Rebalancing over multiple accounts

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Topic Author
Structure
Posts: 13
Joined: Sat Feb 21, 2015 2:05 am

Rebalancing over multiple accounts

Post by Structure »

Hello,

I'm looking to re-balance percentages and or switch allocations to the most desirable accounts. Obviously can't remove dollars from roth/401k yet so getting a bit confused on the %'s. I'm comfortable with 90/10 for now as I still have many working years. I would also like to firm up my overall investing strategy - i'm mostly interested in the lazy 3 fund as promoted here.

I temporarily can not contribute to my roth anymore (filing status) and contribute enough to my 401k to take the max match from my employer. I then contribute an equal amount to taxable. Everything is through vanguard except 401K. The 401k has some managed funds and some other junk but just sticking the the admiral S&P fund there (through vanguard) for now.

Any advise would be appreciated!

Location Asset Class Current %
Taxable International Stock mkt 9.17%
Taxable Total Stock mkt 17.40%
Taxable Total Bond mkt 8.30%
Taxable S&P500 10.25%
401K S&P500 26.70%
Roth Target retirement 2050 28.17%
Francis42
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Joined: Wed Feb 19, 2020 12:27 am

Re: Rebalancing over multiple accounts

Post by Francis42 »

Rebalance in your 401k/IRAs so your total allocation across all accounts hits your target. This will save you cap gains taxes. Keep bonds (and REITs if you go that route later) in you tax advantaged accounts because of how dividends are taxed.

I did not do this and am paying the price. Set my fiancé up the right way and followed these guidelines.
dcabler
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Re: Rebalancing over multiple accounts

Post by dcabler »

Francis42 wrote: Sun Jan 10, 2021 6:23 am Rebalance in your 401k/IRAs so your total allocation across all accounts hits your target. This will save you cap gains taxes. Keep bonds (and REITs if you go that route later) in you tax advantaged accounts because of how dividends are taxed.

I did not do this and am paying the price. Set my fiancé up the right way and followed these guidelines.
+1
The way I'm set up is that my taxable account is 100% equities. All of my bonds are in tax advantaged accounts, BUT they also hold some equities as well - enough such that any rebalancing I need to do from stocks to bonds can pretty much always be done within my tax advantaged accounts. Anybody's ability to do likewise will completely depend on what percentage of your total portfolio is in taxable accounts vs. tax advantaged, relative to your desired AA. If, for example, your desired AA is 60% stock 40% bonds, and you have 30% of your portfolio in tax advantaged accounts and 70% in a taxable account, you're going to end up with some bonds in your taxable account to reach your 60/40 AA. At that point, you either have to suck up the taxes on bond dividends on your taxable account or take a look a something like Muni bonds.
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Eagle33
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Re: Rebalancing over multiple accounts

Post by Eagle33 »

3 wiki topics to enhance your knowledge.
Tax-efficient fund placement
Asset allocation in multiple accounts
Rebalancing

If you want simple - best to rebalance inside the largest tax-deferred account. Have 1 or 2 funds max in the other accounts.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
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grabiner
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Re: Rebalancing over multiple accounts

Post by grabiner »

The way I handle rebalancing across multiple accounts is to put everything in a spreadsheet.

I look at what I hold now, and how everything compares to the target, then change numbers in the tax-deferred accounts (if possible; I have never needed to sell anything in taxable to rebalance) to meet the target. If the total says that I have $10,000 too much in US stock and $10,000 too little in bonds, I will sell $10,000 of the US stock fund in my employer plan to buy a bond fund there.
Structure wrote: Sun Jan 10, 2021 6:08 am I temporarily can not contribute to my roth anymore (filing status)
Since you don't have a traditional IRA, you can still contribute to a Roth via the Backdoor Roth IRA. As married filing separately, you are still eligible to make a non-deductible contribution to a traditional IRA, then convert it to a Roth.
Wiki David Grabiner
Topic Author
Structure
Posts: 13
Joined: Sat Feb 21, 2015 2:05 am

Re: Rebalancing over multiple accounts

Post by Structure »

With that being said - should I move all the $ from my bond fund in taxable account to the stock funds? And then find a bond fund offered in my 401k and allocate the appropriate % over to it?

Is there a more detailed explanation on why holding bonds in a taxable account is disadvantageous due to taxes?

Also the backdoor roth noted below would be interesting but how is that advantageous to do this? My contribution to the trad IRA would be taxed as income and also is non-deductable. So the net effect would be paying taxes now vs in retirement?

Thanks for all the suggestions!
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Eagle33
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Re: Rebalancing over multiple accounts

Post by Eagle33 »

Structure wrote: Tue Jan 12, 2021 10:03 pm Is there a more detailed explanation on why holding bonds in a taxable account is disadvantageous due to taxes?
From wiki topic Tax-efficient fund placement
Tax efficiency of bonds

Some investors see bonds or bond funds as tax-inefficient because almost all of the return comes from the dividend yield, which is fully taxed as ordinary income. [note 3] In contrast, stocks get most of their return from price appreciation, which is not taxed until the stocks are sold and is taxed at the capital-gains tax rate. Therefore, these investors regard bonds as being less tax-efficient than stock index funds (which rarely sell stock) and hold bonds in tax-advantaged accounts when possible. However, low-yielding bonds do not have much return to be taxed, and since they do not grow as fast as other investments, an equal percentage lost from an investment is a smaller dollar loss; this makes low-yielding bonds somewhat more tax-efficient. Therefore, some other investors do just the opposite: they hold stocks with a higher expected return in tax-advantaged accounts when possible. You have to strike a balance between the expected return and the tax rate.

Treasury bonds are exempt from state taxes, and thus are tax-inefficient for federal taxes but may be desirable taxable investments for investors who pay high state taxes but low federal taxes. TIPS have the same tax-efficiency as their treasury bond equivalents; however, since taxes need to be paid annually on the inflation component, which isn't received until the bond matures or is sold, this cash flow problem creates an additional reason to hold individual TIPS (as opposed to a fund) in a tax-advantaged account. [1]

Municipal bond funds have a hidden cost; while their interest incomes are not subject to federal tax, they usually earn less than corporate or treasury bond funds of comparable risk. (The risk may be of a different type; intermediate-term municipal bonds have more credit risk than long-term treasury bonds, but less interest-rate risk, and thus may have a similar after-tax yield.) There are special rules regarding the taxation of Social Security benefits - municipal bond interest in a taxable account may result in additional Social Security benefits being taxable. [note 4]
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
go2run
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Joined: Wed Mar 08, 2017 1:34 pm

Re: Rebalancing over multiple accounts

Post by go2run »

Eagle33 wrote: Sun Jan 10, 2021 7:09 pm 3 wiki topics to enhance your knowledge.
Tax-efficient fund placement
Asset allocation in multiple accounts
Rebalancing

If you want simple - best to rebalance inside the largest tax-deferred account. Have 1 or 2 funds max in the other accounts.
^^^This right here. The questions you ask are all in these wiki's.
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