How to Diversify in Taxable Account With Boglehead Tax Strategy

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seanmerron
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How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

Hello - I am on a plan to retire early so maxing out IRA/401K then have leftovers in a taxable brokerage account. However, to retire earlier I'll be using my taxable accounts after I stop working and then start converting tax advantage retirement accounts (401K) into Roths using the Roth Conversion Ladder strategy when in the lower tax bracket during retirement and need conversions to vest for 5 years (And taxable to last 5 years) before touching anything.

So...I need my taxable account to be diversified to minimize downside in case stocks are in the gutter when I plan to retire early even though they're the most tax efficient. But how do I do this without Bond Market Index and REIT Index in my taxable? It seems very risky without any of this. Do you manage your desired asset allocation % based on taxable + tax-advantaged accounts combined as a whole or treat them completely separate with their own asset allocation %'s?

Summed up... is more tax efficiency or less downside risk more important in taxable account with a smaller time horizon? A.K.A some returns every year with diversification that compounds vs. some years with <= 0 returns from 100% stock in taxable (little diversification)?
Last edited by seanmerron on Wed Jun 15, 2016 7:23 pm, edited 1 time in total.
livesoft
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by livesoft »

It will depend on how many years of living expenses you keep in your taxable account. If you need 5 years of living expenses and keep 20 years in your taxable account, then I don't see a problem of 100% equities in taxable.

Otherwise, you do NOT need REIT funds in your taxable account and you can have some bond funds in your taxable account. Choose the bond fund appropriate for your marginal income tax bracket. That could mean a tax-exempt muni bond fund or not.

I manage my portfolio allocation as a whole and do not need bond funds in taxable.
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

livesoft wrote:It will depend on how many years of living expenses you keep in your taxable account. If you need 5 years of living expenses and keep 20 years in your taxable account, then I don't see a problem of 100% equities in taxable.
Thanks for taking the time to respond. This isn't the case for me, I'm saving enough to last for x years at ~5% until I can access tax-advantaged accounts to last "forever." So I think I'll need some diversification in this taxable account or else I could be putting years off my early retirement. Any diversification recommendations?
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by grabiner »

It's still OK to have your taxable account all in stock, even if you need to spend some of it before you can get at your retirement accounts. If you need to sell $10,000 in bonds and your taxable account is all stock, you can sell $10,000 in taxable stock, and move $10,000 from bonds to stock in your retirement account, keeping the same stock allocation.

It may also make sense for you to hold bonds in your taxable account anyway, although I see that you live in VA and Vanguard doesn't have a VA muni fund. In particular, holding I-Bonds in your taxable account is likely to be a good deal; you pay no tax until you cash them in, and the gains when you do cash them in are taxed at your (likely lower) retirement tax rate and exempt from state tax.
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

grabiner wrote:It may also make sense for you to hold bonds in your taxable account anyway, although I see that you live in VA and Vanguard doesn't have a VA muni fund. In particular, holding I-Bonds in your taxable account is likely to be a good deal; you pay no tax until you cash them in, and the gains when you do cash them in are taxed at your (likely lower) retirement tax rate and exempt from state tax.
Thanks for the insight! Does the same apply to REITs? The taxes aren't paid until cashed in/sold?
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by grabiner »

seanmerron wrote:
grabiner wrote:It may also make sense for you to hold bonds in your taxable account anyway, although I see that you live in VA and Vanguard doesn't have a VA muni fund. In particular, holding I-Bonds in your taxable account is likely to be a good deal; you pay no tax until you cash them in, and the gains when you do cash them in are taxed at your (likely lower) retirement tax rate and exempt from state tax.
Thanks for the insight! Does the same apply to REITs? The taxes aren't paid until cashed in/sold?
No. If you hold stocks or REITs which pay dividends, you pay tax on the dividends every year; REITs are particularly bad in a taxable account because the dividends are high and non-qualified. Then, when you sell, you pay tax on any capital gain. You don't pay tax twice on the same amount, because reinvested dividends increase your basis, but you lose the advantage of compounding because the tax you pay this year reduces the amount you can invest for next year.

