Is it dumb of me to not have any money in taxable?

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travellight
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Is it dumb of me to not have any money in taxable?

Post by travellight »

All of my money is in retirement accounts, a 401k and IRA, current value is 660K and I am 52. I have investment real estate that create income of about 120-132K per year after all costs (factored in taxes, insurance, vacancies and repairs) except mortgages. (I have managed these for years and have a solid track record and I am comfortable with this income stream)

I plan to retire after these mortgages are all paid off which is in about 4 years. Mortgages should be paid off in 4 years but I would retire some time later. I would then live off this income of 120K plus. I will have a pension kick in later as well. Is there a reason that I should consider having money in taxable with this scenario? I feel like I am missing something reading threads on taxable but not sure that I need the taxable component in my scenario. Thanks in advance.
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Re: Is it dumb of me to not have any money in taxable?

Post by Call_Me_Op »

Do you have an emergency fund - or at least easy access to cash?
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Yes, I don't keep any money in cash because I want maximum work efficiency from my money. My access to funds is 2 helocs (just in case there is a problem with one): one with Wells Fargo for 250k and another with a local regional bank for about 500k.
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gerrym51
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Re: Is it dumb of me to not have any money in taxable?

Post by gerrym51 »

at your age a good reason to get money into taxable is Obamacare. assuming it is still in existence you will be able to get a better subsidy if you have a lower income.if you have to remove money from tax deferred accounts to live on this will be counted as earnings.
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Re: Is it dumb of me to not have any money in taxable?

Post by SpringMan »

Certainly it is not dumb, but there is a case to diversify accounts with respect to tax status. Having some taxable, some tax deferred, and some tax free(Roth) is not a bad idea. We have some of each but in our case the lion's share is still tax deferred.
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Re: Is it dumb of me to not have any money in taxable?

Post by sunnyday »

gerrym51 wrote:at your age a good reason to get money into taxable is Obamacare. assuming it is still in existence you will be able to get a better subsidy if you have a lower income.if you have to remove money from tax deferred accounts to live on this will be counted as earnings.
If that's the case wouldn't a roth account make better sense than taxable?
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Re: Is it dumb of me to not have any money in taxable?

Post by SpringMan »

With income of over 120K per year, I doubt if Obamacare subsidies apply. Once on Medicare, still at least 13 years away , AFA will not matter
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Re: Is it dumb of me to not have any money in taxable?

Post by Artsdoctor »

Travellight,

Just like asset allocation, I think there is something to gain from asset location. Tax diversification, to me, is just as important as asset diversification. When it does come time to retire, you would like to have as many options as possible in order to start drawing down.

A taxable account will allow you to sell your gains in the future at a capital gains rate which will hopefully continue to be more attractive than your income tax rate. You will be able to tax-loss harvest which can be beneficial (see the Wiki on this). You will have access to assets that are not suitable to for tax-advantaged accounts (municipal bonds, for example, whose tax-equivalent yields you may find attractive).

You should still maximize your tax-advantaged accounts as much as possible (provided they have reasonable fees), but it appears that you do have assets that you can invest in a taxable account.

I would like to think that when I am drawing down my assets in retirement, I will be able to be flexible enough to do it in order to minimize (or at least control) taxes to the best of my inability. Taxable accounts, tax-deferred accounts, tax-sheltered accounts (a Roth), and an HSA account all expand options that will hopefully be helpful.
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Re: Is it dumb of me to not have any money in taxable?

Post by Watty »

I feel like I am missing something
A reserve fund to cover large unexpended expenses on the rental property so that you don't have to take money out of one of your retirement accounts and pay taxes on it at a bad time. This is especially important before the age 59.5 or 55(for the 401k) since you will be able to get money out of the retirement accounts easier then.

Having a line of credit set up might be an alternative but you might need to get more two on different properties. The problem with just one is that if a property is damaged by a big storm then the line of credit based on that property might be cancelled.

Doing a back door Roth or doing Roth conversions after you retire but before the pension and social security start might worth looking into to see if the numbers work for you. I would suspect at all of your social security will be taxed but it would also be good to look into that so that you know just how it will be taxes.

http://www.bogleheads.org/wiki/Taxation ... y_benefits
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Re: Is it dumb of me to not have any money in taxable?

Post by gerrym51 »

SpringMan wrote:With income of over 120K per year, I doubt if Obamacare subsidies apply. Once on Medicare, still at least 13 years away , AFA will not matter


subsidies are based on income. if no income you can get big subsidies.reasons were asked for-i gave one.
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Re: Is it dumb of me to not have any money in taxable?

