I want to establish the following asset allocation:
15% domestic large cap stock etf
15% domestic small cap stock etf
10% international large cap stock etf
10% international small cap stock etf
10% emerging markets etf
10% real estate investment trust etf
30% intermediate bond etf
I can substitute mutual funds for any of the etfs, if desired.
I want to distribute these assets among the following account types in a way that will be tax efficient:
12% Roth IRA
I've been thinking of putting all of the domestic and international large cap, the real estate, and the bonds in the IRA; 12% of the domestic small cap in the Roth IRA; and the remaining 3% of the domestic small cap, the international small cap, and the emerging markets in the non-qualified account. Is there a more tax-efficient placement?
======================================= MODERATOR'S COMMENT:
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On Friday, October 31, 2014 11:40:06 AM UTC-7, Dave wrote:
The general rule is (taxable) bonds in the IRA, stocks in taxable and/or Roth accounts. General rules, of course, have lots of situation-specific exceptions.
Nevertheless, the idea is that a substantial portion of the return on bonds (if not all) is going to be taxable as ordinary income, at your highest marginal rate -- which is exactly how withdrawals from the IRA are going to be taxed anyway.
Qualified dividends from stocks, as well as long-term capital gains (also more likely from stocks) are not taxed the same way, so they do okay, relatively, in a taxable account.
The Roth IRA is where you'd want your "growth-iest" things - if you expect, say, small-cap, international small-cap, emerging markets to outperform large-caps -- you'd put them all into the Roth. This, of course, depends on what you expect those returns to be - which is just a guess.
REITs are generally an exception -- the dividends from them are generally not "qualified" like those of more typical stocks from companies which pay taxes -- and therefore they are terribly tax-inefficient at least with respect to their dividends.
Additionally, take into consideration your marginal tax rate and taxable-equivalent yield of muni bonds.
And don't forget the new Medicare Net Investment Income tax (part of the Affordable Care Act) -- which can (if your AGI is high enough) impose an additional 3.8% tax on investment income -- which does *not* include distributions from IRAs and Roths (though distributions from IRAs could contribute to pushing other investment income up above the threshold).
Your planned sequence of withdrawals should be considered, as well as the possibility of doing Roth conversions as well.
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