Out of tax deferred space for fixed income holdings

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placeholder
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Out of tax deferred space for fixed income holdings

Post by placeholder »

One of the consequences of retirement is that no new contributions go into the 401k to increase deferred space and with stock growth boosting the other accounts it's no longer large enough to hold all of the fixed income in the portfolio so I'm a bit unsure where to put the excess.

Updated based on early responses
1. The portfolio base allocation is 60/40 and the current deferred space is 33% of the total.
2. Of the fixed I allocate half each to bond index and stable value.
3. The latter has lately been money market and similar due to the better return but I will change back to the stable value fund when advantageous.
4. Due to my pension I am in the 12% marginal bracket but due to a large taxable proportion the qualified dividends fill up the remaining space.
5. Due to that every new dollar of ordinary income bumps out a dollar of 0% qdivs and has a net effect of 27% plus any relevant state tax.
6. I have just been buying short term bond products like the sgov etf in roth or taxable as cash distributions become available.
7. I have no income so no ira contributions.
8. The amount of overrun is in the low six figures.


Assuming I don't want to change my allocation the question becomes what the best approach for the future is sp whether to suffer the relatively high tax rate for bond dividends in taxable or eat up roth space.
Last edited by placeholder on Sun May 12, 2024 9:23 pm, edited 2 times in total.
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mmse
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Re: Out of tax deferred space for fixed income holdings

Post by mmse »

placeholder wrote: Sun May 12, 2024 6:03 pm Assuming I don't want to change my allocation the question becomes what the best approach for the future is sp whether to suffer the relatively high tax rate for bond dividends in taxable or eat up roth space.
$15k/year of I-Bonds is one possibility
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

mmse wrote: Sun May 12, 2024 6:07 pm
placeholder wrote: Sun May 12, 2024 6:03 pm Assuming I don't want to change my allocation the question becomes what the best approach for the future is sp whether to suffer the relatively high tax rate for bond dividends in taxable or eat up roth space.
$15k/year of I-Bonds is one possibility
I didn't really go over the size of the portfolio which is perhaps an oversight so that's at best a small help but something to consider.
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Re: Out of tax deferred space for fixed income holdings

Post by watchnerd »

Can you contribute to an IRA?
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

watchnerd wrote: Sun May 12, 2024 6:17 pm Can you contribute to an IRA?
Nope.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

placeholder wrote: Sun May 12, 2024 6:11 pm I didn't really go over the size of the portfolio which is perhaps an oversight so that's at best a small help but something to consider.
In reflection it's small in comparison to the overall fixed but as far as the excess it's a better fraction although I have been reluctant to deal with treasury direct.
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retiredjg
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Re: Out of tax deferred space for fixed income holdings

Post by retiredjg »

So your other choices are taxable and Roth IRA?

Sounds odd, but since you are looking at a 27% tax rate on each added dollar of ordinary income, I'd consider a tax-exempt bond fund in taxable. That could work for awhile.

Might be a good time to start/increase contributions of appreciated stock to a donor advised fund.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

retiredjg wrote: Sun May 12, 2024 6:54 pm So your other choices are taxable and Roth IRA?

Sounds odd,
I'm not sure why it's odd but perhaps I didn't explain it well so the roth and taxable were 100% in stock funds and stocks have gone up over 60% since I retired and bonds have not and while at retirement the 401k was 42% of the overall portfolio and now it's just 33%
since you are looking at a 27% tax rate on each added dollar of ordinary income, I'd consider a tax-exempt bond fund in taxable. That could work for awhile.
That's a possibility.
AlwaysLearningMore
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Re: Out of tax deferred space for fixed income holdings

Post by AlwaysLearningMore »

As of course of last resort, perhaps you could look into a very low cost variable annuity with a low cost of bond fund?
A post above also mentioned municipal bonds.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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Re: Out of tax deferred space for fixed income holdings

Post by retiredjg »

placeholder wrote: Sun May 12, 2024 7:06 pm I'm not sure why it's odd....
I meant that my suggestion is a bit odd for someone whose ordinary income is actually in the 12% tax bracket. :D. But it would work for you...just not sure how many years it would work.
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FiveK
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Re: Out of tax deferred space for fixed income holdings

Post by FiveK »

placeholder wrote: Sun May 12, 2024 6:03 pm 1. The portfolio base allocation is 60/40 and the current deferred space is 33% of the total.
4. Due to my pension I am in the 12% marginal bracket but due to a large taxable proportion the qualified dividends fill up the remaining space.

