Bond Allocation in Tax-Deferred Accts before RMD

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FrankyZoo
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Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.

When you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.

Thanks!
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ruralavalon
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by ruralavalon »

FrankyZoo wrote: Wed Dec 01, 2021 8:53 am Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.
I do not understand your hypothetical.

These types of questions cannot be answered in the abstract.

What are the actual facts of your accounts and investments? Also, what is your tax bracket, both federal and state? What State do you pay any State income taxes to? Do you have any Roth accounts? What is your desired asset allocation? Please use this format: "Asking Portfolio Questions".


FrankyZoo wrote: Wed Dec 01, 2021 8:53 amWhen you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.

Thanks!
I not understand this question.

In general you make changes inside tax-advantaged accounts to maintain your desired asset allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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retiredjg
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by retiredjg »

I'm having trouble understanding as well. For starters, if your taxable account is all stocks and your tax-deferred accounts are all bonds, you are not keeping the stock/bond allocation constant across all accounts.

One further comment...if you are thinking that all stocks should be in taxable and all bonds should be in tax-deferred, that is a complete (but very common) misunderstanding. If you are just using that as an example, ignore this comment.
abc132
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by abc132 »

FrankyZoo wrote: Wed Dec 01, 2021 8:53 am Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.

Thanks!
You would likely want to withdraw from the tax-deferred account before required RMD's as part of managing your future taxes.

It becomes a bit more complicated if you retire before 59.5, so please clarify if that is what you are asking.
RetiredCSProf
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by RetiredCSProf »

In general, I have found it challenging to maintain a desired AA across all account types (tax-deferred, taxable, and Roth) while concurrently assigning a specific AA to each of the account types. There are too many moving parts, especially it you are paying attention to asset location and not just AA. At some point, you will find that you have conflicting goals.

One solution is to focus on your desired AA in each of the account types and accept that your AA across all account types may shift accordingly. Another solution is to hold firm on your overall AA and adjust the AA in each of the account types toward meeting that goal.

Do you have a Roth account? If not, this may be a good time to convert equities from your tax-deferred account into Roth, using your taxable account to cover the taxes on the conversion.
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by grabiner »

Tax-efficient allocation is a relative decision. You should first choose your asset allocation, then put the most tax-efficient funds in your taxable account. Thus, if you prefer to hold stocks in taxable, but your taxable account is smaller than your target stock allocation, you should hold some stocks in your IRA and 401(k). And if your taxable account is all stock but you want to sell some bonds, you can sell taxable stock, then move an equal amount from bonds to stock in your 401(k), so that you keep the correct asset allocation.
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by MrJedi »

Withdraw in a tax efficient way (if you do not need money out of tax deferred and prior to RMD, you may consider Roth conversion and then using taxable for living expenses), then use the tax advantaged accounts to rebalance as needed.
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by JnyVuko »

FrankyZoo wrote: Wed Dec 01, 2021 8:53 am Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.

When you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.

Thanks!
I suggest reading the Wiki on tax-efficiency of different types of investments (e.g., equities versus bonds).

https://www.bogleheads.org/wiki/Tax-eff ... _placement

How one withdraws money upon retirement is a topic unto itself.
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by Leif »

FrankyZoo wrote: Wed Dec 01, 2021 8:53 am When you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.
It sounds like a retire early scenario. You have deferred in bonds and taxable/Roth in stock, correct? You don't want to withdraw from deferred due to the penalty of withdrawing from deferred prior to 59 1/2 (or in special cases 55).

I would keep a buffer of fixed income in taxable, such as cash/CDs. If I was in a high tax situation I would have some municipal money market / bonds. If I went outside my rebalance band then I would buy stock in my deferred. Assuming you are changing your AA as you age, to be more conservative, it may not be necessary to buy stock in deferred.
Last edited by Leif on Thu Dec 02, 2021 9:32 am, edited 1 time in total.
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goingup
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by goingup »

FrankyZoo wrote: Wed Dec 01, 2021 8:53 am Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.

When you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.

Thanks!
I think I understand your scenario. The solution for us was to have stock funds and bond funds in both taxable and tax-advantaged accounts. Pretty much mirrored at 60/40. Our situation is a little unusual because 75% of our portfolio is in taxable account.

In early retirement it has worked well. We haven't had to sell appreciated stock funds yet and have been able to utilize ACA subsidies.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

ruralavalon wrote: Wed Dec 01, 2021 10:46 am
FrankyZoo wrote: Wed Dec 01, 2021 8:53 am Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.
I do not understand your hypothetical.

