Taxable/tax-advantaged allocations

The trick is to avoid selling a taxable investment to balance asset classes, but if there has been a gain, there will be taxes. You make future contributions to the underperforming asset class to bring it into balance. Its sounds counterintuitive to invest in underperformers. But you are going after the long term return of class, not its short term.

Tax advantaged accounts are nice, but not necessary.

Stocks that grow at a steady rate should be in the taxable account, because you don't need to sell them.

More speculative stocks that may suddenly shoot up or be acquired should be in your tax advantaged accounts so that you won't have to pay taxes on short termed gains.

-- Ron

I won't be buying any individual stocks. Everything in the brokerage account(s) will be ETFs, mostly index ones where available. Hopefully, all rebalancing will be accomplished with new money on a quarterly basis.

With this in mind, is there anything that would be candidate other than REITs or bonds? Some of the value ones will produce dividends, of course.

Brian

Yeah, I'm aware of that.

Brian

I own EWY and EWZ for foreign exposure, and am looking at EWA. You might want to try IYE for energy stock exposure which moves somewhat independently of the rest of the market. SMH would give you exposure to the semiconductor industry.

-- Ron

"Default User" wrote On allocating among an IRA, 401(k), and taxable account, with attention to the fact that the 401(k) does not have a REIT choice, and the IRA holds only about 10% of the portfolio.

Pros of putting REITs into the Roth IRA:

-- REIT dividends currently are taxed as "unqualified dividends." One pays a higher income tax rate on unqualified dividends compared to qualified ones. Thus tax protection for REITs is desirable.

-- REIT yield tends to be higher than non-REIT yields. The high dividend reinvestment will cause your IRA's total to compound quickly. So this is still another argument for tax protection.

Cons:

-- REITs' dividend increase rates tend to be lower than that for many non-REIT companies. So holding non-REITs (like value companies that pay dividends) in a taxable account could start getting expensive. The compounding effect of (1) increasing dividends; and (2) re-investing these dividends, especially as the market seesaws (so you end up often buying low without lifting a finger) is staggering. It's something not enough investors consider. I think it was financial academic (and now WisdomTree ETF consultant/executive yada) Jeremy Siegel who has put a huge emphasis on this in the last 15 years or so.

-- How long the "qualified dividends" lower tax rates will exist remains to be seen. These new tax rates were new as of IIRC only 2003.

I'd go with holding REITs in the IRA and adjusting as needed (and as tax law changes?) in the coming years.

Lastly, we may be splitting hairs over the tax advantages at this point.

They make a huge difference for asset classes which throw off income streams - bonds, reits, etc.

That may work for a low-turnover highly diversified equity portfolio with a low dividend yield.

One more consideration to make regarding, in particular, assets in the Roth vs. assets in a taxable account vs. a tax-deferred (ie. traditional IRA) account - with the Roth, the gains *never* get taxed. With the taxable account, if you can hold on a long time and it is an investment which throws off little in the way of current income (ie. dividends or mutual fund distributions), you get effective tax-deferral *and* a lower cap-gains rate. But the traditional IRA - as magic as the tax deferral may be - turns capital gains into regular income. It may actually make sense to keep the more tax-efficient things (ie. that low-turnover equity index mutual fund) in a *taxable* account than in the 401k or traditional IRA. (assuming cap-gains continue to get the lower tax rate they have now).

Bonds and REITS should be in a tax-advantaged account if at all possible, and if you have both a Roth and a traditional account, put those into the traditional account and put things you think will grow more/faster into the Roth.

Are you suggesting these for tax-advantaged accounts?

Brian

This is just my approach for a retired, widowed woman, whose account I manage. Having mostly stock in the account I call "cash" and mostly cask/CDs in the account which is an IRA took a bit of explaining, but as usual, a spreadsheet showed the favorable dividend/cap gain rates made the non-retirement account the right one for stocks. (The Roth also gets the stock) JOE

Those are highly focused single-country emerging markets ETFs and single-industry ETFs. They maybe be suitable for active portfolio management, but they are way too specific and specialized for a basic asset-allocation, minimal-trading long-term plan. If you want emerging markets in a more set-it-and-forget it style, something like VWO might be a better fit.

Anwyay, if you're going to time and/or trade in and out of those sectors and countries, you definitely want to do it in a tax-advantaged account, else you'll be having to deal with cap-gains issues every time you trade and your tax efficiency goes to hell.

Those specialized ETFs might be suitable for a small "play" portion of your portfolio, but they are certainly not "core" holdings.

One of my personality aspects is that I can get very interested in a subject for a time, then lose a lotinterest. As such, my plan is certainly NOT to be very active, because I'd likely not keep it up.