Assuming I don't want to change my allocation....
Depending on how much of your basic expenses the pension covers, it might be worthwhile to reconsider that assumption. :?:

Doing so (e.g., choosing a 75/25 "excluding pension" AA) would solve your problem. ;)
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

FiveK wrote: Sun May 12, 2024 8:31 pm
placeholder wrote: Sun May 12, 2024 6:03 pm
Assuming I don't want to change my allocation....
Depending on how much of your basic expenses the pension covers, it might be worthwhile to reconsider that assumption. :?:

Doing so (e.g., choosing a 75/25 "excluding pension" AA) would solve your problem. ;)
Well there is that and I've thought about it which is why I mentioned it and to answer your question the non cola pension covers a lot of spending right now with qdivs the rest.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

placeholder wrote: Sun May 12, 2024 6:03 pm
8. The amount of overrun is in the high five figures.
Mistake in my arithmetic so it's double that in the low six figures.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

retiredjg wrote: Sun May 12, 2024 8:03 pm I meant that my suggestion is a bit odd
Gotcha.
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Re: Out of tax deferred space for fixed income holdings

Post by mariezzz »

placeholder wrote: Sun May 12, 2024 6:22 pm
placeholder wrote: Sun May 12, 2024 6:11 pm I didn't really go over the size of the portfolio which is perhaps an oversight so that's at best a small help but something to consider.
In reflection it's small in comparison to the overall fixed but as far as the excess it's a better fraction although I have been reluctant to deal with treasury direct.
From other threads here, TD is taking 6 months to a year to process claims by beneficiaries when someone dies - a major headache for beneficiaries. But i-bonds do allow you to defer paying taxes on the interest for up to 30 years. As mentioned above, a small change to your desired asset allocation would solve your problem (and your beneficiaries wouldn't have to deal with TD).
nassau34
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Re: Out of tax deferred space for fixed income holdings

Post by nassau34 »

What you're describing is very close to the same situation I'm in. I've weighed many of the options that have been suggested in the comments. So far all I've come up with is buying medium to longer term TIPS with the yields looking attractive right now, and letting my asset allocation slowly drift up, hopefully, by not rebalancing.
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Re: Out of tax deferred space for fixed income holdings

Post by retiredjg »

The idea of letting the AA drift up a tiny bit is not unreasonable if you are comfortable with that. But more than 5% seems like a poor idea to me. You chose 60:40 for a reason. Presumably, that reason has not changed.

Investing and investors tend to have a lot of rules and guidelines. It is important to remember which ones are very important, which ones are secondary, and which ones are of little importance at all...something to follow when all other things are equal.

A person's risk tolerance is far more important that the little boost one might get from holding stocks instead of bonds in Roth IRA. Yes, I like stock funds in Roth IRA just like everybody else. But having the right AA is critical. Having some bonds in Roth IRA is a small disappointment.

You are about 7% off of target. Consider putting a 3% slice of tax-deferred bonds in taxable and a 3% slice of bonds in Roth IRA and call it good until the market requires you to make another adjustment. Maybe interest rates will drop a bit and solve your problem for you.
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Re: Out of tax deferred space for fixed income holdings

Post by TomatoTomahto »

placeholder wrote: Sun May 12, 2024 6:03 pm
Assuming I don't want to change my allocation…
Why don’t you want to change your AA? Your stocks have done well. If I’m not misunderstanding, you have sufficient fixed income to call your portfolio a quasi liability matching portfolio. You probably are not worried about running out of money. Just put new money into taxable broad based equities. Who needs a percentage based AA? Not me for sure, and I think not you either.

And, forget Ibonds if you are expecting them to be inherited. I got rid of mine because of the PITA for my heirs for what is a small piece of pie.
I get the FI part but not the RE part of FIRE.
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Re: Out of tax deferred space for fixed income holdings

Post by CloseEnough »

Although there is a rule of some sort about not letting the tax tail wag the dog, I tend to agree with the last two comments to consider letting the AA adjust upward toward equities to avoid inefficient tax treatment. As long as it is true that there is enough in the lesser fixed income allocation in absolute terms. The difference between 60/40 and 70/30 or even higher is not that great and the additional risk may be worth it to avoid known tax liabilities. Or, just don't worry about it and pay more tax.
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Re: Out of tax deferred space for fixed income holdings

Post by makeitcount »

I agree with the last few comments as well.
We are in a similar position (having an absolute dollar number in fixed income which is LMPish and mostly out of room in tax deferred for more bonds) and are leaning towards letting the AA drift. The dollar amount in fixed income is giving us peace of mind at present.
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Re: Out of tax deferred space for fixed income holdings

Post by Rex66 »

Why not myga?
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Re: Out of tax deferred space for fixed income holdings

Post by MrBobcat »

makeitcount wrote: Mon May 13, 2024 2:08 pm I agree with the last few comments as well.
We are in a similar position (having an absolute dollar number in fixed income which is LMPish and mostly out of room in tax deferred for more bonds) and are leaning towards letting the AA drift. The dollar amount in fixed income is giving us peace of mind at present.
That's kind of where I think I'm heading as well. I only have 22% of my portfolio in tax deferred and I'm out of bond space there. I don't want to put bonds in our Roth (may eventually change my mind if taxes become a problem). I'm building up my bonds in taxable right now, but I'm going to stop once I hit 2 years cash 8-10 years bonds/fixed and then just let the equities ride. I'm almost there now.