These types of questions cannot be answered in the abstract.

What are the actual facts of your accounts and investments? Also, what is your tax bracket, both federal and state? What State do you pay any State income taxes to? Do you have any Roth accounts? What is your desired asset allocation? Please use this format: "Asking Portfolio Questions".


FrankyZoo wrote: Wed Dec 01, 2021 8:53 amWhen you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.

Thanks!
I not understand this question.

In general you make changes inside tax-advantaged accounts to maintain your desired asset allocation.
Thanks for your response and my apologies for not being clear. I'll try to edit to clarify some of the questions people have asked. A key piece of info is that I'm 50 y/o, so can't do withdrawls from my tax-deferred accounts without a penalty.

I posted my portfolio in another post. However, my scenario is hypothetical for a couple of reasons:

1- I am looking at rebuilding my portfolio because I am with a Financial Advisor and I'm looking to leave them and reduce expenses (see also the post linked above), so am considering how I will structure my accounts.

2- I am not working, so don't have new investments into my 401k. My target allocation is 60/40 stocks/bonds and I am slightly overweight in equities right now, so have been buying BND in my taxable account. However, it got me thinking that maybe I should be buying VTI and VXUS instead and then re-allocating my 401k or IRA more toward bonds.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

abc132 wrote: Wed Dec 01, 2021 11:09 am
FrankyZoo wrote: Wed Dec 01, 2021 8:53 am Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.

Thanks!
You would likely want to withdraw from the tax-deferred account before required RMD's as part of managing your future taxes.

It becomes a bit more complicated if you retire before 59.5, so please clarify if that is what you are asking.
I am 50, so don't have any RMD and I am trying to avoid withdrawing from the tax-deferred acct.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

RetiredCSProf wrote: Wed Dec 01, 2021 2:12 pm In general, I have found it challenging to maintain a desired AA across all account types (tax-deferred, taxable, and Roth) while concurrently assigning a specific AA to each of the account types. There are too many moving parts, especially it you are paying attention to asset location and not just AA. At some point, you will find that you have conflicting goals.

One solution is to focus on your desired AA in each of the account types and accept that your AA across all account types may shift accordingly. Another solution is to hold firm on your overall AA and adjust the AA in each of the account types toward meeting that goal.

Do you have a Roth account? If not, this may be a good time to convert equities from your tax-deferred account into Roth, using your taxable account to cover the taxes on the conversion.
Thanks. Are you saying to do the Roth conversion as a way to pay some taxes now before RMD kicks in in order to smooth out the tax burden over time?
abc132
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by abc132 »

FrankyZoo wrote: Thu Dec 02, 2021 2:34 pm I am 50, so don't have any RMD and I am trying to avoid withdrawing from the tax-deferred acct.
One of the advantages of early retirement is drawing down your tax deferred before RMD's kick in.

You should be able to pay less taxes by managing your taxable income bracket, assuming you plan to live a couple more decades.

Deferring taxes into a lower tax bracket should be the goal - and withdrawal during early retirement likely accomplishes that. A Roth conversions ladder will let you do this before 59.5 in a low tax bracket, paying taxes now to withdraw them tax free after they grow.

If you are trying to pay more taxes, delaying those RMD's will do it.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

abc132 wrote: Thu Dec 02, 2021 3:12 pm
FrankyZoo wrote: Thu Dec 02, 2021 2:34 pm I am 50, so don't have any RMD and I am trying to avoid withdrawing from the tax-deferred acct.
One of the advantages of early retirement is drawing down your tax deferred before RMD's kick in.

You should be able to pay less taxes by managing your taxable income bracket, assuming you plan to live a couple more decades.

Deferring taxes into a lower tax bracket should be the goal - and withdrawal during early retirement likely accomplishes that. A Roth conversions ladder will let you do this before 59.5 in a low tax bracket, paying taxes now to withdraw them tax free after they grow.

