Straying from "investment plan" for the purpose of tax efficiency?

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jplee3
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Joined: Thu Nov 13, 2014 9:15 pm

Straying from "investment plan" for the purpose of tax efficiency?

Post by jplee3 »

Hey all,

I don't have a formal investment plan but I *roughly* follow what the Personal Capital investment checkup tool recommends. I know this is not the most ideal way to do it but I'm still sort of a noob with all this, and particularly really sitting down to conjure up a formal investment plan which I at some point started doing and then had a rough idea of what would make sense as far as my allocation is concerned.

That said, for those of you who have and use investment plans, do you commonly stray or deviate from them? One immediate example I can think of, along the lines of 'tax efficiency', is when you might have an excess of income or taxable funds that you are deciding on investing and perhaps decide to invest the funds in an international fund because of foreign tax credit, etc. Or perhaps you decided to invest that money in municipal bonds instead. Either way, in both cases let's assume that you are over-allocated in either or both international stocks as well as bonds.

Just wanted to get some feedback on how you approach this scenario.

TIA!
Thecallofduty
Posts: 90
Joined: Sat Jan 19, 2019 10:59 am

Re: Straying from "investment plan" for the purpose of tax efficiency?

Post by Thecallofduty »

Hi

In general there are ways to usually accomadate your asset allocation with no major issues.

Example- if you place all your bonds in 401k and you still need to add more to portfolio as per your asset allocation then you start placing in ira. If thats full then taxable is next and you just choose whats most tax efficient.

In regards to “excess” taxable funds I hope that will never be an issue seeing as how I prefer total stock market or international fund as only two stock mutual funds I need.

Not sure if Im answering what you are asking but if you had a more specific question maybe I or someone else can address it.
-thecallofduty
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Phineas J. Whoopee
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Re: Straying from "investment plan" for the purpose of tax efficiency?

Post by Phineas J. Whoopee »

Tax efficiency is included in my investment plan.
PJW
Last edited by Phineas J. Whoopee on Thu Feb 14, 2019 9:29 pm, edited 1 time in total.
Big Dog
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Re: Straying from "investment plan" for the purpose of tax efficiency?

Post by Big Dog »

Tax efficiency is included in my investment plan.
Ditto.
renue74
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Re: Straying from "investment plan" for the purpose of tax efficiency?

Post by renue74 »

I had a windfall 5 years ago.

Based on our AA of 70/30 at the time, we had a chunk of total bond fund in taxable. Sometimes there is no way around it. IRAs were all bond funds.

Over time, I was able to get bonds down in our taxable...based on some rental property purchases and my wife’s new 403b, I sold off bonds in taxable and she invests in bonds in the 403b maxing it out.

Sometimes it takes time. Sometimes multiple years to get a better hold of tax efficiency.

Just be cognoscent of it when you are buying. We can’t always be optimized.
stocknoob4111
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Re: Straying from "investment plan" for the purpose of tax efficiency?

Post by stocknoob4111 »

You also have to take into account your personal situation regarding tax efficiency, for instance in my case I have a lousy low yield high expense ratio bond fund in my 401k which I have no interest in holding. In addition I don't believe in holding a slow growth asset like a bond fund in my precious Roth space and I make too much to contribute to a tax deferred IRA so I don't hold that so by exclusion my bonds are in my taxable.

It's not much of a problem currently since bond yields are very low, just a percentage over the yield on the S&P500 and the fact that CA taxes all investment income as ordinary income makes the difference even less of an issue.
Last edited by stocknoob4111 on Thu Feb 14, 2019 10:47 pm, edited 1 time in total.
UpperNwGuy
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Re: Straying from "investment plan" for the purpose of tax efficiency?

Post by UpperNwGuy »

If you take tax efficiency into account when you design your investment plan, you don't have to deviate to achieve tax efficiency.
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grabiner
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Re: Straying from "investment plan" for the purpose of tax efficiency?

Post by grabiner »

There are reasonably tax-friendly options for all of the major asset classes: Total US indexes,Total international indexes, and municipal bonds. Therefore, you can choose your asset allocation first, and fill your tax-deferred account with whichever of the three fits best there (depending on your tax situation and 401(k) options), and get the rest of your allocation with any of the three in taxable.

One adjustment you might make is to allow minor deviations in order to avoid selling for a tax cost. In my own Investment Policy Statement, I say that I will not sell for a capital gain unless I am overweighted by more than 5% in an asset class and cannot fix that in some other way. In contrast, I rebalance to my exact allocation target if I can do so in tax-deferred. (I have never needed to sell for a capital gain to rebalance, although I came close in 2007 in emerging markets; I was at 14% with a 10% target, and one more year of gains would have forced me to sell for a gain to rebalance.)
Wiki David Grabiner
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