Tuesday, January 20, 2015

Tax Efficiency Question - What to Put Where?

Over at Bogleheads we came across the following discussion: Tax Efficiency Question- What to Put Where?

Postby CJ_Punk » Mon Jan 19, 2015 7:14 pm
I'm just wondering how to prioritize what to put in my Roth IRA, and what to put in my taxable accounts.

Emergency funds: Check.
Debt: None
Tax Filing Status: Single
Tax Info: I'll probably be 15% or under federally, and I'm in Florida, so no state income tax (6.5% sales tax)


I'm looking at investing in:

VTSAX- Total Stock Market Index- 62%
VTIAX- International Market Index- 20%
BND- Total Bond Market ETF- 8%
BNDX- International Bond Market- 2%
VNQ- REIT Index ETF- 2%
VDE- Energy ETF- 2%
VHT- Health ETF- 2%
VBR, VBK or VB- Small cap ETF (still deciding)- 2%


My Roth IRA can hold ~37% of my portfolio, and the rest would need to go into my taxable account.

I know my bonds should go into my IRA, but in my head, the only reason I'm investing in bonds is for some stability just in case, so having that in my IRA would kind of defeat the purpose in a catastrophic event... I'm also thinking the last 4 investments (tilts I'm considering), I should put in my IRA, because I could see myself moving those assets around more than I would either of my major stock investments (VTSAX and VTIAX). But I'd love to get some feedback.
Last edited by CJ_Punk on Mon Jan 19, 2015 7:36 pm, edited 1 time in total.
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Re: Tax Efficiency Question- What to Put Where?

Postby livesoft » Mon Jan 19, 2015 7:17 pm
Put VTSAX and VTIAX in taxable. If you did that would you fill your taxable?
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Re: Tax Efficiency Question- What to Put Where?

Postby CJ_Punk » Mon Jan 19, 2015 7:35 pm
livesoft wrote:Put VTSAX and VTIAX in taxable. If you did that would you fill your taxable?


Do you mean would I fill my nontaxable Roth (I don't have a limit to my taxable... I don't think, anyway).

I haven't finalized the numbers yet, but I know that if I put everything except VTSAX and VTIAX in my Roth, I would be short of filling it (I think that would fill somewhere just under half).

But do you think there's that much of an advantage in being tax efficient to over rule my idea of keeping the stabler funds accessible? (I'll edit my original post, but I have emergency funds covered and no debit).
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Re: Tax Efficiency Question- What to Put Where?

Postby retiredjg » Mon Jan 19, 2015 7:37 pm
Is there no 401k, 403b, 457b, SEP IRA or SIMPLE IRA available at work?
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Re: Tax Efficiency Question- What to Put Where?

Postby livesoft » Mon Jan 19, 2015 7:37 pm
No, that is not what I meant.
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Re: Tax Efficiency Question- What to Put Where?

Postby mnvalue » Mon Jan 19, 2015 7:45 pm
CJ_Punk wrote:I don't have a limit to my taxable... I don't think, anyway

The limit is how much money you have. Do you have more money in taxable than your asset allocation days should be stocks?
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Re: Tax Efficiency Question- What to Put Where?

Postby Toons » Mon Jan 19, 2015 7:48 pm
Taxable
VTSAX- Total Stock Market Index- 62%
VTIAX- International Market Index- 20%

Roth
BND- Total Bond Market ETF- 8%
BNDX- International Bond Market- 2%
VNQ- REIT Index ETF- 2%
VDE- Energy ETF- 2%
VHT- Health ETF- 2%
VBR, VBK or VB- Small cap ETF (still deciding)- 2%
:happy
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Re: Tax Efficiency Question- What to Put Where?

Postby RyeWhiskey » Mon Jan 19, 2015 7:54 pm
Your "tilts" (BNDX, VNQ, VDE, VHT, etc) are 2% a piece, too small to have a meaningful effect on your portfolio as a whole. Furthermore, you say "I could see myself moving those assets around more than I would either of my major stock investments." This leads me to believe that these are speculative assets and hence should be held in a separate account from your main investments as you may be inclined to put more money than necessary into them over time.

I suggest you hold the TSM and TISM in your taxable account and the rest in your tax shelter. This said, I think you should simplify your allocation.:sharebeer
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Re: Tax Efficiency Question- What to Put Where?

Postby CJ_Punk » Mon Jan 19, 2015 9:55 pm
retiredjg wrote:Is there no 401k, 403b, 457b, SEP IRA or SIMPLE IRA available at work?


No, I'm an independent contractor. I was recently informed of LLCing to start a solo 401k, which I will be looking into, but I feel like going to be a major time commitment, which I won't be able to fully look into for a while.

mnvalue wrote:The limit is how much money you have. Do you have more money in taxable than your asset allocation days should be stocks?


Ah. I'm sorry, livesoft, I misunderstood, then. Actually, I'd have almost exactly the right amount in my taxable to cover my VTSAX fund entirely.



RyeWhiskey, honestly, I think your right... I didn't really realize they were as speculative until someone broke down tilting to me in a different way in another thread and you just pointed out that. In my head, I wanted about 5% 'fun money,' and conceptually, I combined that concept with tilting. Looks like I'm going back to the drawing board (I'm thinking combine REITs and International bonds into one of those two, and and combine the remaining 3 into one of the options, maybe 2). As far as a separate account, I won't be tempted to add money to those smaller, non-simple funds... self control is my specialty.8-) This was just a conceptual misunderstanding.
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Re: Tax Efficiency Question- What to Put Where?

Postby DSInvestor » Mon Jan 19, 2015 10:28 pm
CJ_Punk wrote:
retiredjg wrote:Is there no 401k, 403b, 457b, SEP IRA or SIMPLE IRA available at work?


No, I'm an independent contractor. I was recently informed of LLCing to start a solo 401k, which I will be looking into, but I feel like going to be a major time commitment, which I won't be able to fully look into for a while.


You don't need an LLC or other corporate structure to use a Solo 401k. Sole proprietors (Schedule C) can use Solo 401k, SEP-IRA or SIMPLE-IRA as small business retirement plans - Pick one. You may need to have an EIN (employer identification number) or Taxpayer Identification number to establish your small business retirement plan.

If you don't already have an EIN, IRS has a page where you can apply for one online:

Give the small business folks at Vanguard or Fidelity a call. It won't take a lot of time and they'll be able to tell you what plans you can and cannot use with your current business structure and explain the plans to you.
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Re: Tax Efficiency Question- What to Put Where?

Postby grabiner » Mon Jan 19, 2015 11:35 pm
CJ_Punk wrote:In my head, I wanted about 5% 'fun money,' and conceptually, I combined that concept with tilting.


Your "fun money" needs to be in your IRA. Even if a fund you hold is itself tax-efficient (such as a sector index ETF), it isn't tax-efficient in your portfolio if you sell it before you need to spend the money. In an IRA, you don't have to worry about this, as you may trade with no tax consequences.

REITs should be in your IRA for different reasons; unlike most ETFs and index funds, REIT Index is tax-inefficient.

David Grabiner

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