Tuesday, February 17, 2015

Tax Efficiency of Fund Allocation: Question...

       Over at Bogleheads we came across the following discussion:
           
Postby Winterjp123 » Mon Feb 16, 2015 7:28 pm
                       
Trying to simplify my reading over the past few days...I've recently ditched Ameriprise in favor of a low cost 3 fund portfolio from Vanguard. I plan to adopt the 80/20 strategy that I've read so much about. At 39 I've accumulated around 520k in taxable and tax advantaged accounts, I feel pretty comfortable instituting a Total Stock, Total Bond and International Stock split with the following:

520k - Total Portfolio

200k in Taxable Brokerage

287k in Tax Advantage IRA

33k in tax free Roth

On a very fundamental level, my question is if I allocate 104k or 20% according to my reading I should buy all Total Bond in the Roth and put the rest under the tax advantaged IRA account in order to remain most tax efficient? The remaining 416k in Stock Funds I will put into the two buckets left. I realize this is a somewhat basic question and I may have not asked it clearly but I'm trying to keep it simple for educational purposes. Thank you in advance for any input
                   
                   
                Winterjp123            
Posts: 3
Joined: Mon Feb 16, 2015 11:03 am
           
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Re: Tax Efficiency Question

           
Postby DSInvestor » Mon Feb 16, 2015 7:35 pm
                       
Winterjp123 wrote:Trying to simplify my reading over the past few days...I've recently ditched Ameriprise in favor of a low cost 3 fund portfolio from Vanguard. I plan to adopt the 80/20 strategy that I've read so much about. At 39 I've accumulated around 520k in taxable and tax advantaged accounts, I feel pretty comfortable instituting a Total Stock, Total Bond and International Stock split with the following:

520k - Total Portfolio

200k in Taxable Brokerage

287k in Tax Advantage IRA

33k in tax free Roth

On a very fundamental level, my question is if I allocate 104k or 20% according to my reading I should buy all Total Bond in the Roth and put the rest under the tax advantaged IRA account in order to remain most tax efficient? The remaining 416k in Stock Funds I will put into the two buckets left. I realize this is a somewhat basic question and I may have not asked it clearly but I'm trying to keep it simple for educational purposes. Thank you in advance for any input

You didn't say how much international you wanted but let me use this AA- 60% US 20% INTL 20% bonds.

OPTION 1:
Taxable brokerage 40% of portfolio
40% Total Stock Market Index Admiral (very tax efficient)

Tax Advantage IRA 55% of portfolio (largest account - Hold all asset classes)
20% Total Bond Market Index Admiral (your entire bond allocation)
20% Total International Stock Market Index Admiral (your entire international allocation)
15% Total Stock Market Index Admiral.

Roth IRA 5%
05% Total Stock Market Index Admiral (set and forget)

Portfolio is simple, very easy to manage and very tax efficient. The entire portfolio can be rebalanced by trading in the big IRA.

OPTION 2
If you'd like to hold some bonds in the Roth IRA to reduce the volatility of the Roth IRA balance, you could hold 10K of Total Bond Index there. It would look something like this:
Taxable brokerage 40% of portfolio
40% Total Stock Market Index Admiral (very tax efficient)

Tax Advantage IRA 55% of portfolio (largest account - Hold all asset classes)
18% Total Bond Market Index Admiral (reduced because of TBM holding in Roth IRA)
20% Total International Stock Market Index Admiral (your entire international allocation)
17% Total Stock Market Index Admiral (increased because of reduced Roth holding)

Roth IRA 5%
03% Total Stock Market Index Admiral (reduced to make room for TBM)
02% Total Bond Market Index Admiral (10K to qualify for Admiral shares)

OPTION 2 is just as tax efficient as option1.
                           
Last edited by DSInvestor on Mon Feb 16, 2015 8:01 pm, edited 1 time in total.                                    
           
       
                   
                DSInvestor            
Posts: 6937
Joined: Sat Oct 04, 2008 11:42 am
           
       
   
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Re: Tax Efficiency Question

           
Postby Winterjp123 » Mon Feb 16, 2015 7:47 pm
                       
Got it...that's simple enough. Much appreciated!
                   

3 comments: