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I am invested 100% in equities and want to re-allocate. My plan is to have a 3 fund portfolio with the following composition:
Taxable account:
45% - S&P500 Index fund (VOO)
20% - International (VTIAX)
10% - Bonds (VBTLX)
401k -
25% - Bonds (JCBUG)
Total allocation mix: 65/35 Equities/Bonds
My question is to do with the allocation of bonds between my taxable and tax exempt accounts. I plan to convert all my money in my 401k to Bonds since that is 25% of my total assets and then an additional 10% in my taxable. The justification for this is that I would avoid paying ordinary income tax on the dividends. My marginal rate is rather high - 24% Federal (the new Trump plan) and 9.3% CA state.
Does this seem right or is there ever a reason to keep money in my 401k in equities and the bonds in taxable?
there sure is a reason . holy cow am i glad i have my equities in my ira last year . the fund distributions were killer .some spun off as much as 12% gains were so high .
depending on what your funds spin off , turnover and time frame even a 1% dividend in a brokerage account can wipe away any tax savings if you are not in the 15% tax bracket .
on the other hand taking up valuable compounding space in an ira with bonds at these low interest rate levels may be a poor choice .
EXECUTIVE SUMMARY
In an environment where generating portfolio alpha is difficult, strategies like managing assets on a household basis to take advantage of asset location opportunities to generate “tax alpha” are becoming more and more popular. The caveat, however, is that making effective asset location decisions is not easy, either.
For instance, while the traditional asset location strategy “rule of thumb” is that tax-inefficient bonds go into an IRA, while equities eligible for preferential tax rates go into a brokerage account, the reality is that for investors with long time horizons the optimal solution may be the opposite. Once stock dividends and portfolio turnover are considered, the ongoing “tax drag” of the portfolio can be so damaging to long-term returns that placing equities into an IRA may be more efficient, even though they are ultimately taxed at higher rates!
In fact, it turns out that almost any level of portfolio turnover will eventually tilt equities towards being held in IRAs given a long enough time horizon (and especially while today’s low interest rates result in almost no benefit for bonds to gain tax-deferred growth inside of retirement accounts). Which means in the end, good asset location decisions depend not only on returns and tax efficiency, but an investor’s time horizon as well!
all index funds can differ too and you can get banged in taxes in some of them . very few index funds are pure plays . index funds like spy are pure plays . but many others loan securities out , trade in and out of minor issues , deal in options ,etc all of which create taxes . as little as a 1% dividend can wipe a way any tax advantage in a brokerage account over the long term .
you can see some tax ratio's on s&p 500 funds can be high .
mathjak107, i'm referring purely to bond funds. What I did in the end was just go with my desired asset mix for both taxable and tax-exempt. Bond interest is not significant anyways but when I did the math it's about $800-900 saved in the best case scenario as I have only $103k in my 401k but will contribute the max yearly to my 401k.
mathjak107, i'm referring purely to bond funds. What I did in the end was just go with my desired asset mix for both taxable and tax-exempt. Bond interest is not significant anyways but when I did the math it's about $800-900 saved in the best case scenario as I have only $103k in my 401k but will contribute the max yearly to my 401k.
i would never take up valuable space in the tax deferred accounts with bonds at these levels if i had a choice .
so your justification is for tax deferred growth based on dividend re-investment? But isn't a taxable account also tax deferred growth because you don't pay taxes unless to sell and for a long term buy and hold strategy it should not be an issue?
Also equity dividends will be at 15%+State and Bond interest will be Marginal+State, however dividends will be higher than bond interest but the tax rate is 10% lower so probably a wash in the end?
There are arguments all over the place for an against putting most of the bonds in a portfolio in tax-exempt and they contradict each other so it's really confusing.
funds have dividends and many have capital gains distributions whether you sell or not and they can be thousands ,.
i use actively manged funds which have out performed indexing by a lot but they have capital gains distributions every year . 1 of mine had a 12% distribution last year .
so most of that is in ira's . we have many thousands in distributions for 2017 .
paying taxes on those distributions not only wipe out the tax advantage over the long term but leave you worse off . as little as a 1% dividend over time can wipe out the tax savings .
funds have dividends and many have capital gains distributions whether you sell or not and they can be thousands ,.
i use actively manged funds which have out performed indexing by a lot but they have capital gains distributions every year . 1 of mine had a 12% distribution last year .
so most of that is in ira's . we have many thousands in distributions for 2017 .
paying taxes on those distributions not only wipe out the tax advantage over the long term but leave you worse off . as little as a 1% dividend over time can wipe out the tax savings .
I read this article and it makes the case that this is not so much of a problem for passive investing via index funds since they have very low turnover so not much capital gains.
VTIAX and VOO both has zero cap gains distributions for 2017 and dividends of 2%, VBTLX 2.69% (.28/share) which is what I am seeing.
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