Upper six-figures portfolio & tax management part 2

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stock_blazer
Posts: 12
Joined: Sat Mar 08, 2014 7:16 am

Upper six-figures portfolio & tax management part 2

Post by stock_blazer » Wed Sep 12, 2018 12:32 pm

Hey all,

My situation has changed a bit since I last posted.

Prologue

Emergency funds/cash: $15,000
Debt: No debt, house fully paid off, car fully paid off
Tax Filing Status: Single
Tax Bracket: Federal: 25% (expected)
ASL: 30,M,USA
Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: ~35% of total equity

Retirement Assets
82% stock / 18% bonds

Taxable ~$575k
% Name Ratio
100% Vanguard Total Stock Market Index Fund Adm (VTSAX) .04%

Non-taxable
IIRA-2 ~$240k
% Name Ratio
8% Vanguard Emerging Markets Bond Fund Inv (VEMBX) .6%
11% Vanguard Emerging Mkts Stock Index Adm (VEMAX) .14%
17% Vanguard Intermediate-Term Bond Index Fund Adm (VBILX) .07%
13% Vanguard Total Bond Mkt Index Adm (VBTLX) .05%
13% Vanguard Total International Bond Index Fund Adm (VTABX) .11%
39% Vanguard Total International Stock Index Fund Adm (VTIAX) .11%

IIRA-1 ~$20k
% Name Ratio
100% Vanguard Intermediate-Term Bond Index Fund Adm (VBILX) .07%

Roth IRA ~$20k
% Name Ratio
52% Vanguard Intermediate-Term Bond Index Fund Adm (VBILX) .07%
48% Vanguard Total International Stock Index Fund Adm (VTIAX) .11%

401k ~$12k
% Name Ratio
15% Fidelity Intl Index Inst .04%
85% Fidelity US Bond Index Prem .02%

Stock allocation:

(US = 81.3%)
Large cap: 73%
Mid cap: 19%
Small cap: 8%
(Abroad = 18.7%)
Europe: 34.4%
Pacific: 23.6%
Canada: 5.2%
emerging: 36%

Bond allocation:
domestic: 69% [100% taxable but all in tax deferred accounts]
international: 31%

Questions/Comments:
1. I need to rebalance. My age has increased by 5 years and my percentage of equity has also increased by almost 5% from last time I posted here. I'm struggling to figure out how to obtain more bond exposure and simultaneously increase my international diversification to the desired level.
2. I can't put money INTO the inherited IRAs and I can only contribute $5,500 into my Roth IRA which barely makes a change in the percentage. When I contribute, I sell in the taxable account and put the proceeds into the Roth IRA so it has a slightly larger effect on the percentage shift.
3. I don't think my tax bracket is high enough to justify munis in the taxable account but I'm not entirely sure.
4. My employer does 10% of my salary if I put in 5%. so 200% which is insane and I love that. Perhaps that would be the way to accomplish this but I'm really not sure. I could maybe defer more of my salary into the 401k and use the quarterly dividends from the taxable account to replace the income I am deferring.

Any help, ideas, or constructive criticism would be appreciated.

Thank you guys for your time.

aristotelian
Posts: 4799
Joined: Wed Jan 11, 2017 8:05 pm

Re: Upper six-figures portfolio & tax management part 2

Post by aristotelian » Wed Sep 12, 2018 2:24 pm

Turn off dividend reinvesting on your taxable VTSAX. Pay estimated tax on the dividend payout, then buy muni bonds, I bonds, and international stock with the rest.

stock_blazer
Posts: 12
Joined: Sat Mar 08, 2014 7:16 am

Re: Upper six-figures portfolio & tax management part 2

Post by stock_blazer » Wed Sep 12, 2018 3:35 pm

aristotelian wrote:
Wed Sep 12, 2018 2:24 pm
Turn off dividend reinvesting on your taxable VTSAX. Pay estimated tax on the dividend payout, then buy muni bonds, I bonds, and international stock with the rest.
Thanks. Do international stock index funds distribute qualified dividends?