If you are trying to pay more taxes, delaying those RMD's will do it.
Thank you. I hadn't even considered that.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

grabiner wrote: Wed Dec 01, 2021 9:09 pm Tax-efficient allocation is a relative decision. You should first choose your asset allocation, then put the most tax-efficient funds in your taxable account. Thus, if you prefer to hold stocks in taxable, but your taxable account is smaller than your target stock allocation, you should hold some stocks in your IRA and 401(k). And if your taxable account is all stock but you want to sell some bonds, you can sell taxable stock, then move an equal amount from bonds to stock in your 401(k), so that you keep the correct asset allocation.
Thank you. This confirms what I thought would be the ideal strategy.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

MrJedi wrote: Wed Dec 01, 2021 9:22 pm Withdraw in a tax efficient way (if you do not need money out of tax deferred and prior to RMD, you may consider Roth conversion and then using taxable for living expenses), then use the tax advantaged accounts to rebalance as needed.
Thanks. I hadn't considered Roth conversion, and others have made a similar suggestion, which makes sense.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

Leif wrote: Thu Dec 02, 2021 8:43 am
FrankyZoo wrote: Wed Dec 01, 2021 8:53 am When you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.
It sounds like a retire early scenario. You have deferred in bonds and taxable/Roth in stock, correct? You don't want to withdraw from deferred due to the penalty of withdrawing from deferred prior to 59 1/2 (or in special cases 55).

I would keep a buffer of fixed income in taxable, such as cash/CDs. If I was in a high tax situation I would have some municipal money market / bonds. If I went outside my rebalance band then I would buy stock in my deferred. Assuming you are changing your AA as you age, to be more conservative, it may not be necessary to buy stock in deferred.
Yes that is correct - it is a retire early scenario and I'm sorry I was unclear. I understand why you'd need to have fixed-income in taxable if the taxable account is larger than the portfolio's stock allocation. However, if that is not the case would you still try to have fixed income in the taxable account. In my case, tax-deferred accounts make up 36.5% of my portfolio and my target bond allocation is 40%. So even if my tax-deferred is 100% bonds, I have to have some bonds in my taxable account.
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by retiredjg »

FrankyZoo wrote: Thu Dec 02, 2021 3:58 pm In my case, tax-deferred accounts make up 36.5% of my portfolio and my target bond allocation is 40%. So even if my tax-deferred is 100% bonds, I have to have some bonds in my taxable account.
Based on just this information, here is a simple suggestion of how this can be done.

Set your portfolio up like this (yes, I know it may take months or years to get there but anything in the neighborhood will do)

Taxable 63.5%
53.5% stocks (probably a total stock index and a total international index)
10% bonds (taxable bonds or tax-exempt bonds depending on your tax bracket)


Tax-deferred 36.5%
6.5% stocks
30% bonds

This puts both stocks and bonds in both accounts, but most of the bonds are in tax-deferred accounts. This type of set up gives you maximum flexibility.

Spend from the tax-deferred accounts unless there is a reason not to do that (I'm not sure at this point). There may not be a need to do the Roth conversions people are talking about (but I have not reviewed your original post lately). Disregard. I forgot you are too young.

Spend from stocks in taxable. If you spend enough to change the balance of your portfolio (which seems very unlikely), sell bonds in the tax-deferred accounts and buy stocks to get back to balance.

And consider doing some Roth conversions of the tax-deferred accounts.
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Leif
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by Leif »

FrankyZoo wrote: Thu Dec 02, 2021 3:58 pm Yes that is correct - it is a retire early scenario and I'm sorry I was unclear. I understand why you'd need to have fixed-income in taxable if the taxable account is larger than the portfolio's stock allocation. However, if that is not the case would you still try to have fixed income in the taxable account. In my case, tax-deferred accounts make up 36.5% of my portfolio and my target bond allocation is 40%. So even if my tax-deferred is 100% bonds, I have to have some bonds in my taxable account.
Interesting question. One I've looked at myself.

That your AA matches perfectly with the ideal configuration of asset location would be quite a happenstance. So what is more important to you? A particular AA or the ideal tax efficient asset location? For me my AA is in the driver's seat. But, I still try to arrange my asset location as tax efficient as I can. That drives me to Roth convert my stock in deferred to my Roth (but also for the desire of lower RMDs). Also, spare cash from my maturing CDs I use to buy stock in taxable and to sell stock in deferred to buy bonds (keeping the same AA). Whether by luck or design (I guess some of both) the relative sizes of my taxable/Roth vs. deferred is very similar to my desired AA.

