VG Target Retirement Income Fund or slice and dice?

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invhelpme
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VG Target Retirement Income Fund or slice and dice?

Post by invhelpme » Sun Mar 17, 2013 3:23 pm

Mom has $70,000 in a brokerage account invested in 75% individual stocks and 25% cash. She wants to lower her equity allocation to 30% stock/70% bonds in a single fund that rebalances itself. This is NOT in a tax-advantaged account. We know that balanced funds are not as tax efficient as say Total Us and Total International Funds. We want to minimizes taxes at the end of each year from distributions of dividends and capital gains as much as possible. All dividends will be reinvested. Which portfolio would you all recommend?

1. VG Retirement Income(VIENX) -100%

2. Total US Stock Index Admiral (VTSAX)- 25%
Total International Stock Index (VGTSX) -5%
Intermediate Term Tax Exempt (VWITX) -35%
Limited Term Tax-Exempt ( VMLTX) -35%

Which portfolio would have the least tax consequences at the end of the year? She is in the 25% tax bracket. With the slice and dice I would want her to rebalance at least once per year. With the single fund it rebalances itself. I realize the bonds in the Retirement Income fund are not tax-exempt.

Thanks to all help in advance.

livesoft
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Re: VG Target Retirement Income Fund or slice and dice?

Post by livesoft » Sun Mar 17, 2013 3:28 pm

Personally, I don't think one will want to rebalance once a year. I think they will want to look to see if they need to rebalance and will find that things haven't moved far enough out of balance and thus do nothing. They can even look often and find they need to do nothing.

You did not mention mom's age. Her tax bracket and current bond yields suggest that Target Retirement will OK for her tax-wise.

As for "least tax consequences" please tell me the distributions that your two suggested portfolios had in 2011 and 2012, then I can tell you which one might have the least tax consequences in 2013. Or did you want me to look that up for you?
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tyler_cracker
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Re: VG Target Retirement Income Fund or slice and dice?

Post by tyler_cracker » Sun Mar 17, 2013 3:35 pm

invhelpme,

does your mother have any tax-advantaged space at all, or does her entire portfolio live in taxable?

if your #1 goal is really to avoid taxes, then a TR fund will never be optimal since it contains "regular" bonds which are not a tax-efficient investment. you might do better by managing your own simple portfolio that looks very similar to a TR fund but which uses a more tax-friendly investment like municipal bonds or some kind of tax-managed bond fund.

...which i guess is your second proposed portfolio, more or less.

you and your mother will have to decide whether the extra care and feeding for the manual portfolio are worth the the tax savings.

invhelpme
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Re: VG Target Retirement Income Fund or slice and dice?

Post by invhelpme » Sun Mar 17, 2013 3:41 pm

Mother is 71 and doesn't want to put any new money into an IRA since she would have to take distributions. I don't know how much the divendend distributed but can tell you it it was from six large cap stocks like McDonald, Coke, Exxon, ect. Thank you for your help.

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tyler_cracker
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Re: VG Target Retirement Income Fund or slice and dice?

Post by tyler_cracker » Sun Mar 17, 2013 3:44 pm

i don't know much about how RMDs work, but i *think* you might be leaving some money on the table by not using an IRA at all.

livesoft was asking about the dividend consequences of your proposed portfolios, not the one she has now (which, since you're getting rid of it, isn't relevant to the discussion). by looking at how those portfolios performed in the past vis-a-vis tax consequences, we can take some guesses about how those two portfolios will perform in the future vis-a-vis tax consequences. this information may help with your current dilemma.

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BrandonBogle
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Re: VG Target Retirement Income Fund or slice and dice?

Post by BrandonBogle » Sun Mar 17, 2013 4:00 pm

Invhelpme, will your mom take big capital gains from selling these stocks? Not saying you shouldn't move away from the individual holdings, but doing taxable bonds in the same year as large gap gains is really going to make the tax man happy. Depending on the big picture, it may be worthwhile to sell certain lots, donate others, and have any and all future distributions go to the new portfolio allocation.

Also, you mention she does my want to put any in IRA because of RMDs, but does she already have any IRAs? If so, what are they invested in. We need to make sure we are looking at the total portfolio across all accounts.

invhelpme
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Re: VG Target Retirement Income Fund or slice and dice?

Post by invhelpme » Sun Mar 17, 2013 4:10 pm

I'm afraid she would have a lot of long term capital gains as these stocks have been held for a long time. The only other portfolio she has is a small 401k with Fidelity since she still works. It only has about $6,000.00 in it. Thanks

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tyler_cracker
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Re: VG Target Retirement Income Fund or slice and dice?

