How to transition my portfolio towards a more efficient portfolio?

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Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

I read the 2009 book "Bogleheads' Guide to Retirement Planning" and learned that my asset allocation is not tax efficient.
Here is where we stand financially:

Emergency funds: I have more than six months of expenses in reserve.

Debt: $0

Tax Filing Status: Single

Tax Rate: 0% Federal, 0% State

State of Residence: New Mexico

Age: 61 (born 1959)

Desired Asset allocation: stocks = 115 - my_age = 115 - 61 = 54% stocks / 46% bonds

Desired International allocation: 31% (my current allocation in VG Emerging Markets Stock Index Fund Adm)

Size of my current total portfolio: $1,200,000

My current assets, including all investment and retirement accounts, as a percentage of the entire portfolio:
Allocated% Fund name (ticker) (expense ratio)

Taxable account
4% VG Total Stock Market Index Adm (VTSAX) (0.04%)
9% VG PRIMECAP Core Fund (VPCCX) (0.46%)
6% VG Total Bond Market Index Adm (VBTLX) (0.05%)
49% VG Target Retirement 2035 (VTTHX) (0.14%)

Traditional IRA account
15% VG Emerging Markets Stock Index Fund Adm (VEMAX) (0.14%)

Roth IRA account
16% VG Emerging Markets Stock Index Fund Adm (VEMAX) (0.14%)
1% VG Target Retirement 2035 (VTTHX) (0.14%)

Total Asset allocation: 81% stocks / 19% bonds
I do not own real estate.

I am retired and currently not taking Social Security befits.
2029 is the latest my Social Security befits can start.
2030 is the latest my IRA RMD can start.
Around 2030 I expect to inherit about $300,000.

Questions:
I need some advice on how to transition my portfolio towards a more efficient portfolio
- My foreign investment is in IRA. It would be more efficient in a taxable account.
- My bonds are in a taxable account. It would be more tax efficient in an IRA account.
- I have a Targeted fund. A 3-fund portfolio of Admiral funds would have a lower expense ratio.

1. Selling and buying funds, to make my portfolio more tax-efficient, would increase my capital-gains tax rate.
e.g. exchanging a taxable Targeted fund for an equivalent 3-fund portfolio would incur capital gains.
I could spread the transition over a few years to minimize total taxes.
How to determine the rate of change that minimizes total taxes? 0% 12% 15% tax bracket?

2. Is there a way to swap IRA assets and taxable account assets without incurring sell-buy expenses and taxes?
e.g. move my foreign investment from IRA to a taxable account and move my bonds from a taxable account to an IRA account.
Last edited by steamer on Tue May 04, 2021 3:43 pm, edited 4 times in total.
JBTX
Posts: 8003
Joined: Wed Jul 26, 2017 12:46 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by JBTX »

I'm not sure the theoretical benefits of international in taxable or bonds in tax deferred is worth a lot of manipulation causing capital gain recognition. I personally don't think it is.

How can you be in zero bracket? What are you living on?

It may be worth it to consider Roth conversions up to 12%, or capital gains recognition to the top of at the zero cap gain bracket, or some combination. There's probably some tax optimization strategies to pick how best to do that.

I know of no way to swap ira and taxable funds without selling the taxable assets.
Nightowl99
Posts: 52
Joined: Mon Feb 26, 2018 7:49 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by Nightowl99 »

If Total Bond ever shows a capital loss in your taxable account, then you could exchange it for foreign in taxable, then buy bonds in the IRA without bad tax consequences.

If you decide it's worth the trouble to shift things around, do it gradually and estimate taxes with the TurboTax taxcaster or something like that first.

Also, if you're using the taxable account for living expenses in retirement anyway, consider not reinvesting the dividends in the taxable account, if they're being reinvested now. Then you could use some of the dividends to invest in the lower cost three funds you described, to get out of the target date fund over time. Maybe you're already doing that. Anyway, those are just some suggestions to consider....
Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

JBTX wrote: Thu Apr 29, 2021 8:55 pm How can you be in zero bracket? What are you living on?
I'm living on Qualified dividends + Capital gains, and living rent free.

