3 fund portfolio across all accounts?

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Topic Author
SimpleRob
Posts: 6
Joined: Wed Aug 29, 2018 6:27 pm

3 fund portfolio across all accounts?

Post by SimpleRob » Wed Aug 29, 2018 6:54 pm

I have been following for some time and would like the guidance of the experts with this first post.
My wife and I have a total of 5 accounts. We both have a 401k and both have rIRA as well as one taxable account.
At this time the 4 tax advantaged accounts are all invested the exact same with a 3 fund approach 65/35. All accounts with Schwab.
I would now like to set up my taxable account the same but have learned from this forum I should consider a tax friendly bond choice.
Questions:
1. For those of us who like simple things, is it ok to have all my accounts structured this way?
2. What should I consider for bonds in a taxable account? We are VA residents if this matters.
3. As of now about 7% of the retirement account balances are in the rIRA's. Our 401k allows both Roth and traditional deferrals. To this point we have only made traditional deferrals but I am considering some Roth deferrals to increase the Roth balances. I am assuming our tax rate will be lower in retirement than it currently is. However shouldn't one also take into consideration the tax free earnings on theses deferrals. We have always maxed out our accounts but I will admit I have never calculated my tax savings with my pre tax deferrals and then invested the amount from those tax savings.
My wife and I are both 52 yr. Retirement time line is 10 -13 years.
Thanks for any thoughts.

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: 3 fund portfolio across all accounts?

Post by PFInterest » Wed Aug 29, 2018 7:29 pm

SimpleRob wrote:
Wed Aug 29, 2018 6:54 pm
I have been following for some time and would like the guidance of the experts with this first post.

Questions:
1. For those of us who like simple things, is it ok to have all my accounts structured this way?
2. What should I consider for bonds in a taxable account? We are VA residents if this matters.
3. As of now about 7% of the retirement account balances are in the rIRA's. Our 401k allows both Roth and traditional deferrals. To this point we have only made traditional deferrals but I am considering some Roth deferrals to increase the Roth balances. I am assuming our tax rate will be lower in retirement than it currently is. However shouldn't one also take into consideration the tax free earnings on theses deferrals. We have always maxed out our accounts but I will admit I have never calculated my tax savings with my pre tax deferrals and then invested the amount from those tax savings.
My wife and I are both 52 yr. Retirement time line is 10 -13 years.
Thanks for any thoughts.
- it is. its your life.
- you should put more FI into your tax advantaged accounts first. see the problem? you have a need yet for a taxable FI fund...
- you should take any FI out of the rIRAs.
- if your tax rate will be lower, Roth is the incorrect way to go.

ExitStageLeft
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Re: 3 fund portfolio across all accounts?

Post by ExitStageLeft » Wed Aug 29, 2018 8:18 pm

Welcome to the forum!

You are actually creating more work for yourself by having the same asset mix in every account. When it comes time to rebalance, you have to do it in every account. Now that you want to establish a taxable account, how do you rebalance without incurring a lot of capital gains (long or short)?

The ideal asset distribution puts each asset where it serves you the best. Your bonds belong in a 401k or traditional IRA. Equities in everything else. The assets with the highest anticipated yield should go in your Roth accounts.

Here's why it matters. Firstly, bonds throw off income which you don't want in a taxable account. You end up paying your normal marginal tax rate on that income, whereas with a tax-efficient stock fund you may see all earnings and growth in the form of qualified dividends and long-term capital gains. These get taxed at your LTCG rate, which is likely much lower than your marginal rate.

The reason bonds are best in tax-deferred is because you still need to pay taxes on the earnings. For earnings in a Roth account they grow tax free. Suppose you have a $1M portfolio, 50% stocks and 50% bonds, with annual total returns of 6%. Let's say you have a 50/50 mix with $500k each in the 401k and the Roth. The 6% growth in the 401k will amount to $60k that will be subject to income tax, and the growth in the Roth will amount to $60k that is tax-free.

Now suppose you have $500k of bonds in the 401k earning 3% and you have $500k in the Roth in stocks earning 9%. A year's growth for this portfolio yields $30k that will eventually be taxed and $90k that is tax-free. Overall return is the same but the amount of spending money increases by paying less taxes.

Topic Author
SimpleRob
Posts: 6
Joined: Wed Aug 29, 2018 6:27 pm

Re: 3 fund portfolio across all accounts?

Post by SimpleRob » Wed Aug 29, 2018 8:35 pm

So tell me if this is a flawed way of thinking. I see my assets in the Roth as more valuable than the ones in the 401k even though my 401k balance is larger. For this reason I thought it prudent to protect it with a balanced asset allocation as opposed to mostly if not all equities. Is the thought with a 10-13 year timeline to retirement and then the ability to tap the Roth later if necessary I am reducing my risk of being exposed during a down market? Is it also prudent to use a tax exempt bond fund inside a taxable account to avoid the tax consequences mentioned? Thanks

JBTX
Posts: 5534
Joined: Wed Jul 26, 2017 12:46 pm

Re: 3 fund portfolio across all accounts?

Post by JBTX » Wed Aug 29, 2018 10:14 pm

SimpleRob wrote:
Wed Aug 29, 2018 6:54 pm
I have been following for some time and would like the guidance of the experts with this first post.
My wife and I have a total of 5 accounts. We both have a 401k and both have rIRA as well as one taxable account.
At this time the 4 tax advantaged accounts are all invested the exact same with a 3 fund approach 65/35. All accounts with Schwab.
I would now like to set up my taxable account the same but have learned from this forum I should consider a tax friendly bond choice.
Questions:
1. For those of us who like simple things, is it ok to have all my accounts structured this way?
I think it is if that is what you prefer. While having bonds in taxable does spit off some unwanted taxable income, that is somewhat offset by having higher growth in your tax advantaged accounts.

