The Three-Fund Portfolio [Minimizing tax impacts]

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MrDogg
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The Three-Fund Portfolio [Minimizing tax impacts]

Postby MrDogg » Thu Aug 18, 2016 1:57 pm

[Moved into a stand-alone thread from: The Three-Fund Portfolio --admin LadyGeek]

I may be over thinking this but I have a question at the end of this post. Any advise and comments will be appreciated.

I am totally sold on the 3FP and have the following -

Traditional IRA:
US Total Stock Index Admiral VTSAX 48%
Int'l Total Stock Index Admiral VTIAX 12%
US Total Bond Index Admiral VBTLX 40%

ROTH IRA:
US Total Stock Index Admiral VTSAX 48%
Int'l Total Stock Index Admiral VTIAX 12%
US Total Bond Index Admiral VBTLX 40%

Taxable:
US Total Stock Index Admiral VTSAX 52%
Int'l Total Stock Index Admiral VTIAX 13%
US Total Bond Index Admiral VBTLX 35%
also
Prime Money Market VMMXX $1K (to be converted to Federal MM per Vanguard dictate)
ST Invest Grade Bonds VFSUX $50K (used as a liquid savings account in case I need some emergency cash)

My question is would I be better off tax wise or otherwise spreading around my 3FP over the IRA and taxable accounts whereby, for example, the bonds would all be in the IRA's and the stocks would be in the taxable account while still maintaining my chosen asset allocations?

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CABob
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Re: The Three-Fund Portfolio

Postby CABob » Thu Aug 18, 2016 2:47 pm

From a tax efficiency standpoint you would be better off with your bond funds in one of the tax advantaged accounts.
Since you indicate that the reason for VFSUX being in taxable is for a reason other than asset allocation you may want to ignore this but the total bond fund would certainly be better in one of the tax deferred accounts.
Bob

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steve roy
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Re: The Three-Fund Portfolio [Minimizing tax impacts]

Postby steve roy » Thu Aug 18, 2016 5:05 pm

VG Intermediate Tax Exempt Bonds are of shorter duration than Total Bond. If you need to put bonds in taxable, they might be a good option.

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Taylor Larimore
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Re: The Three-Fund Portfolio [Minimizing tax impacts]

Postby Taylor Larimore » Thu Aug 18, 2016 9:23 pm

My question is would I be better off tax wise or otherwise spreading around my 3FP over the IRA and taxable accounts whereby, for example, the bonds would all be in the IRA's and the stocks would be in the taxable account while still maintaining my chosen asset allocations?

Mr. Dogg:

I underlined the conventional thinking about fund placement.

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

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abuss368
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Re: The Three-Fund Portfolio [Minimizing tax impacts]

Postby abuss368 » Thu Aug 18, 2016 9:34 pm

MrDogg wrote:My question is would I be better off tax wise or otherwise spreading around my 3FP over the IRA and taxable accounts whereby, for example, the bonds would all be in the IRA's and the stocks would be in the taxable account while still maintaining my chosen asset allocations?


Hi Mr. Dogg,

Welcome to the Bogleheads forum.

Your questions is excellent and personal in nature. That is what works best for you. Essentially there are two approaches and for the most part they in all likelihood yield the same results. We are splitting hairs. One strategy is "equal location" which places the same funds (for the most part) in all accounts. Another strategy is "asset location" which is the placement of a fund in only one account or so. The difference may be Total Bond in the tax advantage accounts and possibly a tax exempt bond fund in the taxable. Total Stock and Total International Stock are in all accounts.

There are advantages and disadvantages to both approaches. Notable investment expert Rick Ferri recommends the "equal location" approach. Find what works best. We are dancing on the head of a needle!

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

randomguy
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Re: The Three-Fund Portfolio [Minimizing tax impacts]

Postby randomguy » Thu Aug 18, 2016 10:45 pm

CABob wrote:From a tax efficiency standpoint you would be better off with your bond funds in one of the tax advantaged accounts.
Since you indicate that the reason for VFSUX being in taxable is for a reason other than asset allocation you may want to ignore this but the total bond fund would certainly be better in one of the tax deferred accounts.


Read the bonds in taxable threads for the alternative viewpoint. You may not agree with the arguements, but you should try and understand their logic.


I think there are a few cases where it is clear cut (i.e. you are in the 15% bracket in a 0% state. Paying almost 0% on stock versus 15% on everything is just too big of win) and a bunch where it is marginal either way (paying a 35% tax drag on your 2% qDivs versus a 45% on your 1.75 total bond yield).

The big issue with using doing different allocation is remembering that a dollar in an IRA has a different value than one in taxable which has a different value than one in ROTH. How you adjust those value has a bit of guessing involved.

MrDogg
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Re: The Three-Fund Portfolio [Minimizing tax impacts]

Postby MrDogg » Fri Aug 19, 2016 9:17 am

abuss368 wrote:We are splitting hairs. One strategy is "equal location" which places the same funds (for the most part) in all accounts. Another strategy is "asset location" which is the placement of a fund in only one account or so.

There are advantages and disadvantages to both approaches. Notable investment expert Rick Ferri recommends the "equal location" approach. Find what works best. We are dancing on the head of a needle!

Best.
[/quote]

Your response nails the crux of my question. I'm retired and in a low tax bracket so I am going with the "equal location" strategy which is how I have it set now. Thank you for clarifying.

MrDogg
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Location: South Florida

Re: The Three-Fund Portfolio [Minimizing tax impacts]

Postby MrDogg » Fri Aug 19, 2016 9:22 am

Thanks to all who commented. I have a clearer understanding of the issue and as a result have confidence in the way I have my accounts and allocations set up. What a great forum!

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abuss368
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Re: The Three-Fund Portfolio [Minimizing tax impacts]

Postby abuss368 » Fri Aug 19, 2016 11:36 am

MrDogg wrote:
abuss368 wrote:We are splitting hairs. One strategy is "equal location" which places the same funds (for the most part) in all accounts. Another strategy is "asset location" which is the placement of a fund in only one account or so.

There are advantages and disadvantages to both approaches. Notable investment expert Rick Ferri recommends the "equal location" approach. Find what works best. We are dancing on the head of a needle!

Best.


Your response nails the crux of my question. I'm retired and in a low tax bracket so I am going with the "equal location" strategy which is how I have it set now. Thank you for clarifying.[/quote]

Hi Mr. Dogg,

Glad to assist. I also follow the "equal approach" strategy and it has worked well for us. Very easy.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs


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