The special tax treatment above applies only to savings bonds (I bonds or EE bonds, but EE bonds aren't usually a good investment).
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dolphintraveler
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by dolphintraveler »

[quote="seanmerron"]
So...I need my taxable account to be diversified to minimize downside in case stocks are in the gutter when I plan to retire early even though they're the most tax efficient. But how do I do this without Bond Market Index and REIT Index in my taxable? /quote]

Other alternatives are:
1) Municipal bonds (tax free for your state if big enough state)
2) Sell what you need to in taxable to live on, then when doing the rollover balance it out (if equities are down buy more even though you sold in taxable)
3) Withdrawals from your tax protected accounts via SEPP / 72(t) (see https://www.bogleheads.org/wiki/Substan ... c_payments)
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

dolphintraveler wrote: 2) Sell what you need to in taxable to live on, then when doing the rollover balance it out (if equities are down buy more even though you sold in taxable)
Thanks for the info!

So you're saying if my taxable is all equity and they're down, make up for it while doing my Roth conversions during early retirement to keep my desired asset allocation? My problem is if they're down my taxable won't last until when I plan to access tax-advantaged accounts. Oh well? The diversification/downward protection in taxable just isn't worth the tax hit? Thus if down when I originally planned to start early retirement then may need to wait longer?
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

grabiner wrote:No. If you hold stocks or REITs which pay dividends, you pay tax on the dividends every year; REITs are particularly bad in a taxable account because the dividends are high and non-qualified. Then, when you sell, you pay tax on any capital gain. You don't pay tax twice on the same amount, because reinvested dividends increase your basis, but you lose the advantage of compounding because the tax you pay this year reduces the amount you can invest for next year.
Thanks for the clarification! So I was thinking I could retire earlier if I can get my taxable accounts to last until I touch my tax-advantaged accounts. If it was just stocks that seems a bit risky and could cut short (or delay) that early retirement (taxable withdrawal) period without diversification. Would you agree?

Or maybe I'm missing something...I'm thinking when I retire early I then start Roth conversions making tax-advantaged accounts accessible after 5 year vesting period from that point and using taxable to hold me off until then (or longer depending on conversion amounts to stay in lower tax bracket). Should I rather be thinking of using some taxable and tax-advantaged withdrawal combination right when early retirement starts and disregard the vesting period? Just try to take less from tax-advantaged to cover down years in taxable/equities?
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
grabiner wrote:No. If you hold stocks or REITs which pay dividends, you pay tax on the dividends every year; REITs are particularly bad in a taxable account because the dividends are high and non-qualified. Then, when you sell, you pay tax on any capital gain. You don't pay tax twice on the same amount, because reinvested dividends increase your basis, but you lose the advantage of compounding because the tax you pay this year reduces the amount you can invest for next year.
Thanks for the clarification! So I was thinking I could retire earlier if I can get my taxable accounts to last until I touch my tax-advantaged accounts. If it was just stocks that seems a bit risky and could cut short (or delay) that early retirement (taxable withdrawal) period without diversification. Would you agree?
seanmerron,

I disagree. I need you to create an example in order for this discussion to go further.

1) What is your AA?

2) What will be the distribution of your asset across taxable, Roth, and Rollover IRA/Trad. 401K.

3) A number on your annual expense. This does not have to be real. It is just use for discussion.

Please note that you may or may not have a problem. And, the problem may have to do with your AA versus placement of asset in each account. Unfortunately, AA, annual expense, and placement of investment are all inter-related. You would need to setup an example in order to run through the thinking process.

For example, if a market crash could stop your early retirement, perhaps

A) Your portfolio is not big enough

And / or

B) Your AA is too aggressive.

KlangFool
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

KlangFool wrote:I disagree. I need you to create an example in order for this discussion to go further.
Thanks for wanting to look into this further for me :happy I diversify using a split of US Stock, International Stock, US Bonds and Real estate using Vanguard admiral (lower cost) fund tickers: VTSAX / VTIAX / VBILX / VGSLX

Taxable: 40% US Stock / 20% Int. Stock / 20% US Bond / 20% REIT
Tax-Advantaged: 30% US Stock / 20% Int. Stock / 25% US Bond / 25% REIT

