splitting investments between accounts

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Topic Author
anaelmasri
Posts: 66
Joined: Thu Sep 10, 2020 6:24 pm

splitting investments between accounts

Post by anaelmasri »

Hello.
so I recently setup my roth ira with vanguard. and I already have a brokerage account with them. I also
I am 36, want to focus on LONG TERM and minimize my tax hits. my income is 35k a year and I want to try to diversify and divide my investment in the smartest way. I'm interested in investing in mostly ETFs, US STocks, minimal minimal bond.

side note: I opened also a Roth Solo 401k for a mutual fund VTSAX with no funds yet since I didnt make any 1099 income yet for 2020. as a backup once things pick up with a roth ira and if thing contnutes to get better and I max out my roth I will allocate to either brokerage or solo 401k. ( I dont get regular 401k from employment as I mostly freelance - but for strictly maxing out roth and 1099 income).

I wanted to ask and see what your thoughts are as far as how you would allocate your assets in a Roth IRA and Taxable Brokerage account.
would you add ETFs and bonds to the IRA for example? how would you allocate each account for optimal result?
shess
Posts: 637
Joined: Wed May 17, 2017 12:02 am

Re: splitting investments between accounts

Post by shess »

anaelmasri wrote: Tue Sep 15, 2020 1:19 am Hello.
so I recently setup my roth ira with vanguard. and I already have a brokerage account with them. I also
I am 36, want to focus on LONG TERM and minimize my tax hits. my income is 35k a year and I want to try to diversify and divide my investment in the smartest way. I'm interested in investing in mostly ETFs, US STocks, minimal minimal bond.

side note: I opened also a Roth Solo 401k for a mutual fund VTSAX with no funds yet since I didnt make any 1099 income yet for 2020. as a backup once things pick up with a roth ira and if thing contnutes to get better and I max out my roth I will allocate to either brokerage or solo 401k. ( I dont get regular 401k from employment as I mostly freelance - but for strictly maxing out roth and 1099 income).

I wanted to ask and see what your thoughts are as far as how you would allocate your assets in a Roth IRA and Taxable Brokerage account.
would you add ETFs and bonds to the IRA for example? how would you allocate each account for optimal result?
This might have useful knowledge: https://www.bogleheads.org/wiki/Tax-eff ... _placement
Also: https://www.bogleheads.org/wiki/Lazy_portfolios

ETFs are just a way to hold groups of assets, it's not really relevant to placement (you can have ETFs holding stocks, ETFs holding bonds, ETFs holding gold, whatever).

Something which the placement wiki page doesn't get into it arranging things so that your rebalance points are in your tax-advantaged accounts. That way periodic rebalancing doesn't result in capital gains. This may or may not happen if you just sort-then-allocate like the page talks about.
Topic Author
anaelmasri
Posts: 66
Joined: Thu Sep 10, 2020 6:24 pm

Re: splitting investments between accounts

Post by anaelmasri »

shess wrote: Tue Sep 15, 2020 2:38 am
anaelmasri wrote: Tue Sep 15, 2020 1:19 am Hello.
so I recently setup my roth ira with vanguard. and I already have a brokerage account with them. I also
I am 36, want to focus on LONG TERM and minimize my tax hits. my income is 35k a year and I want to try to diversify and divide my investment in the smartest way. I'm interested in investing in mostly ETFs, US STocks, minimal minimal bond.

side note: I opened also a Roth Solo 401k for a mutual fund VTSAX with no funds yet since I didnt make any 1099 income yet for 2020. as a backup once things pick up with a roth ira and if thing contnutes to get better and I max out my roth I will allocate to either brokerage or solo 401k. ( I dont get regular 401k from employment as I mostly freelance - but for strictly maxing out roth and 1099 income).

I wanted to ask and see what your thoughts are as far as how you would allocate your assets in a Roth IRA and Taxable Brokerage account.
would you add ETFs and bonds to the IRA for example? how would you allocate each account for optimal result?
This might have useful knowledge: https://www.bogleheads.org/wiki/Tax-eff ... _placement
Also: https://www.bogleheads.org/wiki/Lazy_portfolios

ETFs are just a way to hold groups of assets, it's not really relevant to placement (you can have ETFs holding stocks, ETFs holding bonds, ETFs holding gold, whatever).

Something which the placement wiki page doesn't get into it arranging things so that your rebalance points are in your tax-advantaged accounts. That way periodic rebalancing doesn't result in capital gains. This may or may not happen if you just sort-then-allocate like the page talks about.

Yes I’m have seen the tax efficiency link but still isn’t clear to me on what to allocate in which account

I know what etfs are . I’m more figuring out do I put stocks in ira or brokerage for long term ? ETFs in which account would be beneficial for tax purposes long term ? Bonds ?
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celia
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Location: SoCal

Re: splitting investments between accounts

Post by celia »

If all three of your accounts were opened in the last 3 years at Vanguard (Taxable, Roth IRA, and 401k), they all would be "brokerage" accounts. A "brokerage" account is just an account that can hold ETFs, individual stocks or bonds, or even mutual funds. A brokerage account differs from a mutual fund account in that the mutual fund account can only hold mutual funds. While Vanguard has both older mutual fund accounts (that are being phased out) and brokerage accounts, other investment companies usually only have brokerage accounts. Some people will refer to their taxable account as their "brokerage account" while, in reality, any kind of account can be a "brokerage account".


The tax status of each account depends on which category the account is in:

Roth accounts have contributions taxed as the money is being contributed to the account (and withdrawals are later tax-free, assuming the account has been open at least 5 years and the account owner is at least 59.5, at the time of withdrawal).

Traditional IRA accounts (which the OP apparently doesn't own) have contributions that were deductible (and withdrawals are later taxed as ordinary income).

