Balancing across multiple accounts, and for tax efficiency

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ConstantlyLearning57
Posts: 10
Joined: Thu Nov 30, 2017 1:42 am

Balancing across multiple accounts, and for tax efficiency

Post by ConstantlyLearning57 » Thu Dec 07, 2017 2:41 am

Emergency funds: I have six months of expenses
Debt: 1 mortgage; interest rate: 3.75%
Tax Filing Status: Single
Tax Rate: 28% Federal
State of Residence: WA
Age: 45
Desired Asset allocation: 64% stocks / 36% bonds
Desired International allocation: 32% of stocks
Approximate portfolio size is high 6-figures

CURRENT RETIREMENT ASSETS

TAXABLE
41.3% [Many mutual funds, I can edit this and add them but there are a lot. This is managed by Schwab for 1% fee, going to change this after this post.]
15.7% Cash

PRE-TAX 401k
5.5% VANG RUS 1000 GR TRUST (0.02%)
5.0% VANG RUS 1000 VAL TRUST (0.02%)
4.3% VANG RUS 2000 GR TRUST (0.03%)
4.3% DFA SM/MD CAP VAL (0.26%)
2.1% TP12 INTL VALUE ACCOUNT (0.57%)
2.1% TPC6 INTL GROWTH ACCOUNT (0.57%)
2.1% TPG6 PIMCO TOTAL RETURN (0.27%)
16.5% VBIPX VANG ST BD IDX IS PL (0.04%)
Company match? Yes

ROLLOVER ROTH IRA FROM AFTER TAX 401k
0.1% No funds yet, just started this.

ROTH IRA
0.7% SCHH (0.07%)

H S A
0.3% VIPSX (0.20%)


CONTRIBUTIONS IN 2018
$18,500 to pre-tax 401k (employee match is $9,250) 
$25,000 to after-tax 401k, and will convert to Roth IRA immediately each pay period. (no match on after-tax)
Will also make $5,500 lump sum contribution to tIRA (backdoor Roth)
Will also make $3450 contribution to H. S. A.

AVAILABLE FUNDS
Funds available in 401(k)
PIMCO All Asset All Authority Inst (PAUIX) (Gross: 1.99%, Net: 1.27%) Bonds, INTL, cash
BlackRock Short-Term Investment Account (Benchmark: USTREAS T-Bill Auction Ave 3 Mon) (0.04%) Cash
International Growth Account (Benchmark: MSCI ACWI Ex USA Growth NR USD) (0.57%) Morning star category: "Foreign large growth"
International Value Account (Benchmark: MSCI ACWI Ex USA Value NR USD) (0.57%) Morning star category: "Foreign large value"
Vanguard S&P Index Trust (Benchmark: S&P 500 TR USD) (0.01 %) Morning star category: "Large blend"
Fidelity Contrafund Commingled Pool Class 2 (Benchmark: 75% Russell 3000 TR USD, 25% MSCI EAFE NR USD) (0.38%) Morningstar category: "Large growth"
Fidelity Growth Company Commingled Pool Class 2 (Benchmark: Russell 3000 Growth TR USD) (0.38%) Morningstar category: "Large growth"
Vanguard Russell 1000 Growth Index Trust (Benchmark: Russell 1000 Growth TR USD) (0.02%) Morningstar category: "Large growth"
Vanguard Russell 1000 Value Index Trust (Benchmark: Russell 1000 Value TR USD) (0.02%) Morningstar category: "Large Value" 
Artisan Mid Cap Account, Benchmark: (Russell Mid Cap Growth TR USD) (0.50%) Morningstar category: "MidCap Growth" 
Vanguard Russell 2000 Growth Index Trust (Benchmark: Russell 2000 Growth TR USD) (0.03%) Morningstar category: "Small Growth" 
DFA Small/Mid-Cap Value (Benchark: Russell 2500 Value TR USD) (0.26%) Morningstar category: "Small Value" 
PIMCO Total Return Account (Benchmark: BBgBarc US Agg Bond TR USD) (0.27%) Morningstar category: "Intermediate-Term Bond"
Vanguard Short-Term Bond Index Fund Institutional Plus Shares (BVIPX) (0.04%)
PIMCO Inflation Response MultiAsset Instl (PIRMX) (Gross: 1.06%, Net: 0.69%)

QUESTIONS
I know I have some work to do in my taxable accounts. That's why I'm posting. I want to allocate my investments so that they are tax efficient and balanced across all accounts.
1. I want to start allocating across multiple accounts. I want to start with the 401k. Should I start allocating toward a bond fund first? Or should I allocate toward the cheapest fund first, which is the S&P 500?
2. I was then going to allocate International funds in the taxable accounts, and then US stock funds to the remaining portions left in all accounts. Does that sequence make sense to you?