I treat them separately because I plan to drain taxable until tax-advantaged grows enough to give me the earliest retirement date possible (FIRE). I created the example here which closely matches my numbers in each accounts that I'm working on building to retire early with expected expenses around 41K/year at retirement with taxes. *Replace the word deferred with tax-advantaged anywhere in the site. In order to count on the taxable accounts to last long enough I need a safe return of maybe 5% with diversification. All equities in that account scares me.
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
KlangFool wrote:I disagree. I need you to create an example in order for this discussion to go further.
Thanks for wanting to look into this further for me :happy I diversify using a split of US Stock, International Stock, US Bonds and Real estate using Vanguard admiral (lower cost) fund tickers: VTSAX / VTIAX / VBILX / VGSLX

Taxable: 40% US Stock / 20% Int. Stock / 20% US Bond / 20% REIT
Tax-Advantaged: 30% US Stock / 20% Int. Stock / 25% US Bond / 25% REIT

I treat them separately because I plan to drain taxable until tax-advantaged grows enough to give me the earliest retirement date possible (FIRE). I created the example here which closely matches my numbers in each accounts that I'm working on building to retire early with expected expenses around 41K/year at retirement with taxes. *Replace the word deferred with tax-advantaged anywhere in the site. In order to count on the taxable accounts to last long enough I need a safe return of maybe 5% with diversification. All equities in that account scares me.
seanmerron,

<< Taxable: 40% US Stock / 20% Int. Stock / 20% US Bond / 20% REIT
Tax-Advantaged: 30% US Stock / 20% Int. Stock / 25% US Bond / 25% REIT>>

I disagreed. And, I think you are over-complicating the issue. And, you are paying a lot more taxes in the process. It costs you fair amount of tax by putting REIT and Bond in taxable account. You should not do that unless it is ABSOLUTELY necessary. And, I do not think it is necessary.

So, let's assume that your annual expense is 40K.

A) Your FI number is? 25X40K = 1 million or?

B) Your over all AA number that you are targeting? in term of Stock / Bond / REIT

C) The spread of your asset in term of Taxable / Roth / 401K (Rollover IRA)

Please answer question (A), (B), and (C). We are not looking for exact answer. It is just something to think through and I believe it will educational for you. Then, you can use the same process for the real number.

KlangFool
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

KlangFool wrote:Please answer question (A), (B), and (C). We are not looking for exact answer. It is just something to think through and I believe it will educational for you. Then, you can use the same process for the real number.
Sorry I'm a little confused... Are you suggesting I can retire early using both taxable and tax-deferred at the same time? I don't think that's feasible and would put off my early retirement whereas I could instead use taxable for x years before being touching tax-advantaged after it has grown to the amount I need for SWR. But I need taxable to be diversified and less risky to last that long.

A) SWR of 4% means I would need 1mil (41K/.04)
B) My ideal diversification split is 30% US Stock / 20% Int. Stock / 25% US Bond / 25% REIT but I lowered in taxable a bit for some tax savings.
c) Money right now is about 40% taxable / 10% Roth / 50 % 401K
jfave33
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by jfave33 »

Problem with having bonds in taxable for this purpose is not only the tax inefficiency but that you are likely to need to save maybe twice as much anyway since there will be less expected growth with bonds vs stocks.

I would just put total stock funds in taxable. You want that taxable account to grow nicely before retirement and want tax efficiency. You could look into tax loss harvesting to offset gains when you come to sell. You could move into bonds as you get closer to retirement time if your balance isn't say twice what you need. How far out are you?

Also consider 72t substantially equal periodic payments as an alternative to the roth conversion strategy. Though personally I like the roth conversion ladder better.
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
KlangFool wrote:Please answer question (A), (B), and (C). We are not looking for exact answer. It is just something to think through and I believe it will educational for you. Then, you can use the same process for the real number.
Sorry I'm a little confused... Are you suggesting I can retire early using both taxable and tax-deferred at the same time? I don't think that's feasible and would put off my early retirement whereas I could instead use taxable for x years before being touching tax-advantaged after it has grown to the amount I need for SWR. But I need taxable to be diversified and less risky to last that long.

A) SWR of 4% means I would need 1mil (41K/.04)
B) My ideal diversification split is 30% US Stock / 20% Int. Stock / 25% US Bond / 25% REIT but I lowered in taxable a bit for some tax savings.
c) Money right now is about 40% taxable / 10% Roth / 50 % 401K
seanmerron,

So, let's assume that you have

400K -> Taxable
100K -> Roth
500K -> 401K

Your AA is 75/25 -> let's take REIT out and assume REIT to be stock in order to simplify this discussion. Before crash, you have

400K -> taxable -> 100% stock
100K -> Roth --> 100% stock
500K -> 401K -> 50% -> 250K bond and 250K in stock.