And thanks for the information.
Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

Nightowl99 wrote: Thu Apr 29, 2021 11:04 pm estimate taxes with the TurboTax taxcaster or something like that first.
Thanks for the tip. Your other suggestions appear in the book, "Bogleheads' Guide to Retirement Planning". They are sound advice.
JBTX
Posts: 8003
Joined: Wed Jul 26, 2017 12:46 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by JBTX »

steamer wrote: Fri Apr 30, 2021 2:26 am
JBTX wrote: Thu Apr 29, 2021 8:55 pm How can you be in zero bracket? What are you living on?
I'm living on Qualified dividends + Capital gains, and living rent free.

And thanks for the information.
OK. Then you could definitely "tax gains harvest". Realize capital gains up to the 0% limit. Either that, and or do Roth conversions up to top of 12%. I'd definitely do one or the other every year prior SS and RMDS.

This link may be helpful


https://www.kitces.com/blog/navigating- ... nversions/
Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

JBTX wrote: Fri Apr 30, 2021 8:28 am This link may be helpful

https://www.kitces.com/blog/navigating- ... nversions/
Thank you JBTX. I read the "Navigating The Capital Gains Bump Zone" by Kitces with great interest.
Here is an extension of Kitces' work:
https://actuaryonfire.com/mapping-the-c ... ne-part-1/
https://actuaryonfire.com/optimizing-yo ... p-zones-2/

Avoiding this Bump Zone would be very useful in my situation.
But my Form 1040 doesn't seem to follow the same tax code.

Several tax sites say:

Code: Select all

2020 income tax for single filers
| Tax rate | Taxable income bracket | Tax owed              |
|----------+------------------------+-----------------------|
|      10% | $0 to $9,875           | 10% of taxable income |
But my Form 1040 Tax is $0.
Why are my Taxable interest and Ordinary dividends not taxed at 10%?

Code: Select all

2020 Form 1040 excerpts
| Line                  | Amount |
|-----------------------+--------|
| 2b Taxable interest   |    +27 |
| 3b Ordinary dividends | +14289 |
| 12 Standard deduction | -12400 |
| 15 Taxable income     |  36484 |
| 16 Tax                |      0 |
I need to understand my taxes so I can make my investment portfolio more tax efficient.
I can attach my Form 1040 and worksheets on request if that would help.
SnowBog
Posts: 1280
Joined: Fri Dec 21, 2018 11:21 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by SnowBog »

steamer wrote: Sat May 01, 2021 10:56 pm
JBTX wrote: Fri Apr 30, 2021 8:28 am This link may be helpful

https://www.kitces.com/blog/navigating- ... nversions/
Thank you JBTX. I read the "Navigating The Capital Gains Bump Zone" by Kitces with great interest.
Here is an extension of Kitces' work:
https://actuaryonfire.com/mapping-the-c ... ne-part-1/
https://actuaryonfire.com/optimizing-yo ... p-zones-2/

Avoiding this Bump Zone would be very useful in my situation.
But my Form 1040 doesn't seem to follow the same tax code.

Several tax sites say:

Code: Select all

2020 income tax for single filers
| Tax rate | Taxable income bracket | Tax owed              |
|----------+------------------------+-----------------------|
|      10% | $0 to $9,875           | 10% of taxable income |
But my Form 1040 Tax is $0.
Why are my Taxable interest and Ordinary dividends not taxed at 10%?

Code: Select all

2020 Form 1040 excerpts
| Line                  | Amount |
|-----------------------+--------|
| 2b Taxable interest   |    +27 |
| 3b Ordinary dividends | +14289 |
| 12 Standard deduction | -12400 |
| 15 Taxable income     |  36484 |
| 16 Tax                |      0 |
I need to understand my taxes so I can make my investment portfolio more tax efficient.
I can attach my Form 1040 and worksheets on request if that would help.
I'm not sure I follow your numbers... you are saying a taxable income of $36,484 - but only showing about $14k of dividends/interest... Where's the other $22k income coming from? Or is the $22k from cap gains?

If that's the case - then presumably all/most of your ordinary dividends are "qualified" dividends (taxed like LTCG). This site might help, as you can plug in your numbers to visual your taxes: https://engaging-data.com/tax-brackets/ ... 7&cg=36457

Let's work backwards - any long term gains (presumably the $22k mentioned above) as well as any "qualified dividends" are taxed at the lower long term capital gains rates. (we'll come back to this...)

You can recognize up to the standard deduction in "ordinary" income (that would include interest and non-qualified dividends, as well as "short term" gains - and any "earned" income or social security [although SS is taxed differently]). So this minimally includes your $27 of interest, and any "non-qualified" dividends.

But the deduction is "used up" - so it ends up covering the first $12,400 of any sort of income (including the otherwise low long term cap gains rates).

Which leaves you with [presumably] $24,084 of "long term capital gains" as your only income. For 2020, a single person could have $40k of LTCG taxed at 0%.

(You'll "see" this in the link above)

Which means you could have sold up to an additional $15,916 in "gains" without paying taxes. One option could be doing "tax gain harvesting" - recognizing those gains - and then simply rebuying the same stock at the "now current" price - which basically lets you "use" the 0% tax rate to lower your future tax bill (as the repurchased shares will be at a higher cost basis - so less taxes later when sold).

You could also use this 0% space to switch funds.
Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

SnowBog wrote: Sat May 01, 2021 11:34 pm Where's the other $22k income coming from? Or is the $22k from cap gains?

Code: Select all

2020 Form 1040 excerpts
| Line                                    | Amount |
|-----------------------------------------+--------|
| 1  Wages Attach Form(s) W-2             |        |
| 2b Taxable interest                     |     27 |
| 3a Qualified dividends                  |   7956 |
| 3b Ordinary dividends from sched B ln 6 |  14289 |
| 7  Capital gain from sched D ln 16      |  34568 |
| 9  Total income = 1+2b+3b+7             |  48884 |
| 11 Adjusted gross income (AGI) = 9-10   |  48884 |
| 12 Standard deduction                   |  12400 |
| 15 Taxable income = 11-12               |  36484 |
| 16 Tax                                  |      0 |
SnowBog
Posts: 1280
Joined: Fri Dec 21, 2018 11:21 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by SnowBog »

steamer wrote: Sun May 02, 2021 12:11 am
SnowBog wrote: Sat May 01, 2021 11:34 pm Where's the other $22k income coming from? Or is the $22k from cap gains?

Code: Select all

2020 Form 1040 excerpts
| Line                                    | Amount |
|-----------------------------------------+--------|
| 1  Wages Attach Form(s) W-2             |        |
| 2b Taxable interest                     |     27 |
| 3a Qualified dividends                  |   7956 |
| 3b Ordinary dividends from sched B ln 6 |  14289 |
| 7  Capital gain from sched D ln 16      |  34568 |
| 9  Total income = 1+2b+3b+7             |  48884 |
| 11 Adjusted gross income (AGI) = 9-10   |  48884 |
| 12 Standard deduction                   |  12400 |
| 15 Taxable income = 11-12               |  36484 |
| 16 Tax                                  |      0 |
OK - so AGI was $48k with $34k of cap gains... I think the $7956 of "qualified" dividends gets lumped into that number, brining cap gains up to $42,524 for tax calculations. The balance of the dividends ($14289 - $7956) + $27 of interest makes up "ordinary income" of $6360. That $6360 is completely covered by the standard deduction - as is the first $6,040 of your cap gains. Which leaves you with $36,484 of cap gains - still in the 0% bracket. But your "unused" space was only $3,516 still at 0% taxes.