401K accounts are employer plans that usually have contributions that were deductible, although some contributions can be already taxed. These differently taxed contributions will be put in different "sub-accounts" in the 401K. In particular, the contributions from the employer MUST be deductible, while the employee contributions can be either deductible or post-tax. The deductible "sub-account" will have withdrawals be taxed at withdrawal time, whereas the Roth "sub-account" will not have its withdrawals taxed. [There are also some 401Ks that have "post-tax" contributions that were already taxed, but the growth will be taxed at withdrawal time.] For purposes of discussion clarity in this forum. it is useful to give what per cent of your portfolio is in the pre-tax part of your 401k and what percentage of your portfolio is post-tax or Roth.] See the IRS description of solo 401K plans.

Taxable accounts are your accounts that don't have any special tax attributes. You pay tax on the money in the year it was earned and after that, only pay tax on distributions and gains in the account that were distributed in each tax year.


Now, to have the most tax-efficient portfolio, stocks should be in Roths (Roth IRAs or 401K Roth sub-accounts) as much as possible, in order to maximize tax-free growth. Bonds should be in Traditional IRAs or the pre-tax "sub account" of a 401K since interest doesn't have any special tax break. (It is taxed as ordinary income.) This will also slow down the growth of these accounts and the future RMDs (and their tax) that is being deferred until later. Taxable accounts should hold International stocks and the remaining stocks (and preferably only have "index" funds as they are more tax-efficient). If the International ETFs/funds spin off dividends that include "foreign taxes", these taxes paid to a foreign country on your behalf could be deductible on your tax return if the International ETF/fund is in a taxable account.

All this may sound easy, but in practice, it is rare that a person's desired Asset Allocation of stocks/international stocks/ bonds will be the same as the percentage of their portfolio that is in Roth/ taxable/ and tax-deferred accounts. When that happens, just do the best you can by first placing the smallest holding in the location that is best for it. Then move up to the next smallest holding in the remaining unfilled location that is best for it. Rinse and repeat until you are out of space in one tax category.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
shess
Posts: 637
Joined: Wed May 17, 2017 12:02 am

Re: splitting investments between accounts

Post by shess »

anaelmasri wrote: Tue Sep 15, 2020 2:57 am
shess wrote: Tue Sep 15, 2020 2:38 am
anaelmasri wrote: Tue Sep 15, 2020 1:19 am Hello.
so I recently setup my roth ira with vanguard. and I already have a brokerage account with them. I also
I am 36, want to focus on LONG TERM and minimize my tax hits. my income is 35k a year and I want to try to diversify and divide my investment in the smartest way. I'm interested in investing in mostly ETFs, US STocks, minimal minimal bond.

side note: I opened also a Roth Solo 401k for a mutual fund VTSAX with no funds yet since I didnt make any 1099 income yet for 2020. as a backup once things pick up with a roth ira and if thing contnutes to get better and I max out my roth I will allocate to either brokerage or solo 401k. ( I dont get regular 401k from employment as I mostly freelance - but for strictly maxing out roth and 1099 income).

I wanted to ask and see what your thoughts are as far as how you would allocate your assets in a Roth IRA and Taxable Brokerage account.
would you add ETFs and bonds to the IRA for example? how would you allocate each account for optimal result?
This might have useful knowledge: https://www.bogleheads.org/wiki/Tax-eff ... _placement
Also: https://www.bogleheads.org/wiki/Lazy_portfolios

ETFs are just a way to hold groups of assets, it's not really relevant to placement (you can have ETFs holding stocks, ETFs holding bonds, ETFs holding gold, whatever).

Something which the placement wiki page doesn't get into it arranging things so that your rebalance points are in your tax-advantaged accounts. That way periodic rebalancing doesn't result in capital gains. This may or may not happen if you just sort-then-allocate like the page talks about.
Yes I’m have seen the tax efficiency link but still isn’t clear to me on what to allocate in which account
The tax-efficient placement link is pretty in depth, you should prefer things like bonds in tax-deferred accounts (like traditional IRA), equities in tax-free accounts (Roth), and stable kinds of equity investments in taxable, with some consideration for turnover because that's easier in the tax-advantaged accounts. It also points out that you can reasonably place tax-efficient options like total-market equity funds anywhere you want, so place them last. Do you have specific areas where that link is not answering your questions? I doubt that anyone is going to write up something so general and thorough in a forum post. But if you have specific investments in mind, you might get suggestions for how to lay them out.

If you want a specific example of how a person might lay things out, in my case I have:
- all of my VTI (Vanguard Total Stock Market) in taxable, because of the capital gains expectations and relatively low distributions generated.
- a lot of shares from a previous employer in taxable because I had no choice on placement
- half of my VEU (Vanguard Total International) in taxable, for foreign tax credit.
- other half of VEU distributed across Roth IRAs, IRAs, and some in 401k because I didn't have enough taxable, and since I retired the credit isn't always worth as much. I'd like to say I have high hopes for returns in the Roth, but those hopes haven't been rewarded thus far :-).
- REIT in 401k so I don't have to deal with the tax complications, IRA would work but the 401k has cheaper ER.
- bonds in 529 plans because my kids are college and high-school age, I'll be shifting the bond position to IRA/401k as I deplete the 529 plans.
- a muni fund and seasoned iBonds (>5 years old) in taxable, acting as bond positions and possible deep emergency fund
- I also have a good-sized bond position in taxable right now for various reasons. Short term, I don't care as yields aren't that high, but I'll probably get around to swapping positions with international equities in the tax-advantaged accounts at some point.
anaelmasri wrote: Tue Sep 15, 2020 2:57 am I know what etfs are . I’m more figuring out do I put stocks in ira or brokerage for long term ? ETFs in which account would be beneficial for tax purposes long term ? Bonds ?
You're not being convincing about your level of knowledge :-). A bond ETF can go in your tax-deferred account, a stock ETF can go in your taxable account or your Roth, there's no particular tax benefit (or harm) to using ETFs, they're just a vehicle for bundling assets and they pass through ALL taxable results the held assets generate. Some ETFs are more or less tax-efficient than others, but you have to look at the specific ETFs to figure that out, it's not an attribute of ETFs as a class.
sailaway
Posts: 2212
Joined: Fri May 12, 2017 1:11 pm

Re: splitting investments between accounts

Post by sailaway »

celia wrote: Tue Sep 15, 2020 6:04 am If all three of your accounts were opened in the last 3 years at Vanguard (Taxable, Roth IRA, and 401k), they all would be "brokerage" accounts. A "brokerage" account is just an account that can hold ETFs, individual stocks or bonds, or even mutual funds. A brokerage account differs from a mutual fund account in that the mutual fund account can only hold mutual funds. While Vanguard has both older mutual fund accounts (that are being phased out) and brokerage accounts, other investment companies usually only have brokerage accounts. Some people will refer to their taxable account as their "brokerage account" while, in reality, any kind of account can be a "brokerage account".


The tax status of each account depends on which category the account is in:

Roth accounts have contributions taxed as the money is being contributed to the account (and withdrawals are later tax-free, assuming the account has been open at least 5 years and the account owner is at least 59.5, at the time of withdrawal).

Traditional IRA accounts (which the OP apparently doesn't own) have contributions that were deductible (and withdrawals are later taxed as ordinary income).

401K accounts are employer plans that usually have contributions that were deductible, although some contributions can be already taxed. These differently taxed contributions will be put in different "sub-accounts" in the 401K. In particular, the contributions from the employer MUST be deductible, while the employee contributions can be either deductible or post-tax. The deductible "sub-account" will have withdrawals be taxed at withdrawal time, whereas the Roth "sub-account" will not have its withdrawals taxed. [There are also some 401Ks that have "post-tax" contributions that were already taxed, but the growth will be taxed at withdrawal time.] For purposes of discussion clarity in this forum. it is useful to give what per cent of your portfolio is in the pre-tax part of your 401k and what percentage of your portfolio is post-tax or Roth.] See the IRS description of solo 401K plans.

Taxable accounts are your accounts that don't have any special tax attributes. You pay tax on the money in the year it was earned and after that, only pay tax on distributions and gains in the account that were distributed in each tax year.


Now, to have the most tax-efficient portfolio, stocks should be in Roths (Roth IRAs or 401K Roth sub-accounts) as much as possible, in order to maximize tax-free growth. Bonds should be in Traditional IRAs or the pre-tax "sub account" of a 401K since interest doesn't have any special tax break. (It is taxed as ordinary income.) This will also slow down the growth of these accounts and the future RMDs (and their tax) that is being deferred until later. Taxable accounts should hold International stocks and the remaining stocks (and preferably only have "index" funds as they are more tax-efficient). If the International ETFs/funds spin off dividends that include "foreign taxes", these taxes paid to a foreign country on your behalf could be deductible on your tax return if the International ETF/fund is in a taxable account.

All this may sound easy, but in practice, it is rare that a person's desired Asset Allocation of stocks/international stocks/ bonds will be the same as the percentage of their portfolio that is in Roth/ taxable/ and tax-deferred accounts. When that happens, just do the best you can by first placing the smallest holding in the location that is best for it. Then move up to the next smallest holding in the remaining unfilled location that is best for it. Rinse and repeat until you are out of space in one tax category.
That is interesting. At Fidelity and E-Trade, I have account types by tax status, so that only the taxable account is labelled as a brokerage account. Why does Vanguard use a different system of categorization?
livesoft
Posts: 73207
Joined: Thu Mar 01, 2007 8:00 pm

Re: splitting investments between accounts

Post by livesoft »

If you are not paying any income taxes like more than 40% of American families, then I don't think it will matter that much until you start paying income taxes. In order to prepare for that:

1. Bond funds are paying almost no dividends nowadays, so I think it is OK to put your fixed income in a taxable account. It is also OK to have tax-efficient broad market index funds such as VTI, VXUS, and VOO in a taxable account.

2. Roth IRAs do not get taxed, so it is OK to put broad market index funds such as VTI, VXUS, and VOO in a Roth IRA. Some folks would put some bond funds in a Roth IRA because they would like to rebalance tax-efficiently when the equity funds drop a lot. Others like to avoid bond funds in a Roth IRA because they think equity funds have higher expected return. I am rather agnostic about all this: Sometimes my Roth IRA is 100% equity funds and sometimes it is 100% bond funds and sometimes it is a mix of equity funds and bond funds.

Confused? At this point in time, I don't think it matters much as long as you are open to changing things.

However, in your shoes, I would learn about both Tax-Gain Harvesting and Tax-Loss Harvesting and become very adept at both of them in your taxable account.
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Topic Author
anaelmasri
Posts: 66
Joined: Thu Sep 10, 2020 6:24 pm

Re: splitting investments between accounts

Post by anaelmasri »

celia wrote: Tue Sep 15, 2020 6:04 am If all three of your accounts were opened in the last 3 years at Vanguard (Taxable, Roth IRA, and 401k), they all would be "brokerage" accounts. A "brokerage" account is just an account that can hold ETFs, individual stocks or bonds, or even mutual funds. A brokerage account differs from a mutual fund account in that the mutual fund account can only hold mutual funds. While Vanguard has both older mutual fund accounts (that are being phased out) and brokerage accounts, other investment companies usually only have brokerage accounts. Some people will refer to their taxable account as their "brokerage account" while, in reality, any kind of account can be a "brokerage account".


The tax status of each account depends on which category the account is in:

Roth accounts have contributions taxed as the money is being contributed to the account (and withdrawals are later tax-free, assuming the account has been open at least 5 years and the account owner is at least 59.5, at the time of withdrawal).

Traditional IRA accounts (which the OP apparently doesn't own) have contributions that were deductible (and withdrawals are later taxed as ordinary income).

