Tax-efficient fund placement?

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Whacker
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Joined: Sun Mar 29, 2015 1:12 am

Tax-efficient fund placement?

Post by Whacker » Sun Apr 15, 2018 12:09 pm

Helping a retired family member who has little investment experience/aptitude simplify and diversify into a 3-fund-ish portfolio. I will help implement, manage, and rebalance. The Wiki on tax-efficient fund placement and several posts on the topic have helped me create a target portfolio (outlined below). Due to the recent downturn in the market, I think we can harvest about $30k in losses as we implement these changes.

Emergency funds: Yes
Debt: No debt
Tax Filing Status: Married Filing Separately (2018), Single thereafter
Tax Rate: 22% Federal, 7.4% State
State of Residence: ID
Age: 73
Desired Asset allocation: 60/40
Desired International allocation: 33% of stocks

Low seven figures portfolio divided among the following account types:
Taxable: 52%
tIRA: 33%
Roth IRA: 7%
Cash Savings: 8%

Relative wants to keep 2-3 years of spending in high-interest savings acct, which we are counting toward the bond allocation. Yes, this creates drag and does not maximize tax-efficiency, but it helps relative sleep at night.

Anticipated withdrawal rate: 3% (RMD with the balance from taxable/cash)

The following fund placement (US/Intl/Bond) would hit the overall 60/40 AA target, and is my attempt at tax-efficient placement:
Taxable: 66/34/0
tIRA: 6/0/94
Roth IRA: 66/34/0
Cash Savings

US: FUSVX – Fidelity 500 Index
Intl: FSGDX – Fidelity Global Ex US
Bond: FSITX – Fidelity Us Bond Index, Brokered CD Ladder, and Cash Savings

Questions:
1) Is the fund placement outlined above appropriate for tax-efficiency?
2) Is it more/less complicated than it needs to be?
3) Should we consider another type of fixed-income (munis, treasuries, etc.) specifically due to tax-efficiency and available tax-advantaged space?
Edit to add: 4) After the tIRA is 100% bonds (due to RMDs, rebalancing, etc.), where would be the next best place to hold fixed income and what type?
Last edited by Whacker on Thu Apr 19, 2018 8:27 am, edited 1 time in total.

mega317
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Re: Tax-efficient bond/fixed-income placement

Post by mega317 » Sun Apr 15, 2018 1:02 pm

Looks good to me with the information available. Any improvement would just be at the fringes.

Setting aside the fact that I would never want 2-3 years of cash, you could put it in treasuries with higher yield and no state tax. Even 1 month treasuries beat, after taxes, some of the best high-yield savings accounts right now. Laddering them out to 2 or 3 years is far superior, although more effort. Also consider putting the 6% stocks in tIRA in some cash-equivalent and then putting the taxable cash in stocks. Again all of this is of probably no practical difference.

It doesn't make sense to use munis instead of tax-deferred total bond in my opinion.

Edit to add at 3% withdrawal rate and already in your 70s, you could even consider increasing the stock allocation since you're investing for heirs.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Tax-efficient fund placement?

Post by retiredjg » Sun Apr 15, 2018 1:33 pm

It looks fine to me.

Intl: FSGDX – Fidelity Global Ex US <<---there is a newer and maybe "better" fund available. Take a look at FTIPX Fidelity Total International Index. There's not a great deal of difference. FTIPX just adds small caps.

livesoft
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Re: Tax-efficient fund placement?

Post by livesoft » Sun Apr 15, 2018 3:20 pm

And instead of FUSVX, go total US stock FSTVX.
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Whacker
Posts: 25
Joined: Sun Mar 29, 2015 1:12 am

Re: Tax-efficient bond/fixed-income placement

Post by Whacker » Sun Apr 15, 2018 3:47 pm

mega317 wrote:
Sun Apr 15, 2018 1:02 pm
Looks good to me with the information available. Any improvement would just be at the fringes.

Setting aside the fact that I would never want 2-3 years of cash, you could put it in treasuries with higher yield and no state tax. Even 1 month treasuries beat, after taxes, some of the best high-yield savings accounts right now. Laddering them out to 2 or 3 years is far superior, although more effort. Also consider putting the 6% stocks in tIRA in some cash-equivalent and then putting the taxable cash in stocks. Again all of this is of probably no practical difference.

It doesn't make sense to use munis instead of tax-deferred total bond in my opinion.

Edit to add at 3% withdrawal rate and already in your 70s, you could even consider increasing the stock allocation since you're investing for heirs.
Thanks for reviewing and taking the time to respond. All helpful comments/suggestions.

Whacker
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Joined: Sun Mar 29, 2015 1:12 am

Re: Tax-efficient fund placement?

Post by Whacker » Thu Apr 19, 2018 8:25 am

After the tIRA is 100% bonds (due to RMDs, rebalancing, etc.), where would be the next best place to hold fixed income and what type?

retiredjg
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Re: Tax-efficient fund placement?

Post by retiredjg » Thu Apr 19, 2018 8:30 am

Of the accounts you have available, I'd put the rest of the bonds in taxable and reserve most or all of the Roth IRA for stock funds. The "bonds in taxable" could be CDs if you like Cds and can find some at good rates.

Whacker
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Re: Tax-efficient fund placement?

Post by Whacker » Thu Apr 19, 2018 10:21 am

retiredjg wrote:
Thu Apr 19, 2018 8:30 am
Of the accounts you have available, I'd put the rest of the bonds in taxable and reserve most or all of the Roth IRA for stock funds. The "bonds in taxable" could be CDs if you like Cds and can find some at good rates.
The general idea being we should try to save the Roth space for maximum growth, correct?

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Peter Foley
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Re: Tax-efficient fund placement?

Post by Peter Foley » Thu Apr 19, 2018 11:25 am

Whacker wrote:
The general idea being we should try to save the Roth space for maximum growth, correct?
Yes to the question posed above. Putting the taxable into CD's as recommended is fine. Interest rates for short term CD's are nearing the rate of inflation so one is basically maintaining buying power. Some here recommend a tax free bond fund or intermediate term treasuries as alternatives to CD's. I do not have an opinion in that regard.

inbox788
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Re: Tax-efficient fund placement?

Post by inbox788 » Thu Apr 19, 2018 11:45 am

Whacker wrote:
Sun Apr 15, 2018 12:09 pm
I think we can harvest about $30k in losses as we implement these changes.
Tax Rate: 22% Federal, 7.4% State
Age: 73
Desired Asset allocation: 60/40
...
Relative wants to keep 2-3 years of spending in high-interest savings acct, which we are counting toward the bond allocation. Yes, this creates drag and does not maximize tax-efficiency, but it helps relative sleep at night.
1) looks pretty good
2) I'd just forgo the 6% tIRA and use 100% bond in tIRA now (it's 6% of 33%, so around 2% of overall portfolio, so with a 4% SWR, it's just about 6 months, plus you have RMD to deal with, so do it now or Jan 2019)
3&4) I'd use Tax Exempt in Taxable.

Is there other income or just the RMD that puts him in the 22% tax bracket? What will the 30k losses (TLH) take the marginal tax rate to and capital gains tax rate? Does it make sense to use it all and/or sell some taxable for gains? Can you TLH and TGH at the same time not just simply cancelling out? I still seem to be confused by this matter... viewtopic.php?t=226550#p3509596

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