Post by stan1 »

This is a liquidity and leverage trade-off that you'll have to decide for yourself. Personally I would not rely on a HELOC for liquidity (but I'm probably the wrong person to ask because I would never own rental property). I guess the question for you is whether the cash flow from your rentals is good enough and whether you want more diversification away from real estate. If you are netting $120-132K/year in income now before you are retired it seems like you could divert some of this into a taxable account, if you chose to do so. From your posts we know you prefer real estate over equities and bonds so you would have to make a decision whether going forward you wanted further diversification.
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Re: Is it dumb of me to not have any money in taxable?

Post by MooreBonds »

SpringMan wrote:With income of over 120K per year, I doubt if Obamacare subsidies apply. Once on Medicare, still at least 13 years away , AFA will not matter
The OP says
travellight wrote:I have investment real estate that create income of about 120-132K per year after all costs (factored in taxes, insurance, vacancies and repairs) except mortgages.
But it's unclear what that figure exactly is. They say that the 120k-132k per year is BEFORE MORTGAGES, so it's not a given that it's also before depreciation or after.

If it's before mortgage interest and depreciation, when you add that in, PLUS other indirect self-employed business costs (business use of your home, retirement plan contributions, etc.) it is possible to bring down your Adjusted Gross Income - and perhaps quite considerably with depreciation.

Regarding the question of taxable funds - because real estate has fairly steady deductions for depreciation and capital improvements with 10-40 year depreciation schedules, there isn't really an issue of having taxable investments realize capital gains to take advantage of a sudden drop of adjusted gross income one year (barring higher than average vacancy, which the OP states isn't a considerable factor).

While it's handy to have lines of credit, I personally would prefer to have other means available, since those might not be the cheapest sources of funds. And me being a tightwad :)....I'd rather have a small stash in some account (I-bonds, CDs, whatever) to have available for whatever reason - but still growing at a respectable rate to not be a drag on my overall investment performance.

Also, one other tax consideration - Qualified Dividends and high levels of Foreign Tax Credits are worthless in your tax advantaged accounts. If you held stocks/funds paying qualified dividends or capital gain distributions (such as timber companies, pipeline MLPs, and even some various other stocks), your distributions would be taxed less (or not at all!) if you held it in taxable. By holding it in a tax-deferred account, you will be taxed at a full marginal rate when it's withdrawn (higher than 15%), versus 15% on qualified dividends and long-term capital gains if you held it in your taxable. If you hold these in you ROTH, it won't matter, since distributions are non-taxable.

Likewise, if you have any holdings that have high % of foreign tax credits available, you aren't getting the benefit of reducing your taxes by holding that in your tax-advantage accounts.
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Re: Is it dumb of me to not have any money in taxable?

Post by VictoriaF »

Artsdoctor wrote:Travellight,

Just like asset allocation, I think there is something to gain from asset location. Tax diversification, to me, is just as important as asset diversification. When it does come time to retire, you would like to have as many options as possible in order to start drawing down.

A taxable account will allow you to sell your gains in the future at a capital gains rate which will hopefully continue to be more attractive than your income tax rate. You will be able to tax-loss harvest which can be beneficial (see the Wiki on this). You will have access to assets that are not suitable to for tax-advantaged accounts (municipal bonds, for example, whose tax-equivalent yields you may find attractive).
Municipal bonds are not suitable for tax-advantaged accounts because they do not generate Federal income taxes, but they do generate state taxes. There are some state-specific municipal bonds, but I think those are too narrowly focused and thus more risky.

Tax-deferred (tIRA) and tax-free (Roth) locations, on the other hand, are excellent stores of TIPS.

Victoria
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Re: Is it dumb of me to not have any money in taxable?

Post by livesoft »

Our taxable accounts will ensure that we pay no taxes on our Roth conversions and withdrawals from our 401(k)s. It is a very subtle use of the tax laws that will let us do that. I wrote this up in this thread: http://www.bogleheads.org/forum/viewtopic.php?t=87471

Folks who do not have taxable accounts will very likely have to pay taxes on their 401(k) withdrawals. Pity that.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Thanks for your responses. A few clarifying points:

-I have health care provided for life, a great benefit at my workplace, so I am not looking into the ACA.

-I have very strong insurance policies on each home so that in case of a storm, etc., I am only at risk for the $1000 deductible.

