Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

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Stang70
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Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Stang70 »

Bogleheads generally advocates placing bonds in tax-deferred versus taxable (for tax efficient placement). I would appreciate Bogleheads asset location recommendations.

Suppose a 3.5 million portfolio distributed across 401k, Roth, and Taxable as follows:
-Tax-deferred: 1400k
-Roth: 300k
-Taxable: 1800k

-If I desire a 60% Stock/40% Bond AA, what would be your recommended breakout for stock/bond asset location?

-Would you make the tax-deferred 100% bonds?

-If taxable is all stocks, Roth is all stocks, and 401k is all bonds…..where do I rebalance?

-How would this asset location play out over time (in retirement) when the equities grow and there is no new 'income' to add to the 401k?

-Any unintended consequences from the chosen asset location?

Appreciate any helpful information that you provide!
phoroner
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by phoroner »

Hi Stang70

There is some disagreement here. Optimizing asset allocation will increase tax efficiency, but it will also adjust risk vs having the same allocation in all accounts. See some of the discussion here: viewtopic.php?p=4692869#p4692869

I think optimizing asset allocation for tax reasons is appropriate for most investors and do so myself. With the portfolio you list below, assuming there are no capital gains to do this, I would fill the tax-deferred account with only fixed-income. At the start, this would hold it just all of it, so the taxable and roth accounts would be 100% stock.

As time passes, you would then presumably rebalance. Assuming you spend down your FI from tax-deferred and/or there is growth of equities, you would have to decide whether to add fixed-income to taxable vs roth. Depending on your tax rate, you may want to pay capital gains in taxable to sell appreciated equities and by fixed income, or you may instead want to use your roth account. For many investors there could be a combination of the two; It would depend on tax costs and your preferences. Then again, if equities do poorly, you might have to buy some in your tax-deferred account.

Post back with questions

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rockstar
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by rockstar »

If you have a high state tax rate, deferred might not be the best place to hold a lot of treasuries.
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mhadden1
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by mhadden1 »

There are Tax Equivalent Yield calculators that could help you decide whether to use municipals in taxable.
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livesoft
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by livesoft »

Stang70 wrote: Thu Feb 08, 2024 11:45 am
-If taxable is all stocks, Roth is all stocks, and 401k is all bonds…..where do I rebalance?

-How would this asset location play out over time (in retirement) when the equities grow and there is no new 'income' to add to the 401k?

-Any unintended consequences from the chosen asset location?

Appreciate any helpful information that you provide!
Rebalance in your 401(k) and otherwise allow your asset allocation to drift. If for some reason you are contributing so much to your taxable that your asset allocation gets out of whack, then that would mean to me that you are in a very high tax bracket, so that you could add some tax-exempt muni bonds to your taxable portfolio at that point.

No unintended consequences of an significance. You can also do this for a few years and see how it goes.

We have a 60/40 portfolio with taxable all broad-market index stock funds, Roths all index stock funds, and 401(k)/IRA holding all our bond funds plus some stock index funds.
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mhc
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by mhc »

I would make the 401k 100% bonds. There are two good reasons for this. Bonds are tax inefficient. Also, bonds have the lower expected return.

The method of rebalancing depends on if you are adding (working) or withdrawing (retired) from the portfolio. There are a lot of factors that determine the best method to rebalance. Rebalancing does not have to occur very frequently, so I don't see it is a major issue.
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Stang70
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Stang70 »

Thank you to all who have posted thus far. I sincerely appreciate your input and will be digesting the information as I make moves going forward.
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jeffyscott
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by jeffyscott »

We don't have much of a taxable account, but my preferences would be to fill the taxable with US stocks (with International stock the second choice), the TIRA with fixed income ("bonds"), and the Roth with the remaining stock. Of course, all of these are: to the extent possible, based on asset allocation.

So in your example, I would have all bonds in the tax deferred.

If rebalancing is selling stocks and buying bonds, you could do that in the Roth. You could also use the dividends from the stocks in taxable to buy treasuries, tax-exempt bonds, I-bonds, or EE bonds depending the relative yields vs. buying equivalents in Roth and depending on what makes sense in your tax brackets, etc. If your past rebalancing has stocks in TIRA, you can move that back to bonds.

