Does tax efficient allocation cause glide path issue?
by C8H18Engineer » Tue Jan 14, 2014 11:37 am
If one has chosen a strategy to do age-x in bonds and is trying to be tax efficient by placing equities in taxable and bonds in tax-deferred, does this create an issue as you approach retirement age? In the expected scenario, your highest income years are the final working ones, but with a pure tax efficient allocation, and the long term view that equities rise faster than bonds, does this mean that one might be forced to take large capital gains near retirement as you make a shift to bonds?
Does this imply that a good strategy would be to keep at least some equities in tax-deferred for the nearly inevitable rebalancing that will happen down the road?
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Re: Does tax efficient allocation cause glide path issue?
by Doc » Tue Jan 14, 2014 2:10 pm
C8H18Engineer wrote:Does this imply that a good strategy would be to keep at least some equities in tax-deferred for the nearly inevitable rebalancing that will happen down the road?
Keeping some equities in tax-deferred and short bonds in taxable is more tax efficient for many people regardless of the rebalancing aspects.
Regardless of a glide path, equities are expected to outperform FI and at some point you will need to sell to stay in balance. That is one of the reasons why the tax deferment aspects of LTCG sometimes gets exaggerated. You just can't keep the position for as long as you may think.
A scientist looks for THE answer to a problem, an engineer looks for AN answer. Investing is not a science.
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Re: Does tax efficient allocation cause glide path issue?
by grabiner » Tue Jan 14, 2014 11:13 pm
If you have a taxable account, and your highest earning years are late in your career, you are likely to be adding a lot to your taxable account at that time. If your stock allocation is too large, you can add munis to the taxable account.
In addition, selling stocks to reduce your allocation isn't really a tax loss, since you would take that tax loss anyway. If you have taxable stock, you intend to lose 15% of your gains to capital-gains tax; if you have to do that to follow the glidepath, you'll lose the 15% now rather than in retirement.
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Re: Does tax efficient allocation cause glide path issue?
by JohnDoh » Wed Jan 15, 2014 9:19 am
Don't forget savings bonds. As part of the glide path -- and depending on income -- one can (should IMHO) start maxing out (to the extend possible) annual I Bond purchases. This give one: 1) additional tax sheltered space; 2) additional inflation-protected fixed income allocation; 3) an I-Bond ladder that can be used later as a SS income supplement (if one takes a liability-matching approach to retirement funding).
Of course, if one has a very large income, the savings bond limits may be relatively paltry. But still an individual can get $15,000 per year (including $5,000 via tax refund); a couple can get $25,000 per year.
Since they have 30 year maturities, a ladder begun at age 40 must be tapped beginning at age 70 at the latest, but can be tapped earlier if needed / desired.
(Also, there are now VERY LOW COST variable annuities available from Jefferson National (fixed $240 fee per year). Under certain circumstances, it might make sense to shift some taxable investing into such a VA which would then allow tax-free rebalancing / reallocating. Just a thought.)
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