Nate79
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Location: Delaware

Re: Upper six-figures portfolio & tax management part 2

Post by Nate79 » Wed Sep 12, 2018 3:43 pm

In addition to what was mentioned put all new money invested towards bonds in taxable and tax deferred. Honestly 7% is kind of meaningless in the grand scheme of things. No need to incur tax cost to rebalance for such a minor allocation difference.

You are also debt free so you are not leveraged which is a risk reduction you may not realize.

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goingup
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Re: Upper six-figures portfolio & tax management part 2

Post by goingup » Wed Sep 12, 2018 3:45 pm

Why not put more bonds in IIRA-2? That seems like the easiest fix.

And with a large taxable portfolio I personally don't think you need an "emergency fund". Just count that 15K as part of your bond/cash allocation.

I'd also max out that 401K. With a paid off house, car and no debt, maxing it should be no problem.

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House Blend
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Re: Upper six-figures portfolio & tax management part 2

Post by House Blend » Wed Sep 12, 2018 4:46 pm

Some of this has already been said:

1. Do not auto-reinvest dividends in taxable.

2. Add the cash flow from those dividends to the cash flow from RMDs generated by the inherited IRAs. That's maybe $16K/year ballpark.

3. Unclear whether you are maxing out your 401(k) + Roth IRA. Do that. Use the extra $16K of cash flow in #2 to help make up for the lost income, if necessary. If income is left over, invest in taxable. (See #7.)

4. I don't see much point in bothering with an allocation to Emerging Markets. I would dump that. Maybe it's because the Fidelity Intl Index n the 401(k) does not include Emerging Markets? I still wouldn't bother.

5. To meet your current AA targets, looks like you need ~ $650K in stocks ($425K US, $225K Intl) and ~$215K bonds. Since the stock/bond ratio is vastly more important, I would get that done, more or less now. See to it that you have ~ $215K allocated to bonds/fixed income. The inherited IRAs and 401(k) are good places for that.

6. That leaves you with $77K of remaining tax-advantaged space (including Roth). Use that for Intl stock, such as VTIAX or the Fidelity Fund.

7. If you have substantial capital gains in all of your shares of VTSAX in taxable, then be happy with what you have, and accept that you will be below target in Intl for the time being. But do use new cash to buy Intl in taxable.

However, if you own some shares of VTSAX that have losses, or low (long term) gains, make sure you are using Specific Share ID and understand what that is. Then plan on exchanging those particular shares for Intl stocks in taxable when opportunities arise to do this in a tax minimal way.

Ex: The type of dilemma (trilemma?) you might face is:
Sell $10K worth at a net loss of $200--definitely worth it.
Sell $10K worth at a net gain of $200--might be worth it to you.
Sell $100K worth at gain of $25,000 LT and $1,000 ST, almost certainly
not worth it. (At least not in your tax bracket, IMO.)

Note: The 25% bracket is gone. You're probably in the 22% bracket.

aristotelian
Posts: 4799
Joined: Wed Jan 11, 2017 8:05 pm

Re: Upper six-figures portfolio & tax management part 2

Post by aristotelian » Wed Sep 12, 2018 5:25 pm

stock_blazer wrote:
Wed Sep 12, 2018 3:35 pm
aristotelian wrote:
Wed Sep 12, 2018 2:24 pm
Turn off dividend reinvesting on your taxable VTSAX. Pay estimated tax on the dividend payout, then buy muni bonds, I bonds, and international stock with the rest.
Thanks. Do international stock index funds distribute qualified dividends?
Yes, but foreign government's withhold taxes so you get the foreign tax credit to offset their higher dividend.

tmcc
Posts: 153
Joined: Tue Feb 06, 2018 6:38 pm

Re: Upper six-figures portfolio & tax management part 2

Post by tmcc » Wed Sep 12, 2018 7:28 pm

Wait why are you supposed to not reinvest dividends in taxable? Doesn't that increase your basis which reduces the LTCG? ie less tax on sale?