401K accounts are employer plans that usually have contributions that were deductible, although some contributions can be already taxed. These differently taxed contributions will be put in different "sub-accounts" in the 401K. In particular, the contributions from the employer MUST be deductible, while the employee contributions can be either deductible or post-tax. The deductible "sub-account" will have withdrawals be taxed at withdrawal time, whereas the Roth "sub-account" will not have its withdrawals taxed. [There are also some 401Ks that have "post-tax" contributions that were already taxed, but the growth will be taxed at withdrawal time.] For purposes of discussion clarity in this forum. it is useful to give what per cent of your portfolio is in the pre-tax part of your 401k and what percentage of your portfolio is post-tax or Roth.] See the IRS description of solo 401K plans.

Taxable accounts are your accounts that don't have any special tax attributes. You pay tax on the money in the year it was earned and after that, only pay tax on distributions and gains in the account that were distributed in each tax year.

Now, to have the most tax-efficient portfolio, stocks should be in Roths (Roth IRAs or 401K Roth sub-accounts) as much as possible, in order to maximize tax-free growth. Bonds should be in Traditional IRAs or the pre-tax "sub account" of a 401K since interest doesn't have any special tax break. (It is taxed as ordinary income.) This will also slow down the growth of these accounts and the future RMDs (and their tax) that is being deferred until later. Taxable accounts should hold International stocks and the remaining stocks (and preferably only have "index" funds as they are more tax-efficient). If the International ETFs/funds spin off dividends that include "foreign taxes", these taxes paid to a foreign country on your behalf could be deductible on your tax return if the International ETF/fund is in a taxable account.

All this may sound easy, but in practice, it is rare that a person's desired Asset Allocation of stocks/international stocks/ bonds will be the same as the percentage of their portfolio that is in Roth/ taxable/ and tax-deferred accounts. When that happens, just do the best you can by first placing the smallest holding in the location that is best for it. Then move up to the next smallest holding in the remaining unfilled location that is best for it. Rinse and repeat until you are out of space in one tax category.
this is very valuable and incredible information, thank you so much for taking the time to explain all that.

I plan on using the roth ira for stock, bonds, etfs and once I grow my income I will diversify in brokerage taxable account. its good to know where one should think about what to invest and where.
All this may sound easy, but in practice, it is rare that a person's desired Asset Allocation of stocks/international stocks/ bonds will be the same as the percentage of their portfolio that is in Roth/ taxable/ and tax-deferred accounts. When that happens, just do the best you can by first placing the smallest holding in the location that is best for it. Then move up to the next smallest holding in the remaining unfilled location that is best for it. Rinse and repeat until you are out of space in one tax category.
im sorry I feel I am lost in the wording, can you please explain that part to me again? I really appreciate it.
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celia
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Location: SoCal

Re: splitting investments between accounts

Post by celia »

sailaway wrote: Tue Sep 15, 2020 12:19 pm That is interesting. At Fidelity and E-Trade, I have account types by tax status, so that only the taxable account is labelled as a brokerage account. Why does Vanguard use a different system of categorization?
It is irrelevant if an account has the word "brokerage" in it's title or not. That does not determine if the account is (or isn't) a brokerage account. To me, this is like saying some of my accounts use my middle name or not. Both of the accounts still identify me as the owner.

Vanguard may be different because John Bogle had an early focus on mutual funds. For many years, that is all the retail investor could buy at Vanguard. But once ETFs became more popular, and they could be bought and sold anytime during stock market hours, to offer them, it might have been a technical (or SEC) issue that they needed to "upgrade" their platform. [That started all the threads on this forum of why we needed to "upgrade" our accounts even if we were going to stay with mutual fund investments.] I am one of those who still has some mutual fund accounts at Vanguard as well as some brokerage accounts.
Image
Some of my IRAs are still on the mutual fund platform and some are on the "upgraded" brokerage account platform. The same tax rules apply to both Roth accounts above and I don't care what the titles say as long as they have my name and are tagged as "Roth".
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celia
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Location: SoCal

Re: splitting investments between accounts

Post by celia »

anaelmasri wrote: Tue Sep 15, 2020 7:56 pm
celia wrote: Tue Sep 15, 2020 6:04 am Now, to have the most tax-efficient portfolio, stocks should be in Roths (Roth IRAs or 401K Roth sub-accounts) as much as possible, in order to maximize tax-free growth. Bonds should be in Traditional IRAs or the pre-tax "sub account" of a 401K since interest doesn't have any special tax break. (It is taxed as ordinary income.) This will also slow down the growth of these accounts and the future RMDs (and their tax) that is being deferred until later. Taxable accounts should hold International stocks and the remaining stocks (and preferably only have "index" funds as they are more tax-efficient). If the International ETFs/funds spin off dividends that include "foreign taxes", these taxes paid to a foreign country on your behalf could be deductible on your tax return if the International ETF/fund is in a taxable account.

All this may sound easy, but in practice, it is rare that a person's desired Asset Allocation of stocks/international stocks/ bonds will be the same as the percentage of their portfolio that is in Roth/ taxable/ and tax-deferred accounts. When that happens, just do the best you can by first placing the smallest holding in the location that is best for it. Then move up to the next smallest holding in the remaining unfilled location that is best for it. Rinse and repeat until you are out of space in one tax category.
im sorry I feel I am lost in the wording, can you please explain that part to me again? I really appreciate it.
OK, Let's look at some examples.

