Portfolio Check Up: fund placement and tax efficiency

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
TXJeff
Posts: 103
Joined: Mon Sep 25, 2017 7:47 pm

Re: Portfolio Check Up: fund placement and tax efficiency

Post by TXJeff » Mon Feb 25, 2019 11:15 am

celia wrote:
Fri Feb 15, 2019 6:36 pm
Comments are in a random order:
TXJeff wrote:
Tue Feb 12, 2019 2:48 pm
retiredjg wrote:
Tue Feb 12, 2019 11:50 am
How important is it to you to stay under a limit to get ACA subsidies? What is the number you need to stay under?
For 2019, I need to stay under $48,000. Subsidy at that amount is just under $4,000. Note that in the taxable account, some of those individual holdings are non-dividend stocks. Early estimate is that I can prob. do $28,000 in Roth conversion this year.
If you’re serious about Roth conversions, you will need to convert a lot more than $28K /year. That doesn't even make a dent in the tIRA balance. The growth per year in the tIRA is likely more than $28K /year.

I’m not that familiar with the ACA, but my impression is that it is not very compatible to get ACA subsidies (by keeping your income low) AND do much in Roth conversions (which makes your income high). You need to choose which ONE OF THEM you will do in a given year.

To get a picture of what lies ahead, have you made something like a financial timeline (spreadsheeet) for yourself with a column for each year showing what your incomes would be for the year and calculate the taxes for each year, such as in this example which was created under the old tax code. (It is also immediately preceded with an example chart showing three possible Roth conversion drawdowns that illustrate what will happen after age 70.) Your timeline needs to go to at least age 72 to see what RMDs and SS will do to your taxes. Give growth to the tIRA each year from now until then according to the AA of just the tIRA. If your taxes will be over the 22% tax bracket then, I think you would be better off leveling off your “income” and thus your taxes each year. That doesn’t mean you forego the ACA for all of those years, but maybe some of them. Consider the $4K lost subsidy as part of the Roth conversion taxes you would pay and look at the whole picture, not just one year, and not just one tax bracket.
TXJeff wrote:
Tue Feb 12, 2019 3:03 pm
retiredjg wrote:
Tue Feb 12, 2019 1:09 pm
Before I head into ideas for bigger changes, what is your well-thought out multi year strategy?
The strategy:
2018: in taxable, sell largest two stock holdings to the top of 15% cap gains bracket (was able to go over thanks to TLH). Buy total stock index and total international index. Put 3 years spending in CD’s as part of re-balancing.***
2019, 20, 21: manage income for ACA subsidy. Do Roth conversions.
2022, 23: Depending on factors such as the state of the market and of the ACA/it’s subsidies, consider another large sale of individual stocks in one of these years.
2024, 25: manage income for ACA subsidies if still available—or for Medicare “lookback” income limits if not. Do ROTH conversions.
2026-31: priority is ROTH conversions—last chance.
Personally, I would “reverse” your strategy and start with large Roth conversions for 2019, 2020, and 2021. The tax rates are due to revert to 2017 levels after 2025, right when you are currently planning to do large conversions (unless Congress makes the current rates permanent). [I hope I understand your strategy correctly.] I would aim to convert half your tIRA sooner rather than later and get growth stock funds in that Roth. The sooner you get money in the Roth, the sooner it would start growing tax-free and save taxes in the long run. I would split annual conversions up to happen 2 or 3 times in the year to get a diversity of price, but if the market went down over 30%, I would immediately convert for the year. (The conversion taxes would also be lower when the share price is lower. I think of this as “conversion taxes are on sale”.)

If it was me, I’d look at my capital gains and other incomes, then convert to the top of the 24% tax bracket for Singles, which is Taxable Income (after your $12K standard deduction) of $160,000 for Singles. Make another new timeline for this scenario and see how your taxes increase now and not so much after age 70, with a lower spot in between.

I also suggest you run everything through tax software for each year to confirm your estimates. Use 2018 software for years 2019-2025, ignoring inflation. After that use both 2018 and 2017 software for later years just to get a feel of what might happen if the tax laws revert back to 2017 rules.