If you need to rebalance from bonds to stocks, you can do that in the tax-deferred account. If your past rebalancing has some bonds in taxable or Roth, then future rebalancing could move that back to stocks.

You may or may not want to bother with tax adjusting the tax-deferred account. Or maybe just slightly modifying your target allocations to account for this would be good enough :?: . Since the tax deferred will hold mostly bonds you might, for example, target 45% or 50% bonds to account for that (those allocations would be close to 60/40 after accounting for about 20% or 30% tax on the tax-deferred bonds).
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Stang70
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Stang70 »

jeffyscott wrote: Fri Feb 09, 2024 10:00 am
You may or may not want to bother with tax adjusting the tax-deferred account. Or maybe just slightly modifying your target allocations to account for this would be good enough :?: . Since the tax deferred will hold mostly bonds you might, for example, target 45% or 50% bonds to account for that (those allocations would be close to 60/40 after accounting for about 20% or 30% tax on the tax-deferred bonds).
Thanks, jeffyscott. Another possibility that I will take under consideration.
johnra
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by johnra »

For me a 60-40 overall allocation would lead to a 60-40 (approximately) allocation in EACH location, or at least in both the taxable and tax-deferred locations (and approximately 100% stock in the Roth location, at least until I approach actually spending from it).

The idea is to have access to cash at any time and that need is best served by flexibility with regards to the markets on both sides of the tax barrrier. If I need money to spend in the taxable location, it will be taken from bonds if the market is down and from stocks if the market is up. If I need money for RMDs, I will take from bonds if the market is down and stocks if the market is up. etc etc. If all my "safe" money (eg bonds) is in tax deferred accounts, then to access it when stocks are down also requires getting taxed, so not as efficient as having it already in the taxable space. Bonds in the taxable location might be municipal bonds, depending on various factors different for each person

Roth is a little different--mostly in stocks until I am getting close to actually accessing it, and I would imagine eventually moving it to about 75-25 or 80-20 stocks-bonds.
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GMCZ71
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by GMCZ71 »

johnra wrote: Sun Feb 11, 2024 1:01 am For me a 60-40 overall allocation in EACH location, or at least in both the taxable and tax-deferred

If I need money to spend in the taxable location, If all my "safe" money (eg bonds) is in tax deferred accounts, then to access it when stocks are down also requires getting taxed, so not as efficient as having it already in the taxable space. Bonds in the taxable location might be municipal bonds, depending on various factors different for each person
Sounds like you are mirroring in each location? This is not efficient, please read the wiki's.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Selling TSM or SP500 in taxable when market is down is a good thing and it may or may not be "taxed" it will likely be a tax deduction.

For a visual your taxable is all TSM with some lots at $70 $80 $90 $100 per share price. Today its price is $121
In Oct 2022 you needed $25k it was at $88 per share at the lows. You sold and moved it into checking.
Choosing the $70-$80 lots gave you a tax loss. But 2 minutes later you bought in tax def $25k of TSM at $88 using the bond/mm in the deferred account.
Did you really sell at a loss?
Did you have easy access to safe money at the market lows?

We are not 100% stock in taxable, there are some Bheads that are.

Edit: Don't do it because we said so, do it because you understand it.
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retiredjg
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by retiredjg »

To do this properly, a person would need to know your tax bracket and if you are in a very high tax state. But based on the scant information given....


Taxable 51.4%
Total Stock
Total International if you want it
5% cash and short term bonds (or tax-exempt money market or short term bonds if in a high tax bracket)

tIRA 40%
5% 500 index
35% bonds

Roth IRA 9%
9% 500 index or extended market index (your preference)


Rebalancing between stocks and bonds could happen (to a certain extent) in the tIRA. Rebalancing between US stocks and foreign stocks should just be forgotten unless you have carryover losses. Or can do it in the Roth IRA.

Of course, the real question is how to get from an already invested taxable account of $1.8 million into just what is listed above...could be a long and somewhat costly project.
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Stang70
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Stang70 »

retiredjg wrote: Sun Feb 11, 2024 8:53 am To do this properly, a person would need to know your tax bracket and if you are in a very high tax state. But based on the scant information given....

Currently 24% Federal. Tentatively planning retirement in about a year where I should be in what is now the 12% bracket for about 10 years before moving into 22%.