Jefferson
Posts: 50
Joined: Wed Feb 21, 2018 1:37 pm

Re: Upper six-figures portfolio & tax management part 2

Post by Jefferson » Wed Sep 12, 2018 7:59 pm

tmcc wrote:
Wed Sep 12, 2018 7:28 pm
Wait why are you supposed to not reinvest dividends in taxable? Doesn't that increase your basis which reduces the LTCG? ie less tax on sale?
Reinvesting dividends has zero impact on basis, at least not the way you’re probably thinking about it. Dividends are taxed as income because they are money paid to you.

Option 1 - Reinvesting - That money is automatically used to buy new shares of the same fund.

Option 2 - Not reinvesting. That money stays as cash (initially). You can then use it to buy new shares of any fund.

Tax-wise, there is no difference.

stock_blazer
Posts: 12
Joined: Sat Mar 08, 2014 7:16 am

Re: Upper six-figures portfolio & tax management part 2

Post by stock_blazer » Thu Sep 13, 2018 4:23 am

House Blend wrote:
Wed Sep 12, 2018 4:46 pm
Some of this has already been said:

1. Do not auto-reinvest dividends in taxable.

2. Add the cash flow from those dividends to the cash flow from RMDs generated by the inherited IRAs. That's maybe $16K/year ballpark.

3. Unclear whether you are maxing out your 401(k) + Roth IRA. Do that. Use the extra $16K of cash flow in #2 to help make up for the lost income, if necessary. If income is left over, invest in taxable. (See #7.)

4. I don't see much point in bothering with an allocation to Emerging Markets. I would dump that. Maybe it's because the Fidelity Intl Index n the 401(k) does not include Emerging Markets? I still wouldn't bother.

5. To meet your current AA targets, looks like you need ~ $650K in stocks ($425K US, $225K Intl) and ~$215K bonds. Since the stock/bond ratio is vastly more important, I would get that done, more or less now. See to it that you have ~ $215K allocated to bonds/fixed income. The inherited IRAs and 401(k) are good places for that.

6. That leaves you with $77K of remaining tax-advantaged space (including Roth). Use that for Intl stock, such as VTIAX or the Fidelity Fund.

7. If you have substantial capital gains in all of your shares of VTSAX in taxable, then be happy with what you have, and accept that you will be below target in Intl for the time being. But do use new cash to buy Intl in taxable.

However, if you own some shares of VTSAX that have losses, or low (long term) gains, make sure you are using Specific Share ID and understand what that is. Then plan on exchanging those particular shares for Intl stocks in taxable when opportunities arise to do this in a tax minimal way.

Ex: The type of dilemma (trilemma?) you might face is:
Sell $10K worth at a net loss of $200--definitely worth it.
Sell $10K worth at a net gain of $200--might be worth it to you.
Sell $100K worth at gain of $25,000 LT and $1,000 ST, almost certainly
not worth it. (At least not in your tax bracket, IMO.)

Note: The 25% bracket is gone. You're probably in the 22% bracket.
Thank you for your ideas. Your thoughts align with my thoughts. Yep 22% bracket.

1-3. I will stop the dividend reinvestment. My RMDs + annual taxable dividends are currently ~$14k. Obviously this will increase as the Life Expectancy Factor decreases. Good estimate. I do need to replace the lost income from 401k contributions. Lifestyle creep I guess. I don't think I can max the 401k currently. I will shoot for $14k of my own contributions and my employer will do 10% of my salary. The Roth IRA does get maxed every year.

4. I met with an investment adviser who suggested that emerging markets were currently undervalued while the US market was overvalued. I agree on the US market analysis which is one reason I'm rebalancing now. I won't allocate new money to emerging markets but I'd like to keep that for now.

