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Tax efficient placement strategy
Tax efficient placement strategy
by nobility » Sat Dec 07, 2013 4:05 pm
My asset allocation (w/ ER):
40% Total U.S. Stock Market Indx (.02% institutional, .05% admiral)
35% Total International Stock Market Indx (.1% institutional, .2% admiral)
10% Extended Market Plus (small/mid) - VEMPX (.1% institutional, .14% admiral)
10% REIT (.08% institutional, .1% admiral)
5% Total Bond Market Indx (.05% institutional, .1% admiral)
Placement strategy:
401k: Put all of REIT, Bond, and Extended Market here. I have enough in the 401k to do this completely. Whatever is left over in 401k is split 50/50 between U.S. & International
Roth IRA: Fill up with International
Taxable: Put any remaining International here and fill the rest with U.S.
Questions
Please note that my 401k has lower ERs (due to institutional shares) for all 5 funds, not sure if that makes a difference for the answers to below.
1. Should I be putting any of the REIT, Bond, or Extended Market funds in the Roth IRA? If so, why?
2. Is it best to maximize US Stocks over International in the Taxable account? I view International to have a greater return (given higher risk) so it makes sense to put it in Tax-advantaged accounts if there's room left. Are the benefits of foreign tax credit via International sufficient to justify it taking priority of U.S in Taxable?
3. Am I under invested in Bonds? I'm 29 yrs. Target retirement funds for my age is at 10% bonds. Should I bump up to 10%?
4. Any other observations on my asset allocation and/or placement strategy?
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Re: Tax efficient placement strategy
by Duckie » Sat Dec 07, 2013 10:10 pm
nobility wrote:1. Should I be putting any of the REIT, Bond, or Extended Market funds in the Roth IRA? If so, why?
Only if you run out of room in the 401k because of the cheaper shares. In fact, the difference in cost makes TISM a slightly better option in the 401k than in the Roth IRA (although its admiral shares are 0.16% not 0.20%).
2. Is it best to maximize US Stocks over International in the Taxable account? I view International to have a greater return (given higher risk) so it makes sense to put it in Tax-advantaged accounts if there's room left. Are the benefits of foreign tax credit via International sufficient to justify it taking priority of U.S in Taxable?
I prefer international in taxable for the FTC but others differ because of the qualified dividends (TSM being 100% qualified and TISM being around 70%). Your choice.
3. Am I under invested in Bonds? I'm 29 yrs. Target retirement funds for my age is at 10% bonds. Should I bump up to 10%?
At age 29 I'd bump bonds up to 20%. TR funds are notoriously aggressive.
4. Any other observations on my asset allocation and/or placement strategy?
Why do you have extended market? Is this to deliberately overweight mid/small caps? Because with the total US stock market funds you already hold them at market weight. And most people who do overweight pick small-cap value.
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Re: Tax efficient placement strategy
by livesoft » Sat Dec 07, 2013 10:30 pm
i like your strategy and have tried to do some of the same things, but things have evolved over time.
Currently, we have only equities in taxable. Most of our equities are international, but there is still a significant chunk of US. This happened because a small chunk was US that was tax-loss harvested in the spring of 2009. That small chunk has been left untouched and you can imagine that it has grown significantly.
In tax-advantaged, we have all our bonds. Our 401(k)s have changed over time from craptacular to index funds. So now the 401(k) have S&P500 and total international and bond index. We had shares of extended market index since we wanted to overweight small caps, but since they have done so well, they had to be sold to rebalance. And it was better selling in tax-advantaged than in taxable.
Our Roths have a mix of equities and bonds. I think Roths are precious future tax-free space. I don't like losing money in our Roths since we only recently became eligible for making contributions and they are small. I like to exchange from bonds to equities in the Roth when I think the market has dropped, but I like to exchange from equities to bonds in the Roth when I think the market has popped. I make a corresponding change in a rollover IRA to keep our asset allocation on track. In any event our Roths represent a single digit percentage of our total portfolio, so this is just working around the margins.
Back to taxable: We take distributions in cash and use them for expenses or invest them with an eye towards rebalancing. This means that distributions from US equities can be re-invested in Foreign. It turns out that we haven't bought any more US in taxable since 2009. We do not sell in taxable to in order to rebalance. We do sell in taxable for tax-loss harvesting and occasionally to meet expenses. For example, in 2013 we have sold only once and that was a small amount to make a college tuition payment.
So I guess my advice is to prepare for things changing in the future if need be. Since your expense ratios are so low, I probably wouldn't consider them in any of your decisions. Example: If REITs tanked, then I would put them in your Roth until they recovered.
Also, I would suggest more bonds, too.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: Tax efficient placement strategy
by Peter Foley » Sun Dec 08, 2013 12:41 am
I would put bonds in tax deferred and put more growth oriented assets in a Roth. I would increase my bond allocation to at least 10% if not 20%. It is important to keep some power dry in case there is a need to rebalance. 5% in bonds just isn't enough.
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