Updated link to the visual with these numbers: https://engaging-data.com/tax-brackets/ ... 0&cg=42524
Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

Thank you so much SnowBog! I forgot that qualified dividends were included in ordinary dividends :oops: . Mystery solved.

Here your answer rewritten in algebra style:

Code: Select all

    Ordinary income = (ordinary dividends - qualified dividends) + taxable interest
                    = ($14289 - $7956) + $27 = $6360 < $12400 Standard deduction
    Taxable income = ordinary dividends + taxable interest + Capital gains - Standard deduction
                   = $14289 + $27 + $34568 - $12400 = $36484 < $40000 income is 0% cap gains tax bracket
SnowBog
Posts: 1280
Joined: Fri Dec 21, 2018 11:21 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by SnowBog »

steamer wrote: Sun May 02, 2021 1:46 am Thank you so much SnowBog! I forgot that qualified dividends were included in ordinary dividends :oops: . Mystery solved.

Here your answer rewritten in algebra style:

Code: Select all

    Ordinary income = (ordinary dividends - qualified dividends) + taxable interest
                    = ($14289 - $7956) + $27 = $6360 < $12400 Standard deduction
    Taxable income = ordinary dividends + taxable interest + Capital gains - Standard deduction
                   = $14289 + $27 + $34568 - $12400 = $36484 < $40000 income is 0% cap gains tax bracket
Close but not quite. You need to calculate "ordinary" taxes first, then capital gains separately. You can't mix them. But they "stack" together.
Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

SnowBog wrote: Sun May 02, 2021 3:05 am calculate "ordinary" taxes first, then capital gains separately. You can't mix them. But they "stack" together.
Oh, I see what you mean:

Code: Select all

ordinary income = (ordinary dividends - qualified dividends) + taxable interest
                = ($14289 - $7956) + $27 = $6360 < $12400 standard deduction
ordinary income taxes = $0

unused standard deduction = standard deduction - ordinary income
                          = $12400 - $6360 = $6040

taxable income = qualified dividends + capital gains - unused standard deduction
               = $7956 + $34568 - $6040 = $36484 < $40000 income is 0% cap gains tax bracket
capital gains tax = $0

unused 0% cap gains tax bracket = 0% cap gains tax bracket - taxable income
                 = $40000 - $36484 = $3516
The tax forms were designed for citizens to figure taxes mechanically. Because the form was expanded to many simple lines, understanding the big picture is difficult.
I read https://www.marottaonmoney.com/how-your ... worksheet/ but I still couldn't decipher the tax code.
Is there a source that explains Form 1040 at a meaningful level? Preferably in algebra style.
How do the tax wonks learn it?
SnowBog
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Joined: Fri Dec 21, 2018 11:21 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by SnowBog »

steamer wrote: Sun May 02, 2021 7:27 am
SnowBog wrote: Sun May 02, 2021 3:05 am calculate "ordinary" taxes first, then capital gains separately. You can't mix them. But they "stack" together.
Oh, I see what you mean:

Code: Select all

ordinary income = (ordinary dividends - qualified dividends) + taxable interest
                = ($14289 - $7956) + $27 = $6360 < $12400 standard deduction
ordinary income taxes = $0

unused standard deduction = standard deduction - ordinary income
                          = $12400 - $6360 = $6040

taxable income = qualified dividends + capital gains - unused standard deduction
               = $7956 + $34568 - $6040 = $36484 < $40000 income is 0% cap gains tax bracket
capital gains tax = $0

unused 0% cap gains tax bracket = 0% cap gains tax bracket - taxable income
                 = $40000 - $36484 = $3516
The tax forms were designed for citizens to figure taxes mechanically. Because the form was expanded to many simple lines, understanding the big picture is difficult.
I read https://www.marottaonmoney.com/how-your ... worksheet/ but I still couldn't decipher the tax code.
Is there a source that explains Form 1040 at a meaningful level? Preferably in algebra style.
How do the tax wonks learn it?
Did you look at the link/picture I shared? Probably the best to understand the concept visually.
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by retiredjg »

steamer wrote: Thu Apr 29, 2021 6:32 pm I need some advice on how to transition my portfolio towards a more efficient portfolio
If you are not paying any tax, it does not matter if your portfolio is set up in a tax-efficient manner or not. If you expect to be paying taxes in the future, some changes could be beneficial...but maybe not a lot if your tax rate is still low. Long story short, there may not be a problem to solve here.

