Help creating tax efficient taxable portfolio

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baulrich
Posts: 5
Joined: Wed Jan 08, 2020 2:38 pm

Help creating tax efficient taxable portfolio

Post by baulrich »

Spouse and I have in the past few years taken the risk threshold of our entire portfolio down to around 55%. Across all non-real estate investments, we are at around 55% stock, 34% bond, 10% cash/MM. The cash/MM number is a little high because in addition to living expenses in the checking account, we keep an account for rental business operation. But we also have always kept a pretty good portion of our brokerage account in MM funds, for "trigger money", in case we needed to buy a new vehicle, investment at auction, or needed to make a down-payment on a property that we liked that required us to move quickly, etc. And in some years where we haven't made enough to fully fund retirement accounts, we have siphoned from the taxable brokerage to fill up that space.

We have always maxxed our retirement accounts and most of our savings is in tax-deffered or Roth accounts. Until recently, our taxable brokerage has always been pretty small (fluctuating from like $80k - $120k), and besides the portion we kept in MM, it was a probably like 75-80 stocks. In our accumulation years, we had always kept our taxable account just a little more conservative than our retirement accounts (like 5-10% fewer stocks than the retirement accounts). As we've made the shift to index funds in the 50% stock range, the increased bond exposure (I guess) has caused more and more taxable dividend/interest each year... at the same time that our taxable account has grown quickly as we've sold and refinanced some property and have significantly more funds there now.

My question is: I'm looking for advice on ways to structure the taxable account and/or the portfolio as a whole to be more tax efficient.

Our income, filing jointly, keeps us at a level that allows us to realize up to $10-15K in LT capital gains at 0%... we are usually under $60K taxable. In a handful of prior years we have done some tax gain harvesting that way, and some tax losses in other years. I don't have a great understanding, but I think that our recent move from funds around 80% stock to funds with around 50% stock are going to decrease the likelihood/level of gain harvesting while also generating dividend that will be taxed at the marginal rate.

Without the problem mentioned in the paragraph above, my preference would be to keep about 40% of the taxable account in money market, and 60% in a fund that is around 50/50 stock/bond... I think right now it's just in a TD2020 fund.

But maybe it's worth considering structuring the taxable account so that it is all either MM or a growth-oriented index fund of mostly stocks? And then "pairing" the taxable account (mentally, for calculation purposes) with one of our Trad or Roth IRA accounts and adjusting that account to hold a fund that is mostly bonds, something like VASIX,for example... so that the combination of those two accounts keeps the overall portfolio at the desired risk threshold.

My followup question is: Does anyone have specific advice on that, especially whether its best to use a Roth or Tradition account for that purpose? Or does it make more sense to just keep about 60% of taxable in MM and the other 40% in an index fund that is like 80% stock, like VASGX.

In a nutshell,

option 1) determine the minimum amount of safe money market funds I desire in the taxable account, then move everything else in the taxable account to an index fund with high stock exposure. Then choose a retirement account (Roth or Trad) to reallocate to something more conservative than it would otherwise be until it and the taxable, together have the overall desired risk.

option 2) split the taxable account between money market and an index fund with high stock exposure (for tax efficiency), with the percentages determined by the desired risk, even if the amount in money market is higher than desired.

Hopefully that line of thinking makes sense, but any/all advice is welcome. TIA
harikaried
Posts: 2613
Joined: Fri Mar 09, 2012 2:47 pm

Re: Help creating tax efficient taxable portfolio

Post by harikaried »

baulrich wrote: Fri Jul 30, 2021 2:25 pmoption 1) determine the minimum amount of safe money market funds I desire in the taxable account, then move everything else in the taxable account to an index fund with high stock exposure. Then choose a retirement account (Roth or Trad) to reallocate to something more conservative than it would otherwise be until it and the taxable, together have the overall desired risk.
You've basically described the technique of Placing cash needs in a tax-advantaged account where it works by having a taxable account large enough so that even if say taxable as 100% stocks dropped significantly, there would still be enough money to sell for your cash needs while not actually affecting your asset allocation because you repurchase the stocks in another account.

For us, we maintain a minimal amount of cash in our taxable account of 3x average monthly expenses where basically it allows for some spikes in monthly spending (e.g., yearly insurance/tax payments/vacation). If we need additional cash in taxable, e.g., to buy a new vehicle, we sell taxable stocks and exchange bonds to stocks in a 401k to maintain our desired asset allocation.
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