Thanks, I'm new at this so thanks for your help. :)

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FiveK
Posts: 3298
Joined: Sun Mar 16, 2014 2:43 pm

Re: Balancing across multiple accounts, and for tax efficiency

Post by FiveK » Thu Dec 07, 2017 3:50 am

ConstantlyLearning57 wrote:
Thu Dec 07, 2017 2:41 am
1. I want to start allocating across multiple accounts. I want to start with the 401k. Should I start allocating toward a bond fund first? Or should I allocate toward the cheapest fund first, which is the S&P 500?
2. I was then going to allocate International funds in the taxable accounts, and then US stock funds to the remaining portions left in all accounts. Does that sequence make sense to you?
That's a reasonable approach. You might also consider the methodology described in Assigning asset classes to different accounts.

When one has multiple good options (as it appears you do), various approaches may provide equally satisfying portfolios.

TwstdSista
Posts: 37
Joined: Thu Nov 16, 2017 4:03 am

Re: Balancing across multiple accounts, and for tax efficiency

Post by TwstdSista » Thu Dec 07, 2017 4:07 am

I've actually been enjoying the mental exercise of restructuring your portfolio (since I can't sleep, it's been a fun exercise!) That being said, I'm still learning myself and my knowledge is very limited....

I'm thinking the exact same thing you are. I would build up VBIPX first to your desired allocation. You have 15.7% of your assets in cash -- how much cash (or cash equivalent) do you want to keep outside of investments? I *think* this would figure into your 36% desired bond allocation. Then do the math from there. The remainder of your 401k I would put into that S&P 500 fund since I'm not loving the ER on either of the international funds, and everything else is either Growth or Value (I lean towards Blend personally)>

And then yes, a total international index fund in taxable. Are you planning to stay with Schwab? They have index funds similar to the Vanguard index funds usually referred to on this board.

Your Roth appears to be a REIT -- consider how much real estate exposure you might already have (home equity? employment?) If you're good with that, then go nuts. I recently sold my own REIT fund based on my own over-exposure, so just wanted to throw it out there as a thought in your overall process.

Beyond that, I am WAY out of my comfort zone. But very much looking forward to other responses!

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Balancing across multiple accounts, and for tax efficiency

Post by livesoft » Thu Dec 07, 2017 6:40 am

I would do what you intend to do, which I will repeat here:

1. Put all your bond allocation in your 401(k) which I think would be the PIMCO Total Return fund if I read things correctly.

2. That should leave only a little bit room for equities, but this account will be used for rebalancing between equities and bonds if that's needed, so maybe a little US equities say the Russell 2000 fund and a large-cap, plus your choice of International fund. Keep it simple with no more than 4 funds.

3. Taxable: Total US Stock Market and Total International Stock Market

4. Roths: Whatever other equities you like, but Total US and Total International are fine. You can tilt with REIT, small-cap foreign, small-cap value US, Value, whatever you want. However, if you have more than one Roth, I would suggest that some of your Roth have one single fund in them.

5. You can put tax-exempt muni in taxable, too, if you need that mental liquidity, but personally, I have no bond funds in my taxable as they will all fit in my tax-deferred accounts.

It should be obvious how you will keep things in balance by additions and maybe some tax-loss-harvesting. I think only rarely would you need to do any exchanges in the 401(k). And it is unlikely that you would ever need to sell for a gain in taxable.
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oldcomputerguy
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Re: Balancing across multiple accounts, and for tax efficiency

Post by oldcomputerguy » Thu Dec 07, 2017 6:56 am

livesoft wrote:
Thu Dec 07, 2017 6:40 am
I would do what you intend to do, which I will repeat here:

1. Put all your bond allocation in your 401(k) which I think would be the PIMCO Total Return fund if I read things correctly.

