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I am trying to organize my investments in a way that is easy to manage. Here is the problem:
Law requires that retirement (IRA, Roth, 403b) accounts be separate from taxable accounts.
My wife has some retirement accounts, and I have some.
We have normal, taxable investment accounts.
So that is how it looks on Schwab and how tax reporting looks.
On my spread sheet, I have things organized as logical buckets:
Dividend producing equities (2 funds)
Growth equities (3 funds)
Bond and Bond Funds (3 funds)
Cash
Unfortunately the real world accounts do not align at all with my logical buckets and it gets messy. I end up with one fund from bucket #2 split across 3 different Schwab accounts and another fund from bucket #2 split differently across Schwab accounts. And because of the way I generate income, money ends up flowing from one account into 2 or 3 other accounts when I do an income sweep.
I am sure this is a common problem. What do others do to keep things manageable?
What is your goal? What is the reason for the way you organized them?
I organize our investments many different way, depending on what i need to know.
Generally i organize all equity funds, then individual stocks, bonds, cash,without regard to table or not. I do this to see my asset allocation has strayed.
I also have summary of all the different class of find with balances. I will do that to estimate taxable income and to see how each class has done year to year.
What is your goal? What is the reason for the way you organized them?
Well of course we had no choice on the org of retirement accounts. Those happened from work and IRS rules require they be tracked as separate accounts. So that is fixed.
The "buckets" exist so I can track returns and either reinvest those or use it for income. My income generation is a waterfall model - dividend income always results in more bond acquisition. Cap gains does the same. When the cash reserve is low, I sell bonds to replenish. I do not reallocate across asset classes, I only reallocate within an asset class.
The difference between the waterfall and a reallocation model is that in the waterfall, equity investment is never increased - I will never sell bonds to buy equities. This is designed to slowly deplete equities and to grow bonds. It gets more conservative over time.
So to track the waterfall, I have the buckets. The problem here is not really the buckets, it is the funds within a bucket. For instance I have a huge amount of ITOT (iShares Total S&P ETF). I want it in an IRA but it is too big. So I have some of ITOT in my 401k rollover IRA, some in my wife's, and the rest in a taxable account. So now when I want to sell, say 2% of ITOT, I have to go each of those 3 places, calculate what 2% is, and put in 3 SELL orders. But they may execute at different times and different prices, so now I have to track all my holdings of ITOT separately, by account.
But the same problem must exist for someone doing a more standard equities/bonds allocation model.
Well of course we had no choice on the org of retirement accounts. Those happened from work and IRS rules require they be tracked as separate accounts. So that is fixed.
The "buckets" exist so I can track returns and either reinvest those or use it for income. My income generation is a waterfall model - dividend income always results in more bond acquisition. Cap gains does the same. When the cash reserve is low, I sell bonds to replenish. I do not reallocate across asset classes, I only reallocate within an asset class.
The difference between the waterfall and a reallocation model is that in the waterfall, equity investment is never increased - I will never sell bonds to buy equities. This is designed to slowly deplete equities and to grow bonds. It gets more conservative over time.
So to track the waterfall, I have the buckets. The problem here is not really the buckets, it is the funds within a bucket. For instance I have a huge amount of ITOT (iShares Total S&P ETF). I want it in an IRA but it is too big. So I have some of ITOT in my 401k rollover IRA, some in my wife's, and the rest in a taxable account. So now when I want to sell, say 2% of ITOT, I have to go each of those 3 places, calculate what 2% is, and put in 3 SELL orders. But they may execute at different times and different prices, so now I have to track all my holdings of ITOT separately, by account.
But the same problem must exist for someone doing a more standard equities/bonds allocation model.
