Asset location question

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Kelly
Posts: 253
Joined: Sun Nov 18, 2012 7:39 am

Asset location question

Post by Kelly » Thu Jul 27, 2017 5:42 am

Hi all,

Here's my situation:

The taxable account is now $1M after a home sale. The IRA $500,000 The desired portfolio is 50/05 as follows (all Vgd).

15% SP 500
15% Mid cap value
10% Tot Int'l
10% Int'l value
50% Bond

Tax bracket is 25%. At current rates the before tax yield on the bond index is 2.5%. The post tax is 2%. Muni yield is about the same.

I'm trying to determine how much stock should go into the IRA so that taxes on rebalancing can be minimized. RMDs start in 5 years. The first RMD is about 4% of the IRA. Also, very likely that none of these funds will be spent in retirement as there's a military pension in the mix.

Over 15 years I'd lose about $60,000 (at current rates) in lost bond yield if taxable bonds or munis where held in the taxable account compared to holding in IRA. Though if I held a large portion of stocks in the IRA, I could rebalance without taxes.

The question is whether more would be lost due to capital gains taxes from rebalancing than lost yield. The $60,000 lost yield is equal to about $400,000 in capital gains ($403,195=$60,000/0.15).

Has anyone looked into something like this? Am I way off?

Many thanks for any insight!

Kelly

User avatar
grabiner
Advisory Board
Posts: 22688
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Asset location question

Post by grabiner » Thu Jul 27, 2017 7:38 pm

In your situation, I would prefer to keep stock indexes in the taxable account, because you get more in tax efficiency than most investors; you expect to leave much of this portfolio to your heirs, and will never pay taxes on the gains on stocks you never sell. If you continue to hold Vanguard International Value, that needs to stay in the IRA, as it is tax-inefficient; you could also use the ETF EFV in taxable, but that is a fairly expensive ETF.

Another way to reduce your tax burden is to convert the traditional IRA to a Roth IRA, up to the top of the 25% tax bracket every year (or the 28% bracket if 85% of Social Security plus the RMDs will push you into that bracket in retirement). This has the additional benefit of reducing your RMDs
Wiki David Grabiner

User avatar
Peter Foley
Posts: 4538
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Asset location question

Post by Peter Foley » Thu Jul 27, 2017 10:49 pm

I agree with David in principle. I say in principle because I have not done a specific analysis of your situation. I feel it is generally better to keep stock mutual funds in taxable. Hold your bond allocation in your tax deferred account where it will grow more slowly and minimize RMD's. Stock mutual funds in taxable may provide for opportunities to tax loss harvest from time to time.

With your 50/50 AA holding, some bonds in taxable and some stock mutual funds in tax deferred might be okay, especially if, as David suggests, one of your preferred stock mutual funds choices is not tax efficient.

Kelly
Posts: 253
Joined: Sun Nov 18, 2012 7:39 am

Re: Asset location question

Post by Kelly » Fri Jul 28, 2017 10:15 am

Thanks very much for the replies!

Assuming I'm reading this correctly, Morningstar shows that Vanguard's Int'l Value (VTRIX) has a lower tax cost ratio than EFV. Both cost the same at 0.4%. Never understood why Vanguard doesn't make an international value index.


Kelly

User avatar
House Blend
Posts: 4492
Joined: Fri May 04, 2007 1:02 pm

Re: Asset location question

Post by House Blend » Fri Jul 28, 2017 10:19 am

A few remarks:

1. Echoing previous comments, if tax-deferred is 100% bonds and the expected return is 2.5%, your RMDs cannot grow much at all. In fact, if inflation is about 2%, they will essentially be flat in real terms. Overall, that's probably a good thing in terms of tax-efficiency.

2. If you'll have SS income, do factor in the effects of the SS tax hump.

3. Given that you don't expect to be spending the RMDs, that suggests you'll have plenty of income, and the capacity to make charitable donations. And remember that having stocks perform so well that you need to rebalance out is a nice problem to have, like the "risk" of having too much money.

In any case, another way to rebalance out of stocks in taxable without paying cap gains tax is to donate long term shares.

Kelly
Posts: 253
Joined: Sun Nov 18, 2012 7:39 am

Re: Asset location question

Post by Kelly » Fri Jul 28, 2017 12:18 pm

In any case, another way to rebalance out of stocks in taxable without paying cap gains tax is to donate long term shares.
This is valuable advice and will be part of the plan.

Kelly

Post Reply