2. That should leave only a little bit room for equities, but this account will be used for rebalancing between equities and bonds if that's needed, so maybe a little US equities say the Russell 2000 fund and a large-cap, plus your choice of International fund. Keep it simple with no more than 4 funds.

3. Taxable: Total US Stock Market and Total International Stock Market

4. Roths: Whatever other equities you like, but Total US and Total International are fine. You can tilt with REIT, small-cap foreign, small-cap value US, Value, whatever you want. However, if you have more than one Roth, I would suggest that some of your Roth have one single fund in them.

5. You can put tax-exempt muni in taxable, too, if you need that mental liquidity, but personally, I have no bond funds in my taxable as they will all fit in my tax-deferred accounts.

It should be obvious how you will keep things in balance by additions and maybe some tax-loss-harvesting. I think only rarely would you need to do any exchanges in the 401(k). And it is unlikely that you would ever need to sell for a gain in taxable.
+1. I have a TIRA (rollover from my 401k), a Roth IRA, and some taxable. The tIRA holds all my bonds plus a minor allocation to Total stock and total international stock funds, the Roth is all total stock, and taxable is total stock and total international. Rebalancing is done in the tIRA to keep the whole package at 50/50.
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ConstantlyLearning57
Posts: 10
Joined: Thu Nov 30, 2017 1:42 am

Re: Balancing across multiple accounts, and for tax efficiency

Post by ConstantlyLearning57 » Thu Dec 07, 2017 12:59 pm

FiveK wrote:
Thu Dec 07, 2017 3:50 am
ConstantlyLearning57 wrote:
Thu Dec 07, 2017 2:41 am
1. I want to start allocating across multiple accounts. I want to start with the 401k. Should I start allocating toward a bond fund first? Or should I allocate toward the cheapest fund first, which is the S&P 500?
2. I was then going to allocate International funds in the taxable accounts, and then US stock funds to the remaining portions left in all accounts. Does that sequence make sense to you?
That's a reasonable approach. You might also consider the methodology described in Assigning asset classes to different accounts.

When one has multiple good options (as it appears you do), various approaches may provide equally satisfying portfolios.
Thanks! I've been following that link, but under Start with problematic account, Selecting the fund, the first step is "Find the lowest fee fund. In most cases, this fund will be an S&P 500 index fund." This is indeed true for my 401k choices. The fee is for the S&P 500 option is 0.1%. But nonetheless was a little surprised that finding the fund with the lowest fee is the first step. I was expecting the article to walk me through choosing bonds
funds since the article on tax efficiency: (https://www.bogleheads.org/wiki/Tax-eff ... _placement), states how important it is to place bond funds in a tax deferred 401k account first. And that same article shows under step 5 shows that US funds are fairly flexible... that they can be placed in taxable, tax free, or tax deferred.

I guess the question is, shouldn't I place the bond funds first in the 401k, before the S&P 500 fund? Or should I do S&P 500 first before bonds because the low expense ratio benefits of the S&P500 outweigh the tax efficiency benefits of placing the bonds first?

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Balancing across multiple accounts, and for tax efficiency

Post by livesoft » Thu Dec 07, 2017 2:24 pm

I'm kinda chuckling that you are stuck on "Find the lowest fee fund", as if you should believe everything that you read on bogleheads.org.

Try this: your 401(k) is NOT the problematic account.

Some of us have already explicitly answered your question.
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WhiteMaxima
Posts: 627
Joined: Thu May 19, 2016 5:04 pm

Re: Balancing across multiple accounts, and for tax efficiency

Post by WhiteMaxima » Thu Dec 07, 2017 3:35 pm

Bond holding in taxable account is not tax efficient. Frequent rebalance aft-tax will only add tax complication.

ConstantlyLearning57
Posts: 10
Joined: Thu Nov 30, 2017 1:42 am

Re: Balancing across multiple accounts, and for tax efficiency

Post by ConstantlyLearning57 » Thu Dec 07, 2017 5:52 pm

livesoft wrote:
Thu Dec 07, 2017 2:24 pm
I'm kinda chuckling that you are stuck on "Find the lowest fee fund", as if you should believe everything that you read on bogleheads.org.

Try this: your 401(k) is NOT the problematic account.

Some of us have already explicitly answered your question.
Ok fair enough. I'm new... so I don't know the scale from "not problematic" to "problematic." But thanks for your feedback, I appreciate it.