IDK if this is a good idea or not, but it shouldn't be catastrophic if things go south.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

Rex66 wrote: Mon May 13, 2024 2:11 pm Why not myga?
That's not a terrible idea by any means and one I've considered investigating.
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Re: Out of tax deferred space for fixed income holdings

Post by Rex66 »

placeholder wrote: Tue May 14, 2024 1:50 am
Rex66 wrote: Mon May 13, 2024 2:11 pm Why not myga?
That's not a terrible idea by any means and one I've considered investigating.
I’m not sure why are you Luke warm about it

Seems to fit for what you have written
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Re: Out of tax deferred space for fixed income holdings

Post by HomeStretch »

placeholder wrote: Sun May 12, 2024 6:03 pm … 8. The amount of overrun is in the low six figures. …
By “overrun” do you mean the amount of your desired 40% fixed income allocation that will not fit in your tax deferred accounts?

Your pension and Taxable account’s qualified dividends cover your spending. Do you plan to make significant withdrawals (I.e., more than 2-3% each year) from your portfolio during your lifetime for spending, gifting, donating? If not, what are your estate plans - charitable donations, heir bequests?

I-Bonds (including gift box purchases) may help initially but are probably not a long term solution since your overrun will likely grow significantly given your low portfolio withdrawal rate. As a recent beneficiary of some I-Bonds where it took ~ 5-6 months for TD to transfer the I-Bonds, aside from the waiting time (which was not a big deal for me) it went smoothly.

Do you plan to do any Roth conversions?

Spouse and I are in a somewhat-similar situation (but no pension, pre-SS, self-insured for LTC). While we are spending ~2.25% from the portfolio now (which includes dividend income), when SS starts the portfolio distribution rate will drop <2%. Given the low withdrawal rate, our “problem” with not having enough tax deferred space (even with a large I-Bond holding) will only grow.

We decided to:
1. increase our portfolio equity allocation to 70% (and may let it drift upward from there).
2. Do Roth conversions and pay taxes from the Taxable account.
3. On the spending side we decided to gift more with a warm hand and spend a bit more.
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Re: Out of tax deferred space for fixed income holdings

Post by retiredjg »

Rex66 wrote: Tue May 14, 2024 5:53 am
placeholder wrote: Tue May 14, 2024 1:50 am
Rex66 wrote: Mon May 13, 2024 2:11 pm Why not myga?
That's not a terrible idea by any means and one I've considered investigating.
I’m not sure why are you Luke warm about it

Seems to fit for what you have written
I don't know a lot about MYGAs. How does this solve the problem of wanting more bonds than tax-deferred space allows while trying to stay in the 0% cap gains bracket?
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Re: Out of tax deferred space for fixed income holdings

Post by Rex66 »

It’s tax deferred, guaranteed for x years fixed income. Gains taxed as income. Can be rolled into another annuity of any type at end of term.
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Re: Out of tax deferred space for fixed income holdings

Post by retiredjg »

Rex66 wrote: Tue May 14, 2024 7:02 am It’s tax deferred, guaranteed for x years fixed income. Gains taxed as income. Can be rolled into another annuity of any type at end of term.
Are you saying the dividends are not taxable income until the end of the x years? So, if bought in taxable, there is no taxable income for those years?

If yes, that kicks the can down the road, possibly to a time when it does not matter any more. But the income does become taxable as a lump at some point (if not rolled into another annuity).

How is this better than putting some tax-exempt bonds in taxable? Or is it not "better" but just a different option?

How is this better than putting some bonds into Roth IRA? Or just a different option?

I assume MYGAs are low cost or people here would not buy them. But there is a cost, right?
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Re: Out of tax deferred space for fixed income holdings

Post by Rex66 »

MYGAs are “like CDs”.