5-7. Yes. I need to get this rebalance done soon. New cash will be in the 401k. Other "new cash" will be selling $5,500 per year in taxable and moving to the Roth IRA. I don't plan on making my own contributions from my earned income for the time being as I feel that I will be able to retire in 25-30 years without contributing new money. I've run some rough analyses and contributing more to what I already have doesn't make a huge difference to the final numbers.

I do use Specific Share ID and you are close again with your estimates. ~8k can be sold in taxable for rebalancing with ~$1.2k LT gains. 15% tax = $180...fine. I think you're right that I will have to accept I will be underweighted Intl for now but that will change over the next year or two as my 401k grows.

Comments:
-I need to meet with a tax planning professional. I've been delaying it for too long.

Thanks again.

stock_blazer
Posts: 12
Joined: Sat Mar 08, 2014 7:16 am

Re: Upper six-figures portfolio & tax management part 2

Post by stock_blazer » Thu Sep 13, 2018 5:00 am

Nate79 wrote:
Wed Sep 12, 2018 3:43 pm
In addition to what was mentioned put all new money invested towards bonds in taxable and tax deferred. Honestly 7% is kind of meaningless in the grand scheme of things. No need to incur tax cost to rebalance for such a minor allocation difference.

You are also debt free so you are not leveraged which is a risk reduction you may not realize.
Thank you. I did not think about the leverage-free factor. I'm not gonna hold bonds in taxable except maybe munis but I think I can avoid that for now. Thanks

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House Blend
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Joined: Fri May 04, 2007 1:02 pm

Re: Upper six-figures portfolio & tax management part 2

Post by House Blend » Fri Sep 14, 2018 9:02 pm

stock_blazer wrote:
Thu Sep 13, 2018 4:23 am
1-3. I will stop the dividend reinvestment. My RMDs + annual taxable dividends are currently ~$14k. Obviously this will increase as the Life Expectancy Factor decreases. Good estimate. I do need to replace the lost income from 401k contributions. Lifestyle creep I guess. I don't think I can max the 401k currently. I will shoot for $14k of my own contributions and my employer will do 10% of my salary. The Roth IRA does get maxed every year.
If you can't afford to max out the 401(k) + Roth IRA, then it can make sense to take out more than the RMD from your inherited IRAs to make up the difference.

Normally, you'd want to take out only the minimum, so as to keep the money tax sheltered as long as possible. However, in this case you would in effect be doing a tax-free transfer of money from an inherited IRA to your own 401(k).

Example: If you are $4,000 short of maxing out the 401(k), you could increase your 401(k) contributions by $400 for the next 10 paychecks, and take an extra $400 x 10 out of the inherited IRA. It would have no net effect on income or taxes. (But it will mess up your tax withholding, since your employer will take less tax out of your paycheck.)

Granted, the benefit isn't huge--the advantage is that you can avoid RMDs on that $4,000 for the next ~40 years. Also, those 40 years may involve higher tax rates than your retirement years.

Possible downsides are that the 401(k) plan could be worse than the IRA--e.g., extra fees, or poor fund choices.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Upper six-figures portfolio & tax management part 2

Post by KlangFool » Fri Sep 14, 2018 9:26 pm

OP,

Pardon my ignorance. You have 575K in the taxable account. So, why you cannot max out your Trad. 401K? You have at least 10K of dividend/income from your taxable account. You are going to pay tax on that money. So, you could spend that money instead of reinvesting it. Then, you could contribute full 18.5K to the Trad. 401K.

KlangFool

stock_blazer
Posts: 12
Joined: Sat Mar 08, 2014 7:16 am

Re: Upper six-figures portfolio & tax management part 2

Post by stock_blazer » Sat Sep 15, 2018 7:16 am

House Blend wrote:
Fri Sep 14, 2018 9:02 pm
stock_blazer wrote:
Thu Sep 13, 2018 4:23 am
1-3. I will stop the dividend reinvestment. My RMDs + annual taxable dividends are currently ~$14k. Obviously this will increase as the Life Expectancy Factor decreases. Good estimate. I do need to replace the lost income from 401k contributions. Lifestyle creep I guess. I don't think I can max the 401k currently. I will shoot for $14k of my own contributions and my employer will do 10% of my salary. The Roth IRA does get maxed every year.
If you can't afford to max out the 401(k) + Roth IRA, then it can make sense to take out more than the RMD from your inherited IRAs to make up the difference.