ConstantlyLearning57
Posts: 10
Joined: Thu Nov 30, 2017 1:42 am

Re: Balancing across multiple accounts, and for tax efficiency

Post by ConstantlyLearning57 » Thu Dec 07, 2017 11:04 pm

livesoft wrote:
Thu Dec 07, 2017 6:40 am
I would do what you intend to do, which I will repeat here:

1. Put all your bond allocation in your 401(k) which I think would be the PIMCO Total Return fund if I read things correctly.

2. That should leave only a little bit room for equities, but this account will be used for rebalancing between equities and bonds if that's needed, so maybe a little US equities say the Russell 2000 fund and a large-cap, plus your choice of International fund. Keep it simple with no more than 4 funds.

3. Taxable: Total US Stock Market and Total International Stock Market

4. Roths: Whatever other equities you like, but Total US and Total International are fine. You can tilt with REIT, small-cap foreign, small-cap value US, Value, whatever you want. However, if you have more than one Roth, I would suggest that some of your Roth have one single fund in them.

5. You can put tax-exempt muni in taxable, too, if you need that mental liquidity, but personally, I have no bond funds in my taxable as they will all fit in my tax-deferred accounts.

It should be obvious how you will keep things in balance by additions and maybe some tax-loss-harvesting. I think only rarely would you need to do any exchanges in the 401(k). And it is unlikely that you would ever need to sell for a gain in taxable.
Thank you so much, I appreciate these details. This was my suspicion but it really helps getting detailed responses like this.

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ruralavalon
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Location: Illinois

Re: Balancing across multiple accounts, and for tax efficiency

Post by ruralavalon » Fri Dec 08, 2017 9:21 am

The funds offered in the 401k are generally very good, so there are many possible ways to allocate across the multiple accounts.


I think that the approaches outlined by you, livesoft, and oldcomputerguy in this thread are are good. But in your other thread, "Which fund first for multiple accounts allocation?", I promised to walk you thru the thought process, so will do so even if it adds little.

ConstantlyLearning57 wrote:Age: 45
Desired Asset allocation: 64% stocks / 36% bonds
Desired International allocation: 32% of stocks
In my opinion the desired asset allocation is within the range of what is reasonable.

ConstantlyLearning57 wrote:CONTRIBUTIONS IN 2018
$18,500 to pre-tax 401k (employee match is $9,250)
$25,000 to after-tax 401k, and will convert to Roth IRA immediately each pay period. (no match on after-tax)
Will also make $5,500 lump sum contribution to tIRA (backdoor Roth)
Will also make $3450 contribution to H. S. A.
Total = about $62k.


Fund selection & placement.
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

Low expense ratios are critical to long-term investing performance. Seemingly small annual fees have a large cumulative impact over time. Vanguard blog post, "Stopping the silent killer of returns". Please see the table at the end of the post, "Cumulative impact of fees on ending wealth at various time horizons." Also, here is a calculator you could use to estimate the impact of investing expenses. Bankrate.com, "Mutual fund fees calculator".

Also, low expense ratios are the best predictor of future performance. Morningstar article . “If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.” “Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

It is often better to treat all accounts together as a single unified portfolio, rather than view each account separately. Select just one or two of the better funds (most diversified + lower expense ratio) in the work-based account (401k), where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited or choices available in a taxable account or any IRAs. This approach lets you avoid having to use sub-par funds often found in work-based accounts like 401ks.

Start with the 401k. It is about 42% of the current portfolio, and will receive about 45% of new annual contributions.

Bonds. The desired bond allocation is 36%, put the bond fund in your 401k. Wiki article "Tax-efficient fund placement". In the 401k you could use PIMCO Total Return Account (0.27%). I suggest using an intermediate-term bond fund (better return than a short-term bond fund, still good safety). In my opinion PIMCO Total Return offered in your 401k is a good choice for a bond fund. Although actively managed it is a well diversified intermediate-term bond fund with a moderate expense ratio. Nisiprius post in forum discussion "Bond Fund for Three-Fund Portfolio", Total Bond Market vs PTTRX?.

Domestic stocks. For the remaining 06% in the 401k use Vanguard S&P Index Trust (a S&P 500 index fund) (0.01 %). For domestic stocks I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund is good enough by itself for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations". An S&P 500 index fund covers 81% of the U.S. stock market, and in the 25 years since the creation of the first total stock market fund the performance of the two types of funds has been almost identical. Morningstar “growth of $10k” graph, VFINX vs VTSMX.