----------------------------------------------------------------------------------------------
SAMPLE PORTFOLIO #1
When you were starting your career, you were in a low tax bracket and didn't have a lot of money to invest except in Roths and a little in taxable, so assume your portfolio might look like:
Taxable
20% stock fund A
10% bond fund B

Roth IRA
30% stock fund C
20% bond fund D
20% international stock fund E


You are comfortable with the current Asset Allocation of 50% stocks / 20% international stocks / 30% bonds, but your "holding buckets" are 70% in Roth, 30% in Taxable, and nothing in Tax-deferred. The question is how can we re-arrange this so it is more tax-efficient while helping the Roth to grow faster. We start by planning this on "paper". One way to do it is to put all the stocks in Roth first:
Taxable

Roth IRA
20% stock fund A
30% stock fund C

Since you still have 20% of your space unfilled in Roth, you can leave the international stock fund there and put the remaining bonds in taxable, giving you:
Taxable
10% bond fund B
20% bond fund D

Roth IRA
20% stock fund A
30% stock fund C
20% international stock fund E

Now that you have a plan that seems reasonable, you would implement it by selling 20% stock fund A in Taxable and buying 20% bond fund D. At the same time in the Roth, you would sell 20% bond fund D and buy 20% stock fund A. Note that bond funds B and D could refer to the same or different funds. Stock funds A and C could refer to the same or different funds. You still have the same assets you started with, but the portfolio is more tax-efficient. (You would only have to pay taxes on the interest earned by bond funds each year.)

----------------------------------------------------------------------------------------------
SAMPLE PORTFOLIO #2
You have been working for a while in a higher tax bracket, so you've been contributing to an employer plan and Traditional IRA to defer some of your taxes until retirement, when you expect to be in a lower tax bracket. Your portfolio could now look like:
Taxable
10% stock fund G
5% international stock fund H
10% bond fund I

Tax-deferred accounts (401K and tIRA)
30% stock fund J
10% international stock fund K
20% bond fund L

Roth IRA
5% stock fund M
5% international stock fund N
5% bond fund O

This portfolio has an Asset Allocation of 45% stock / 20% international stock / 35% bonds which we want to keep but our holding buckets are 25% in taxable, 60% in tax-deferred, and 15% in Roth. On paper, let's first fill up the Roth with stocks and put the international stocks in Taxable:
Taxable
10% stock fund G (no room to move it anywhere)
5% international stock fund H
5% international stock fund K (from tax-deferred)
5% international stock fund N (from Roth IRA)

Tax-deferred accounts (401K and tIRA)
20% stock fund J (no room to move the last 20%)
5% international stock fund K (no room to move the last 5%)

Roth IRA
5% stock fund M
10% stock fund J (came from tax-deferred)

Note that there wasn't enough room in Roth and taxable to hold all the stocks and international stocks. We could have put all the international in Taxable, but then we would have had to move 5% of stock fund G to tax-deferred. Either way would work. Then we would put the remaining bonds in the only space that is left, which is tax-deferred:

Taxable
10% stock fund G
5% international stock fund H
5% international stock fund K
5% international stock fund N

Tax-deferred accounts (401K and tIRA)
20% stock fund J
5% international stock fund K
10% bond fund I
20% bond fund L
5% bond fund O

Roth IRA
5% stock fund M
10% stock fund J

Again, we have the same assets as we started with, but they are located in better places to save on taxes. Taxes will only apply to the Taxable account and the Tax-deferred account will intentionally grow slower, which will make future RMDs smaller, thus incurring less tax at withdrawal time.

----------------------------------------------------------------------------------------------
SAMPLE PORTFOLIO #3
This retiree portfolio has seen Roth conversions for several years:
Taxable
5% stock fund P
15% money market fund Q (ie, cash)

Tax-deferred
10% stock fund R
30% bond fund S

Roth IRA
10% stock fund T
30% bond fund U

All that this portfolio needs to become more tax-efficient is for the stock in Taxable and Tax-deferred to be exchanged for a bond fund and the same value of bond fund in the Roth to be exchanged for the stock fund(s).

----------------------------------------------------------------------------------------------

Note that in all these portfolios, something was sold in taxable, which would cause Capital Gains or Losses and impact your taxes for the year. If you have a loss on a sale, you also need to be aware of "wash sale" rules.
sailaway
Posts: 2212
Joined: Fri May 12, 2017 1:11 pm

Re: splitting investments between accounts

Post by sailaway »

celia wrote: Wed Sep 16, 2020 1:46 am
sailaway wrote: Tue Sep 15, 2020 12:19 pm That is interesting. At Fidelity and E-Trade, I have account types by tax status, so that only the taxable account is labelled as a brokerage account. Why does Vanguard use a different system of categorization?
It is irrelevant if an account has the word "brokerage" in it's title or not. That does not determine if the account is (or isn't) a brokerage account. To me, this is like saying some of my accounts use my middle name or not. Both of the accounts still identify me as the owner.
That is how I feel about using taxable as a substitute for brokerage when someone asks "Should I move money from my savings account to my taxable account?" Your savings account is a taxable account, you really mean to ask if you should move from savings to brokerage. I do agree that "taxable brokerage" is clunky, but we rarely say that one has their money in an IRA savings, but rather that they are holding their IRA in a savings account. So for me, "brokerage," without further clarification denotes a taxable brokerage account, while I can clarify that I hold an IRA at a brokerage firm or elsewhere, but without clarification it is assumed that we mean it is at a brokerage.
Topic Author
anaelmasri
Posts: 66
Joined: Thu Sep 10, 2020 6:24 pm

Re: splitting investments between accounts

Post by anaelmasri »

celia wrote: Wed Sep 16, 2020 4:35 am
anaelmasri wrote: Tue Sep 15, 2020 7:56 pm
celia wrote: Tue Sep 15, 2020 6:04 am Now, to have the most tax-efficient portfolio, stocks should be in Roths (Roth IRAs or 401K Roth sub-accounts) as much as possible, in order to maximize tax-free growth. Bonds should be in Traditional IRAs or the pre-tax "sub account" of a 401K since interest doesn't have any special tax break. (It is taxed as ordinary income.) This will also slow down the growth of these accounts and the future RMDs (and their tax) that is being deferred until later. Taxable accounts should hold International stocks and the remaining stocks (and preferably only have "index" funds as they are more tax-efficient). If the International ETFs/funds spin off dividends that include "foreign taxes", these taxes paid to a foreign country on your behalf could be deductible on your tax return if the International ETF/fund is in a taxable account.