You might also create a chart like the one in this post that I posted today in this thread. You can even create more scenarios on various Roth conversion patterns by making columns similar to column J thru N for each scenario (ie, a “minimal” Roth conversion, a “moderate” Roth conversion, a “total Roth conversion of all tIRA funds).

TXJeff wrote:
Mon Feb 11, 2019 6:47 am
Questions
1. Fixed income in IRA: After selling all individual stocks in IRA, I split proceeds between BND, BIV and CD’s, and continued reading/researching for a final fixed income plan. But I’m not any clearer now. It seems like some would recommend just BND, while others would suggest fund combinations or a CD ladder. My goal with bonds is to mitigate risk, especially given the risks here of so much in individual stocks. What fixed income strategy would you recommend for this portfolio?
Even bonds can lose money, especially if the feds increase the interest rate and the fund holds lots of bonds with low interest rates. The biggest risk I see is that one individual stock that is 15% of your portfolio. Work on bringing that down to less than 10%.
2. Fixed income in taxable: When I sold some of the appreciated individual stock in 2018, I needed to buy fixed income to rebalance to my AA. I bought CD’s to fund living expenses through 2021, and enable ACA subsidies plus ROTH conversions. I left the bond funds in taxable alone. Should I change that? “Swap” IRA stock etf’s and mutual funds for the bonds in taxable,? (I’ll still need to keep about 5% of portfolio in bonds in taxable—because my IRA is only 30% of my portfolio, and I want and AA of 60/40.)
I look at this as ACA subsidies **OR** Roth conversions. I also like that you have a couple of years in CDs to cover your living expenses.
4. Dividend reinvestment in taxable account. Currently, I reinvest dividends from mutual funds only. (Not from stocks or etf’s.) After research, am thinking of turning off dividends for everything. Reasons: I am at my correct AA; I am living from the money in taxable,; and turning it off in VTSAX, will prevent a wash sale if I TLH VTI. Is this thinking correct? Is there a better strategy?
I agree with turning off dividend re-investment in taxable account.
5. I have $40,000 in cash in my taxable account to re-deploy into the portfolio. Where should I put it? Bulk up my International holdings? Keep it as is to enlarge the cash reserves?
Use it for Roth conversion taxes.
6. The portfolio still seems a long way from the simple, efficient Boglehead 3-fund. Any other suggestions?
The simplest thing is to minimize the number of holdings. Also note that anything that is worth less than 1% of your portfolio hardly has any impact on the portfolio. Even if a 1% holding doubled in value, it would hardly make a dent in your portfolio worth.
Celia, thanks for this post and your PM’s. Giving up ACA subsidies for a couple of years to do early ROTH conversions sounded like it could really jump start the tax free growth. So I compared the two: ROTH conversions, then ACA, vs ROTH conversions with ACA.

To my surprise there wasn’t that much difference. The reasons were in the particulars of my portfolio and in my assumptions about the future.

Portfolio
My AA is 60/40, but my IRA is only 30% of the portfolio, so I hold bonds in taxable. Most of the rest of the taxable account is made up of highly appreciated stocks: much with more than 90% ltcg.

Assumptions
* IRA is 100% fixed income, with annual growth of 3%.
* IRA is reduced from current $600,000 to $300,000 by age 70.
* Taxable portfolio, with AA of 70/30 plus a $65,000 annual withdrawal, has annual growth of 4.0%.
* Taxable portfolio has $12,000 annual dividends, and $9,000 qualified dividends.
* Stocks harvested in taxable portfolio have ltcg of 90%. (2 largest stock holdings are higher rates than this)
* ROTH account is 100% equities, with 6.5% annual growth.
* Inflation: following Celia’s approach, inflation is not counted.
* Taxes revert to higher 2017 brackets in 2025

ACA and ROTH
Thru age 65, convert $162,000, lumping conversions into 6 years $27,000 per year. Tax is $2,700 per year. Total tax is $16,200.
Age 65-70, convert $260,000 lumping conversions into 4 years at $65,000 per year to stay under IRMAA. Tax is $12,500 per year. Total tax is $50,000.
ACA subsidy maintained, min. value $4,000 per year for 7 years, total $28,000.