- My foreign investment is in IRA. It should be in a taxable account.
Your international stocks can be held in any kind of account.

- My bonds are in a taxable account. It should be in an IRA account.
In a higher tax bracket, yes. In your current situation, it does not matter much.

2. Is there a way to swap IRA assets and taxable account assets without incurring sell-buy expenses and taxes?
e.g. move my foreign investment from IRA to a taxable account and move my bonds from a taxable account to an IRA account.
No. Exchanging the funds would require selling and buying.
retiredjg
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by retiredjg »

Steamer, are you under the impression that your portfolio is about 54% stocks and 46% bonds with 31% of your stocks in international?

The portfolio as shown is nowhere near that. What is particularly concerning is that you are holding 31% of your portfolio (not 31% of your stocks) in an emerging markets fund....in addition to the total international that is in the Target 2035 fund.

It is possible that you have shown your portfolio wrong rather than actually have it wrong in reality. This needs to be clarified before going any further with your actual question.
Topic Author
steamer
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Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

SnowBog wrote: Sun May 02, 2021 11:53 am Did you look at the link/picture I shared? Probably the best to understand the concept visually.
Yes. That's I nice graphic. I just thought there was more to Form 1040 and worksheets than that.
Thank you for all your help. I have a much better understanding of taxes now.
Topic Author
steamer
Posts: 14
Joined: Thu Apr 29, 2021 6:18 pm

Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

retiredjg wrote: Sun May 02, 2021 3:50 pm Steamer, are you under the impression that your portfolio is about 54% stocks and 46% bonds with 31% of your stocks in international?

The portfolio as shown is nowhere near that. What is particularly concerning is that you are holding 31% of your portfolio (not 31% of your stocks) in an emerging markets fund....in addition to the total international that is in the Target 2035 fund.
Thanks for catching that error. So my current International allocation is actually 50%.

My total portfolio is 57% stocks and 43% bonds.

I updated the OP to say:
Desired International allocation: 31% (my current allocation in VG Emerging Markets Stock Index Fund Adm)
retiredjg
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by retiredjg »

I'm sorry steamer. I do not see anything close to 43% bonds. I see about 19% bonds. There is something wrong here.
SnowBog
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by SnowBog »

retiredjg wrote: Sun May 02, 2021 5:17 pm I'm sorry steamer. I do not see anything close to 43% bonds. I see about 19% bonds. There is something wrong here.
Agreed...

VTTHX includes 25% bonds, it makes up roughly 50% of portfolio - so adds roughly 12.5% bonds.

VBTLX is all bonds - about 6% of portfolio.

Combined that's roughly 19% bonds (or 18.5% if you don't want to round).

So the AA is more like 81/19 (stocks/bonds), or 50/31/19 (us stocks/international/bonds).

OP if you want 43% bonds, you are drastically out of alignment with your AA.
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retired@50
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by retired@50 »

After reading your post a few thoughts come to mind.

I agree with others that you're not holding what you think you're holding with regard to the stock/bond mix. Something's up.

With regards to tax efficiency, the VPCCX fund Primecap Core is probably better situated in the Roth IRA if you can get it in there without recognizing too much in capital gains to make the move. This will reduce the amount of dividends and capital gains distributions that your taxable account generates, if that's something you desire. If you move this fund into Roth, you'll sidestep the annual "December Surprise" VPCCX dishes out each year.