International stocks. Don't use the international stock funds offered in the 401k because the expense ratios are significantly higher (0.57%, high enough to make a significant difference long-term) and there is no single international blend fund, only separate value and growth funds. So put some or all of the international stock allocation in the taxable account using a fund like Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%. That fund is very tax-efficient. Wiki article "Tax-efficient fund placement".

Other accounts. Both Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11% are well suited to any type of account.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ConstantlyLearning57
Posts: 10
Joined: Thu Nov 30, 2017 1:42 am

Re: Balancing across multiple accounts, and for tax efficiency

Post by ConstantlyLearning57 » Fri Dec 08, 2017 3:56 pm

ruralavalon wrote:
Fri Dec 08, 2017 9:21 am
The funds offered in the 401k are generally very good, so there are many possible ways to allocate across the multiple accounts.


I think that the approaches outlined by you, livesoft, and oldcomputerguy in this thread are are good. But in your other thread, "Which fund first for multiple accounts allocation?", I promised to walk you thru the thought process, so will do so even if it adds little.

ConstantlyLearning57 wrote:Age: 45
Desired Asset allocation: 64% stocks / 36% bonds
Desired International allocation: 32% of stocks
In my opinion the desired asset allocation is within the range of what is reasonable.

ConstantlyLearning57 wrote:CONTRIBUTIONS IN 2018
$18,500 to pre-tax 401k (employee match is $9,250)
$25,000 to after-tax 401k, and will convert to Roth IRA immediately each pay period. (no match on after-tax)
Will also make $5,500 lump sum contribution to tIRA (backdoor Roth)
Will also make $3450 contribution to H. S. A.
Total = about $62k.


Fund selection & placement.
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

Low expense ratios are critical to long-term investing performance. Seemingly small annual fees have a large cumulative impact over time. Vanguard blog post, "Stopping the silent killer of returns". Please see the table at the end of the post, "Cumulative impact of fees on ending wealth at various time horizons." Also, here is a calculator you could use to estimate the impact of investing expenses. Bankrate.com, "Mutual fund fees calculator".

Also, low expense ratios are the best predictor of future performance. Morningstar article . “If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.” “Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

It is often better to treat all accounts together as a single unified portfolio, rather than view each account separately. Select just one or two of the better funds (most diversified + lower expense ratio) in the work-based account (401k), where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited or choices available in a taxable account or any IRAs. This approach lets you avoid having to use sub-par funds often found in work-based accounts like 401ks.

Start with the 401k. It is about 42% of the current portfolio, and will receive about 45% of new annual contributions.

Bonds. The desired bond allocation is 36%, put the bond fund in your 401k. Wiki article "Tax-efficient fund placement". In the 401k you could use PIMCO Total Return Account (0.27%). I suggest using an intermediate-term bond fund (better return than a short-term bond fund, still good safety). In my opinion PIMCO Total Return offered in your 401k is a good choice for a bond fund. Although actively managed it is a well diversified intermediate-term bond fund with a moderate expense ratio. Nisiprius post in forum discussion "Bond Fund for Three-Fund Portfolio", Total Bond Market vs PTTRX?.

Domestic stocks. For the remaining 06% in the 401k use Vanguard S&P Index Trust (a S&P 500 index fund) (0.01 %). For domestic stocks I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund is good enough by itself for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations". An S&P 500 index fund covers 81% of the U.S. stock market, and in the 25 years since the creation of the first total stock market fund the performance of the two types of funds has been almost identical. Morningstar “growth of $10k” graph, VFINX vs VTSMX.

International stocks. Don't use the international stock funds offered in the 401k because the expense ratios are significantly higher (0.57%, high enough to make a significant difference long-term) and there is no single international blend fund, only separate value and growth funds. So put some or all of the international stock allocation in the taxable account using a fund like Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%. That fund is very tax-efficient. Wiki article "Tax-efficient fund placement".

Other accounts. Both Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11% are well suited to any type of account.
Well this made my week. Thank you so much. It probably sounds weird, but I've read each of the wiki articles that you linked in your reply -- several times! But seeing them stitched together the way you did here -- that really glued the pieces for me and I'm super appreciative of that.

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