Total tax burden at age 70 (tax – ACA credits): $38,200
IRA value at age 70: $300,000
ROTH value at age 70: $596,000

ACA or ROTH
Ages 58 and 59, convert $150,000 each year. Tax is $28,000 per year. Total tax $56,000.
Age 59: Sell $150,000 of stock for bonds in taxable to maintain AA while enabling 100% stock in Roth account: $22,500
Ages 60-70: convert $9,000 per year for 10 years. Tax is $600 per year for 5 years, $750 per year for 7 years. Total tax: $8300.
ACA subsidy maintained for 5 years: $20,000

Total tax burden at age 70 (tax – ACA credits): $66,800
IRA value at 70: $300,000
ROTH value at 70: $703,000

Income and taxes at age 71
Desired income : $66,000
Sources of income:
SS: $24,000
RMD: $11,500
Dividends: $12,000. Qualified dividends $9,000.
Taxable interest: $3,000
Harvested long term gains from taxable: $10,000, $1,000 cost basis
ROTH: $5,500
Total income: $66,000

Tax at age 70 under current system: $2,600. Tax rate is 3.8%
Tax at age 70 under 2017 system: $3,400.Tax rate is 5.0%

This same income source combination could be used each year beyond age 71.Tax rate could be brought down even further by using more ROTH.

Thanks again to Celia, retiredjg and all other posters. This was a very valuable exercise. I’m modifying my original plan: I’ll still use the balanced ACA and ROTH approach, but I’ll take advantage any big downturns to make large ROTH conversions.

marcopolo
Posts: 2787
Joined: Sat Dec 03, 2016 10:22 am

Re: Portfolio Check Up: fund placement and tax efficiency

Post by marcopolo » Mon Feb 25, 2019 12:04 pm

TXJeff wrote:
Mon Feb 25, 2019 11:15 am


ACA and ROTH
Thru age 65, convert $162,000, lumping conversions into 6 years $27,000 per year. Tax is $2,700 per year. Total tax is $16,200.
Age 65-70, convert $260,000 lumping conversions into 4 years at $65,000 per year to stay under IRMAA. Tax is $12,500 per year. Total tax is $50,000.
ACA subsidy maintained, min. value $4,000 per year for 7 years, total $28,000.

Total tax burden at age 70 (tax – ACA credits): $38,200
IRA value at age 70: $300,000
ROTH value at age 70: $596,000

Can you explain how you are coming up with the $2700 per year tax on the $27k annual conversion.
I think I mentioned this previously in the thread. But, the ACA subsidy is not flat up to the cliff. You essentially lose 9.8% of each marginal dollar up to the cliff.

So, the $27k of conversion is likely costing you a lot more than the $2700 you are using in your analysis.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Topic Author
TXJeff
Posts: 103
Joined: Mon Sep 25, 2017 7:47 pm

Re: Portfolio Check Up: fund placement and tax efficiency

Post by TXJeff » Mon Feb 25, 2019 2:16 pm

marcopolo wrote:
Mon Feb 25, 2019 12:04 pm
TXJeff wrote:
Mon Feb 25, 2019 11:15 am


ACA and ROTH
Thru age 65, convert $162,000, lumping conversions into 6 years $27,000 per year. Tax is $2,700 per year. Total tax is $16,200.
Age 65-70, convert $260,000 lumping conversions into 4 years at $65,000 per year to stay under IRMAA. Tax is $12,500 per year. Total tax is $50,000.
ACA subsidy maintained, min. value $4,000 per year for 7 years, total $28,000.

Total tax burden at age 70 (tax – ACA credits): $38,200
IRA value at age 70: $300,000
ROTH value at age 70: $596,000

But, the ACA subsidy is not flat up to the cliff. You essentially lose 9.8% of each marginal dollar up to the cliff.