All this may sound easy, but in practice, it is rare that a person's desired Asset Allocation of stocks/international stocks/ bonds will be the same as the percentage of their portfolio that is in Roth/ taxable/ and tax-deferred accounts. When that happens, just do the best you can by first placing the smallest holding in the location that is best for it. Then move up to the next smallest holding in the remaining unfilled location that is best for it. Rinse and repeat until you are out of space in one tax category.
im sorry I feel I am lost in the wording, can you please explain that part to me again? I really appreciate it.
OK, Let's look at some examples.

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SAMPLE PORTFOLIO #1
When you were starting your career, you were in a low tax bracket and didn't have a lot of money to invest except in Roths and a little in taxable, so assume your portfolio might look like:
Taxable
20% stock fund A
10% bond fund B

Roth IRA
30% stock fund C
20% bond fund D
20% international stock fund E


You are comfortable with the current Asset Allocation of 50% stocks / 20% international stocks / 30% bonds, but your "holding buckets" are 70% in Roth, 30% in Taxable, and nothing in Tax-deferred. The question is how can we re-arrange this so it is more tax-efficient while helping the Roth to grow faster. We start by planning this on "paper". One way to do it is to put all the stocks in Roth first:
Taxable

Roth IRA
20% stock fund A
30% stock fund C

Since you still have 20% of your space unfilled in Roth, you can leave the international stock fund there and put the remaining bonds in taxable, giving you:
Taxable
10% bond fund B
20% bond fund D

Roth IRA
20% stock fund A
30% stock fund C
20% international stock fund E

Now that you have a plan that seems reasonable, you would implement it by selling 20% stock fund A in Taxable and buying 20% bond fund D. At the same time in the Roth, you would sell 20% bond fund D and buy 20% stock fund A. Note that bond funds B and D could refer to the same or different funds. Stock funds A and C could refer to the same or different funds. You still have the same assets you started with, but the portfolio is more tax-efficient. (You would only have to pay taxes on the interest earned by bond funds each year.)

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SAMPLE PORTFOLIO #2
You have been working for a while in a higher tax bracket, so you've been contributing to an employer plan and Traditional IRA to defer some of your taxes until retirement, when you expect to be in a lower tax bracket. Your portfolio could now look like:
Taxable
10% stock fund G
5% international stock fund H
10% bond fund I

Tax-deferred accounts (401K and tIRA)
30% stock fund J
10% international stock fund K
20% bond fund L

Roth IRA
5% stock fund M
5% international stock fund N
5% bond fund O

This portfolio has an Asset Allocation of 45% stock / 20% international stock / 35% bonds which we want to keep but our holding buckets are 25% in taxable, 60% in tax-deferred, and 15% in Roth. On paper, let's first fill up the Roth with stocks and put the international stocks in Taxable:
Taxable
10% stock fund G (no room to move it anywhere)
5% international stock fund H
5% international stock fund K (from tax-deferred)
5% international stock fund N (from Roth IRA)

Tax-deferred accounts (401K and tIRA)
20% stock fund J (no room to move the last 20%)
5% international stock fund K (no room to move the last 5%)

Roth IRA
5% stock fund M
10% stock fund J (came from tax-deferred)

Note that there wasn't enough room in Roth and taxable to hold all the stocks and international stocks. We could have put all the international in Taxable, but then we would have had to move 5% of stock fund G to tax-deferred. Either way would work. Then we would put the remaining bonds in the only space that is left, which is tax-deferred:

Taxable
10% stock fund G
5% international stock fund H
5% international stock fund K
5% international stock fund N

Tax-deferred accounts (401K and tIRA)
20% stock fund J
5% international stock fund K
10% bond fund I
20% bond fund L
5% bond fund O

Roth IRA
5% stock fund M
10% stock fund J

Again, we have the same assets as we started with, but they are located in better places to save on taxes. Taxes will only apply to the Taxable account and the Tax-deferred account will intentionally grow slower, which will make future RMDs smaller, thus incurring less tax at withdrawal time.

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SAMPLE PORTFOLIO #3
This retiree portfolio has seen Roth conversions for several years:
Taxable
5% stock fund P
15% money market fund Q (ie, cash)

Tax-deferred
10% stock fund R
30% bond fund S

Roth IRA
10% stock fund T
30% bond fund U

All that this portfolio needs to become more tax-efficient is for the stock in Taxable and Tax-deferred to be exchanged for a bond fund and the same value of bond fund in the Roth to be exchanged for the stock fund(s).

----------------------------------------------------------------------------------------------

Note that in all these portfolios, something was sold in taxable, which would cause Capital Gains or Losses and impact your taxes for the year. If you have a loss on a sale, you also need to be aware of "wash sale" rules.
thank you so much celia for this amazing amazing breakdown. One thing to ask, wouldnt it be better to invest in bonds later since I am 36 years old? and wouldnt it better to keep bonds mostly in IRA because it generates dividend that is taxable annually vs higher tax bill in a taxable brokerage account?
Topic Author
anaelmasri
Posts: 66
Joined: Thu Sep 10, 2020 6:24 pm

Re: splitting investments between accounts

Post by anaelmasri »

celia wrote: Wed Sep 16, 2020 1:46 am
sailaway wrote: Tue Sep 15, 2020 12:19 pm That is interesting. At Fidelity and E-Trade, I have account types by tax status, so that only the taxable account is labelled as a brokerage account. Why does Vanguard use a different system of categorization?
It is irrelevant if an account has the word "brokerage" in it's title or not. That does not determine if the account is (or isn't) a brokerage account. To me, this is like saying some of my accounts use my middle name or not. Both of the accounts still identify me as the owner.

