Over at Bogleheads we came across the following discussion:
How to increase tax efficiency in my investment portfolio
by PrajnaSun » Sat Dec 20, 2014 9:26 am
Hello everyone,
Thank you everyone for making this forum possible. Over the last few years, I have read the forum/this website and tried to follow some advice. However, I am at a point that I begin to wonder whether I would need some assurance on my DIY approach and/or see a fee only financial advisor. This is a review of my portfolio. I appreciate any advice/perspective that you may have. Happy holidays!
Emergency funds: Yes
Debt: None (Paid off mortgage a few years ago)
I do have life insurance, disability insurance, and wills already
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 7% State
State of Residence: Indiana
Age: 42/Spouse 33 (Stay at home mom at this time)
Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 20% of stocks
Size of your current total portfolio: About 600K (Not including the house or our two kids’ 529 plans)
Current retirement assets
Taxable
3.9% Cash/Vanguard Prime Money Market Fund (VMMXX) (ER 0.16)
1.6% Vanguard Long-Term Tax-Exempt Fund Investor Shares (VWLTX) (ER 0.20)
8.1% Vanguard Limited-Term Tax-Exempt Fund Admiral Shares (VMLUX) (ER 0.12)
4.9% Vanguard FTSE Developed MKTS ETF (VEA) (ER 0.09)
2.4% Vanguard Total Stock Market ETF (VTI) (ER 0.05)
His Roth IRA at Vanguard (Converted immediately to Roth from IRA yearly)
5.8% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)) (ER 0.05)
6.2% Vanguard Value Index Fund Admiral Shares (VVIAX) (ER 0.09)
His Roth 401k at TD Ameritrade (No company match)
22.7% Vanguard Target Retirement 2035 Investor Shares (VTTHX) (ER 0.18)
0.4% Vanguard Total Bond Market ETF (BND) (ER 0.08)
His Profit Sharing/401K at TD Ameritrade (No company match)
12.4% Vanguard Target Retirement 2035 Investor Shares (VTTHX) (ER 0.18)
16.2% Vanguard Total Bond Market ETF (BND) (ER 0.08)
1.2% Vanguard REIT ETF (VNQ) (ER 0.10)
2.2% Vanguard Total Stock Market Index Fund ETF Shares (ER 0.05)
His HSA (Used as a “stealth IRA") at TD Ameritrade
0.8% Cash
0.6% Vanguard FTSE All-World ex-US ETF (VEU) (ER 0.15)
1.3% Vanguard Total Bond Market ETF (BND) (ER 0.08)
2.4% Vanguard Total Stock Market Index Fund ETF Shares (VTI) (ER 0.05)
His 403b at TIAA-CREFF
1.7% Traditional TIAA Guaranteed 3% (Not sure what the ER is)
Her Roth IRA at Vanguard (Converted immediately to Roth from IRA yearly)
5.2% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05)
Contributions
New annual Contributions
$ 18,000 His Roth 401k (No employer match)
$ 17,000 His Profit Sharing/401K (No employer match)
$ 5,500 His IRA/Roth IRA
$ 5,500 Her IRA/Roth IRA
$ 6,650 HSA (to be invested in Vanguard funds via TD Ameritrade, again I use this as a “stealth” IRA)
$ 80,000 to 100,000 Taxable (for retirement, not short term goals)
Available funds
Most Vanguard Funds. However, if I use ETF in my Roth 401K or 401K at TD Ameritrade, I use only the commission free ETF. Vanguard Total International Bond ETF (BNDX) is not on that list.
Questions:
1. My company has a age-based retirement structure favored older employees, hence at my age I can’t put in a total of $50K as mentioned in some prior posts. I have consistently maximized the investment in tax shelter space available at work and IRA (then convert immediately to Roth IRA for both spouses). My only option is to do taxable investment, what should I do? It seems a bit counter-intuitive to put stock funds/ETFs in the taxable space as it would increase my taxable income. Yes, I did transfer ETF gained shares to charities (based on first in and first out only) and plan to follow tax loss harvesting in a down year.
2. Is buying an investment property or a vacation house in a different state (also to rent it out through Airbnb or VRBO websites) a good idea for diversification purpose in our situation?
3. I have put $10,000 for my two children (Age 2 and 4) since birth (Vanguard Fund 75 stocks/25 bonds). Should I put more than 10K?
4. Is there a difference between VEU and VEA?
5. What else can I do to maximize tax efficiency? Is my assess allocation reasonable? I am not sure if I should put more Tax-exempt bond funds or Total Stock Market index funds in the taxable space.
6. When I scan my portfolio in VG website, they mentioned this year that I should get some foreign bond exposure, where should I put this?