Normally, you'd want to take out only the minimum, so as to keep the money tax sheltered as long as possible. However, in this case you would in effect be doing a tax-free transfer of money from an inherited IRA to your own 401(k).

Example: If you are $4,000 short of maxing out the 401(k), you could increase your 401(k) contributions by $400 for the next 10 paychecks, and take an extra $400 x 10 out of the inherited IRA. It would have no net effect on income or taxes. (But it will mess up your tax withholding, since your employer will take less tax out of your paycheck.)

Granted, the benefit isn't huge--the advantage is that you can avoid RMDs on that $4,000 for the next ~40 years. Also, those 40 years may involve higher tax rates than your retirement years.

Possible downsides are that the 401(k) plan could be worse than the IRA--e.g., extra fees, or poor fund choices.
That's a really excellent idea. Max the traditional 401k and withdraw from the inherited IRAs + dividends to make up that $18.5k of lost income as needed. I can't withhold tax from the dividend distributions but I can when I withdraw from the inherited IRAs.

Another possible downside is that the 401k is less liquid than the inherited IRAs. I would also be exposing that money to a 10% early withdrawal penalty if I ever needed it before age 59.5. I do have access to Roth 401k contributions also. What are your thoughts on that option with historically low rates rn?

stock_blazer
Posts: 12
Joined: Sat Mar 08, 2014 7:16 am

Re: Upper six-figures portfolio & tax management part 2

Post by stock_blazer » Sat Sep 15, 2018 7:52 am

KlangFool wrote:
Fri Sep 14, 2018 9:26 pm
OP,

Pardon my ignorance. You have 575K in the taxable account. So, why you cannot max out your Trad. 401K? You have at least 10K of dividend/income from your taxable account. You are going to pay tax on that money. So, you could spend that money instead of reinvesting it. Then, you could contribute full 18.5K to the Trad. 401K.

KlangFool
The $9k I receive in dividends isn't enough to cover $18.5k salary reduction. House Blend has a great idea to use inherited IRA withdrawals to make up the difference essentially shifting money from the inherited IRA to the 401k using my employer as the intermediary.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Upper six-figures portfolio & tax management part 2

Post by KlangFool » Sat Sep 15, 2018 8:51 am

stock_blazer wrote:
Sat Sep 15, 2018 7:16 am
House Blend wrote:
Fri Sep 14, 2018 9:02 pm
stock_blazer wrote:
Thu Sep 13, 2018 4:23 am
1-3. I will stop the dividend reinvestment. My RMDs + annual taxable dividends are currently ~$14k. Obviously this will increase as the Life Expectancy Factor decreases. Good estimate. I do need to replace the lost income from 401k contributions. Lifestyle creep I guess. I don't think I can max the 401k currently. I will shoot for $14k of my own contributions and my employer will do 10% of my salary. The Roth IRA does get maxed every year.
If you can't afford to max out the 401(k) + Roth IRA, then it can make sense to take out more than the RMD from your inherited IRAs to make up the difference.

Normally, you'd want to take out only the minimum, so as to keep the money tax sheltered as long as possible. However, in this case you would in effect be doing a tax-free transfer of money from an inherited IRA to your own 401(k).

Example: If you are $4,000 short of maxing out the 401(k), you could increase your 401(k) contributions by $400 for the next 10 paychecks, and take an extra $400 x 10 out of the inherited IRA. It would have no net effect on income or taxes. (But it will mess up your tax withholding, since your employer will take less tax out of your paycheck.)

Granted, the benefit isn't huge--the advantage is that you can avoid RMDs on that $4,000 for the next ~40 years. Also, those 40 years may involve higher tax rates than your retirement years.