Your AA vs. asset location is close to ideal. In your case I would have all bonds in the tax deferred, and the rest of the bonds in taxable, along with your stock.
Last edited by Leif on Thu Dec 02, 2021 4:31 pm, edited 1 time in total.
Topic Author
FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

goingup wrote: Thu Dec 02, 2021 9:27 am
FrankyZoo wrote: Wed Dec 01, 2021 8:53 am Hi All -

I have heard the advice to put as much of your bond allocation as possible into tax-deferred accounts to defer any income tax on dividends. How does this work when you are retired and not yet taking any RMD from your tax-deferred accounts? So, let's assume 100% of the taxable account contains stock funds, and 100% of the tax-deferred are bond funds, and that you are keeping the stock/bond allocation constant across all accounts.

When you withdraw, to avoid penalties you would have to withdraw from the taxable account (which is all stocks), regardless of where stock prices are, thus lowering your stock allocation. In that case, would you then re-allocate some of the tax-deferred account to stocks to keep the allocation constant? And if so, wouldn’t your stock/bond allocation in the tax-deferred account eventually be the target portfolio-wide allocation.

Thanks!
I think I understand your scenario. The solution for us was to have stock funds and bond funds in both taxable and tax-advantaged accounts. Pretty much mirrored at 60/40. Our situation is a little unusual because 75% of our portfolio is in taxable account.

In early retirement it has worked well. We haven't had to sell appreciated stock funds yet and have been able to utilize ACA subsidies.
In my case i have 36.7% of my portfolio in tax-deferred. What I'm trying to figure out is whether the ideal allocation is to have the tax-deferred be 100% bonds and the taxable to be mostly (around 95%) stocks, and whether there are downsides to such a strategy. As you alluded to, increased capital gains could impact ACA subsidies. I'm still on my former company's health plan, and may go on Cobra soon when my severance ends, but eventually I may have to use ACA. ACA subsidies aside, there would still be more capital gains taxes if I was selling stocks. Any other downsides you see (or benefits to the strategy you used)?
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

retiredjg wrote: Thu Dec 02, 2021 4:06 pm
FrankyZoo wrote: Thu Dec 02, 2021 3:58 pm In my case, tax-deferred accounts make up 36.5% of my portfolio and my target bond allocation is 40%. So even if my tax-deferred is 100% bonds, I have to have some bonds in my taxable account.
Based on just this information, here is a simple suggestion of how this can be done.

Set your portfolio up like this (yes, I know it may take months or years to get there but anything in the neighborhood will do)

Taxable 63.5%
53.5% stocks (probably a total stock index and a total international index)
10% bonds (taxable bonds or tax-exempt bonds depending on your tax bracket)


Tax-deferred 36.5%
6.5% stocks
30% bonds

This puts both stocks and bonds in both accounts, but most of the bonds are in tax-deferred accounts. This type of set up gives you maximum flexibility.

Spend from the tax-deferred accounts unless there is a reason not to do that (I'm not sure at this point). There may not be a need to do the Roth conversions people are talking about (but I have not reviewed your original post lately). Disregard. I forgot you are too young.

Spend from stocks in taxable. If you spend enough to change the balance of your portfolio (which seems very unlikely), sell bonds in the tax-deferred accounts and buy stocks to get back to balance.

And consider doing some Roth conversions of the tax-deferred accounts.
Thank you! Would you mind elaborating a bit on why you don't recommend 36.5% in bonds in tax-deferred? Regardless I don't know when I'll make it to whatever target I settle on, but still good to have something to shoot for.

Also, I just asked Leif this same question and alluded to it in another post: Having to sell stock to do withdrawals would result in higher capital gains taxes. Is it still more tax-efficient that way? Because bond interest is ordinary income?
Last edited by FrankyZoo on Thu Dec 02, 2021 4:56 pm, edited 1 time in total.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

Leif wrote: Thu Dec 02, 2021 4:17 pm
FrankyZoo wrote: Thu Dec 02, 2021 3:58 pm Yes that is correct - it is a retire early scenario and I'm sorry I was unclear. I understand why you'd need to have fixed-income in taxable if the taxable account is larger than the portfolio's stock allocation. However, if that is not the case would you still try to have fixed income in the taxable account. In my case, tax-deferred accounts make up 36.5% of my portfolio and my target bond allocation is 40%. So even if my tax-deferred is 100% bonds, I have to have some bonds in my taxable account.
Interesting question. One I've looked at myself.

That your AA matches perfectly with the ideal configuration of asset location would be quite a happenstance. So what is more important to you? A particular AA or the ideal tax efficient asset location? For me my AA is in the driver's seat. But, I still try to arrange my asset location as tax efficient as I can. That drives me to Roth convert my stock in deferred to my Roth (but also for the desire of lower RMDs). Also, spare cash from my maturing CDs I use to buy stock in taxable and to sell stock in deferred to buy bonds (keeping the same AA). Whether by luck or design (I guess some of both) the relative sizes of my taxable/Roth vs. deferred is very similar to my desired AA.

