Asset Location question – Mimicking Asset Allocation in 401k and taxable

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Topic Author
ImmigrantSaver
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Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by ImmigrantSaver »

Hello,

Until recently I didn’t have a good international option in my 401K so I kept most of my international allocation (VTIAX) in taxable account. Last year my 401k got an option of Fidelity International index FSGDX and I’ve been slowly allocating to it. Current mix of US/International is 80/20 in 401k and 35/65 in Taxable. Overall target is 55/45. Both accounts are roughly same size.

Given the recent international performance, I now have an opportunity to re-balance closer to my target of 55/45 US/International in both accounts without incurring taxes (actually it will result in some TLH).

The reason I want to do it is that if I get to retire earlier (55 or so) I would use up the taxable account first to bridge to the time when I can start 401k withdrawals. Given no one knows whether US or International outperforms keeping the similar allocations in both would help smooth the portfolio.

Besides losing the Foreign tax credit and opportunity to TLH in future (since international tends to be more volatile), are there any cons?

Thanks!
I.S.
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BeBH65
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by BeBH65 »

Are you aware of this wiki page: Tax-efficient_fund_placement? There might be some additional info there.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
livesoft
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by livesoft »

I don't see any cons to having some international in any of your accounts nor in all of your accounts. I have international in taxable, Roth, and tax-deferred. I do all of my rebalancing in tax-deferred where there are no tax consequences. I do all of my tax-loss harvesting in taxable because it is the only place to do tax-loss harvesting (Well, duh!).

Furthermore, we are no longer making contributions to taxable since I really don't work anymore, but are still making contributions to Roth IRAs, and to 401(k)s. So contributions help with rebalancing, too.

Clearly, international has not done well so far in 2018 compared to US equities, so adding to international now in whatever account one can is fine.

With multiple accounts, I use the tools I described in this thread to show my overall asset allocation: viewtopic.php?t=150267

so I don't make each account have the same asset allocation, but really only look at the overall total portfolio asset allocation. To anybody looking at a single account, they would think I have a whack-o asset allocation, but who cares?
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Topic Author
ImmigrantSaver
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by ImmigrantSaver »

BeBH65 wrote: Tue Jun 19, 2018 10:17 am Are you aware of this wiki page: Tax-efficient_fund_placement? There might be some additional info there.
I am, thanks! I know I would lose some foreign tax credit but was wondering if there are any other cons to my strategy.
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Taylor Larimore
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by Taylor Larimore »

Besides losing the Foreign tax credit and opportunity to TLH in future (since international tends to be more volatile), are there any cons?
ImmigrantSaver:

There are two primary reasons that it is usually a mistake mimicking funds in both taxable and tax-advantaged accounts:

1. You have increased your portfolio taxes because your portfolio is tax-inefficient:

Tax-inefficient funds belong in tax-advantaged accounts.
Tax-efficient funds belong in taxable accounts (when tax-advantaged accounts are full).

2. Mimicking funds doubles your portfolio complexity. Please read my "Simplicity" link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
dbr
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by dbr »

If by smooth the portfolio you mean keep it properly at desired asset allocation, then I agree it can be helpful to have assets you need in tax deferred accounts to rebalance without capital gains taxes. The usual result of tax location advice is to keep all of one's bonds in tax deferred but that does not extend to an idea that one keeps all of one's stocks in taxable. I think the international fund tax considerations are exaggerated and would not worry about it.
Topic Author
ImmigrantSaver
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by ImmigrantSaver »

livesoft wrote: Tue Jun 19, 2018 10:23 am
With multiple accounts, I use the tools I described in this thread to show my overall asset allocation: viewtopic.php?t=150267

so I don't make each account have the same asset allocation, but really only look at the overall total portfolio asset allocation. To anybody looking at a single account, they would think I have a whack-o asset allocation, but who cares?
I do the same and my overall AA is roughly on target 55/45. I wouldn't care that some of my accounts have a "whack-o asset allocation" either if I knew for sure I'll be accessing both taxable and 401K simultaneously. But if I do get to retire early and depend on taxable for say first 10 years of retirement, and International happen to significantly underperform at that time frame. I might end up with significantly less money to live on. Is that a valid concern, or am I stuck in some mental accounting trap?
livesoft
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by livesoft »

