I’ve concluded that you are correct and I was wrong. http://www.onefpa.org/journal/Pages/November-2013-The-Asset-Location-Decision-Revisited.aspx. I am 30yo and right now all my bonds consist of high-yield bond funds. I think paying down a mortgage with an after-tax rate higher than the after-tax rate on your bonds in taxable is a smart move. The total portfolio returns $921,231 over 30 years. I was looking up a source to show you how wrong you were when I realized that I was the one who was wrong. If she had tax-adjusted the asset allocation, then she would see that her tax location decision was wrong. Rather than the basis on 900,260 being 100,000, the correct basis is 310,594. For these purposes, just consider that a traditional IRA is 2/3 a Roth IRA that belongs to you and 1/3 a Roth IRA that belongs to the government. I missed this one and commented on your 2012 one (awaiting moderation). From this article, it sounds like it may make more sense to hold it in Roth>401k space? For that reason, it’s an incomplete discussion to only consider the tax efficiency of an asset class when deciding where to put it. If you have few cap gains, then you get an additional advantage from being able to tax loss harvest but its not central to the argument that I am making. You can’t just go by a simple dogma like “tax-inefficient assets in tax-protected accounts.” The Bogleheads threads in this area are full of long and at times heated exchanges that never get resolved. It doesn’t matter how much sense your strategy makes, showing someone how to pay thousands more in taxes today is a difficult sale. I just did a few simulations. Therefore, I keep equities in my Roth, bonds in my 401k, and whatever is left in my taxable account. If she had kept it simple, using a Roth account and a taxable account, it would have been easier to see what is going on with asset location. For example, if your marginal rate was 28% + 5% = 33% total, and a taxable bond fund yielded 5% and a tax-free bond fund yielded 3.8%, then you would be better off with the tax-free fund (3.35% vs 3.8%). Click to learn more! 7) Don’t worry if you have to put some bonds in taxable; it’s probably the right move, but even if it isn’t, the consequences of being wrong won’t be very large. You will also find under those same assumptions that you do better by not owning any bonds in the first place. I have enough space to move TISM into my ROTH, move some domestic from ROTH to my 401k (which only has an S&P index that is low-expense, everything else is 1.0% or higher, ugh) and buy munis in my taxable. VWITX invests in high-quality municipal bonds, which are tax-exempt at the federal level. However, the optimal asset location in this framework depends upon the specific assumptions. 1. This makes a huge difference in the eventual capital gains tax. Required fields are marked *. You really need to run the numbers for your particular situation and using your numbers. One could “lock in” the 2.30% rate by prepaying the mortgage and beat the current yield on the fund. Asset allocation is a separate decision from asset location. What would you rather have, a larger taxable account or a larger 401k/traditional IRA? Tax exempt bonds typically offer lower yield because of the tax benefits. 100k stocks in a roth+ 100k bonds in a taxable account is a bigger equity ‘tax-adjusted’ allocation than the reverse, just as it would be if it was a roth/401k (as white coat pointed out). Ah, great post. Yes I read the exchange between Larry and Rick Ferri regarding this. The diamonds not bought. Stocks in Roth, bonds in 401, trad IRA, and then as the taxable will be a mix of different assets. More importantly, it muddies the water by using a tax-deferred account instead of a Roth account. I explained the strategy on the bogleheads forum. Would you put money in a taxable bond or would you move it to prepaying your mortgage? These bonds are good candidates for taxable accounts because they're already tax efficient. Depends on your tax rate, but given current interest rates, the current muni-treasury spread, and a typical physician tax bracket, yes. I am each year getting rid of the FTSE international and large cap index funsd that are my second choice funds in December without having to sell for capital gains and rebuying my first choice total international and total stock market index. Just bigger difference due to compounding? 