-I do have the stomach to sleep okay with the HELOCs. I think it is unlikely I have to tap them and one is at 2.55% and the other at 4%. They are both attached to my primary home. During the 08-09 downturn, I was reassured that my account/loan would not be at risk. One of them is a unique bank product that is a mortgage as well, so it is not a pure heloc, and it is unlikely to be canceled.

-the 120-132K is after all direct costs but before depreciation. Currently, all my money (that could have gone into taxable) is going to paying down the mortgages. I only have 3 mortgages to cover 8 properties and hope to have 7 properties and 90% of value paid off in 4 years.

-with calculating depreciation, I hope to reduce my taxable income for a few years but am resigned to being in the highest tax bracket for life once the pension kicks in; and then SS and RMDs as well. I don't see a way to minimize paying taxes on these.

Thanks for all the great input. I am trying to read and process, much of it is above my level of understanding currently, hence this post. I need to sift and translate into a "why taxable is needed for me.... for dummies". :)
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

I will research and try to understand how I can withdraw from my 401k without paying taxes, seems unreal to me! My pension plus real estate income alone is going to be over 400k per year so I don't know how to avoid taxes. I need to learn your magic tricks!

I did do IRA to back door ROTH so that part helps.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

I'm already paying high taxes; I paid about 167K in income taxes last year, and another 20K in property taxes. :(

Any help is appreciated.
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Re: Is it dumb of me to not have any money in taxable?

Post by livesoft »

travellight wrote:I will research and try to understand how I can withdraw from my 401k without paying taxes, seems unreal to me! My pension plus real estate income alone is going to be over 400k per year so I don't know how to avoid taxes. I need to learn your magic tricks!

I did do IRA to back door ROTH so that part helps.
You will have to give up about $400K in income in order to avoid taxes. Sorry. I won't ever have that kind of income, so I won't have that problem. :)
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Re: Is it dumb of me to not have any money in taxable?

Post by tj »

Sounds like a good problem to have to me. You should never have to worry about $$. It's weird to me that with that kind of revenue, you wouldn't have some sort of taxable investment, but maybe you just don't need one if you have that level of stable income.
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Re: Is it dumb of me to not have any money in taxable?

Post by inbox788 »

travellight wrote:Yes, I don't keep any money in cash because I want maximum work efficiency from my money. My access to funds is 2 helocs (just in case there is a problem with one): one with Wells Fargo for 250k and another with a local regional bank for about 500k.
Where is your excess cash going today? What did the last 100k that you had go towards? If you paid down mortgages, what are your interest rates? Basically loan to self RE business is same as bonds in my book. Did you buy more property? Leveraged? That's equivalent to non-diversified REIT. Do you need diversification? I assume your tax-advantaged accounts are in a diversified low fee index, or should be. What's your AA? What percentage of your future income will come from retirement accounts vs. pension vs. RE business? Will you need estate planning? A good question to ask would be what is more tax-advantaged for beneficiaries inheriting RE property/business vs getting a step-up basis on appreciated stock. I do not know the answer, but would be interested in hearing thoughts if anyone knows.
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Re: Is it dumb of me to not have any money in taxable?

Post by White Coat Investor »

travellight wrote:All of my money is in retirement accounts, a 401k and IRA, current value is 660K and I am 52. I have investment real estate that create income of about 120-132K per year after all costs (factored in taxes, insurance, vacancies and repairs) except mortgages. (I have managed these for years and have a solid track record and I am comfortable with this income stream)

I plan to retire after these mortgages are all paid off which is in about 4 years. Mortgages should be paid off in 4 years but I would retire some time later. I would then live off this income of 120K plus. I will have a pension kick in later as well. Is there a reason that I should consider having money in taxable with this scenario? I feel like I am missing something reading threads on taxable but not sure that I need the taxable component in my scenario. Thanks in advance.
You have a taxable account. It is invested in income properties. I don't see any reason you need a taxable component above and beyond that. In fact, if you're getting an income of $120K+ from your properties I would argue that your taxable account is far bigger than your tax-protected accounts.
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Re: Is it dumb of me to not have any money in taxable?

Post by White Coat Investor »

travellight wrote:I will research and try to understand how I can withdraw from my 401k without paying taxes, seems unreal to me! My pension plus real estate income alone is going to be over 400k per year so I don't know how to avoid taxes. I need to learn your magic tricks!