Also, holding foreign stock in your taxable account has been mentioned, but using the Emerging Markets fund VEMAX isn't the best option for a taxable account since it tends to have a relatively low percentage of qualified dividends, around 50% if I recall correctly. Further, since you have such a low taxable income, if you hold too much foreign stock in your taxable account your foreign tax paid will exceed the threshold of $300 and you'll be forced into using form 1116 and you won't be able to take the full credit. I'd suggest you start with around $100k in VTIAX Total International in the taxable account if you go down this path, then see how things work out on your taxes. Too much foreign tax paid can spoil things.

Regards,
This is one person's opinion. Nothing more.
retiredjg
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by retiredjg »

Desired Asset allocation: stocks = 115 - my_age = 115 - 61 = 54% stocks / 46% bonds

Desired International allocation: 31% (my current allocation in VG Emerging Markets Stock Index Fund Adm)

Size of my current total portfolio: $1,200,000

My current assets, including all investment and retirement accounts, as a percentage of the entire portfolio:
Allocated% Fund name (ticker) (expense ratio)

Taxable account
4% VG Total Stock Market Index Adm (VTSAX) (0.04%)
9% VG PRIMECAP Core Fund (VPCCX) (0.46%)
6% VG Total Bond Market Index Adm (VBTLX) (0.05%)
49% VG Target Retirement 2035 (VTTHX) (0.14%) <----21.8% Total Stock, 14.7% Total International, 12.5% bonds

Traditional IRA account
15% VG Emerging Markets Stock Index Fund Adm (VEMAX) (0.14%)

Roth IRA account
16% VG Emerging Markets Stock Index Fund Adm (VEMAX) (0.14%)
1% VG Target Retirement 2035 (VTTHX) (0.14%) <---.45% Total Stock, .3% Total International, .25% bonds

Total Asset allocation: 57% stocks / 43% bonds 81.25% stocks / 18.75% Bonds is what you are showing above

In addition to that, you are WAY overweighted in emerging markets, the riskiest portion of the international market.


A quick way to remedy this situation today would be to exchange funds in the traditional IRA and Roth IRA. There would be no tax cost for doing this.



Taxable account
4% VG Total Stock Market Index Adm (VTSAX) (0.04%)
9% VG PRIMECAP Core Fund (VPCCX) (0.46%)
6% VG Total Bond Market Index Adm (VBTLX) (0.05%)
49% VG Target Retirement 2035 (VTTHX) (0.14%) <----21.8% Total Stock, 14.7% Total International, 12.5% bonds

Traditional IRA account
15% Total Bond Market

Roth IRA account
4.5% 500 Index
12.5% Total Bond Market

This would get you to your desired 54% stocks/46% bonds today (after hours) and eliminate the overweight in emerging markets. Holding the bonds in Roth IRA is not the most desirable choice, but it gets your portfolio to a reasonable allocation for your age and retirement situation immediately.

For some reason, you think what you have is 57% stocks instead of 81.25% stocks. That is quite a difference. I'm still wondering if you have shown us something incorrect in your portfolio. This must be figured out before trying to decide how to improve your tax-efficiency (if there is any improvement needed).
Topic Author
steamer
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

retiredjg wrote: Sun May 02, 2021 5:17 pm I'm sorry steamer. I do not see anything close to 43% bonds. I see about 19% bonds. There is something wrong here.
You are right. I updated the OP to say: Total Asset allocation: 81% stocks / 19% bonds
This agrees with my Vanguard account's "Asset mix" page, which I should have checked before.
Thank you for catchng the error.
SnowBog
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by SnowBog »

steamer wrote: Tue May 04, 2021 2:15 pm
retiredjg wrote: Sun May 02, 2021 5:17 pm I'm sorry steamer. I do not see anything close to 43% bonds. I see about 19% bonds. There is something wrong here.
You are right. I updated the OP to say: Total Asset allocation: 81% stocks / 19% bonds
This agrees with my Vanguard account's "Asset mix" page, which I should have checked before.
Thank you for catchng the error.
One's AA is very personal to their need, ability, and willingness to take risk.

