Am I Wasting My Tax Deferred Space

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GibsonL6s
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Joined: Tue Aug 29, 2017 12:17 pm

Am I Wasting My Tax Deferred Space

Post by GibsonL6s » Tue Feb 13, 2018 6:27 pm

I have a portfolio that is is roughly 21% of the assets in tax deferred between a 401K (15%) and an IRA. I am comfortable with a 60/40 AA which I currently hold across all accounts. I am in the highest tax bracket in a high tax state and am considering shifting all of my FI to the 401K. In the 401K I can buy Vanguards Total Bond for .05%. As I see it

Pros

Ability to harvest losses since I occasionally get Capital Gains through work investments
Ability to reduce Munis in Taxable which given the greater risks seems desirable

Cons

If you holds equity in the 401K and it does really well, you loose the ability to donate shares or step up basis for kids.
Seems harder to rebalance in a severe market downturn

What am I missing, thanks

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David Jay
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Location: Michigan

Re: Am I Wasting My Tax Deferred Space

Post by David Jay » Tue Feb 13, 2018 6:31 pm

In your tax bracket, you should absolutely utilize all available tax-advantaged space before investing in taxable.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

radiowave
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Re: Am I Wasting My Tax Deferred Space

Post by radiowave » Tue Feb 13, 2018 6:37 pm

I agree with David, max out your tax-deferred space. You'll pay less taxes now and hopefully will have a reduced tax rate upon withdrawal. The 0.05% ER for VG Total Bond is quite good for a 401k.
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iceport
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Joined: Sat Apr 07, 2007 4:29 pm

Re: Am I Wasting My Tax Deferred Space

Post by iceport » Tue Feb 13, 2018 6:47 pm

GibsonL6s wrote:
Tue Feb 13, 2018 6:27 pm
I have a portfolio that is is roughly 21% of the assets in tax deferred between a 401K (15%) and an IRA. I am comfortable with a 60/40 AA which I currently hold across all accounts. I am in the highest tax bracket in a high tax state and am considering shifting all of my FI to the 401K. In the 401K I can buy Vanguards Total Bond for .05%. As I see it

Pros

Ability to harvest losses since I occasionally get Capital Gains through work investments
Ability to reduce Munis in Taxable which given the greater risks seems desirable

Cons

If you holds equity in the 401K and it does really well, you loose the ability to donate shares or step up basis for kids.
Seems harder to rebalance in a severe market downturn

What am I missing, thanks
I'm not really understanding your post. Your "pro" is for holding equity in taxable, and the "con" is for holding equity in the 401k? Aren't both of them pointing towards holding equities in taxable?

Are you saying your portfolio is located like this?

6% IRA
15% 401k
79% taxable

Are you maxing out your tax-advantaged space every year already, and are only asking if you should locate bonds in it? (I think so.)

Or are you asking where to locate ongoing savings? (Maximize tax-advantaged space every year, 401k and backdoor Roth.)
"Discipline matters more than allocation.” ─William Bernstein

GibsonL6s
Posts: 221
Joined: Tue Aug 29, 2017 12:17 pm

Re: Am I Wasting My Tax Deferred Space

Post by GibsonL6s » Tue Feb 13, 2018 6:54 pm

iceport wrote:
Tue Feb 13, 2018 6:47 pm
GibsonL6s wrote:
Tue Feb 13, 2018 6:27 pm
I have a portfolio that is is roughly 21% of the assets in tax deferred between a 401K (15%) and an IRA. I am comfortable with a 60/40 AA which I currently hold across all accounts. I am in the highest tax bracket in a high tax state and am considering shifting all of my FI to the 401K. In the 401K I can buy Vanguards Total Bond for .05%. As I see it

Pros

Ability to harvest losses since I occasionally get Capital Gains through work investments
Ability to reduce Munis in Taxable which given the greater risks seems desirable

Cons

If you holds equity in the 401K and it does really well, you loose the ability to donate shares or step up basis for kids.
Seems harder to rebalance in a severe market downturn

What am I missing, thanks
I'm not really understanding your post. Your "pro" is for holding equity in taxable, and the "con" is for holding equity in the 401k? Aren't both of them pointing towards holding equities in taxable?

