How much equity vs fixed income AA in tax deferred account?t

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wish2bCFP
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How much equity vs fixed income AA in tax deferred account?t

Post by wish2bCFP »

It seems to me that the old adage of having tax inefficient holdings (fixed income funds) held in tax deferred accounts and holding tax efficient index equity funds and/or tax-free bond funds in taxable accounts may not be the best going forward since the fixed income allocation isn't expected to be yielding much long term total return.
Would it be better to have some percent of equity funds in my tax deferred account in order to help increase the potential for long term growth of the tax deferred account? If all I have in my IRA is VG bond funds, then my prospects of expecting a significant total return would seem to be reduced.
Your opinions and comments are solicited

BJ
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retiredjg
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by retiredjg »

I do not believe there was ever a suggestion to put stock funds here and bond funds there (although many people have thought that). To me, the message has always been to fill the tax-deferred accounts first with both stocks and bonds and when that overflows, put stocks in taxable and keep most of your bonds in tax-deferred (along with stocks until that is not possible).

Would it be better to have some percent of equity funds in my tax deferred account in order to help increase the potential for long term growth of the tax deferred account?
Maybe. Maybe not.

The way I understand it there should always been both stock funds and bond funds in tax-deferred accounts. This makes rebalancing much easier and does not trigger tax. On the other hand, if you have a very large tax-deferred account and RMDs look like they might be formidable, reducing the growth of tax-deferred accounts by holding only bonds there can look attractive.

So it all depends on your situation, but I would think that most people probably do/should have stock funds in tax-deferred accounts, along with their bond funds.
HeelaMonster
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by HeelaMonster »

The largest bucket for our tax deferred is federal TSP, invested in the L Income Fund, which is:

71% G fund, 6% F fund, 12% C fund, 3% S fund, and 8% I fund. So lumping together, that is 77% in fixed, 23% in equity.

Roth IRAs and taxable account are heavily weighted in the other direction, toward equities.
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wish2bCFP
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by wish2bCFP »

Thank you both for your replies. Looks like I’ve got some changes to make in my IRA.
BJ
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grabiner
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by grabiner »

HeelaMonster wrote: Fri Jan 21, 2022 10:06 am The largest bucket for our tax deferred is federal TSP, invested in the L Income Fund, which is:

71% G fund, 6% F fund, 12% C fund, 3% S fund, and 8% I fund. So lumping together, that is 77% in fixed, 23% in equity.

Roth IRAs and taxable account are heavily weighted in the other direction, toward equities.
And this makes sense for reasons unrelated to taxes. The TSP G fund is better than anything you can get at retail, while the other TSP funds are comparable to retail funds elsewhere. Thus, if you have the TSP, you should prefer to hold bonds in the G fund.

Conversely, many 401(k) plans have an S&P 500 index as the only low-cost option. If you have such a 401(k), you should prefer to hold stock in it and bonds in some other account.
Wiki David Grabiner
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by sycamore »

retiredjg wrote: Fri Jan 21, 2022 9:43 am I do not believe there was ever a suggestion to put stock funds here and bond funds there (although many people have thought that). To me, the message has always been to fill the tax-deferred accounts first with both stocks and bonds and when that overflows, put stocks in taxable and keep most of your bonds in tax-deferred (along with stocks until that is not possible).
...
The gist of the above is echoed in the Boglehead wiki article Tax-efficient fund placement. OP, you may find that article helpful in terms of how to go about funding which accounts with which assets.
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wish2bCFP
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by wish2bCFP »

Thanks Sycamore! I feel vindicated knowing that I didn’t dream this AA issue up.
BJ
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retiredjg
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by retiredjg »

wish2bCFP wrote: Sat Jan 22, 2022 8:09 am Thanks Sycamore! I feel vindicated knowing that I didn’t dream this AA issue up.
BJ
You absolutely did not dream this up, but it should be considered in the context of where you should save money first.

Most people should not even be using a taxable account for retirement assets at all...unless they have filled both a work plan (if available) and probably an IRA first.

I have not read that Wiki lately and maybe it is not clear enough if you think it is saying to put your stock holdings in taxable and put your bond holdings in tax-deferred accounts...without regard to filling your tax-advantaged accounts first.

On the other hand, if that is what you have been doing, it will likely work out just fine. You may have paid a little extra in tax along the way if you did not fully used your tax-advantaged space, but it should not affect your retirement at all if you saved enough to retire in the first place.

Saving enough money is much more important than which accounts you save it in.
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wish2bCFP
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by wish2bCFP »

I did fill up my tax deferred accounts with fixed income funds before placing equity funds in my taxable. Now that I’m retired at age 70, I’m thinking about exchanging a percent of my bond funds for equity funds in my rollover IRA where all of my tax deferred assets are. I’m wanting to end up with about an overall portfolio of 50:50 AA between fixed and equity for now. I’m counting my SS benefit as part of my fixed income allocation.
I really appreciate all the feedback!
BJ
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retiredjg
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Re: How much equity vs fixed income AA in tax deferred account?t

Post by retiredjg »

So sorry, I didn't understand your first sentence that way. :(

Having some of each in each account does give some flexibility you won't get otherwise. I even ended up putting a little slice of bonds in Roth IRA for that reason (flexibility).
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