I did do IRA to back door ROTH so that part helps.
You're not going to be able to avoid taxes on your 401K withdrawal given your other income. You can, however, avoid the early withdrawal penalties if you want:

http://whitecoatinvestor.com/how-to-get ... age-59-12/
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Where is your excess cash going today? What did the last 100k that you had go towards? If you paid down mortgages, what are your interest rates? Basically loan to self RE business is same as bonds in my book. Did you buy more property? Leveraged? That's equivalent to non-diversified REIT. Do you need diversification? I assume your tax-advantaged accounts are in a diversified low fee index, or should be. What's your AA? What percentage of your future income will come from retirement accounts vs. pension vs. RE business? Will you need estate planning? A good question to ask would be what is more tax-advantaged for beneficiaries inheriting RE property/business vs getting a step-up basis on appreciated stock. I do not know the answer, but would be interested in hearing thoughts if anyone knows.
Terrific questions, inbox.... thanks. Really makes me think. Here are some of the answers:

I think of my path as a rocket in propulsion trying to get out of the gravitational field so I can cruise. I am in major power out mode, i.e. extreme savings. All of my funds left over after paying mortgages and essentials went to paying down my mortgage. My discretionary spending is about $500/month. I am driven to get these mortgages paid off in 4 years, then I will relax. My interest rates are great; 2.55%, 1.99% (penfed's 5 year program) and 2.75% 15 year fixed on one rental house.

I don't know if I am leveraged..... my total mortgage debt is about 1 million, net value of real estate holdings is over 5 million. That would seem not leveraged to me. Real estate is about 90% of my portfolio so some may think I need diversification. I see it as being diversified in 3 buckets: pension, real estate, and equities (all of which are in tax advantaged retirement funds). I am capable of living on only one bucket if two should fail.

Future income: about 200k/year pension, 120-132+k per year real estate, and investments are whatever current 660K turns into and yields. Yes, they are all in Vanguard low fee index funds. My AA was 60/40 stocks/bonds but I changed future allocations (didn't sell what I have) to 100% stocks due to my feeling that I have a very secure situation with the other buckets and can take the risk.

I don't have the answer to your last two questions. Clearly, I do need estate planning and need to get answers to these. I do have a living trust. I am a single mom with one child and I have distribution of his funds/inheritance in the case of premature death to be graduated until age 30.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

You have a taxable account. It is invested in income properties. I don't see any reason you need a taxable component above and beyond that. In fact, if you're getting an income of $120K+ from your properties I would argue that your taxable account is far bigger than your tax-protected accounts.
Ha! That is a great perspective, emergdoc. I never looked at it this way. Thanks.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Also, one other tax consideration - Qualified Dividends and high levels of Foreign Tax Credits are worthless in your tax advantaged accounts. If you held stocks/funds paying qualified dividends or capital gain distributions (such as timber companies, pipeline MLPs, and even some various other stocks), your distributions would be taxed less (or not at all!) if you held it in taxable. By holding it in a tax-deferred account, you will be taxed at a full marginal rate when it's withdrawn (higher than 15%), versus 15% on qualified dividends and long-term capital gains if you held it in your taxable. If you hold these in you ROTH, it won't matter, since distributions are non-taxable.

Likewise, if you have any holdings that have high % of foreign tax credits available, you aren't getting the benefit of reducing your taxes by holding that in your tax-advantage accounts.
Thanks, Moorebond. This is the kind of high level stuff I don't yet understand. I will try to learn this. Your post takes me from "I don't know what I don't know" to "at least now I do know what I don't know".... and I can work to acquire this knowledge.
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Re: Is it dumb of me to not have any money in taxable?

Post by prudent »

gerrym51 wrote:at your age a good reason to get money into taxable is Obamacare. assuming it is still in existence you will be able to get a better subsidy if you have a lower income.if you have to remove money from tax deferred accounts to live on this will be counted as earnings.
I wonder if this will cause tax-deferred "bunching" of withdrawals - draw out more than necessary in one year and get no subsidy, then the next year live off the earlier withdrawal to qualify for the subsidy.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

by VictoriaF » Sun Dec 01, 2013 8:37 am

Artsdoctor wrote:
Travellight,

Just like asset allocation, I think there is something to gain from asset location. Tax diversification, to me, is just as important as asset diversification. When it does come time to retire, you would like to have as many options as possible in order to start drawing down.

A taxable account will allow you to sell your gains in the future at a capital gains rate which will hopefully continue to be more attractive than your income tax rate. You will be able to tax-loss harvest which can be beneficial (see the Wiki on this). You will have access to assets that are not suitable to for tax-advantaged accounts (municipal bonds, for example, whose tax-equivalent yields you may find attractive).


Municipal bonds are not suitable for tax-advantaged accounts because they do not generate Federal income taxes, but they do generate state taxes. There are some state-specific municipal bonds, but I think those are too narrowly focused and thus more risky.