Possible downsides are that the 401(k) plan could be worse than the IRA--e.g., extra fees, or poor fund choices.
That's a really excellent idea. Max the traditional 401k and withdraw from the inherited IRAs + dividends to make up that $18.5k of lost income as needed. I can't withhold tax from the dividend distributions but I can when I withdraw from the inherited IRAs.

Another possible downside is that the 401k is less liquid than the inherited IRAs. I would also be exposing that money to a 10% early withdrawal penalty if I ever needed it before age 59.5. I do have access to Roth 401k contributions also. What are your thoughts on that option with historically low rates rn?
stock_blazer,

You should check out this article.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

Lafder
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Re: Upper six-figures portfolio & tax management part 2

Post by Lafder » Sat Sep 15, 2018 9:06 am

Change your % to of portfolio, versus per account as you are doing now.

It makes it much easier to calculate your AA and rebalance since the % are equivalent to each other. It also helps you see how tiny some holdings are and makes it easier to simplify.

I agree with the comments to max your retirement contributions and enjoy the pretax savings. You can use your taxable account for living expenses if you need it after maxing your retirement account contributions.

lafder

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House Blend
Posts: 4503
Joined: Fri May 04, 2007 1:02 pm

Re: Upper six-figures portfolio & tax management part 2

Post by House Blend » Sat Sep 15, 2018 12:05 pm

stock_blazer wrote:
Sat Sep 15, 2018 7:16 am
House Blend wrote:
Fri Sep 14, 2018 9:02 pm
stock_blazer wrote:
Thu Sep 13, 2018 4:23 am
1-3. I will stop the dividend reinvestment. My RMDs + annual taxable dividends are currently ~$14k. Obviously this will increase as the Life Expectancy Factor decreases. Good estimate. I do need to replace the lost income from 401k contributions. Lifestyle creep I guess. I don't think I can max the 401k currently. I will shoot for $14k of my own contributions and my employer will do 10% of my salary. The Roth IRA does get maxed every year.
If you can't afford to max out the 401(k) + Roth IRA, then it can make sense to take out more than the RMD from your inherited IRAs to make up the difference.

Normally, you'd want to take out only the minimum, so as to keep the money tax sheltered as long as possible. However, in this case you would in effect be doing a tax-free transfer of money from an inherited IRA to your own 401(k).

Example: If you are $4,000 short of maxing out the 401(k), you could increase your 401(k) contributions by $400 for the next 10 paychecks, and take an extra $400 x 10 out of the inherited IRA. It would have no net effect on income or taxes. (But it will mess up your tax withholding, since your employer will take less tax out of your paycheck.)

Granted, the benefit isn't huge--the advantage is that you can avoid RMDs on that $4,000 for the next ~40 years. Also, those 40 years may involve higher tax rates than your retirement years.

Possible downsides are that the 401(k) plan could be worse than the IRA--e.g., extra fees, or poor fund choices.
That's a really excellent idea. Max the traditional 401k and withdraw from the inherited IRAs + dividends to make up that $18.5k of lost income as needed. I can't withhold tax from the dividend distributions but I can when I withdraw from the inherited IRAs.

Another possible downside is that the 401k is less liquid than the inherited IRAs. I would also be exposing that money to a 10% early withdrawal penalty if I ever needed it before age 59.5. I do have access to Roth 401k contributions also. What are your thoughts on that option with historically low rates rn?
As Lafder points out, you already have a large taxable account, so I wouldn't worry much about losing some liquidity from your inherited IRAs.

I try to stay out of the Roth vs. traditional arguments, especially with only limited information about your current situation, prospects, and goals for retirement. That said, my default advice would be what you are doing now: use Roth for IRA, tax-deferred for 401(k).

stock_blazer
Posts: 12
Joined: Sat Mar 08, 2014 7:16 am

Re: Upper six-figures portfolio & tax management part 2

Post by stock_blazer » Sun Sep 16, 2018 9:16 am

Thanks for your help everybody. I will carefully begin implementing this idea.

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