Given the confusion between if your AA is:
  • Your original 54/46 with 31% of stocks in international (which would be about 17% of your portfolio)
  • Your revised 81/19 with close to 2x as much international (31% of your portfolio)
And the general rule of thumb is to assume stocks could lose 50% of value in a crash. With a 54/46 AA that could be a 27% loss vs. 41% (for an AA of 81/19)...

I'd recommend taking a second look through your portfolio and make sure you understand and are comfortable with what you hold.
retiredjg
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by retiredjg »

steamer wrote: Tue May 04, 2021 2:15 pm
retiredjg wrote: Sun May 02, 2021 5:17 pm I'm sorry steamer. I do not see anything close to 43% bonds. I see about 19% bonds. There is something wrong here.
You are right. I updated the OP to say: Total Asset allocation: 81% stocks / 19% bonds
This agrees with my Vanguard account's "Asset mix" page, which I should have checked before.
Thank you for catchng the error.
This 81/19 ratio is not what most would consider appropriate for your age and the fact that you are retired. It is much too aggressive.

What can we do to help you fix this?
Topic Author
steamer
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

retiredjg wrote: Mon May 03, 2021 7:28 am Taxable account
4% VG Total Stock Market Index Adm (VTSAX) (0.04%)
9% VG PRIMECAP Core Fund (VPCCX) (0.46%)
6% VG Total Bond Market Index Adm (VBTLX) (0.05%)
49% VG Target Retirement 2035 (VTTHX) (0.14%) <----21.8% Total Stock, 14.7% Total International, 12.5% bonds

Traditional IRA account
15% Total Bond Market

Roth IRA account
4.5% 500 Index
12.5% Total Bond Market

This would get you to your desired 54% stocks/46% bonds today (after hours) and eliminate the overweight in emerging markets. Holding the bonds in Roth IRA is not the most desirable choice, but it gets your portfolio to a reasonable allocation for your age and retirement situation immediately.

Thanks for the idea. I am going to think about this.

What does the arrow mean? Should it add up to 100%?
retiredjg wrote: Mon May 03, 2021 7:28 am VG Target Retirement 2035 (VTTHX) (0.14%) <----21.8% Total Stock, 14.7% Total International, 12.5% bonds

Vanguard's VTTHX underlying funds page https://investor.vanguard.com/mutual-fu ... folio/0305 looks like:
VG Target Retirement 2035 (VTTHX) (0.14%) <----44.5% Total Stock, 30.0% Total International Stock, 25.5% bonds
retiredjg
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by retiredjg »

What I was trying to show was how much of that holding in your portfolio is in each asset class.

The target fund is 49% of your portfolio. As far as your portfolio is concerned that 49% slice is made up of 21.8% Total Stock, 14.7% Total International, 12.5% bonds (21.8 + 14.7 + 12.5 = 49)

Does that help?
Topic Author
steamer
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

retiredjg wrote: Tue May 04, 2021 3:12 pm Does that help?
Yes, I understand now. Thank you.
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steamer
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

retired@50 wrote: Sun May 02, 2021 7:09 pm using the Emerging Markets fund VEMAX isn't the best option for a taxable account since it tends to have a relatively low percentage of qualified dividends, around 50% if I recall correctly. Further, since you have such a low taxable income, if you hold too much foreign stock in your taxable account your foreign tax paid will exceed the threshold of $300 and you'll be forced into using form 1116 and you won't be able to take the full credit.
You're right. In 2020, I paid $348 in foreign taxes, filled a form 1116, and my foreign tax credit came to $0.
That will change. From now on I plan to be in the 12% tax bracket. So then I would get the foreign tax credit.
At a 12% tax bracket
- A VG Emerging Markets Stock Index (VEMAX) foreign tax credit would almost pay for tax on ordinary (non-qualified) dividends.
- A VG Total International Stock Index (VTIAX) foreign tax credit would more than pay for tax on ordinary dividends.