After the crash, the stock drop 50% and bond drop 25%

200K stock -> taxable
50K stock -> Roth
125K in stock and 187.5K in bond -> 401K

You can spend up to 4 years of expenses with Bond while waiting for the market to recover. Meanwhile, you can sell stock in taxable and harvest losses. You just need to watch out for WASH SALE.

Year 1
A) Sell 40K of stock in taxable account.
B) Sell 40K in bond and exchange to stock at 401K account
C) You could do Roth conversion of at least 20K at 0% tax. So, Roth conversion of 20K of stock in 401K to 20K of stock in Roth IRA.

Year 2
Repeat as year 1

year 3
Repeat as year 2

year 4
Repeat as year 3

Year 5
Spend the remainder bond and Roth contribution from Roth IRA

Please note that if you are close to your FI number, you probably do not want you AA to be 75/25. But, even in this example, you can survive up to 5 years before selling your stock.

KlangFool
Last edited by KlangFool on Thu Jun 16, 2016 11:36 am, edited 1 time in total.
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

jjface wrote:Problem with having bonds in taxable for this purpose is not only the tax inefficiency but that you are likely to need to save maybe twice as much anyway since there will be less expected growth with bonds vs stocks.

I would just put total stock funds in taxable. You want that taxable account to grow nicely before retirement and want tax efficiency. You could look into tax loss harvesting to offset gains when you come to sell. You could move into bonds as you get closer to retirement time if your balance isn't say twice what you need. How far out are you?

Also consider 72t substantially equal periodic payments as an alternative to the roth conversion strategy. Though personally I like the roth conversion ladder better.
jjface,

He does not need 72t when 40% of his investment is in taxable account. Without a crash, it can fund 10 years of his annual expense. Even with a 50% crash, he can fund 5 years of his annual expense. After that, the Roth conversion money can be used.

I have a similar setup with 45% of my portfolio in taxable account.

KlangFool
jfave33
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by jfave33 »

KlangFool wrote:
jjface wrote:Problem with having bonds in taxable for this purpose is not only the tax inefficiency but that you are likely to need to save maybe twice as much anyway since there will be less expected growth with bonds vs stocks.

I would just put total stock funds in taxable. You want that taxable account to grow nicely before retirement and want tax efficiency. You could look into tax loss harvesting to offset gains when you come to sell. You could move into bonds as you get closer to retirement time if your balance isn't say twice what you need. How far out are you?

Also consider 72t substantially equal periodic payments as an alternative to the roth conversion strategy. Though personally I like the roth conversion ladder better.
jjface,

He does not need 72t when 40% of his investment is in taxable account. Without a crash, it can fund 10 years of his annual expense. Even with a 50% crash, he can fund 5 years of his annual expense. After that, the Roth conversion money can be used.

I have a similar setup with 45% of my portfolio in taxable account.

KlangFool
Yes you are right - I wrote that before I saw his post about the 40% taxable account. Sounds like he has nothing to worry about with that much. The opening post made it sound like he was going to be able to only save a small amount in taxable before reitrement say 5-6 years of expenses and so was worried a crash would cause his taxable to be too small.
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

jjface wrote:I would just put total stock funds in taxable. You want that taxable account to grow nicely before retirement and want tax efficiency. You could look into tax loss harvesting to offset gains when you come to sell. You could move into bonds as you get closer to retirement time if your balance isn't say twice what you need. How far out are you?
I'm about 8 years out from early retirement and would need that money to last about 7 years before I can have enough in tax-advantaged accounts to last "forever." which is still < 55 when I think you can use SEPP so using Roth ladder for earlier access reasons.

8 years seems like a small time horizon to only have stocks and then need it to last another 7 years with just stocks or start moving to bonds as you mentioned. I just thought the point of diversification was to reduce risk and be ok with 4-5% conservative gains vs. large swings that could kill early retirement with all stocks. Isn't years with some returns better then some years with negative? Sorry, I'm stuck :(
Topic Author
seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

KlangFool wrote:You can spend up to 4 years of expenses with Bond while waiting for the market to recover. Meanwhile, you can sell stock in taxable and harvest losses. You just need to watch out for WASH SALE.