Tax-deferred (tIRA) and tax-free (Roth) locations, on the other hand, are excellent stores of TIPS.
More good homework for me. Thanks artsdoctor and Victoria.

I am feeling like it is okay right now for me to continue my path and not have taxable. Once I pay off mortgages in 4 years, it should be smart to channel all those funds to starting taxable accounts (whatever is left after fully funding graduate education for my son, lol).
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Re: Is it dumb of me to not have any money in taxable?

Post by Dandy »

One issue with large tax deferred accounts is that their growth often makes RMDs rather large, especially in later retirement. This can mean that you will be in a very high tax bracket given a pension, ss and money from your real estate investments.

You should try to max out Roth IRA, perhaps with conversions if needed if you haven't done that already. Its not dumb to have little in taxable but I would not want to rely on home equity loans. A bit in a muni fund would be what I would do. Then again I don't have your nice cash flow.
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Re: Is it dumb of me to not have any money in taxable?

Post by VictoriaF »

travellight wrote:I did do IRA to back door ROTH so that part helps.
Are all your current IRA money in Roth? If not, when you convert to Roth you have to take proportionally from pre-tax and post-tax IRAs and pay taxes on the "pre-tax" parts.

If it's currently all Roth, be careful about rolling your 401(k) into an IRA, because that would cause proportional conversions.

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Re: Is it dumb of me to not have any money in taxable?

Post by grabiner »

SpringMan wrote:Certainly it is not dumb, but there is a case to diversify accounts with respect to tax status. Having some taxable, some tax deferred, and some tax free(Roth) is not a bad idea. We have some of each but in our case the lion's share is still tax deferred.
Diversification between tax-deferred and tax-free makes sense, because they have similar benefits. Diversification between taxable and tax-advantaged has a large cost, so you should only use it if necessary (either because you don't have room for tax-advantaged savings, or because you will need to use money before retirement and would have a penalty if you withdraw it from tax-deferred.

If you retire before 59-1/2, you can withdraw contributions, and conversions made at least five years ago, from a Roth IRA tax-free and penalty-free. Beyond that, you would have to take Substantially Equal Periodic Payments from an IRA; look up the IRS guidance.
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Re: Is it dumb of me to not have any money in taxable?

Post by VictoriaF »

grabiner wrote:Diversification between tax-deferred and tax-free makes sense, because they have similar benefits.
David,

What are the benefits of the diversification between tax-deferred and tax-free? Does not it make sense to convert tax-deferred into tax-free (Roth) during early retirement years and by the time of claiming Social Security at the age of 70 to have only Roth?

Thank you,

Victoria
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Re: Is it dumb of me to not have any money in taxable?

Post by grabiner »

VictoriaF wrote:
grabiner wrote:Diversification between tax-deferred and tax-free makes sense, because they have similar benefits.
David,

What are the benefits of the diversification between tax-deferred and tax-free? Does not it make sense to convert tax-deferred into tax-free (Roth) during early retirement years and by the time of claiming Social Security at the age of 70 to have only Roth?
Either tax-deferred or tax-free may be better, depending on the tax rate when you contribute to tax-free and when you withdraw. If one is clearly better, you would go with everything in that account. But if you expect to retire in the same tax bracket, you may want to diversify because of the risk that your income tax rate will go either up or down in retirement.

Unless you have an annuity or other source of income, you don't want to have only a Roth when you take Social Security; you'll waste much of the 15% tax bracket.
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Re: Is it dumb of me to not have any money in taxable?

Post by VictoriaF »

grabiner wrote:
VictoriaF wrote:
grabiner wrote:Diversification between tax-deferred and tax-free makes sense, because they have similar benefits.
David,

What are the benefits of the diversification between tax-deferred and tax-free? Does not it make sense to convert tax-deferred into tax-free (Roth) during early retirement years and by the time of claiming Social Security at the age of 70 to have only Roth?
Either tax-deferred or tax-free may be better, depending on the tax rate when you contribute to tax-free and when you withdraw. If one is clearly better, you would go with everything in that account. But if you expect to retire in the same tax bracket, you may want to diversify because of the risk that your income tax rate will go either up or down in retirement.

Unless you have an annuity or other source of income, you don't want to have only a Roth when you take Social Security; you'll waste much of the 15% tax bracket.
I am making tax-deferred contributions at the 28% marginal rate but will be taking money out or converting to Roth at the 25% rate. After I start taking Social Security I will be in the 25% bracket due to other income sources. Thus, converting all tax-deferred money into Roth prior to the age of 70 seems to make sense in my case.

