified dividends or capital gains.

You don't need to worry about having stock in your taxable account and planning to go through the taxable account first, because you can always rebalance as needed. If you want to sell $10,000 worth of bonds but are selling from an all-stock taxable account, you can sell $10,000 worth of stock in your taxable account, and move $10,000 from bonds to stock in the IRA, keeping the same total stock holding. (Since you are 58, you aren't going to burn through the entire taxable account before you are allowed to take penalty-free withdrawals from the IRA.)

You might want to rebalance to a less aggressive allocation, as your risk tolerance will be lower once you retire.
Wiki David Grabiner

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Taylor Larimore
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Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by Taylor Larimore » Thu Jul 23, 2015 8:31 pm

Dave:

Welcome to the Bogleheads forum!

Grabiner, who gave you the first reply to your question, is an expert in mutual fund taxation. Consider his advice carefully.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

livesoft
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Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by livesoft » Thu Jul 23, 2015 8:45 pm

grabiner has made excellent points, but here is one more:

If equities take a haircut, then taxable is the place to be since one can tax-loss harvest and have your taxes possibly go to zero for several years while converting your IRA money to Roth IRA. And that conversion can keep your income taxes at zero in your later years.
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Lafder
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Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by Lafder » Thu Jul 23, 2015 10:10 pm

For answers that are specific to YOUR situation, post everything you have like this viewtopic.php?f=1&t=6212

and include the cash for investing as a % so all % add up to 100%. :)

lafder

Topic Author
OffGridder
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Location: Eastern WA.

Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by OffGridder » Tue Jul 28, 2015 10:51 pm

Thank you Grabiner, Taylor & Livesoft. I absolutely will take expert advice seriously. At suggestion of Lafder, I updated my post above in the recommended format Please feel free to weigh in again.

Thanks again,
-Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

abyan
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Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by abyan » Tue Jul 28, 2015 11:00 pm

Livesoft, I get the overall benefit of TLH if equities take a bath. But how will it help a Roth conversion? Wouldn't the capital losses only help to the tune of a $3k deduction from income per year?

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Taylor Larimore
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Suggested Portfolio

Post by Taylor Larimore » Wed Jul 29, 2015 9:20 am

Dave:

I have modified your (already excellent) portfolio. It now meets your desired asset-allocation with the same three Vanguard funds placed in the most tax-efficient accounts (as before) but with fewer funds:

Taxable (35%)
19% Total Stock Market
16% Total International

His 401k (16%)
16% Total Bond Market

His Roth IRA at Vanguard
7% Total Stock Market

His Rollover IRA at Vanguard (34%)
15% Total Stock Market
19% Total Bond Market

Her 401K
2% Total Stock Market

Her Roth IRA at Vanguard
5% Total Stock Market

Her Traditional IRA at Vanguard
1% Total Stock Market
__________________________________________________________________________________________________
Asset-Allocation
49% Total Stock Market
16% Total International
35% Total Bond Market

Best wishes.
Taylor

Edited
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
OffGridder
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Location: Eastern WA.

Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by OffGridder » Wed Jul 29, 2015 10:32 pm

You are awesome Taylor. Still I have one question. Why did you put the TBM in the Roth accounts rather then fill them with TSM? There is enough headroom in the TSM to move some from the traditional rollover IRA to the Roth accounts making them 100% stock and still maintain the same asset allocation and simplicity. Particularly given it is my plan to tap the Roth accounts last. Thoughts?

Thanks,
-Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

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Taylor Larimore
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Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by Taylor Larimore » Thu Jul 30, 2015 12:34 am

"Why did you put the TBM in the Roth accounts rather then fill them with TSM?"
Dave:

It is usually more tax-efficient to put bonds in tax-deferred accounts and tax-efficient stock funds in taxable accounts.

You are right about normally spending your Roth accounts last (and your taxable accounts first).

I like your idea of filling the Roths with TSM which I had put into "His rollover IRA." I have edited my suggested portfolio.

* Consider converting Her Traditional 1% IRA into Her 5% Roth IRA (one less account). Paying the small tax now should be worth it.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
OffGridder
Posts: 51
Joined: Thu Jul 23, 2015 8:03 am
Location: Eastern WA.

Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by OffGridder » Thu Jul 30, 2015 1:49 am

Hi Taylor,

Your quick and valuable feedback is again very much appreciated. One more follow-up question if you do not mind. In your last edit of my portfolio is there a reason you only moved TSM to "Her Roth" and not another 7% from the rollover IRA to "His Roth"? That would result in 15% TSM / 19% TBM in the rollover IRA. I am not sure limiting the reallocation of TSM to "Her Roth" was deliberate on your part or just an oversight.

Kind Regards
-Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

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Taylor Larimore
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Further improvement

Post by Taylor Larimore » Thu Jul 30, 2015 11:58 am

Dave:

You're right! I have edited your suggestion into the portfolio.

You might also reduce the taxable allocations to include cash. Use a tax-exempt money market fund for that purpose. I run all my account transactions (not many) through my MM fund for record-keeping in one fund's account.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
OffGridder
Posts: 51
Joined: Thu Jul 23, 2015 8:03 am
Location: Eastern WA.

Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by OffGridder » Tue Sep 15, 2015 3:06 pm

It has been 6 weeks since my original post and receipt of the great guidance you have provided. Thought I would follow up and let you know what I have done. Well I have moved both ROTH's and my wife's 401K to 100% TSM. What I am still on the fence about is allocation of the lump sum in my taxable account to TSM and Total International with a corresponding reallocation of my rollover IRA to TBM. Even in the event equities were to take a deep dive in the next few years, at age 58 I have no concern that my taxable funds will not carry me to age 59-1/2 when I can access my rollover IRA without penalty. I am also OK with rebalancing to equities in my rollover IRA in the event the equities in my taxable took a deep dive.

Admittedly I did not think this through enough to include the following factors in my original post. My plan is to procure health insurance through the exchange until I hit 65 and qualify for Medicare. I also plan to do TIRA to Roth conversions up to the edge of the ACA " subsidy "cliff" which currently $62K. My analysis results indicates this will be advantagous tax wise in the long run. I should add that my plan is to delay SSI until I am 70 but file and suspend at FRA so my wife can qualify for spousal benefits. My intent is to use our taxable account to fund expenses until I turn 70. There are adequate funds in our taxable account to accomplish this if we invest it 100% in a fixed income fund such at VG Tax Exempt Intermediate Bonds.

My current primary concern is if I load my taxable up with equities and the market takes a deep dive, I will have to tap the TIRA for expenses consuming Roth Conversion head space. How much head space would depend on the magnitude and timing of the equity market dive. With this in mind should I be looking at my taxable account more like short / intermediate term money and keep most of it in fixed income and cash and maintain my higher equity allocation in my rollover TIRA? Does the LTCG (0%), Qualified Dividends and TLH advantages of loading my taxable account with TSM & TISM rate outweigh the risks of loosing Roth Conversion and ACA subsidy head space in the event of significant dive in the equity market?

Thanks ever so much for you experienced guidance as I work to fine tune my financial plans going into retirement.

-Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

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grabiner
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Re: Rebalance in Taxable or in IRA after receipt of Lump Sum

Post by grabiner » Mon Sep 21, 2015 10:17 pm

OffGridder wrote:My current primary concern is if I load my taxable up with equities and the market takes a deep dive, I will have to tap the TIRA for expenses consuming Roth Conversion head space. How much head space would depend on the magnitude and timing of the equity market dive.
If you load your taxable account with equities and the market takes a dive, you can sell stock in the taxable account for a capital loss, so it won't cost you any Roth conversion room under the ACA subsidy, and will give you an extra $3000 to work with. (You would then rebalance by selling bonds in the IRA to buy stock.) In addition, you will be able to offset carryover losses against capital gains in later years, so they will not use up conversion room if the market goes back up.

You will lose ACA subsidy room if your taxable account is all stock and the market rises. If the market rises 20% and you withdraw $36,000 with a $30,000 basis you have a $6000 capital gain, and even if this is not taxed, it reduces the amount you can convert by $6000. However, if that same $30,000 had been in stock an IRA, it would have increased the size of the IRA by $6000, and thus increased the amount you need to convert by the same $6000, so you don't really benefit by having it in an IRA.

If you do hold bonds in taxable, don't use munis. What's Included as Income under the ACA says that muni income is counted even though it is not taxable. Thus, in a 15% bracket, you are better off using taxable bonds.
Wiki David Grabiner

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