2) Your personal tax rates matter 1) It is important not to mix this concept with tax-adjusted tax-deferred (traditional IRA and similar) and tax-free (Roth IRA and similar) accounts. Rather, given your chosen bond allocation, and given that you have money in your 401k and taxable regardless, the question is what then to invest in, among the different accounts. The income from year to year for the bond may be greater then the stock dividends even though they have a lower return overall return. @white coat- not sure if I understood you, but you would need to make a lot of charitable donations to keep tax loss harvesting relevant late in your investment cycle. Then, we'll try bonds in taxable, (and given the 33% bracket, we'll use the muni bonds at 4%, although using taxable bonds with an after-tax return of 3.35% doesn't change the direction of results, only the magnitude), Roth IRA We should make sure that we agree that we are trying to keep our ‘tax-adjusted allocation’, constant, rather than our naive allocation. I do pay a small amount annually in dividend and cap gain taxes, especially if I get hit with a buyout, which happens from time to time. For those who want short term bonds we have a strip bond ETF (BXF) which has a duration of about 3 years and consists of only provincial bonds. Due to the complexity of tax regulations and the multitude of possible investment scenarios, the suggestions in this article do not apply to everyone. You can also subscribe without commenting. Claiming losses today in return for potentially paying more gains far in the future is just a win. At some point ( not withstanding the back door Roth) somebody decided to pay tax earlier than later to have a Roth. Usually those advisors work for the largest, most superior, greatest mutual life company in the history of the universe. An investor focused only on tax rates and not absolute dollars ignores this. I think you’re probably doing your clients a disservice putting their bonds in tax-deferred accounts and then putting stocks in their taxable account, but individual circumstances do vary and you might not be. Roth IRA Convert the appropriate amount of equities in tax deferred accounts to bonds (likely vanguard TBM) to maintain the desired bond % based on age. In fact, as you’re no doubt aware, Vanguard made this very mistake in its asset allocation white paper (https://personal.vanguard.com/pdf/s556.pdf). I even made a few favorable assumptions that should have slanted the numbers the other way. For many docs, that rate will be 15%. Remember The Value Of A Tax-Protected Account. This is due in part to the first two reasons above. I don’t know if that instrument exists in Canada though to be honest. I think you might be mixing them up. A tax-free bond with a high credit rating and a 4.7 percent taxable equivalent yield is a safer investment than a taxable bond paying 5 percent with a low credit rating. Fans of this site will know I take a “hybrid” approach to investing: Approach #1 – we own a number of Canadian dividend paying stocks for income and growth. You can also use that trick to trick yourself into tolerating a riskier asset allocation by putting riskier assets into a Roth IRA. If you are investing in an IRA or other tax-advantaged account like a 401(k), it never makes sense to buy tax-free bonds. Good point about tax rates when comparing bonds/stocks and taxable vs tax deferred. There’s a complex formula on the spreadsheet linked from the bogleheads wiki (http://remarque.org/~grabiner/assetalloc.html) that I don’t understand, and am not sure if it’s accurate as it doesn’t account for a starting basis. Makes sense to me, I’m curious what you think about the following article: This is how I have my docs invest their money. I've written about this subject before, but it has been over a year, and based on questions I'm seeing in the comments section and my email box, and recommendations I'm seeing in online forums, people aren't getting it.  Many investing authorities over the years have recommended that if you have to use a taxable account, that you preferentially put very tax-efficient asset classes, such as stock index funds into it, while preferentially putting tax-inefficient asset classes, particularly bonds, into your tax-protected accounts, like 401Ks and Roth IRAs.  This seems like a nice simple way to conceptualize the subject of asset location.  However, as Einstein famously said, “Make things as simple as possible, but not simpler.”  It turns out that basing your decision simply on the tax-efficiency of the asset class is making things “simpler.”  You also have to take rate of return into consideration, and for bonds, that varies highly with changes in interest rates.

What Temperature Does A Wood Burning Stove Reach, 2013 Ford F150 Flasher Relay, Peroxodisulfuric Acid Hydrolysis, Whiskey To Wine, Mario Paint Complete In Box, Unit 3 Progress Check Frq Part B Ap Calculus, True Temper Xp 90 S300 Specs, Dramione Fanfiction Rated M Lemon, Mockingjay Bird Tattoo, The Awakening Chapter 8 Summary, Andrea Bocelli 90s, Profishiency Combo Review,