My point was if I keep some equity in the 401K, would that possibly allow for more charitable giving or leave more for the kids since I have a bigger 401K to draw on for longer.

Are you saying you're portfolio is located like this?

6% IRA
15% 401k
79% taxable

Yes exactly

Are you maxing out your tax-advantaged space every year already, and are only asking if you should locate bonds in it? (I think so.)

Yes, again sorry I was not clear. I max the 401K, and no longer contribute to an IRA it was an old 401k rollover

Or are you asking where to locate ongoing savings? (Maximize tax-advantaged space every year, 401k and backdoor Roth.)

The question is just does it make sense to go all bonds in tax deferred. Thanks


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iceport
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Re: Am I Wasting My Tax Deferred Space

Post by iceport » Tue Feb 13, 2018 8:01 pm

GibsonL6s wrote:
Tue Feb 13, 2018 6:54 pm

The question is just does it make sense to go all bonds in tax deferred. Thanks
I think so, because it should be more tax-efficient overall. You've got a great bond fund to use in the 401k.

I don't really follow the reasoning that a larger tax-deferred account would be better for your beneficiaries. Presumably, you'll need the same amount to live on no matter where it comes from. More growth in the taxable account (if you favor putting equities there) would just mean you can draw more from it and still leave as much for beneficiaries as if the tax-deferred account had grown more (if you left some equities there) and you took less from taxable.

Given your high tax rates, I'm surprised you aren't using a backdoor Roth to get a little more tax-advantaged space. You would need to deal with the rollover IRA somehow: Backdoor Roth IRA — Caution
"Discipline matters more than allocation.” ─William Bernstein

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Am I Wasting My Tax Deferred Space

Post by mega317 » Wed Feb 14, 2018 7:32 am

Here's another way to think about it. On capital gains and qualified dividends you pay 20 + 12.3 (CA?) + 3.8 = 36.1%. This is way more than most and makes stocks slightly less great in taxable when you have the muni option.

I wouldn't make munis my only bond holding but Vanguards funds, at least the national and CA ones, are good credit quality.

Of course with stocks in taxable and bonds in tax deferred you have flexibility with TLH, donating or gifting appreciated shares, stepped up basis for heirs.

cherijoh
Posts: 4946
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Am I Wasting My Tax Deferred Space

Post by cherijoh » Wed Feb 14, 2018 8:12 am

GibsonL6s wrote:
Tue Feb 13, 2018 6:27 pm
I have a portfolio that is is roughly 21% of the assets in tax deferred between a 401K (15%) and an IRA. I am comfortable with a 60/40 AA which I currently hold across all accounts. I am in the highest tax bracket in a high tax state and am considering shifting all of my FI to the 401K. In the 401K I can buy Vanguards Total Bond for .05%. As I see it

Pros

Ability to harvest losses since I occasionally get Capital Gains through work investments
Ability to reduce Munis in Taxable which given the greater risks seems desirable

Cons

If you holds equity in the 401K and it does really well, you loose the ability to donate shares or step up basis for kids.
Seems harder to rebalance in a severe market downturn

What am I missing, thanks
If you are 60/40 in tax-advantaged you have more equity in tax-advantaged than if you go to 100% bond in your tax advantaged space. Obvious, right? So your "con" actually applies to your current allocation NOT to if you went 100% to bonds in tax-advantaged. I don't think you thought this through logically - you listed two "pros" for going to 100% bonds in tax-advantaged.

In addition with only 21% of your assets in tax-advantaged space, it is impossible to "put all your FI" into tax advantaged if you want to maintain a 60/40 asset allocation. Being 100% FI in your 401k will still leave you with a lot of FI in taxable.

GibsonL6s
Posts: 221
Joined: Tue Aug 29, 2017 12:17 pm

Re: Am I Wasting My Tax Deferred Space

Post by GibsonL6s » Wed Feb 14, 2018 10:53 am

Thank you everyone, I agree I was not looking at this correctly, which is why I am glad to be here and get the thoughts of these great minds :D

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