Post by tyler_cracker » Sun Mar 17, 2013 4:13 pm

6k of available space for stashing bonds is nothing to sneeze at.

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BrandonBogle
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Re: VG Target Retirement Income Fund or slice and dice?

Post by BrandonBogle » Sun Mar 17, 2013 4:13 pm

invhelpme wrote:I'm afraid she would have a lot of long term capital gains as these stocks have been held for a long time. The only other portfolio she has is a small 401k with Fidelity since she still works. It only has about $6,000.00 in it. Thanks
While it may only be $6k, I would devote that 100% to a good bond fund (if available) and max out the contributions to it to offset the amount of income being taxed.

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tyler_cracker
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Re: VG Target Retirement Income Fund or slice and dice?

Post by tyler_cracker » Sun Mar 17, 2013 4:15 pm

this is also a great example of why you should follow directions and use the template for posting portfolio questions: http://www.bogleheads.org/forum/viewtop ... f=1&t=6212. it's hard to give good advice without the complete picture.

livesoft
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Re: VG Target Retirement Income Fund or slice and dice?

Post by livesoft » Sun Mar 17, 2013 4:16 pm

So could she contribute $23,000 to the 401(k) dropping her tax bracket and then live off her accounts? If one is in the 15% marginal income tax bracket, my impression is that long-term realized cap gains are tax-free and so are qualified dividends. It may not be possible, but it is worth a look.

And when she is in the lower tax bracket, she could do some conversion of 401(k) and IRA money to Roth IRA. That is, possibly pay no taxes now and no more taxes in the future as well. Of course, this is conjecture based on lack of information, but it is food for thought.
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BL
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Re: VG Target Retirement Income Fund or slice and dice?

Post by BL » Sun Mar 17, 2013 4:19 pm

invhelpme wrote:Mother is 71 and doesn't want to put any new money into an IRA since she would have to take distributions. I don't know how much the divendend distributed but can tell you it it was from six large cap stocks like McDonald, Coke, Exxon, ect. Thank you for your help.
This is what happens when the suggested format for asking questions is not followed. The above suggests that she may be still working, otherwise she would not consider an IRA. She is not eligible for a traditional IRA but if working she could use a Roth and/or 401k.

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BrandonBogle
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Re: VG Target Retirement Income Fund or slice and dice?

Post by BrandonBogle » Sun Mar 17, 2013 4:20 pm

livesoft wrote:So could she contribute $23,000 to the 401(k) dropping her tax bracket and then live off her accounts? If one is in the 15% marginal income tax bracket, my impression is that long-term realized cap gains are tax-free and so are qualified dividends. It may not be possible, but it is worth a look.

And when she is in the lower tax bracket, she could do some conversion of 401(k) and IRA money to Roth IRA. That is, possibly pay no taxes now and no more taxes in the future as well. Of course, this is conjecture based on lack of information, but it is food for thought.
Yup. Getting her to the 15% bracket can save a bundle on her cap gains!

invhelpme
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Re: VG Target Retirement Income Fund or slice and dice?

Post by invhelpme » Sun Mar 17, 2013 4:29 pm

My apologies to you all for not using proper posting procedures. You are correct and I should have followed the procedures. I'll remember that next time. Sorry. My Mother probably will not need this money and will be handed down to my brother and I. My parents were farmers. Their retirement money comes from the cash rent they receive from the land they own and not rent out. Thanks again.

livesoft
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Re: VG Target Retirement Income Fund or slice and dice?

Post by livesoft » Sun Mar 17, 2013 4:31 pm

So why doesn't your mom give you the money now when she is still alive to see you enjoy it?
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invhelpme
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Re: VG Target Retirement Income Fund or slice and dice?

Post by invhelpme » Sun Mar 17, 2013 4:37 pm

Good question. She and my Dad are very different. She is still very conservative with her money. She may think she might need it for a nursing home to gooble up if she lives to be 100. I can't blame her though because it is her money.

bdpb
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Re: VG Target Retirement Income Fund or slice and dice?

Post by bdpb » Mon Mar 18, 2013 12:44 am

You really need to be specific with all the details. It is very possible that your mother is not in the 25% bracket. If she is drawing SS, it's very possible she could paying taxes at a 37.5% marginal rate.

It might make sense to put as much as possible into her 401k. It might also make sense to take a tax hit from selling all in one year and using the proceeds to fund future 401k and Roth contributions.

You should not take any advice given here until you reveal additional details.

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