7. With the price of oil dropping so much, I am tempted to invest in a Vanguard Energy ETF (VDE) in taxable space. Good/bad idea? It would seem to go against Bogleheads’ principles of not to do market timing and not to favor one sector heavily.
8. With the 3% guaranteed at TIAA-CREFF, should I just leave the fund there or should I transfer to VG, pay tax now, and convert that to Roth?
Last edited by PrajnaSun on Sun Dec 21, 2014 2:40 pm, edited 6 times in total.
Posts: 2
Joined: Fri Dec 19, 2014 10:38 am
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Re: How to increase tax infficiency in my investment portfol
by Laura » Sat Dec 20, 2014 12:08 pm
Why are you using a roth 401k at your high tax rate? The first thing to do would be to switch that to traditional and save yourself a significant amount of tax right off the bat. You could move the tiny TIAA account and convert it. I would be tempted to do that because it is becoming an increasingly small portion of your total and a return of 3% on only 1.7% of your money just isn't worth the hassle in my book.
I also notice that you are blending target retirement type funds and then other funds, probably in an effort to hit your target asset allocation. Given your large and growing taxable account I believe it is time to give up Target Retirement funds. You also seem to just be adding funds rather than restructuring to keep this streamlined. You now have a large number of funds representing less than 5% of your total portfolio which just adds complexity and not much else. You should consider moving to something like this:
taxable
20.9% Vanguard Total Stock Market
his roth (includes TIAA rollover)
13.7% Total Intl Stock Market
his roth 401k/traditional 401k
20.1% Total Stock Market (this will be moved slowly into Total Bond Market)
3% Total Bond Market
his profit sharing 401k
32% Total Bond Market
his HSA
5.1% Total Stock Market
0% Total Intl Stock Market
her roth
5.2% Total Stock Market
0% Total Intl Stock Market
New Contributions
taxable
$90k Total Stock Market
his roth
$5.5k Total Intl Stock Market
his roth 401k/traditional 401k
$18k Total Bond Market
$15k transfer from Total Stock Market to Total Bond Market
his profit sharing 401k
$17k Total Bond Market
his HSA
$6.65 Total Intl Stock Market
her roth
$5.5k Total Intl Stock Market
This move probably isn't completely possible because you will have a taxable event to change some of those taxable holdings. However, this is an example of what you can work toward. You really don't need nearly as many tiny holdings as you currently have. By blending everything across your entire portfolio you can have a low cost, tax efficient, broadly diversified portfolio that is much less complex.
Laura
Posts: 7549
Joined: Mon Feb 19, 2007 7:40 pm
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Re: How to increase tax infficiency in my investment portfol
by duke33 » Sat Dec 20, 2014 12:53 pm
I agree with him simplifying his accounts, but a few things to keep in mind in your taxable account.
First of all; What is your income? What state?
1. If income is high (>300K) should consider Tax Muni Bond Exposure in taxable.
2. Advantageous for you to have International Exposure in Taxable account for tax credits
3. Beneficial to have 4-5 funds in taxable to be able to tax-loss harvest from losers
Posts: 28
Joined: Sun Feb 09, 2014 9:46 am
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Re: How to increase tax infficiency in my investment portfol
by PrajnaSun » Sun Dec 21, 2014 10:07 am
Thank you for your prompt response and suggestions, Laura. Please allow me to clarify.
"Why are you using a roth 401k at your high tax rate? The first thing to do would be to switch that to traditional and save yourself a significant amount of tax right off the bat"
--> When I started my job, that was the only two options presented to me. Roth 401K and Profit Sharing/401K. Let me ask them to see if I can choose to do the 401K instead. I didn't know that was an option.
"You could move the tiny TIAA account and convert it. I would be tempted to do that because it is becoming an increasingly small portion of your total and a return of 3% on only 1.7% of your money just isn't worth the hassle in my book."
--> Thank you. I will do that.
his roth 401k/traditional 401k[/u]
$18k Total Bond Market
$15k transfer from Total Stock Market to Total Bond Market"
--> Could you clarify this? Where is "$15k transfer from Total Stock Market to Total Bond Market" come from?
P
Last edited by PrajnaSun on Sun Dec 21, 2014 2:41 pm, edited 1 time in total.
Posts: 2
Joined: Fri Dec 19, 2014 10:38 am
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Re: How to increase tax efficiency in my investment portfoli
by Laura » Sun Dec 21, 2014 1:02 pm
The recommended transfer is the way to maintain your target asset allocation. The new contributions basically add to much money into stocks which are best held in your taxable account. Bonds throw off taxable dividend income so they are best placed in retirement accounts. You need $15k more in your bonds than the new contributions have so you fix this by transferring money from stocks to bonds in retirement accounts.
Laura
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