Thank you,

Victoria
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Re: Is it dumb of me to not have any money in taxable?

Post by Artsdoctor »

Travellight,

A couple of things. Given your income and assets, you MUST familiarize yourself with federal and state tax laws. I know it's boring and cumbersome, but it's a necessary evil. Spend some time with the Wiki here--it's very helpful. You and I are both California residents, and it took me a long time to factor in state taxes; it seems everyone is so focused on federal taxes that state taxes really don't get the attention they deserve. And that might be OK if you lived in a low tax state but CA is not. If you don't feel you can stomach reading about it, bite the bullet and spend the money to talk to your accountant. Take him/her out to dinner. It is worth it.

Given your age, bonds may not be that important and I understand that. But ultimately you will need some. Municipals will be essential, given your tax bracket. Victoria's point is well-taken; there are two CA muni bond funds but you are tying things up in one state. But you can easily diversify: some in a CA muni fund and some in a national fund. The state tax benefit for you will be worth it. And there will probably be a role for individual munis as well.

I wish I could tell you that you don't need to learn about tax rules, but your situation is complicated that it is really important.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

by Dandy » Sun Dec 01, 2013 12:37 pm

One issue with large tax deferred accounts is that their growth often makes RMDs rather large, especially in later retirement. This can mean that you will be in a very high tax bracket given a pension, ss and money from your real estate investments.

You should try to max out Roth IRA, perhaps with conversions if needed if you haven't done that already. Its not dumb to have little in taxable but I would not want to rely on home equity loans. A bit in a muni fund would be what I would do. Then again I don't have your nice cash flow.


I don't think I know of a way right now of avoiding being in the highest tax bracket in retirement, Dandy. I need to learn more about muni funds, it seems. I am in the process of completing a back door ROTH IRA conversion.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

by VictoriaF » Sun Dec 01, 2013 1:42 pm

travellight wrote:
I did do IRA to back door ROTH so that part helps.


Are all your current IRA money in Roth? If not, when you convert to Roth you have to take proportionally from pre-tax and post-tax IRAs and pay taxes on the "pre-tax" parts.

If it's currently all Roth, be careful about rolling your 401(k) into an IRA, because that would cause proportional conversions.

Victoria
Luckily my situation was optimal for a back door ROTH conversion, Victoria. It is all post tax money so I simply converted my basis to a ROTH IRA and am transferring my pre-tax gains to my 401k at work which accepts it. I should occur no taxes with this. Thanks.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

grabiner » Sun Dec 01, 2013 3:57 pm

SpringMan wrote:
Certainly it is not dumb, but there is a case to diversify accounts with respect to tax status. Having some taxable, some tax deferred, and some tax free(Roth) is not a bad idea. We have some of each but in our case the lion's share is still tax deferred.


Diversification between tax-deferred and tax-free makes sense, because they have similar benefits. Diversification between taxable and tax-advantaged has a large cost, so you should only use it if necessary (either because you don't have room for tax-advantaged savings, or because you will need to use money before retirement and would have a penalty if you withdraw it from tax-deferred.

If you retire before 59-1/2, you can withdraw contributions, and conversions made at least five years ago, from a Roth IRA tax-free and penalty-free. Beyond that, you would have to take Substantially Equal Periodic Payments from an IRA; look up the IRS guidance.
Thanks David. I am understanding that your advice is to do taxable only if I feel it would be necessary due to needing the money before retirement due to the large cost difference. That is good to know about being able to withdraw from the Roth IRA without cost for contributions made at least 5 years ago.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Municipals will be essential, given your tax bracket. Victoria's point is well-taken; there are two CA muni bond funds but you are tying things up in one state. But you can easily diversify: some in a CA muni fund and some in a national fund. The state tax benefit for you will be worth it. And there will probably be a role for individual munis as well.

I wish I could tell you that you don't need to learn about tax rules, but your situation is complicated that it is really important.
Thanks, artsdoctor. I think I need to study munis! I can probably invest in them within my tax-advantaged accounts unless there is particular reason to do it within a taxable account? I do think about state taxes quite a bit; I paid about 35K last year in state taxes. When I retire, I plan to downsize in California and make my primary residence (6 months+ per year) in a tax free state since it will be worth 35K/year for me to do so.
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tadamsmar
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Re: Is it dumb of me to not have any money in taxable?