If you really want simplicity consider a target date or life strategy fund in your retirement accounts if they have an offering with very low expense ratio.

2. What should I consider for bonds in a taxable account? We are VA residents if this matters.
It really depends on your tax rate. The higher your tax rate the better municipals look. Also having a small portion in ibonds may make sense.
3. As of now about 7% of the retirement account balances are in the rIRA's. Our 401k allows both Roth and traditional deferrals. To this point we have only made traditional deferrals but I am considering some Roth deferrals to increase the Roth balances. I am assuming our tax rate will be lower in retirement than it currently is. However shouldn't one also take into consideration the tax free earnings on theses deferrals. We have always maxed out our accounts but I will admit I have never calculated my tax savings with my pre tax deferrals and then invested the amount from those tax savings.
My wife and I are both 52 yr. Retirement time line is 10 -13 years.
Thanks for any thoughts.
This is a highly complex and individualized decision based upon your situation, what assumptions you make, what your plans are, etc. Ultimately having both Roth and traditional is good, but exactly how you get there varies. As a general rule, the higher your tax rate now, the less attractive a Roth 401k looks compared to traditional. You'd have to post a lot more info about your current income, savings, retirement plans, other sources of retirement income etc to be able to answer your question (and you will still get different answers)

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Watty
Posts: 17600
Joined: Wed Oct 10, 2007 3:55 pm

Re: 3 fund portfolio across all accounts?

Post by Watty » Wed Aug 29, 2018 10:29 pm

SimpleRob wrote:
Wed Aug 29, 2018 6:54 pm
1. For those of us who like simple things, is it ok to have all my accounts structured this way?
It would result in you paying more taxes than you need to, or earning less interest on tax exempt bond.

You would also have less of an opportunity to harvest occasional capital losses and your rebalancing in the taxable account would cause you to pay more capital gains taxes. It is more work too, that might not be a big deal now but when you are 85, or a less financially capable spouse has to manage the money it could be a significant problem.

If one of you survives the other and starts filing tax returns using the higher single tax brackets then the taxes will be even more of an issue.

There is a wiki on tax efficient fund placement that you should read and understand.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

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peterinjapan
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Location: Japan!

Re: 3 fund portfolio across all accounts?

Post by peterinjapan » Wed Aug 29, 2018 10:39 pm

One thing I realized was that, having things like normal stocks in an IRA converts the low-tax qualified dividends and capital gains to the highest possible tax rate, your normal income rate, when you tap the money eventually. Which is why I try to only have CDs, bonds or bond-like high yield things in my IRA.

PFInterest
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Re: 3 fund portfolio across all accounts?

Post by PFInterest » Thu Aug 30, 2018 6:53 am

SimpleRob wrote:
Wed Aug 29, 2018 8:35 pm
So tell me if this is a flawed way of thinking. I see my assets in the Roth as more valuable than the ones in the 401k even though my 401k balance is larger. For this reason I thought it prudent to protect it with a balanced asset allocation as opposed to mostly if not all equities. Is the thought with a 10-13 year timeline to retirement and then the ability to tap the Roth later if necessary I am reducing my risk of being exposed during a down market? Is it also prudent to use a tax exempt bond fund inside a taxable account to avoid the tax consequences mentioned? Thanks
its flawed in a sense that you want the highest chance for growth in a Roth, so would make it 100% equities. the Roth is the last in the line of money to be tapped, hopefully never and passed down to heirs.
you only need bonds in taxable once you have filled up non-Roth tax advantaged accounts.

Topic Author
SimpleRob
Posts: 6
Joined: Wed Aug 29, 2018 6:27 pm

Re: 3 fund portfolio across all accounts?

Post by SimpleRob » Thu Aug 30, 2018 9:42 am

PFInterest wrote:
Thu Aug 30, 2018 6:53 am


its flawed in a sense that you want the highest chance for growth in a Roth, so would make it 100% equities. the Roth is the last in the line of money to be tapped, hopefully never and passed down to heirs.
you only need bonds in taxable once you have filled up non-Roth tax advantaged accounts.
Thanks PFI. That does make sense. The other tax advantaged accounts have been filled and I now wanted to start building a similar easy portfolio in a taxable account with some idle cash and monthly contributions.

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Mursili
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Re: 3 fund portfolio across all accounts?

Post by Mursili » Fri Aug 31, 2018 10:37 am

There is one thing that confuses me about such discussions. If my idea of early retirement is a date before we can access tax-advantaged accounts without penalty, then does it not make sense to have FI in taxable accounts?

In other words, I imagine that we will need to draw down the taxable accounts first, then it does not follow that those accounts should be made up entirely of equities. I do realize that asset allocation should be considered over the entire portfolio, but it seems you want the assets to be used in the next couple-few years to be in FI.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

PFInterest
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Re: 3 fund portfolio across all accounts?

Post by PFInterest » Fri Aug 31, 2018 11:04 am

Mursili wrote:
Fri Aug 31, 2018 10:37 am
There is one thing that confuses me about such discussions. If my idea of early retirement is a date before we can access tax-advantaged accounts without penalty, then does it not make sense to have FI in taxable accounts?

In other words, I imagine that we will need to draw down the taxable accounts first, then it does not follow that those accounts should be made up entirely of equities. I do realize that asset allocation should be considered over the entire portfolio, but it seems you want the assets to be used in the next couple-few years to be in FI.
by utilizing AA across all accounts, it doesnt matter. if you spend equities in taxable. you might buy equities in tax advantaged to make up the difference. you pay LTCG in taxable, and you pay no taxes by re-balancing in tax advantaged.
also you can access retirement accounts prior to 59.5.

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