Year 1
A) Sell 40K of stock in taxable account.
B) Sell 40K in bond and exchange to stock at 401K account
C) You could do Roth conversion of at least 20K at 0% tax. So, Roth conversion of 20K of stock in 401K to 20K of stock in Roth IRA.
Thanks for the detailed response. However, how do I get $$ I need for year 1 of early retirement for expenses from bonds in my 401K? I'd just be starting the Roth conversion ladder and it wouldn't be vested. I'd have to sell stock from my taxable at a large loss to pay for year 1 expenses.
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
KlangFool wrote:You can spend up to 4 years of expenses with Bond while waiting for the market to recover. Meanwhile, you can sell stock in taxable and harvest losses. You just need to watch out for WASH SALE.

Year 1
A) Sell 40K of stock in taxable account.
B) Sell 40K in bond and exchange to stock at 401K account
C) You could do Roth conversion of at least 20K at 0% tax. So, Roth conversion of 20K of stock in 401K to 20K of stock in Roth IRA.
Thanks for the detailed response. However, how do I get $$ I need for year 1 of early retirement for expenses from bonds in my 401K? I'd just be starting the Roth conversion ladder and it wouldn't be vested. I'd have to sell stock from my taxable at a large loss to pay for year 1 expenses.
seanmerron,

The net effect of (A) and (B) is you are selling bond from 401K. You are swapping 40K stock in taxable account to 40K stock in 401K account.

<<I'd have to sell stock from my taxable at a large loss to pay for year 1 expenses.>.

From tax stand point, you are correct. And, that is a good thing. You can write off the loss from your income tax. And, that allow for larger Roth conversion in (C).

If you sell 40K of stock in taxable account and buy 40K of stock in 401K account, net-net, you are selling $0 worth of stock.

KlangFool
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
jjface wrote:I would just put total stock funds in taxable. You want that taxable account to grow nicely before retirement and want tax efficiency. You could look into tax loss harvesting to offset gains when you come to sell. You could move into bonds as you get closer to retirement time if your balance isn't say twice what you need. How far out are you?
I'm about 8 years out from early retirement and would need that money to last about 7 years before I can have enough in tax-advantaged accounts to last "forever." which is still < 55 when I think you can use SEPP so using Roth ladder for earlier access reasons.

8 years seems like a small time horizon to only have stocks and then need it to last another 7 years with just stocks or start moving to bonds as you mentioned. I just thought the point of diversification was to reduce risk and be ok with 4-5% conservative gains vs. large swings that could kill early retirement with all stocks. Isn't years with some returns better then some years with negative? Sorry, I'm stuck :(
seanmerron,

You are confusing 2 separate issues here.

1) Risk diversification with the AA

2) Placement of investment in Taxable , Roth, and 401K account.

They are INDEPENDENT of each others. If you cannot afford to let a market crash to delay your early retirement, you need to lower your OVERALL stock ratio within your AA.

KlangFool
jfave33
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by jfave33 »

seanmerron wrote:
jjface wrote:I would just put total stock funds in taxable. You want that taxable account to grow nicely before retirement and want tax efficiency. You could look into tax loss harvesting to offset gains when you come to sell. You could move into bonds as you get closer to retirement time if your balance isn't say twice what you need. How far out are you?
I'm about 8 years out from early retirement and would need that money to last about 7 years before I can have enough in tax-advantaged accounts to last "forever." which is still < 55 when I think you can use SEPP so using Roth ladder for earlier access reasons.

8 years seems like a small time horizon to only have stocks and then need it to last another 7 years with just stocks or start moving to bonds as you mentioned. I just thought the point of diversification was to reduce risk and be ok with 4-5% conservative gains vs. large swings that could kill early retirement with all stocks. Isn't years with some returns better then some years with negative? Sorry, I'm stuck :(
You have to consider that money is fungible for this situation. You need to look at your portfolio as one whole portfolio and not as separate pots. As Klangfool described if stocks tank you can always a) sell stocks in taxable but you also b) replace bonds in your 401k with stocks. The overall portfolio effect is that you really sold bonds and not stocks. Hence overall you are not increasing your overall risk by having all stocks in taxable.