Your AA vs. asset location is close to ideal. In your case I would have all bonds in the tax deferred, and the rest of the bonds in taxable, along with your stock.
Thanks. AA is more important to me as well but also trying to strategize a little around tax efficiency. When selling stock, I'm likely to have higher capital gains. Is it still more tax-efficient to weigh the portfolio so heavily in stocks?
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retiredjg
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by retiredjg »

FrankyZoo wrote: Thu Dec 02, 2021 4:45 pm
retiredjg wrote: Thu Dec 02, 2021 4:06 pm
FrankyZoo wrote: Thu Dec 02, 2021 3:58 pm In my case, tax-deferred accounts make up 36.5% of my portfolio and my target bond allocation is 40%. So even if my tax-deferred is 100% bonds, I have to have some bonds in my taxable account.
Based on just this information, here is a simple suggestion of how this can be done.

Set your portfolio up like this (yes, I know it may take months or years to get there but anything in the neighborhood will do)

Taxable 63.5%
53.5% stocks (probably a total stock index and a total international index)
10% bonds (taxable bonds or tax-exempt bonds depending on your tax bracket)


Tax-deferred 36.5%
6.5% stocks
30% bonds

This puts both stocks and bonds in both accounts, but most of the bonds are in tax-deferred accounts. This type of set up gives you maximum flexibility.

Spend from the tax-deferred accounts unless there is a reason not to do that (I'm not sure at this point). There may not be a need to do the Roth conversions people are talking about (but I have not reviewed your original post lately). Disregard. I forgot you are too young.

Spend from stocks in taxable. If you spend enough to change the balance of your portfolio (which seems very unlikely), sell bonds in the tax-deferred accounts and buy stocks to get back to balance.

And consider doing some Roth conversions of the tax-deferred accounts.
Thank you! Would you mind elaborating a bit on why you don't recommend 36.5% in bonds in tax-deferred? Regardless I don't know when I'll make it to whatever target I settle on, but still good to have something to shoot for.
To maintain some flexibility. The only way to rebalance in tax-deferred (or in taxable) is to hold both stocks and bonds there. You could put your entire tax-deferred account into bonds, but it is not very flexible to do that.

Also, I just asked Leif this same question and alluded to it in another post: Having to sell stock to do withdrawals would result in higher capital gains taxes. Is it still more tax-efficient that way? Because bond interest is ordinary income?
Higher capital gains taxes than what?

If you sell stocks in taxable, you only pay tax on the gains. You do not pay tax on your investment because the investment has already been taxed. Also, long term capital gains tax rates are lower than ordinary income tax rates.

The same is true of bonds - if you sell bonds, you will pay capital gains tax on the bonds if the bonds are worth more than you paid for them (including paying tax on dividends all along). But bonds are not going to have much in the way of capital gains if you sell bond shares.
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FrankyZoo
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by FrankyZoo »

retiredjg wrote: Thu Dec 02, 2021 5:05 pm
FrankyZoo wrote: Thu Dec 02, 2021 4:45 pm
retiredjg wrote: Thu Dec 02, 2021 4:06 pm
FrankyZoo wrote: Thu Dec 02, 2021 3:58 pm In my case, tax-deferred accounts make up 36.5% of my portfolio and my target bond allocation is 40%. So even if my tax-deferred is 100% bonds, I have to have some bonds in my taxable account.
Based on just this information, here is a simple suggestion of how this can be done.

Set your portfolio up like this (yes, I know it may take months or years to get there but anything in the neighborhood will do)

Taxable 63.5%
53.5% stocks (probably a total stock index and a total international index)
10% bonds (taxable bonds or tax-exempt bonds depending on your tax bracket)


Tax-deferred 36.5%
6.5% stocks
30% bonds

This puts both stocks and bonds in both accounts, but most of the bonds are in tax-deferred accounts. This type of set up gives you maximum flexibility.

Spend from the tax-deferred accounts unless there is a reason not to do that (I'm not sure at this point). There may not be a need to do the Roth conversions people are talking about (but I have not reviewed your original post lately). Disregard. I forgot you are too young.