So, the $27k of conversion is likely costing you a lot more than the $2700 you are using in your analysis.
Marcopolo, you're right. Looks like I need to add in:

ACA and ROTH strategy: loses a total of $21600 in ACA subsidies.
$3600 in ACA subsidies lost each of the 6 years of $27,000 conversions, which is almost at the top of the cliff

ACA or ROTH strategy: gains $18000 in ACA subsidies.
$3600 in additional ACA subsidies for each of the 5 years of $9,000 conversions ages 60-64

Would this tip you to the "ACA or ROTH" strategy?

marcopolo
Posts: 2787
Joined: Sat Dec 03, 2016 10:22 am

Re: Portfolio Check Up: fund placement and tax efficiency

Post by marcopolo » Mon Feb 25, 2019 3:22 pm

TXJeff wrote:
Mon Feb 25, 2019 2:16 pm
marcopolo wrote:
Mon Feb 25, 2019 12:04 pm
TXJeff wrote:
Mon Feb 25, 2019 11:15 am


ACA and ROTH
Thru age 65, convert $162,000, lumping conversions into 6 years $27,000 per year. Tax is $2,700 per year. Total tax is $16,200.
Age 65-70, convert $260,000 lumping conversions into 4 years at $65,000 per year to stay under IRMAA. Tax is $12,500 per year. Total tax is $50,000.
ACA subsidy maintained, min. value $4,000 per year for 7 years, total $28,000.

Total tax burden at age 70 (tax – ACA credits): $38,200
IRA value at age 70: $300,000
ROTH value at age 70: $596,000

But, the ACA subsidy is not flat up to the cliff. You essentially lose 9.8% of each marginal dollar up to the cliff.

So, the $27k of conversion is likely costing you a lot more than the $2700 you are using in your analysis.
Marcopolo, you're right. Looks like I need to add in:

ACA and ROTH strategy: loses a total of $21600 in ACA subsidies.
$3600 in ACA subsidies lost each of the 6 years of $27,000 conversions, which is almost at the top of the cliff

ACA or ROTH strategy: gains $18000 in ACA subsidies.
$3600 in additional ACA subsidies for each of the 5 years of $9,000 conversions ages 60-64

Would this tip you to the "ACA or ROTH" strategy?
I think it really comes down to what you think your marginal rate is going to be when your RMDs hit.
Any conversions you do now, factoring in the ACA loss of subsidy is really being taxed at a marginal rate of 22%. If you think your marginal rate will be at that or higher once SS and RMD hits you, it probably still makes sense to do some conversions to get the RMD lower, if possible.
If not, then i don't see the payoff.

I am still going back and forth on this for our own situation, I will wait until the end of the year to decide if, and how much to convert to Roth.
Right now I am leaning towards NOT doing any ROth conversion for the time being for the following reasons:

1) We still have 13 years until we are Medicare eligible (assuming age does not get pushed out), and 18 years to RMDs, so we have a lot of time to do conversions to reduce RMDs.

2) We have a good chuck of money in Roths already from doing Mega backdoor conversions for years

3) I am not sure how long ACA subsidies will remain available, so I am leaning towards optimizing those for now, then do more conversions if/when they go away

4) We keep mostly bonds and CDs in out tax-deferred accounts, so they are likely to be the slowest growing portion of our portfolio, keeping a lid on the tax bomb once Soc Sec and RMDs hit.

It is all way too complex. I have no idea if i am doing the right thing, I am not even sure there a right thing given all the unknowns.
I wish the tax code was simpler.

Good luck to you whichever way you decide to go.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Topic Author
TXJeff
Posts: 103
Joined: Mon Sep 25, 2017 7:47 pm

Re: Portfolio Check Up: fund placement and tax efficiency

Post by TXJeff » Tue Feb 26, 2019 8:03 am

marcopolo wrote:
Mon Feb 25, 2019 3:22 pm


I think it really comes down to what you think your marginal rate is going to be when your RMDs hit.
Any conversions you do now, factoring in the ACA loss of subsidy is really being taxed at a marginal rate of 22%. If you think your marginal rate will be at that or higher once SS and RMD hits you, it probably still makes sense to do some conversions to get the RMD lower, if possible.
If not, then i don't see the payoff.

I am still going back and forth on this for our own situation, I will wait until the end of the year to decide if, and how much to convert to Roth.
Right now I am leaning towards NOT doing any ROth conversion for the time being for the following reasons:

1) We still have 13 years until we are Medicare eligible (assuming age does not get pushed out), and 18 years to RMDs, so we have a lot of time to do conversions to reduce RMDs.