Post by tadamsmar »

What's your long-term plan for the real estate you manage? Looks like you plan to move to another state. Seems like moving away and ageing might make it harder to manage. If you sell it you get hit with a big tax bill. You can do a tax-free exchange for a different property. Perhaps you have heirs that can manage the properties as you get older.

I got rid of some real estate partly because I did not want to manage it in my old age. But for another person with a different mindset, that might seem like a good retirement activity I guess.
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Re: Is it dumb of me to not have any money in taxable?

Post by Artsdoctor »

travellight wrote:
Municipals will be essential, given your tax bracket. Victoria's point is well-taken; there are two CA muni bond funds but you are tying things up in one state. But you can easily diversify: some in a CA muni fund and some in a national fund. The state tax benefit for you will be worth it. And there will probably be a role for individual munis as well.

I wish I could tell you that you don't need to learn about tax rules, but your situation is complicated that it is really important.
Thanks, artsdoctor. I think I need to study munis! I can probably invest in them within my tax-advantaged accounts unless there is particular reason to do it within a taxable account? I do think about state taxes quite a bit; I paid about 35K last year in state taxes. When I retire, I plan to downsize in California and make my primary residence (6 months+ per year) in a tax free state since it will be worth 35K/year for me to do so.
Travellight,

Municipal bond are usually NOT taxed at the federal level and MAY not be taxed at the state level is you buy a state municipal bond. They are ONLY suitable for a taxable account. They should NOT be placed in a Roth or 401, etc.

Spend some time with the Wiki here before you get pulled in different directions. "The Bogleheads' Guide to Investing" is not a bad place to start either.

Best wishes.
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Re: Is it dumb of me to not have any money in taxable?

Post by marcos123 »

MooreBonds wrote: Also, one other tax consideration - Qualified Dividends and high levels of Foreign Tax Credits are worthless in your tax advantaged accounts.....
Likewise, if you have any holdings that have high % of foreign tax credits available, you aren't getting the benefit of reducing your taxes by holding that in your tax-advantage accounts.
Great point. Consideration of whether to place Foreign Equity or Foreign Bond Funds in taxable or tax-advantaged owing to the potential presence of the Foreign Tax Credit is indeed critical and often overlooked. I have bold-faced/underlined what I consider the key operative phrase above.

In the final analysis, though, it may still be worth placing Foreign Equity and Foreign Bond Funds with Foreign Tax Credits in tax-advantaged depending on, other factors being equal (such factors include: the proportion of the fund's earnings which are foreign source,the proportion of that which are Qualified Dividends and long-term capital gains, and the overall tax efficiency of the fund), the differential in the foreign tax rate that the fund itself is subjected to vs. the fund-holder's own actual marginal (US) tax bracket. I am always happy to forego the FTC inside a tax-advantaged account if that will also result in net lower US taxes.

For this reason, depending on the specifics (see above) of the foreign fund, I maintain them in both taxable and tax-advantaged space.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

thanks marcos123 and artsdoctor. I will try to learn more about these concepts.
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VictoriaF
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Re: Is it dumb of me to not have any money in taxable?

Post by VictoriaF »

Artsdoctor wrote:
travellight wrote:
Municipals will be essential, given your tax bracket. Victoria's point is well-taken; there are two CA muni bond funds but you are tying things up in one state. But you can easily diversify: some in a CA muni fund and some in a national fund. The state tax benefit for you will be worth it. And there will probably be a role for individual munis as well.

I wish I could tell you that you don't need to learn about tax rules, but your situation is complicated that it is really important.
Thanks, artsdoctor. I think I need to study munis! I can probably invest in them within my tax-advantaged accounts unless there is particular reason to do it within a taxable account? I do think about state taxes quite a bit; I paid about 35K last year in state taxes. When I retire, I plan to downsize in California and make my primary residence (6 months+ per year) in a tax free state since it will be worth 35K/year for me to do so.
Travellight,

Municipal bond are usually NOT taxed at the federal level and MAY not be taxed at the state level is you buy a state municipal bond. They are ONLY suitable for a taxable account. They should NOT be placed in a Roth or 401, etc.

Spend some time with the Wiki here before you get pulled in different directions. "The Bogleheads' Guide to Investing" is not a bad place to start either.

Best wishes.
If Travellight retires in four years and moves out of California, does it still make sense for him to hold California municipal bonds for four years?

Victoria
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

tadamsmar » Mon Dec 02, 2013 5:54 am

What's your long-term plan for the real estate you manage? Looks like you plan to move to another state. Seems like moving away and ageing might make it harder to manage. If you sell it you get hit with a big tax bill. You can do a tax-free exchange for a different property. Perhaps you have heirs that can manage the properties as you get older.