The only reason to be worried about all stocks in taxable is if you do not have enough in there. If a crash happens and you cannot withdraw enough for your 5 years then you will have to pay a penalty to access your 401k or postpone early retirement. So the only increased risk you have is to your taxable balance and whether it will be enough for 5 years of withdrawals. However for you it sounds like you will have plenty of taxable funds not to have to worry about this.
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

KlangFool wrote:They are INDEPENDENT of each others. If you cannot afford to let a market crash to delay your early retirement, you need to lower your OVERALL stock ratio within your AA.
Exactly! I cannot afford a market crash to delay or shorten early retirement because I need taxable to last at least 7 years.

Let me ask you this...Would you drain taxable accounts before withdrawing from tax-advantaged accounts? It seems the longer they can sit with tax advantages (even stocks) the greater the growth potential?
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
KlangFool wrote:They are INDEPENDENT of each others. If you cannot afford to let a market crash to delay your early retirement, you need to lower your OVERALL stock ratio within your AA.
Exactly! I cannot afford a market crash to delay or shorten early retirement because I need taxable to last at least 7 years.

Let me ask you this...Would you drain taxable accounts before withdrawing from tax-advantaged accounts? It seems the longer they can sit with tax advantages (even stocks) the greater the growth potential?
seanmerron,

<<Would you drain taxable accounts before withdrawing from tax-advantaged accounts? >>

Yes.

<<It seems the longer they can sit with tax advantages (even stocks) the greater the growth potential?>>

And, nothing had changed. THINK carefully.

You had created capital loss for future taxable gain to write off. And, you had shifted stock into 401K and Roth IRA.

KlangFool
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seanmerron
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

KlangFool wrote:You had created capital loss for future taxable gain to write off. And, you had shifted stock into 401K and Roth IRA.
But I have also cut early retirement by x years and having to start tax-advantaged account withdrawals x years earlier because of the risk in the taxable account. I'm just not seeing where the tax benefits of all stocks outweigh the risk diversion of having a diversified taxable account to help prolong withdrawals from tax-advantaged accounts. WHY AM I NOT SEEING THIS? **Hits self in head**

I really respect your input but I'm just having trouble seeing it. This is about withdrawing enough money in retirement to cover expenses, not having an excessive amount of money where crashes aren't a big deal.
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Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
KlangFool wrote:You had created capital loss for future taxable gain to write off. And, you had shifted stock into 401K and Roth IRA.
But I have also cut early retirement by x years and having to start tax-advantaged account withdrawals x years earlier because of the risk in the taxable account. I'm just not seeing where the tax benefits of all stocks outweigh the risk diversion of having a diversified taxable account to help prolong withdrawals from tax-advantaged accounts. WHY AM I NOT SEEING THIS? **Hits self in head**

I really respect your input but I'm just having trouble seeing it. This is about withdrawing enough money in retirement to cover expenses, not having an excessive amount of money where crashes aren't a big deal.
seanmerron,

<<But I have also cut early retirement by x years>>

That is because of your overall AA. And, it has NOTHING to do with the below

<< and having to start tax-advantaged account withdrawals x years earlier because of the risk in the taxable account.>>

You either have THE MONEY to retire early or not. It has NOTHING to do with whether the money is in taxable account or tax-advantage account. In your case, with 40K annual expense, you will be able to withdraw money from tax advantaged account with ZERO TAX. So, it is NOT an issue.

Run through the calculation. And, you will see that it does not matter. Look at the example that I provided earlier. Does it really matter that stock is in taxable account and suffer 50% loss? Will it makes ANY difference if the stock is in 401K account? The answer is NO.

Stop confusing yourself!!

KlangFool
jfave33
Posts: 3108
Joined: Thu Mar 19, 2015 6:18 pm

Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by jfave33 »

He mentioned needing taxable to last for 7 years - not sure why?
KlangFool
Posts: 19638
Joined: Sat Oct 11, 2008 12:35 pm

Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

OP,

Let's start with the BASIC.

If you have a 75/25 AA and the market crashes, you will have

375K in stock and 187.5K in bond.

This is INDEPENDENT of where the money is.

Case 1)

You have 187.5K of bond in taxable account and 375K of stock in tax advantaged account. You spend 40K by selling bond in taxable account and do nothing to the stock in tax advantaged account. You do this for 4 years and you pull money from tax advantage account in year 5.

