Asset type location for taxable heavy investors

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fortunefavored
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Asset type location for taxable heavy investors

Post by fortunefavored »

This came up in another thread so I'm wondering what people think.

Say you're an investor with a ratio of between 5:1 an 10:1 for taxable(and roth) vs. traditional IRA/401k and some where between 3 and 10 million and a preferred AA of any where between 60/40 and 90/10. Similarly, this portfolio throws off a lot of income later, limiting Roth conversions.

What are some factors that influence where to put what? Since you don't have a large amount of tax deferred space, following the wiki doesn't work, so you have to make some decisions. Is there a tool that can model this with tax rates and RMDs, IRMAA, etc?

If you hold international, keeping some in taxable lets you take the foreign tax credit
If you plan to spend all your money and can afford the taxes up front putting lower growth fixed income in traditional/401k avoids big RMDs later
If you plan to leave a legacy, high growth in IRA/401k lets that grow tax free, big RMDs & IRMAA aren't an issue

I'm approaching a large rebalance next year, so if I am going to make changes that'll be the time.
Florida Orange
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Re: Asset type location for taxable heavy investors

Post by Florida Orange »

Mid cap and small cap stocks generally pay lower dividends than large cap stocks. Municipal bonds for the fixed income.
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Hacksawdave
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Re: Asset type location for taxable heavy investors

Post by Hacksawdave »

fortunefavored wrote: Tue Apr 02, 2024 8:43 am Say you're an investor with a ratio of between 5:1 an 10:1 for taxable(and roth) vs. traditional IRA/401k and some where between 3 and 10 million and a preferred AA of any where between 60/40 and 90/10. Similarly, this portfolio throws off a lot of income later, limiting Roth conversions.

What are some factors that influence where to put what? Since you don't have a large amount of tax deferred space, following the wiki doesn't work, so you have to make some decisions. Is there a tool that can model this with tax rates and RMDs, IRMAA, etc?
I would draw down as much ordinary income (OI) to fill 0% from the tax deferred as possible. My tax deferred account percent of portfolio is around 36%, so this example is much lower than what I have at around 15% of total assets located in tax deferred in the example portfolio.

If a MFJ couple started 2023 with $5M in taxable VFIAX S&P 500 index fund, they realized $89,825 worth of QDs in 2023 (assuming taken in cash). Combine this with municipal income and $27K in OI from the tax deferred withdrawals and the federal tax liability is $0.

If the tax deferred reaches the high point of $2M, then the first RMD at today’s percentage is $75,472. This raises the federal tax bill to $12,545 for 2023 using the RMD and the $89.8K QD as income figures. Adding SS benefits increases this of course.
afan
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Re: Asset type location for taxable heavy investors

Post by afan »

Current dividend rate on VTI is 1.38%. That is not a high tax hurdle. Depending on your state and the current relative yields of taxable vs muni bonds, perhaps use munis for fixed income in taxable.
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grabiner
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Re: Asset type location for taxable heavy investors

Post by grabiner »

Asset location is always relative: you should put the most tax-efficient investments in your taxable account. If stock is more tax-efficient for you than bonds, then you should hold as much of your bond allocation as possible in tax-advantaged accounts.

If your portfolio is mostly tax-sheltered and you prefer to hold stock in the taxable account, it can be all stock, with both bonds and stock in tax-sheltered accounts. Conversely, if your portfolio is mostly taxable and you prefer to hold stock in the taxable account, you may have to hold all your stock there, and then add bonds as well; your tax-sheltered accounts will then be all bonds.

The one significant issue for a mostly-taxable portfolio is that you should limit tax-inefficient stocks to your tax-advantaged account. For example, if your IRA isn't large enough for your target allocation to REITs and your 401(k) doesn't have a REIT fund, it is better not to hold the target allocation to REITs. (Before the development of value factor ETFs which are almost as tax-efficient as broad-market index funds, I limited my REIT and value allocation to my Roth IRA, which left me short of my target weight for value stocks. Now, I hold some value ETFs in my taxable account.)
Wiki David Grabiner
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