I got rid of some real estate partly because I did not want to manage it in my old age. But for another person with a different mindset, that might seem like a good retirement activity I guess.
Great question. I am already managing from another state (properties are in Utah and I live in California) so the future move is not an issue. At some point though, I will want to sell. My thought was to sell some time in my retirement and move to each house for two years (all 4 are lovely SFRs in great neighborhoods) and then sell a house every two years to get the exemption. There are two homes I will not want to live in and those I will just have to sell and pay the capital gains tax on one (lowest appreciation, smallest house) and do a 1031 exchange on the other (a duplex) to buy a home in a tax free state (I am thinking of Seattle or Vancouver, Washington right now, Vancouver is essentially Portland, Oregon without state income tax). If I don't feel like moving through all four other homes, I will just sell and pay the tax. I don't count on my heirs to manage it so I will liquidate by age 70. I hope to only have personal residences at age 70.

You are right; there is work involved in real estate. I am pretty sure I will be ready to give that up by age 70 and will plan a de-accumulation period over 8 years.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

I don't know if I am leveraged..... my total mortgage debt is about 1 million, net value of real estate holdings is over 5 million. That would seem not leveraged to me. Real estate is about 90% of my portfolio so some may think I need diversification. I see it as being diversified in 3 buckets: pension, real estate, and equities (all of which are in tax advantaged retirement funds). I am capable of living on only one bucket if two should fail.
I have been thinking about my response to inbox on this issue of whether I am leveraged or not. I think in a sense, I am leveraged but I think in a good way. From the current perspective that I have about 20% debt and 80% equity in real estate, it seems not leveraged to me. However, my total cash in was $239K to purchase $1,743,000 (purchase price of all rental real estate) which is now worth $2,369,000 (up 626k or 32%). This investment of 239K of my money is earning me yearly income of 120-142K per year. To get equivalent earnings without touching principal using 4% withdrawal rate would require about/over 3 million of my money in a liquid fund. My real estate activity has been over a 3-6 year period to realize those gains. I think it is favorable to tie up 239k of my money to get the same or better yearly income as 3 million.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Just a point of clarification: that 239K to 3 million comparison is just after the mortgage is paid off. The favorable aspect is due to tenants doing the heavy lifting and paying off the mortgage for me, and tax benefits of depreciation. What I have not been able to calculate out is how much of my earned money would have had to have been invested to yield 3 million over the same time period. I somehow don't think it would be as low as 239k.
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Re: Is it dumb of me to not have any money in taxable?

Post by leonard »

You are essentially asking if it is smart to maximize tax advantaged contributions - the other side of the coin. Yes.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

by leonard » Mon Dec 02, 2013 10:44 am

You are essentially asking if it is smart to maximize tax advantaged contributions - the other side of the coin. Yes.
Well, that part seems like a no-brainer, Leonard. lol... Of course it is smart to max out tax advantagedcontributions. I just wanted to know if I was missing a link and a critical step in not having any taxable money in my situation. I've learned a lot on this thread about what I don't know that I need to study.
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Re: Is it dumb of me to not have any money in taxable?

Post by tadamsmar »

One reason to have money in taxable investments rather than real estate is that it's more passive so you can perhaps better manage it for the rest of your life so that your heirs inherit it and get the stepped up basis. If your in real estate and you can't turn management over to the kids and you can't manage it yourself until it's inherited, then you can end up getting out of real estate and paying the tax man. You can also pay a property manager and keep the real estate, but a good one is costly and needs to be monitored.
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Re: Is it dumb of me to not have any money in taxable?

Post by leonard »

travellight wrote:
by leonard » Mon Dec 02, 2013 10:44 am

You are essentially asking if it is smart to maximize tax advantaged contributions - the other side of the coin. Yes.
Well, that part seems like a no-brainer, Leonard. lol... Of course it is smart to max out tax advantagedcontributions. I just wanted to know if I was missing a link and a critical step in not having any taxable money in my situation. I've learned a lot on this thread about what I don't know that I need to study.
I would add one thing after reviewing your info above - I understand you have 2 HELOC's for emergencies. However, there is nothing like cash, especially when one of those unpredictable rental problems happens over a weekend - roof, hotwater heater, sewer-septic system, and who knows what else. I personally would feel better having some cash as a business emergency fund in those instances - in case you can't access either HELOC for some reason. For me the "drag" on performance would be worth the piece of mind.
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