Portfolio Review: Taxable vs Roth & Harvesting Gains

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Topic Author
mnvalue
Posts: 1107
Joined: Sun May 05, 2013 2:22 pm

Portfolio Review: Taxable vs Roth & Harvesting Gains

Post by mnvalue »

Emergency funds: Yes
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal, 6.8% State
State of Residence: Minnesota
Age: 76 Him & 70 Her

Desired Asset allocation: 40% stocks / 60% bonds
Desired International allocation: 40% of stocks

Please provide an approximate size of your total portfolio: low six-figures

Current retirement assets

32% His/Her Taxable
8% Vanguard Total Stock Market (VTSAX)
7% Vanguard Total International Stock (VTIAX)
17% Vanguard Total Bond Market (VBTLX)

21% His Roth IRA at Vanguard
12% Vanguard Total Stock Market (VTSAX)
9% Vanguard Total International Stock (VTIAX)

35% Her Roth IRA at Vanguard
8% Vanguard Total Stock Market (VTSAX)
27% Vanguard Total Bond Market (VBTLX)

6% His TreasuryDirect
6% I Bonds

6% Her TreasuryDirect
6% I Bonds

Contributions
None

Additional information

I understand that this is currently 4% underweight bonds. Rebalancing is straightforward.

Spending needs and most wants are funded via income from state government pensions (with a full survivor election) and Social Security (where she did the spousal benefit until age 70). The portfolio exists to supplement income for infrequent spends (e.g. home repairs, new vehicles, etc.).

I understand the traditional argument is bonds in tax-protected accounts, but I think White Coat Investor makes a compelling argument for bonds in taxable: https://www.whitecoatinvestor.com/asset ... n-taxable/ This seems especially true today, with bond interest rates being incredibly low. If bond rates go up, the bond fund price will go down, which means the bond position in taxable can be exited without large capital gains (and possibly capital losses). That said, I'm open to arguments against bonds in taxable, especially as it relates to the questions below.

Bonds were recently sold in taxable to fund I Bonds for 2021 and upcoming for 2022 (which is already represented above). Bonds, rather than stocks, were sold to minimize capital gains, as the plan at the time was for a Roth conversion in 2021. Since then, the plan has changed and the Roth conversion will be completed in January so it lands in tax year 2022 for cash flow reasons. The Roth conversion has already been represented above.

Questions

1. For future spends, should they withdraw from taxable or Roth first? My gut feeling is taxable, to maximize the tax-free growth in the Roths.

2. Should they realize capital gains on stocks in taxable in 2021 to have more/100% bonds in taxable? It needs to either be done in 2021 or wait until 2023, given the planned Roth conversion in 2022. This would be because some combination of:
A) the argument above that bonds belong in taxable,
B) to reduce capital gains in taxable since bonds are expected to grow slower than stocks. For example, if they had done this already, they'd have less capital gains now.
C) to expand the Roth space, to maximize tax free growth.

3. If so, how much capital gains would be reasonable to realize (assuming they have sufficient other cash to pay the taxes)? The total amount of gains in the stock positions is $16k. Their 2021 AGI is expected to be approximately $107k (with $2k of that being capital gains already realized), so they are firmly in the 22% tax bracket and the 15% capital gains bracket (and expect to stay in both forever). It seems like they could realize all of those gains, going 100% bonds in taxable, and not run into any higher tax bracket.
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