But, by having 187.5K in bond, you pay a lot of taxes every year.

Case 2)

You have 187.5K of stock in taxable account and 187.5K of stock and 187.5K of bond in tax advantaged account.

You sell 40K of stock in taxable account. Then, you SWAP 40K of bond to stock in tax advantaged account. In fact, because of the 50% loss, you generated 40K of capital loss in taxable account.

1) You pay less tax because stock in taxable is more tax efficient.

2) You generate capital loss. Essentially, the stock in taxable account will no longer pay any future capital gain. Aka taxable account is the same as tax advantage account. The earning in taxable account will grow tax free.

So, tell me, WHY case (1) is better than (2)?

KlangFool
KlangFool
Posts: 19638
Joined: Sat Oct 11, 2008 12:35 pm

Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

OP,

If 1 million is your FI number and your AA is 75/25 and the market crashes, you only have 562.5K left. You cannot afford to retire early. This is INDEPENDENT of where you place your money. Your AA is TOO AGGRESSIVE. You cannot afford a market crash.

KlangFool
Topic Author
seanmerron
Posts: 137
Joined: Tue May 31, 2016 5:08 pm

Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

KlangFool wrote:You either have THE MONEY to retire early or not. It has NOTHING to do with whether the money is in taxable account or tax-advantage account. In your case, with 40K annual expense, you will be able to withdraw money from tax advantaged account with ZERO TAX. So, it is NOT an issue.
OMG I FINALLY GOT IT I LOVE YOU!

:oops: :oops: :oops: :oops:

FI Balance = Expenses/SWR
I was so concerned with building tax-advantaged accounts to FI Balance and figuring out the early retirement age where I'd have enough in taxable to last until that tax-advantaged account grew to the FI balance after contributions stopped. But it's much simpler than that... FIRE Age = period where (taxable + tax-advantaged accounts) = FI balance. (Which is the same age I just it figured out a harder way)

Then just keep total AA in line when starting withdrawals from taxable and immediately start Roth conversion ladder. THANKS!!
Topic Author
seanmerron
Posts: 137
Joined: Tue May 31, 2016 5:08 pm

Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by seanmerron »

KlangFool wrote:You sell 40K of stock in taxable account. Then, you SWAP 40K of bond to stock in tax advantaged account. In fact, because of the 50% loss, you generated 40K of capital loss in taxable account.

1) You pay less tax because stock in taxable is more tax efficient.

2) You generate capital loss. Essentially, the stock in taxable account will no longer pay any future capital gain. Aka taxable account is the same as tax advantage account. The earning in taxable account will grow tax free.

This is awesome! 2 questions. If selling in taxable then buying in tax-advantaged is this a wash for tax loss? Also is there a 3K limit for tax loss harvesting per year?
KlangFool
Posts: 19638
Joined: Sat Oct 11, 2008 12:35 pm

Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

seanmerron wrote:
KlangFool wrote:You sell 40K of stock in taxable account. Then, you SWAP 40K of bond to stock in tax advantaged account. In fact, because of the 50% loss, you generated 40K of capital loss in taxable account.

1) You pay less tax because stock in taxable is more tax efficient.

2) You generate capital loss. Essentially, the stock in taxable account will no longer pay any future capital gain. Aka taxable account is the same as tax advantage account. The earning in taxable account will grow tax free.

This is awesome! 2 questions. If selling in taxable then buying in tax-advantaged is this a wash for tax loss? Also is there a 3K limit for tax loss harvesting per year?
seanmerron,

https://www.bogleheads.org/wiki/Wash_sale

1) Read above for wash sale rule.

<<Also is there a 3K limit for tax loss harvesting per year?>>
https://www.bogleheads.org/wiki/Tax_loss_harvesting

2) No. The 3K limit has to do with if you more capital loss than capital gain, you can use 3K of capital loss to offset your taxable income. The capital loss that you do not use this year will be carry forward for future capital gain until it is used up. Read above for more details.

KlangFool
KlangFool
Posts: 19638
Joined: Sat Oct 11, 2008 12:35 pm

Re: How to Diversify in Taxable Account With Boglehead Tax Strategy

Post by KlangFool »

OP,

I believe you need to take a look at your AA. It is 75/25 with 25% in REIT. You are 8 years away from retirement. You might be taking on too much risk.

KlangFool
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