Taxable 51.4%
Total Stock
Total International if you want it
5% cash and short term bonds (or tax-exempt money market or short term bonds if in a high tax bracket)

tIRA 40%
5% 500 index
35% bonds

Roth IRA 9%
9% 500 index or extended market index (your preference)


Rebalancing between stocks and bonds could happen (to a certain extent) in the tIRA. Rebalancing between US stocks and foreign stocks should just be forgotten unless you have carryover losses. Or can do it in the Roth IRA.

Of course, the real question is how to get from an already invested taxable account of $1.8 million into just what is listed above...could be a long and somewhat costly project.

-Taxable: Currently have $900k of equities in taxable (with about $325k of capital gain). The remainder consists of treasuries, money market, I-bonds ($130k).

-Roth: Currentlly 100% Wellington. quote

-tIRA: Currently have $400k in equities; remainder in G-Fund (bond fund in TSP account).
Thank you for input and advice!
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retiredjg
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by retiredjg »

Stang70 wrote: Sun Feb 11, 2024 9:43 am -Taxable: Currently have $900k of equities in taxable (with about $325k of capital gain). The remainder consists of treasuries, money market, I-bonds ($130k).
Are the equities so bad that you need to get rid of them? If not, call it good enough or just get rid of the worst of them....preferably at the 0% capital gains rate that you will be in for several years.

No need to get rid of the I bonds at all and that does give more room for stocks in tIRA. Some money market is probably good, but not a great deal. Treasuries are not my first choice, but certainly not a fatal flaw.

Having a high allocation to bonds in tIRA will reduce the possibility of large RMDs because it should slow down the growth of the large tIRA. For some people that is very attractive. And 10% stocks and 30% bonds in the tIRA would give you more rebalancing room.

Seems like you need to retire now, not later. :happy
Ricola
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Ricola »

If you want simplicity:

Non-Taxable: 100% in VBIAX balanced index fund
Taxable: 100% in VTMFX balanced index fund tax (Fed only) managed
IF:
Taxable in high taxable state: 60% VTI total stock market and 40% State Municipal bond fund
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Pops1860 »

This thread has been moved to the “Personal Investments" forum. Moderator Pops1860
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Topic Author
Stang70
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Stang70 »

Taxable in high taxable state: 60% VTI total stock market and 40% State Municipal bond fund
We are currently in 24% Federal and 4% state. Should be in 12% Federal and possibly 0% state after retirement a year from now (for about 10 years).

Would it still make sense to be in state municipal bond fund now and in the future? Asking for advice, not being snarky, because I am not knowledgeable about it but am all ears to learning more. :shock:

Appreciate the information.
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Stang70
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by Stang70 »

Retiredjg
Having a high allocation to bonds in tIRA will reduce the possibility of large RMDs because it should slow down the growth of the large tIRA. For some people that is very attractive. And 10% stocks and 30% bonds in the tIRA would give you more rebalancing room.
Sounds like it would be ok then to have the majority of bonds in tax-deferred, without doing it 100%? As others have commented, a mirrored allocation can have its merits. So, in my situation, a heavy weighted bond allocation in tax-deferred would still be fine when balanced with a similary heavily weighted equity allocation in taxable?

Thanks again for your time and knowledge.
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retiredjg
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by retiredjg »

Stang70 wrote: Sun Feb 11, 2024 4:08 pm
Retiredjg
Having a high allocation to bonds in tIRA will reduce the possibility of large RMDs because it should slow down the growth of the large tIRA. For some people that is very attractive. And 10% stocks and 30% bonds in the tIRA would give you more rebalancing room.
Sounds like it would be ok then to have the majority of bonds in tax-deferred, without doing it 100%?
Yes, particularly since you already have the I Bonds already in taxable...there is no need to fill the tax-deferred account with bonds.

So, in my situation, a heavy weighted bond allocation in tax-deferred would still be fine when balanced with a similary heavily weighted equity allocation in taxable?
Probably. Hard to say without actually seeing the portfolio, but that is a reasonable plan and is likely to work out well.
wingman4uz
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Re: Asset location (401k, Roth, Taxable) guidance for $3.5 million portfolio at 60/40 AA.

Post by wingman4uz »

I have a related question on tax efficient asset account allocation. What are the projected tax savings for using tax efficient account placement vs. the “mirrored approach”. For the OPs situation, is the juice worth the squeeze ? Is this quantifiable ?
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