Spend from stocks in taxable. If you spend enough to change the balance of your portfolio (which seems very unlikely), sell bonds in the tax-deferred accounts and buy stocks to get back to balance.

And consider doing some Roth conversions of the tax-deferred accounts.
Thank you! Would you mind elaborating a bit on why you don't recommend 36.5% in bonds in tax-deferred? Regardless I don't know when I'll make it to whatever target I settle on, but still good to have something to shoot for.
To maintain some flexibility. The only way to rebalance in tax-deferred (or in taxable) is to hold both stocks and bonds there. You could put your entire tax-deferred account into bonds, but it is not very flexible to do that.

Also, I just asked Leif this same question and alluded to it in another post: Having to sell stock to do withdrawals would result in higher capital gains taxes. Is it still more tax-efficient that way? Because bond interest is ordinary income?
Higher capital gains taxes than what?

If you sell stocks in taxable, you only pay tax on the gains. You do not pay tax on your investment because the investment has already been taxed. Also, long term capital gains tax rates are lower than ordinary income tax rates.

The same is true of bonds - if you sell bonds, you will pay capital gains tax on the bonds if the bonds are worth more than you paid for them (including paying tax on dividends all along). But bonds are not going to have much in the way of capital gains if you sell bond shares.
If I am selling mostly stocks, I'd have higher capital gains than if I sell bonds. I know the tax rate is lower on LT capital gains than on interest income. But does the tax savings of having bonds in tax-deferred accounts outweigh the increased capital gains I will experience by having to sell stocks in the taxable acct?
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Leif
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by Leif »

FrankyZoo wrote: Thu Dec 02, 2021 4:53 pm Thanks. AA is more important to me as well but also trying to strategize a little around tax efficiency. When selling stock, I'm likely to have higher capital gains. Is it still more tax-efficient to weigh the portfolio so heavily in stocks?
As I said, I like to maintain a buffer of money market funds in my taxable. But I know people of this forum that keep a minimum of cash. I don't like that myself because I don't want to constantly be monitoring my expenses and selling stock to cover. But that also depends on your withdrawal rate and cash flow. That would be determined by details you have not provided. But if you have enough cash flow you can minimize or eliminate your taxable fixed income, within the confines of your AA.
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retiredjg
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Re: Bond Allocation in Tax-Deferred Accts before RMD

Post by retiredjg »

FrankyZoo wrote: Thu Dec 02, 2021 5:10 pm If I am selling mostly stocks, I'd have higher capital gains than if I sell bonds. I know the tax rate is lower on LT capital gains than on interest income. But does the tax savings of having bonds in tax-deferred accounts outweigh the increased capital gains I will experience by having to sell stocks in the taxable acct?
Ok. I see what you are asking now.

Let's pretend you have set your portfolio exactly how you want it at 60% stocks and 40% bonds. You need money to buy groceries and will sell from your taxable account for the money to live on.

You look at your portfolio and see that it has wandered to 62% stocks and 38% bonds. Portfolios never stay where you put them. They ALWAYS wander. So you sell stocks for your groceries that month. This nudges the portfolio back toward your target. If you sold bonds, it would nudge your portfolio away from your target which doesn't seem like a great idea.

The next month, your portfolio is off target, but in the other direction. This time, it is sitting at 57% stocks and 43% bonds. This time, you will sell bonds to pay your expenses and buy groceries, not stocks. This is why it is good to have both stocks and bonds in taxable.

If you take enough money out at one time to push the ratio more than about 5% from target then you need to "rebalance" back to something closer to target. If the market moves your portfolio to 54% stocks and 46% bonds, you need to sell bonds and buy stocks to get back closer to 60/40. You do this in your tax-deferred accounts because there is no tax cost to doing it there. That is why it is important to have both stocks and bonds in the tax-deferred accounts.

I know this is not an exact answer to your question, but you simply cannot set up a portfolio in a way that you always sell bonds so that you pay less tax. If you do that....your portfolio will end up with too much in stocks and not enough in bonds....and guess what you have to do then? You have to sell stocks to buy bonds to get back to or closer to target. If you end up having to sell stocks after all, what did you accomplish by selling only bonds in order to save a little in taxes?

I guess I should have mentioned before all this why you want to stay "close" to your target - it is so that you stay at the same risk level no matter what the market or your spending is doing. How close to you need to be? Plus or minus 5 percentage points is what many people use. Any number between 55% stocks and 65% stocks carries about the same risk. It is not important to be any closer to your 60% target than that.
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