Is this an "OK" Strategy tax-wise (Mainly about intended placement of bonds)

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Topic Author
SpartanBull
Posts: 131
Joined: Fri Jun 06, 2014 12:31 am

Is this an "OK" Strategy tax-wise (Mainly about intended placement of bonds)

Post by SpartanBull »

Hello,
I'm 24 years old in Michigan. Mid-6 figures portfolio. Low 6-figures income. I want to check if this breakdown of assets is "OK". For what its worth, I have a taxable account, a roth IRA, and a SOLO 401k Since I have an LLC with no common-law employees. My 401k space allows 18k employee portion, and 25% of income on the employer portion. All of that must be less than 53k. I also have a separate personal Roth IRA
I posted a portfolio breakdown below, however I'm mainly looking for insight as to whether my breakdown is "OK" from a tax standpoint. The quick summary of what I'm sort of what i'm aiming to eventually do is directly below, and I want to see if this a decent strategy from a tax standpoint. Full disclosure, I know many people say "Bonds go in Roth/Tax deferred accounts, etc", however I have trouble with that viewpoint because I view the main purpose of bonds to be safety. I don't ever want to give up a lot of those tax benefit accounts, especially roth, if I ever had to pull funds out of that--I would feel like I'm losing some of that prime tax free growth. It makes more sense to me that an unexpected withdrawal (not expecting ANY withdrawals from these accounts, but if it came to that) would be from taxable...because I'm not worried about giving up space in that. The bond fund I have in mind is intermediate term tax exempt. So heres what I'm thinking

Cliff notes for what I'm sort of shooting for
401k-All VTSAX
Roth-ALL VTSAX
Taxable-This is where all of my VTIAX would go, eventually equaling 33% of my equities), This is where all of my bonds would go, eventually equaling 10% of portfolio,and lastly this would obviously have some VTSAX. Essentially all of my VTIAX, and intermediate term tax exempt would go in taxable, and all the other accounts would just be total stock market. I may have done an information overload in this thread, but please note that my main concern relates to whether placing bonds in taxable, intermediate tax exempt (or another tax efficient bond fund?) Is a an acceptable strategy, or if its very misguided. Open to other ideas, but thats my main concern at the moment. Thanks!

Current retirement assets (This is more of an actual representation of how things currently stand, for whatever thats worth)
Taxable
Total Stock Admiral VTSAX 50%
Total International Admiral VTIAX 24%
Money Market Prime (These are the funds i have set aside to go into bonds)--14%


401k (Employee Portion--ROTH)
4% Total stock market investor shares (VTSMX)

401K Employer portion
4% Total Stock Market investor Shares (VTSMX)

My personal Roth IRA at Vanguard
4% Total Stock investor shares (VTSMX)
Topic Author
SpartanBull
Posts: 131
Joined: Fri Jun 06, 2014 12:31 am

Re: Is this an "OK" Strategy tax-wise (Mainly about intended placement of bonds)

Post by SpartanBull »

I will add that the main purpose of all my international being in taxable is nothing more than a simplicity thing. As markets swing, values change, I don't object to some international going into the Tax-Deffered accounts with future contributions. However thats also not the main point of the thread, I just wanted to point that out.
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grabiner
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Re: Is this an "OK" Strategy tax-wise (Mainly about intended placement of bonds)

Post by grabiner »

My rule of thumb, worked out in the thread When to prefer low-rate bonds to stocks in taxableis that munis in taxable and US stocks in an IRA are break-even with corporate bonds in taxable and US stocks in an IRA if the yields are equal.

Thus, with the 1.73% yield on Admiral shares of Intermediate-Term Tax-Exempt, and 2.02% on Total Stock Market Index, it makes sense to put munis in taxable now. However, if muni yields rise, you'll probably want your taxable account to be all stock. (You can do this by selling the muni fund, which will have a capital loss due to rising yields, and selling a bond fund to buy a stock fund in your IRA.)
Wiki David Grabiner
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Re: Is this an "OK" Strategy tax-wise (Mainly about intended placement of bonds)

Post by DSInvestor »

If you're self employed with low 6 digit income and are unlikely to have a defined benefit pension, I would suggest making Traditional Solo 401k contribution instead of Roth 401k. This would give you more Traditional 401k space where you can place a taxable bond fund like Vanguard's Total Bond Market Index or Vanguard Intermediate Term Bond Index. This reduces the need for a tax exempt bond fund in the taxable account.

Not sure how high your income is but if it is large enough to max out or nearly max out a Solo 401k for 53K for 2016 and 2017, that would create much more Traditional space in the 401k to a point where you may be able to fit the entire bond allocation there.

You have a big head start to have accumulated mid 6 digits by age 24. If you decide to retire early without a pension and living off your taxable account, you can do a series of Roth conversions for little or no tax. If this is a possibility for you, think about why you'd want to pay the extra Fed and State taxes on 18K of Roth 401k contributions. If you're in 28% tax bracket, you're volunteering to pay 28% tax on that 18K. If you contributed to Traditional 401k for that 18K, you'd avoid that 5K in fed tax and have the chance to convert at effective rates lower than 28% after you retire or semi-retire.
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