Other than knowing the exact return how much impact does executing 3-4 sales really have on performance? If your transaction cost aren't magnified because of the multiple trades I'm not sure how big of a problem it is
the advantage of going through the motions of a complex bucket system really has little if any advantage over a plain old systematic withdrawal rate just pulling equally from an investment mix.
it is really only a mental thing having buckets,cash buffers and a method of moving cash around.
it pays to keep it simple and easy .
what does count more is what vehicles those assets are in .
as an example traditional ira's and 401k's should be filled not with equities but with bonds,reits, income generating things like cd's etc.
that money has no reduced tax rates like equities would in your taxable account .
ideally you want the income stuff in the deferred accounts and equities in your taxable account or roth . it is there they can benefit from zero to 15% capital gains rates intstead of full tax rates from your ira account. if you are a very high income family you may see 20% capital gains rates but few americans will see that.
you can write off losses and pass tax free to heirs at a stepped up basis when holding equities in a taxable account and not in ira's or 401k's..
roths should contain equities or your largest growing assets.
getting this right can add as much as 20% more spendable cash according to a study at carnegie mellon.
this is far more important than any bucket system and will yield far bigger results.
another issue that requires lots of thought and planning is the tax ramifications when combined with social security , rmd's and sliding tax rates on two moving targets.
one is the sliding tax rate on how much ss gets taxed. the other is as more ss gets taxed your income goes up getting more ss taxed and the circle goes around and
around until every dollar of income additional can throw you from the 25% bracket to almost a 47% marginal rate if married..
these are the issues to really be concerned about and plan for.
many folks get to lost in things that mean little in the end.
i use a bucket system myself just because i like the mental comfort it provides even if the dollar and cents advantage is slim if any.
Last edited by mathjak107; 06-18-2014 at 02:47 AM..
How does that work when it comes time to rebalance? What do you do when you have bonds in your 401k and equities in your taxable account and you want to decrease your percentage of bonds and increase your percentage in equities (or vice versa)?
Do you just rebalance the ratio within each account?
Other than knowing the exact return how much impact does executing 3-4 sales really have on performance? If your transaction cost aren't magnified because of the multiple trades I'm not sure how big of a problem it is
No effect on performance. It has become more complicated than I thought to consolidate all our retirement accounts into one place and organized in such a way that I can easily generate cash. The one to really fix this is Schwab - they need a way to put tags on holdings and then have a way to view all holdings across all your accounts with that tag.
How does that work when it comes time to rebalance? What do you do when you have bonds in your 401k and equities in your taxable account and you want to decrease your percentage of bonds and increase your percentage in equities (or vice versa)?
Do you just rebalance the ratio within each account?
The IRA is the problem account - I cannot grow it, only take distributions out of it. So if rebalancing would cause the IRA account to grow, I would have to sell equities in the taxable account and buy bonds in the taxable account. This is part of the dilemma I am facing - I now have split my bond holdings across two different accounts with two different tax requirements.
what does count more is what vehicles those assets are in .
as an example traditional ira's and 401k's should be filled not with equities but with bonds,reits, income generating things like cd's etc.
that money has no reduced tax rates like equities would in your taxable account .
Yes, I largely agree with that. I want to live off cap gains from equities held in the taxable account. But those equities will generate dividends which are taxable whether I reinvest them or not. And they will be taxed at the ordinary rate. Since I do not want to grow equities, only shrink them, I will not reinvest dividends.
My IRA accounts are way bigger than the bond/fixed-income allocation I will start with, so I will have to put some equities in the IRA. But my plan is to slowly milk those equities down and replace with bonds, so the bond holdings in the IRA will replace the equities.
The things with RMD's scare me. I have no idea how I will deal with those.
i most likely will delay ss so the first place we will pull from is our tax deferred accounts. we can pull around 42k out of taxable ira's lessening rmd's while taxes on that money will be a tiny 1800 bucks or so. the rest of our income will be mostley coming from the taxable accounts with most of the taxes already paid.
so many folks listen to old school advice and pull from taxable accounts first where taxes have already been paid. in many situations that would be foolish as you can get at least 20k out of your deferred ira's and 401k's and pay zero tax on it. why give that up? in some cases it may not matter if your way over income wise but in others you are giving up tax free money.
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