Vanguard may be different because John Bogle had an early focus on mutual funds. For many years, that is all the retail investor could buy at Vanguard. But once ETFs became more popular, and they could be bought and sold anytime during stock market hours, to offer them, it might have been a technical (or SEC) issue that they needed to "upgrade" their platform. [That started all the threads on this forum of why we needed to "upgrade" our accounts even if we were going to stay with mutual fund investments.] I am one of those who still has some mutual fund accounts at Vanguard as well as some brokerage accounts.
Image
Some of my IRAs are still on the mutual fund platform and some are on the "upgraded" brokerage account platform. The same tax rules apply to both Roth accounts above and I don't care what the titles say as long as they have my name and are tagged as "Roth".
I am looking at your 3 account breakdown screen shot. can you please explain the difference beween ROTH IRA BROKERAGE and ROTH IRA? can you not trade via the non brokerage account? or where would the money in the ROTH IRA as opposed to ROTH IRA BROKERAGE go to?
sycamore
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Re: splitting investments between accounts

Post by sycamore »

anaelmasri wrote: Wed Sep 16, 2020 6:43 pm
celia wrote: Wed Sep 16, 2020 1:46 am
sailaway wrote: Tue Sep 15, 2020 12:19 pm That is interesting. At Fidelity and E-Trade, I have account types by tax status, so that only the taxable account is labelled as a brokerage account. Why does Vanguard use a different system of categorization?
It is irrelevant if an account has the word "brokerage" in it's title or not. That does not determine if the account is (or isn't) a brokerage account. To me, this is like saying some of my accounts use my middle name or not. Both of the accounts still identify me as the owner.

Vanguard may be different because John Bogle had an early focus on mutual funds. For many years, that is all the retail investor could buy at Vanguard. But once ETFs became more popular, and they could be bought and sold anytime during stock market hours, to offer them, it might have been a technical (or SEC) issue that they needed to "upgrade" their platform. [That started all the threads on this forum of why we needed to "upgrade" our accounts even if we were going to stay with mutual fund investments.] I am one of those who still has some mutual fund accounts at Vanguard as well as some brokerage accounts.
Image
Some of my IRAs are still on the mutual fund platform and some are on the "upgraded" brokerage account platform. The same tax rules apply to both Roth accounts above and I don't care what the titles say as long as they have my name and are tagged as "Roth".
I am looking at your 3 account breakdown screen shot. can you please explain the difference beween ROTH IRA BROKERAGE and ROTH IRA? can you not trade via the non brokerage account? or where would the money in the ROTH IRA as opposed to ROTH IRA BROKERAGE go to?
"ROTH IRA BROKERAGE" means it's a brokerage account so you can buy/sell ETFs, stocks, bonds, CDs, and mutual funds, and you use a settlement fund. By contrast, "ROTH IRA" can hold only mutual funds, and there's no need or use of a settlement fund. You can do many of the same things in that account: buy, sell, exchange, transfer to/from a bank account. You're just limited to Vanguard mutual funds. Note that this is not something only Vanguard did or still does.

Some history of how the industry evolved over decades would help explain why we have a mutual fund-only account versus brokerage accounts. I'll just mention that mutual fund-only accounts used to be more common not so long ago. Many fund providers (Vanguard, T. Rowe Price, American Century, American Funds, Dodge & Cox, etc.) started off selling directly to the customer, i.e., not through a brokerage like E.F. Hutton or Dean Witter. Brokerages were rather expensive back in the day (prices used to be regulated still in the 70's, and I remember $49.95 commissions in the early 90's). To avoid high commissions, you as a customer could skip the fees by buying directly, and only buying no-load funds.

At some point it made more sense - for both the customer and the companies - to use a brokerage account so the customer could buy or sell whatever assets, not just mutual funds.
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celia
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Re: splitting investments between accounts

Post by celia »

anaelmasri wrote: Wed Sep 16, 2020 6:43 pm I am looking at your 3 account breakdown screen shot. can you please explain the difference beween ROTH IRA BROKERAGE and ROTH IRA? can you not trade via the non brokerage account? or where would the money in the ROTH IRA as opposed to ROTH IRA BROKERAGE go to?
Sycamore nailed it in the previous post. I'm retired now and can't contribute to IRAs any more (no earned income), but if I was to put more money in, I would put it in the Brokerage account if I wanted to buy more stocks, else into the non-brokerage account if I was going to buy mutual funds. I can trade in either account. If I want to withdraw from either account, I can transfer money from either account to my checking account.

My main point here was to show you that Vanguard labels brokerage accounts with the word "brokerage", even if the account is not taxable.
anaelmasri wrote: Wed Sep 16, 2020 6:39 pm One thing to ask, wouldnt it be better to invest in bonds later since I am 36 years old?
Since you are on the younger side, you can afford to have a higher percentage of stocks since you have time to make up for any losses due to market downturns. But I will assume you haven't lived through a volatile bear market yet, like in 2008, or your investments were much smaller then. You need to figure out what level of risk you are willing to take, both in good times and bad times, that can occur without any warning. Some people call it the ability "to sleep well at night" (ie, not staying awake worrying about your investments). Bonds in your portfolio will help reduce the volatility you will experience. Those portfolios with bonds will have gentler swings while those portfolios with all stocks will have sharper spikes, both up and down.

Most people will adjust their desired stock/bond ratio to decrease their stock percentage and increase bonds as they get closer to retirement and need to rely on a more stable portfolio to help them pay for retirement living expenses.
and wouldnt it better to keep bonds mostly in IRA because it generates dividend that is taxable annually vs higher tax bill in a taxable brokerage account?
In general, it is better to keep bonds in a tax-deferred account, even though tax-deferred accounts are not taxed until withdrawals are made.

When investing, you should first figure out what Asset Allocation is best for you starting with percent in stocks vs bonds. Then you should choose what particular mutual funds/ETFs you will use to meet that stock vs bonds goal. After that, you decide WHERE to put those assets. This is for someone starting with a blank slate (such as after a windfall). In your case, since some assets already exist, just do the best you can in moving things to better accounts, if needed. Just be aware of any sales in taxable that would impact your taxes.
RetiredCSProf
Posts: 481
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Re: splitting investments between accounts

Post by RetiredCSProf »

sycamore wrote: Wed Sep 16, 2020 7:03 pm "ROTH IRA BROKERAGE" means it's a brokerage account so you can buy/sell ETFs, stocks, bonds, CDs, and mutual funds, and you use a settlement fund. By contrast, "ROTH IRA" can hold only mutual funds, and there's no need or use of a settlement fund. You can do many of the same things in that account: buy, sell, exchange, transfer to/from a bank account. You're just limited to Vanguard mutual funds. Note that this is not something only Vanguard did or still does.
I have a Roth IRA in a mutual fund account at TRowe. One difference between this MF account and a brokerage account: I can convert partial shares from my rollover IRA MF account at TRowe into the Roth MF account. At a brokerage, I can Roth convert only in whole shares. Also, each investment in my MF accounts can be designated to a different beneficiary.
Topic Author
anaelmasri
Posts: 66
Joined: Thu Sep 10, 2020 6:24 pm

Re: splitting investments between accounts

Post by anaelmasri »

celia wrote: Thu Sep 17, 2020 4:04 pm
anaelmasri wrote: Wed Sep 16, 2020 6:43 pm I am looking at your 3 account breakdown screen shot. can you please explain the difference beween ROTH IRA BROKERAGE and ROTH IRA? can you not trade via the non brokerage account? or where would the money in the ROTH IRA as opposed to ROTH IRA BROKERAGE go to?
Sycamore nailed it in the previous post. I'm retired now and can't contribute to IRAs any more (no earned income), but if I was to put more money in, I would put it in the Brokerage account if I wanted to buy more stocks, else into the non-brokerage account if I was going to buy mutual funds. I can trade in either account. If I want to withdraw from either account, I can transfer money from either account to my checking account.

My main point here was to show you that Vanguard labels brokerage accounts with the word "brokerage", even if the account is not taxable.
anaelmasri wrote: Wed Sep 16, 2020 6:39 pm One thing to ask, wouldnt it be better to invest in bonds later since I am 36 years old?
Since you are on the younger side, you can afford to have a higher percentage of stocks since you have time to make up for any losses due to market downturns. But I will assume you haven't lived through a volatile bear market yet, like in 2008, or your investments were much smaller then. You need to figure out what level of risk you are willing to take, both in good times and bad times, that can occur without any warning. Some people call it the ability "to sleep well at night" (ie, not staying awake worrying about your investments). Bonds in your portfolio will help reduce the volatility you will experience. Those portfolios with bonds will have gentler swings while those portfolios with all stocks will have sharper spikes, both up and down.

Most people will adjust their desired stock/bond ratio to decrease their stock percentage and increase bonds as they get closer to retirement and need to rely on a more stable portfolio to help them pay for retirement living expenses.
and wouldnt it better to keep bonds mostly in IRA because it generates dividend that is taxable annually vs higher tax bill in a taxable brokerage account?
In general, it is better to keep bonds in a tax-deferred account, even though tax-deferred accounts are not taxed until withdrawals are made.

When investing, you should first figure out what Asset Allocation is best for you starting with percent in stocks vs bonds. Then you should choose what particular mutual funds/ETFs you will use to meet that stock vs bonds goal. After that, you decide WHERE to put those assets. This is for someone starting with a blank slate (such as after a windfall). In your case, since some assets already exist, just do the best you can in moving things to better accounts, if needed. Just be aware of any sales in taxable that would impact your taxes.
thank you so much for the explanation. I currently dont own asset but assessing what to invest in. and there is so much information its easy to lose sight or mistakes occur - I wondered if having a ROTH IRA BROKERAGE needs to be changed to just ROTH IRA for it to be an actual roth ira and not taxed - from what I am reading vanguard is already upgrading and changing the regular labeled ROTH IRA to ROTH IRA BROKERAGE ACCOUNT.
if I am focusing more on just ROTH IRA , obviously it makes more sense to have BONDS in there as opposed to a brokerage taxable account - if I am correct
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celia
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Re: splitting investments between accounts

Post by celia »

anaelmasri wrote: Fri Sep 18, 2020 12:45 am thank you so much for the explanation. I currently dont own asset but assessing what to invest in. and there is so much information its easy to lose sight or mistakes occur -
I know. Too much information overload and a lot of it will repeat from what you read elsewhere (which is a good thing since it reinforces the topic -- or shows you another view of the topic). If you want to learn in a more organized way, you might want to read a Bogleheads book listed in the Amazon link at the top of the page. You can also borrow many of the books from your library.

There's also a link at the top of the page to go to our wiki, which is sort of like a dictionary of different investing topics. Forum members created these pages using the philosophy of John Bogle, for whom this site is named.
I wondered if having a ROTH IRA BROKERAGE needs to be changed to just ROTH IRA for it to be an actual roth ira and not taxed - from what I am reading vanguard is already upgrading and changing the regular labeled ROTH IRA to ROTH IRA BROKERAGE ACCOUNT.
if I am focusing more on just ROTH IRA , obviously it makes more sense to have BONDS in there as opposed to a brokerage taxable account - if I am correct
You don't have a choice these days between opening a Roth IRA or a Roth IRA Brokerage account. All new accounts at Vanguard are now brokerage accounts. But don't worry, the two accounts act the same way, and if you only want mutual funds, you can own them in the brokerage account as well. You can own bonds funds there too (but you wouldn't want to do that in a Roth, would you?) <--I want to see if you remember this!
:sharebeer
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