ImmigrantSaver wrote: Tue Jun 19, 2018 10:38 am..., I might end up with significantly less money to live on. Is that a valid concern, or am I stuck in some mental accounting trap?
Not a valid concern in my opinion. I am was early retired. Now I am simply retired because I got old.
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Topic Author
ImmigrantSaver
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by ImmigrantSaver »

dbr wrote: Tue Jun 19, 2018 10:35 am If by smooth the portfolio you mean keep it properly at desired asset allocation, then I agree it can be helpful to have assets you need in tax deferred accounts to rebalance without capital gains taxes. The usual result of tax location advice is to keep all of one's bonds in tax deferred but that does not extend to an idea that one keeps all of one's stocks in taxable. I think the international fund tax considerations are exaggerated and would not worry about it.
By smoothing, I really meant to keep the performance of both accounts fairly equal in case I retire early and need to use taxable before I can touch 401k. Not sure if I am doing some unnecessary mental accounting
dbr
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by dbr »

ImmigrantSaver wrote: Tue Jun 19, 2018 10:38 am
livesoft wrote: Tue Jun 19, 2018 10:23 am
With multiple accounts, I use the tools I described in this thread to show my overall asset allocation: viewtopic.php?t=150267

so I don't make each account have the same asset allocation, but really only look at the overall total portfolio asset allocation. To anybody looking at a single account, they would think I have a whack-o asset allocation, but who cares?
I do the same and my overall AA is roughly on target 55/45. I wouldn't care that some of my accounts have a "whack-o asset allocation" either if I knew for sure I'll be accessing both taxable and 401K simultaneously. But if I do get to retire early and depend on taxable for say first 10 years of retirement, and International happen to significantly underperform at that time frame. I might end up with significantly less money to live on. Is that a valid concern, or am I stuck in some mental accounting trap?
If you are spending down a poor performing asset in taxable, balance it out by selling something in tax deferred to buy back that asset in tax deferred. There are many middle ways to apply common sense to asset allocation and asset location short of rigid rules to either put all of something in one kind of account or rigorously mirror everything in both accounts. Taxation and personal situation are too varied, too complicated, and too changeable over time to find a perfect optimum. Maybe there is some tool in operations research that does this problem, but I doubt most of us are going to attempt such a thing.
Topic Author
ImmigrantSaver
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by ImmigrantSaver »

livesoft wrote: Tue Jun 19, 2018 10:43 am
ImmigrantSaver wrote: Tue Jun 19, 2018 10:38 am..., I might end up with significantly less money to live on. Is that a valid concern, or am I stuck in some mental accounting trap?
Not a valid concern in my opinion. I am was early retired. Now I am simply retired because I got old.
Do you think it wasn't a problem for you mostly because you happen to early retire during the bull market. (I am assuming here as I don't know your exact timeline)
Topic Author
ImmigrantSaver
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by ImmigrantSaver »

dbr wrote: Tue Jun 19, 2018 10:45 am
ImmigrantSaver wrote: Tue Jun 19, 2018 10:38 am
livesoft wrote: Tue Jun 19, 2018 10:23 am
With multiple accounts, I use the tools I described in this thread to show my overall asset allocation: viewtopic.php?t=150267