I'm trying to get everything on a reasonable autopilot while I'm hot about. I have a spreadsheet set up that should guide me on quarterly new investing/rebalancing. I should be able to handle that level once I kind of cool off.

Brian

That's something I've considered. One of my problems is that a big chunk of "Large Value" is in the taxable account currently. Years ago, a previous attempt at investing lead me to a friend-of-a-friend broker, who sold me a loaded mutual fund, American Funds ICA.

It's not done badly, and for actively managed it's reasonably low in expenses. I probably put in around $5500, and it's currently worth about $35,000. That's a big chunk of unrealized capital gains, so it makes it hard to do much with large value, unless I bite the cap gains tax bullet right now.

That's probably the way I'll go.

Probably. The bonds might be a bigger issue. As I mentioned elsewhere, my original thought was view the 401(k) and outside accounts separately, as that's easier than trying to "trade off" allocations between them.

Brian

I don't have any traditional IRA accounts, just Roth and 401(k). I think I'm heading toward a plan that would have the REITs in the Roth (as much as I can for now), move out most if not all of the Large Cap Index exposure from the 401(k) to the taxable account, and up the bond portion in there.

My original plan was to deal with the 401(k) and the "outside" accounts separately for ease of maintenance, so I hope I don't overy complicate things.

Brian

"Default User" wrote

snip

Have you taken into account that you may already (that is, over the years) have paid a sizable chunk of the cap gains tax on this via the fund's annual distributions (which fund owners must report on their taxes, etc.)?

Even if you still would owe a large tax, then depending on the fund's stock turnover rate, it may pay to switch to a more tax efficient, (and lower expense?) "large value" mutual fund or ETF.

If you have the fund's ticker symbol, that might be helpful for checking on these parameters (distributions and turnover rate) as well as be a good addition of detail for the archives here.

For tax purposes in my comments, treat the 401k as a traditional IRA - inasmuch as it's tax-deferred and distributions are taxable as regular income. You want income-oriented stuff in there, not in a taxable account and, in fact, if you have both income-oriented and cap-gains/growthy stuff, you want the income-oriented stuff in the tradIRA/401k and the cap-gains/growthy stuff in either the taxable account or the Roth.

I'd forgotten that the issue you were having was lack of access to REITs in the 401k. Frankly, I'd just not worry about it all too much. It's a decent asset class, but it shouldn't be more than a few percent of your portfolio anyway, you get some exposure to it in the SP500, and if your space in the Roth is limited and most of your investments are in the 401k, I'm not sure I'd bother "wasting" precious Roth space on REITs.

I'd keep the bonds entirely in the 401k and max the Roth out with equities (especially the higher-octane stuff) and keep the taxable account limited to a very low turnover (probably large-cap) index.

I forget, did you post a list of the funds available in that 401k? I'm assuming the Roth and the taxable accounts are regular brokerage accounts with access to a vast array of funds.

What's your target asset allocation?

Yes. I have them in tax-advantaged accounts.

-- Ron

[old mutual fund]

I have paid yearly capital gains and dividend taxes. For instance, my

2005 return (which I have handy) shows $690 in capital gains and $570 in ordinary dividends. So whatever that is at the current rates.

However, if I sold it now I'd owe tax on the difference in value, I think. If I'm wrong on that, please correct me.

The ticker is AIVSX. While Morningstar lists it as "Large Value", their box shows it as a blend. I put it in my value allocation because I didn't know what else to do with it.

Brian

Right. From a complete picture standpoint, it would be best to treat everything as one big account, from an ease of use point, separately is better.

I think the strategy of doing what I can with available space now makes sense, and adjust as needed when more Roth becomes available.

Yeah, about 10% of the account space outside the 401(k).

Actually, the two are roughly equal, the investable portion of the outside account, not including emergency fund, is about 80% of the

401(k).

What would be better to go in there?

That's the way I'm leaning. It makes the overall management a bit trickier, but I can probable gin up a spreadsheet to do that as well.

I did at one point. If you can't find it I could post it again.

I'll make a separate reply to keep the size of this one down.

Brian

The over split is targeted at 70% stocks to 30% bonds etc. Within the stock portion, I have planned:

Domestic Equity Large Cap 15.00% Large Value 20.00% Small Cap 10.00% Small Value 10.00% REIT 10.00% Commodities 5.00% Total 70.00% International Equity 30.00% Large Cap 5.00% Large Value 5.00% Small Cap 5.00% Small Value 5.00% Emerging Markets 5.00% REIT 5.00% Total 30.00%

Brian