The OP claims no tax deferred space available

Look up stinky myga thread
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Re: Out of tax deferred space for fixed income holdings

Post by beardsicles »

NTSX could open up some interesting solutions.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

HomeStretch wrote: Tue May 14, 2024 6:33 am
placeholder wrote: Sun May 12, 2024 6:03 pm … 8. The amount of overrun is in the low six figures. …
By “overrun” do you mean the amount of your desired 40% fixed income allocation that will not fit in your tax deferred accounts?
Indeed.
Your pension and Taxable account’s qualified dividends cover your spending. Do you plan to make significant withdrawals (I.e., more than 2-3% each year) from your portfolio during your lifetime for spending, gifting, donating? If not, what are your estate plans - charitable donations, heir bequests?
I don't know because I don't know the future so the money is there for whatever purpose I decide but there's nothing in particular at this time.
Do you plan to do any Roth conversions?
Those have the same problem in that conversions are taxed higher than it might appear and of course don't help the current situation.
We decided to:
1. increase our portfolio equity allocation to 70% (and may let it drift upward from there).
2. Do Roth conversions and pay taxes from the Taxable account.
3. On the spending side we decided to gift more with a warm hand and spend a bit more.
Thank you for your recommendations.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

Rex66 wrote: Tue May 14, 2024 5:53 am I’m not sure why are you Luke warm about it

Seems to fit for what you have written
I didn't mean to be dismissive and as I said I'm looking into this as an option.
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Re: Out of tax deferred space for fixed income holdings

Post by watchnerd »

placeholder wrote: Sun May 12, 2024 6:20 pm
watchnerd wrote: Sun May 12, 2024 6:17 pm Can you contribute to an IRA?
Nope.
Why is that?

You can contribute to a traditional IRA even if its not deductible; there is no income limit.
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

watchnerd wrote: Tue May 14, 2024 11:20 pm You can contribute to a traditional IRA even if its not deductible; there is no income limit.
I am retired and have no qualifying income.
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Re: Out of tax deferred space for fixed income holdings

Post by TN_Boy »

placeholder wrote: Sun May 12, 2024 6:03 pm One of the consequences of retirement is that no new contributions go into the 401k to increase deferred space and with stock growth boosting the other accounts it's no longer large enough to hold all of the fixed income in the portfolio so I'm a bit unsure where to put the excess.

Updated based on early responses
1. The portfolio base allocation is 60/40 and the current deferred space is 33% of the total.
2. Of the fixed I allocate half each to bond index and stable value.
3. The latter has lately been money market and similar due to the better return but I will change back to the stable value fund when advantageous.
4. Due to my pension I am in the 12% marginal bracket but due to a large taxable proportion the qualified dividends fill up the remaining space.
5. Due to that every new dollar of ordinary income bumps out a dollar of 0% qdivs and has a net effect of 27% plus any relevant state tax.
6. I have just been buying short term bond products like the sgov etf in roth or taxable as cash distributions become available.
7. I have no income so no ira contributions.
8. The amount of overrun is in the low six figures.


Assuming I don't want to change my allocation the question becomes what the best approach for the future is sp whether to suffer the relatively high tax rate for bond dividends in taxable or eat up roth space.
I kinda skimmed the responses here, so I'm probably missing something, but for what it is worth:

1. I wouldn't mess with iBonds; not enough value there for the hassle of the extra account, etc
2. If you want to keep the same asset allocation I'd buy a diversified municipal bond fund in taxable accounts and not worry about it.

Plenty of people with large taxable portfolios worry about this type of issue and while muni bonds are not as safe as treasuries, I'd lose no sleep holding some of them as my fixed income. Depending on your state tax situation, treasuries might not work badly in taxable either. If you want 60/40, just buy the munis.

I wouldn't change my desired asset allocation because I couldn't cram all my fixed income into my tax-deferred accounts. I might change it for other reasons, but not that one.
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Re: Out of tax deferred space for fixed income holdings

Post by grabiner »

At a 27% marginal tax rate, municipal bonds make sense if you need to hold bonds in a taxable account; they are likely to have higher after-tax yields than taxable bonds of comparable risk. (However, if you pay state tax and there is no low-cost muni fund for your state, you might use Treasuries instead; with a 6% state tax rate, your marginal tax rate is 6% on munis and 27% on Treasuries.)
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Re: Out of tax deferred space for fixed income holdings

Post by milktoast »

Are you able to balance by withdrawing from portfolio by only selling stocks?

If not, does it matter?

I’m not trying to be flippant. I’m 90% likely to be in same position in a few years and have been thinking about it.

But if you have enough income and stocks that you can fund retirement without decreasing your bond holdings, do you need more bonds?

You can lock in gains by selling stocks and buying ibonds or municipal bonds to defer or avoid the 27% taxes.

But if you haven’t sold bond, have only sold stocks, and your portfolio is stock heavy then you aren’t seeing the risk that bonds are supposed to protect you from. And you have all the original protections from the original bond sum. So does it matter?
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Re: Out of tax deferred space for fixed income holdings

Post by placeholder »

milktoast wrote: Thu May 16, 2024 11:21 pm Are you able to balance by withdrawing from portfolio by only selling stocks?
My withdrawals are minimal and are currently just a bit of the dividends so no help there.
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