so I don't make each account have the same asset allocation, but really only look at the overall total portfolio asset allocation. To anybody looking at a single account, they would think I have a whack-o asset allocation, but who cares?
I do the same and my overall AA is roughly on target 55/45. I wouldn't care that some of my accounts have a "whack-o asset allocation" either if I knew for sure I'll be accessing both taxable and 401K simultaneously. But if I do get to retire early and depend on taxable for say first 10 years of retirement, and International happen to significantly underperform at that time frame. I might end up with significantly less money to live on. Is that a valid concern, or am I stuck in some mental accounting trap?
If you are spending down a poor performing asset in taxable, balance it out by selling something in tax deferred to buy back that asset in tax deferred. There are many middle ways to apply common sense to asset allocation and asset location short of rigid rules to either put all of something in one kind of account or rigorously mirror everything in both accounts. Taxation and personal situation are too varied, too complicated, and too changeable over time to find a perfect optimum. Maybe there is some tool in operations research that does this problem, but I doubt most of us are going to attempt such a thing.
Ha! This is what wasn't clicking for me! I felt like I wasn't being flexible with how I am thinking about it :oops:
livesoft
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by livesoft »

ImmigrantSaver wrote: Tue Jun 19, 2018 10:48 amDo you think it wasn't a problem for you mostly because you happen to early retire during the bull market. (I am assuming here as I don't know your exact timeline)
I semi-retired in 2007 and saw my equities drop by about 50%. My taxable account was 100% equities and has been that way for at least a couple of decades.

I guess I can say it wasn't a problem because I didn't early retire without enough money. Are you planning to stop working as soon as you have barely enough based on something like FIREcalc? I suggest that you don't do that.
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Topic Author
ImmigrantSaver
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by ImmigrantSaver »

livesoft wrote: Tue Jun 19, 2018 10:53 am
ImmigrantSaver wrote: Tue Jun 19, 2018 10:48 amDo you think it wasn't a problem for you mostly because you happen to early retire during the bull market. (I am assuming here as I don't know your exact timeline)
I semi-retired in 2007 and saw my equities drop by about 50%. My taxable account was 100% equities and has been that way for at least a couple of decades.

I guess I can say it wasn't a problem because I didn't early retire without enough money. Are you planning to stop working as soon as you have barely enough based on something like FIREcalc? I suggest that you don't do that.
Wow :shock: Never mind then!

Agree that the savings rate is the key! I am not super keen on retiring early tbh. But I'd like to be be financially independent fairly early, as given my gender and industry, I expect to get stalled, if not pushed out, by my 50s.. Just an assumption based on my observations so far :)
xb7
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Re: Asset Location question – Mimicking Asset Allocation in 401k and taxable

Post by xb7 »

I'm in my early 60's, and slowly working towards a four-fund approach (TSM, TISM, TBM, TIBM, maybe ST TIP sometime down the road).

I'm starting to think that by the time I have to start taking RMDs at age 70.5, it might be good to have my overall asset allocation reflected more or less equally on the taxable and tax-free side. I.e., the same percentage of U.S. stocks held on the taxable and tax-free side, same percentage of U.S. bonds, etc.

This assumes that RMDs will represent much if not all of the money taken out of the combination of accounts for the year --- so that my RMD takes some from each asset allocation category in an appropriate percentage, I won't then find myself selling on the taxable side or shifting assets around each year on the tax-free side to maintain balance.

It also assumes that I'm okay having some bond funds on the taxable side, because I'm spending the dividends (well, the portion of dividends that remain after taxes).

Put another way, starting at age 70 I don't want to sort of paint myself into a corner where RMD withdrawal forces me to sell things on the taxable side just to maintain asset allocation balance. What makes it a bit more complicated is a glide path that over time shifts money away from stocks and into bonds. If it were a fairly aggressive glide path I could perhaps just have money in only stock categories and taking RMDs from that would tend to just draw down the stock side, but my current guess is that the result would be that I would shortly have too little in stocks --- forcing me then to sell bonds and buy stocks on the taxable side.

Would be interesting to hear from others for whom RMDs turn out to be most or all of the required asset allocation draw-down --- i.e., in any given year, RMD plus social security plus dividends & capital gain distributions on the taxable side sum to approximately their annual living expenses.

I do realize that over time the issue gradually disappears as the IRA or whatever accounts are drawn down.
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