2) We have a good chuck of money in Roths already from doing Mega backdoor conversions for years

3) I am not sure how long ACA subsidies will remain available, so I am leaning towards optimizing those for now, then do more conversions if/when they go away

4) We keep mostly bonds and CDs in out tax-deferred accounts, so they are likely to be the slowest growing portion of our portfolio, keeping a lid on the tax bomb once Soc Sec and RMDs hit.

It is all way too complex. I have no idea if i am doing the right thing, I am not even sure there a right thing given all the unknowns.
I wish the tax code was simpler.

Good luck to you whichever way you decide to go.
Interesting list. Makes a lot of sense for your situation, and I agree with you about points 3 and 4. An added factor for me: the numbers I ran assumed a 6.5 annual growth rate for the ROTH, but personally, I’m skeptical we’ll see that over this next decade. (Yes, I realize that “I know nothing.”)

So now, if I just follow the collective forum advice to 1) do large upfront ROTH conversions 2)balance ROTH and ACA, plus 3)do no ROTH conversions at all—I’ll be fine!

marcopolo
Posts: 2787
Joined: Sat Dec 03, 2016 10:22 am

Re: Portfolio Check Up: fund placement and tax efficiency

Post by marcopolo » Tue Feb 26, 2019 10:34 am

TXJeff wrote:
Tue Feb 26, 2019 8:03 am
marcopolo wrote:
Mon Feb 25, 2019 3:22 pm


I think it really comes down to what you think your marginal rate is going to be when your RMDs hit.
Any conversions you do now, factoring in the ACA loss of subsidy is really being taxed at a marginal rate of 22%. If you think your marginal rate will be at that or higher once SS and RMD hits you, it probably still makes sense to do some conversions to get the RMD lower, if possible.
If not, then i don't see the payoff.

I am still going back and forth on this for our own situation, I will wait until the end of the year to decide if, and how much to convert to Roth.
Right now I am leaning towards NOT doing any ROth conversion for the time being for the following reasons:

1) We still have 13 years until we are Medicare eligible (assuming age does not get pushed out), and 18 years to RMDs, so we have a lot of time to do conversions to reduce RMDs.

2) We have a good chuck of money in Roths already from doing Mega backdoor conversions for years

3) I am not sure how long ACA subsidies will remain available, so I am leaning towards optimizing those for now, then do more conversions if/when they go away

4) We keep mostly bonds and CDs in out tax-deferred accounts, so they are likely to be the slowest growing portion of our portfolio, keeping a lid on the tax bomb once Soc Sec and RMDs hit.

It is all way too complex. I have no idea if i am doing the right thing, I am not even sure there a right thing given all the unknowns.
I wish the tax code was simpler.

Good luck to you whichever way you decide to go.
Interesting list. Makes a lot of sense for your situation, and I agree with you about points 3 and 4. An added factor for me: the numbers I ran assumed a 6.5 annual growth rate for the ROTH, but personally, I’m skeptical we’ll see that over this next decade. (Yes, I realize that “I know nothing.”)

So now, if I just follow the collective forum advice to 1) do large upfront ROTH conversions 2)balance ROTH and ACA, plus 3)do no ROTH conversions at all—I’ll be fine!
That's funny. I often have the same thought.

The great thing about this forum is that you will get a wide range of perspectives considering angles you might not have considered.
The drawback about this forum is that you will get a wide range of perspectives...
Once in a while you get shown the light, in the strangest of places if you look at it right.

retiredjg
Posts: 39929
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio Check Up: fund placement and tax efficiency

Post by retiredjg » Tue Feb 26, 2019 10:45 am

Consider that it may not matter much in the long run. Some of these choices are just personal preference. Or a complete and total guess. :happy

User avatar
Wiggums
Posts: 2863
Joined: Thu Jan 31, 2019 8:02 am

Re: Portfolio Check Up: fund placement and tax efficiency

Post by Wiggums » Tue Feb 26, 2019 11:23 am

TXJeff wrote:
Tue Feb 12, 2019 11:30 am

1) preserve my lifelong ability to spend $65,000 per year in inflation-adjusted 2017 dollars 2) minimize taxes and 3) simplify my investments so I can self-manage into older age.
[/b]
$65,000 represents a 3.25% withdrawal rate which is quite good. Your AA is very reasonable too. You should sleep well army night.

Good luck to you

Post Reply