From https://www.physicianonfire.com/international-stock/
Domestic U.S. funds are more tax-efficient as compared to their international counterparts, even after accounting for the Foreign Tax Credit.
If you have a federal income tax burden of zero, you won’t get a Foreign Tax Credit refund.
If, however, you owe a little something at the end of the year, having international stocks in a taxable brokerage account will lower your taxes.

From https://advisors.vanguard.com/tax-cente ... end-income
VEMAX qualified dividend income (QDI) is about 45%.
VTIAX qualified dividend income (QDI) is about 80%.

retired@50, thank you for all your insights. I am learning so much.
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retired@50
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by retired@50 »

steamer wrote: Tue May 04, 2021 10:41 pm
retired@50 wrote: Sun May 02, 2021 7:09 pm using the Emerging Markets fund VEMAX isn't the best option for a taxable account since it tends to have a relatively low percentage of qualified dividends, around 50% if I recall correctly. Further, since you have such a low taxable income, if you hold too much foreign stock in your taxable account your foreign tax paid will exceed the threshold of $300 and you'll be forced into using form 1116 and you won't be able to take the full credit.
You're right. In 2020, I paid $348 in foreign taxes, filled a form 1116, and my foreign tax credit came to $0.
That will change. From now on I plan to be in the 12% tax bracket. So then I would get the foreign tax credit.
At a 12% tax bracket
- A VG Emerging Markets Stock Index (VEMAX) foreign tax credit would almost pay for tax on ordinary (non-qualified) dividends.
- A VG Total International Stock Index (VTIAX) foreign tax credit would more than pay for tax on ordinary dividends.

From https://www.physicianonfire.com/international-stock/
Domestic U.S. funds are more tax-efficient as compared to their international counterparts, even after accounting for the Foreign Tax Credit.
If you have a federal income tax burden of zero, you won’t get a Foreign Tax Credit refund.
If, however, you owe a little something at the end of the year, having international stocks in a taxable brokerage account will lower your taxes.

From https://advisors.vanguard.com/tax-cente ... end-income
VEMAX qualified dividend income (QDI) is about 45%.
VTIAX qualified dividend income (QDI) is about 80%.

retired@50, thank you for all your insights. I am learning so much.
You still might even find that with an income level in the 12% bracket, the form 1116 doesn't work out as well as you'd hope.

Check out this thread: viewtopic.php?f=1&t=211120

You might actually do better to reduce the foreign holding in your taxable account to get the foreign tax paid below the $300 threshold so form 1116 isn't needed.

Regards,
This is one person's opinion. Nothing more.
Topic Author
steamer
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by steamer »

retired@50 wrote: Tue May 04, 2021 11:43 pm You still might even find that with an income level in the 12% bracket, the form 1116 doesn't work out as well as you'd hope.

Check out this thread: viewtopic.php?f=1&t=211120

You might actually do better to reduce the foreign holding in your taxable account to get the foreign tax paid below the $300 threshold so form 1116 isn't needed.
All my 2020 foreign taxes paid ($348) was from VG Target Retirement 2035 (VTTHX).
So I will sell off enough of that to get below $300 foreign taxes paid.

Can I get foreign tax credit on IRA accounts?
SnowBog
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Re: How to transition my portfolio towards a more efficient portfolio?

Post by SnowBog »

steamer wrote: Wed May 05, 2021 5:07 am
retired@50 wrote: Tue May 04, 2021 11:43 pm You still might even find that with an income level in the 12% bracket, the form 1116 doesn't work out as well as you'd hope.

Check out this thread: viewtopic.php?f=1&t=211120

You might actually do better to reduce the foreign holding in your taxable account to get the foreign tax paid below the $300 threshold so form 1116 isn't needed.
All my 2020 foreign taxes paid ($348) was from VG Target Retirement 2035 (VTTHX).
So I will sell off enough of that to get below $300 foreign taxes paid.

Can I get foreign tax credit on IRA accounts?
No, because you aren't taxed in your IRA, there is no credit. Only "taxable" accounts (where you are paying taxes) can get credits.
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