creating balanced portfolio with individual stock heavy taxable account

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gtg970g
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creating balanced portfolio with individual stock heavy taxable account

Post by gtg970g »

I'm looking for some advice on tools which could help me manage my retired mom's investment portfolio. She has a unique situation in that out of $4M about half is pretax and half after tax and the after tax portion has a significant amount of unrealized capital gains. I will outline below.

Age: 68
Tax Filing Status: Single
Earned Income: none (retired)
IRA (traditional) 2.5M
Taxable brokerage acct: 1.7M (~1M unrealized gains)
Expenses: 60k a year
Marginal tax bracket: 24% (projected to remain 24% with RMDs)
Target AA: 75/25

Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account. Currently the pretax equities are all invested in individual stocks and a few international index funds. I have looked at portfoliovisualizer.com but was wondering if there are any other tools out there that could help create a balanced portfolio. I don't mind a moderately complex setup but would like to be mostly hands off after everything is setup. The AA will not change though I do plan to simplify the bond holdings. And yes she has asked for my help.
venkman
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by venkman »

The good news is that she only needs to withdraw 1.5% a year to cover expenses (even less if she has SS or other income), so most anything should work well enough.

Personally, I'd view the taxable part as a defensive-ish income portfolio to leave alone and let the dividends go to cash to help cover expenses. For the IRA, a simple 3-fund portfolio with a 60/40 AA would put the total portfolio at around 75/25. You'd have a significant overall value tilt, but that wouldn't be a terrible thing, given where relative valuations stand right now. I'd be loathe to load up the IRA with expensive growth stocks just to balance out the value in taxable.
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CyclingDuo
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by CyclingDuo »

gtg970g wrote: Mon Jun 14, 2021 10:09 pmI'm looking for some advice on tools which could help me manage my retired mom's investment portfolio. She has a unique situation in that out of $4M about half is pretax and half after tax and the after tax portion has a significant amount of unrealized capital gains. I will outline below.

Age: 68
Tax Filing Status: Single
Earned Income: none (retired)
IRA (traditional) 2.5M
Taxable brokerage acct: 1.7M (~1M unrealized gains)
Expenses: 60k a year
Marginal tax bracket: 24% (projected to remain 24% with RMDs)
Target AA: 75/25

Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account. Currently the pretax equities are all invested in individual stocks and a few international index funds. I have looked at portfoliovisualizer.com but was wondering if there are any other tools out there that could help create a balanced portfolio. I don't mind a moderately complex setup but would like to be mostly hands off after everything is setup. The AA will not change though I do plan to simplify the bond holdings. And yes she has asked for my help.
Actually, it is a pretty good position to be in. A three legged stool with one leg in taxable, one leg in the tax deferred, and one leg in SS.

30 stocks throwing off qualified dividends which are taxed at the LTCG any way. Whether you sell shares as a DIY dividend or take the dividends - taxes are the same on it as it currently is.

Does she want to change the structure of her portfolio, or is it you? Maybe the income it is producing is all she needs from that account (assuming it is throwing off at least $34-35K per year in dividends). That coupled with her upcoming RMD's from the IRA, and whatever she gets from SS should be a pretty ship as it is.

CyclingDuo
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CyclingDuo
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by CyclingDuo »

duplicate
Last edited by CyclingDuo on Wed Jun 16, 2021 6:14 am, edited 1 time in total.
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iceport
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by iceport »

gtg970g wrote: Mon Jun 14, 2021 10:09 pm I'm looking for some advice on tools which could help me manage my retired mom's investment portfolio. She has a unique situation in that out of $4M about half is pretax and half after tax and the after tax portion has a significant amount of unrealized capital gains. I will outline below.

<...>

Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account. Currently the pretax equities are all invested in individual stocks and a few international index funds. I have looked at portfoliovisualizer.com but was wondering if there are any other tools out there that could help create a balanced portfolio. I don't mind a moderately complex setup but would like to be mostly hands off after everything is setup. The AA will not change though I do plan to simplify the bond holdings. And yes she has asked for my help.
If it were me, my first step would be to sort out each holding and analyze the entire portfolio — treating everything in all accounts as one big portfolio — with Morningstar's Instant X-Ray tool, to see what the current AA looks like. You might be surprised how it sorts out once you've entered all the holdings with their ticker symbols and what percent of the portfolio each represents (or number of shares). (Cash is entered as "CASH$", case-sensitive.)

As a matter of fact, I'd be interested enough in seeing the details of the current AA that I'd sign up for the free 2-week premium membership trial there — assuming they still offer that prominently. Then you can save your instant x-ray analysis as a saved portfolio to your account, and see far more detail. This is important work you're doing! The non-premium account's free anyway, so you can keep it after the trial premium membership ends.

Then I'd find a fund or funds to use as a suitable benchmark, and that you and your mom could use as a model portfolio to follow. Maybe a Vanguard target date or lifecycle fund or something?

Then analyze that fund's portfolio at M* and see how far away your mom's actual allocations really are from a professionally designed portfolio, one without any major tilts to one risk factor or another.

Then and only then can you really get down to deciding where changes are really needed, and where it might be more effort than it's worth (or cost to much in taxes than it's worth) to make revisions. It might be possible to live with some overweighted sector here or there, if it's not too far askew. Or even if is!

Then I'd just set up as simple a spreadsheet as possible to organize the holdings in each account to show current and target allocations for each asset or group of assets.
"Discipline matters more than allocation.” ─William Bernstein
rossington
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by rossington »

gtg970g wrote: Mon Jun 14, 2021 10:09 pm I'm looking for some advice on tools which could help me manage my retired mom's investment portfolio. She has a unique situation in that out of $4M about half is pretax and half after tax and the after tax portion has a significant amount of unrealized capital gains. I will outline below.

Age: 68
Tax Filing Status: Single
Earned Income: none (retired)
IRA (traditional) 2.5M
Taxable brokerage acct: 1.7M (~1M unrealized gains)
Expenses: 60k a year
Marginal tax bracket: 24% (projected to remain 24% with RMDs)
Target AA: 75/25

Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account. Currently the pretax equities are all invested in individual stocks and a few international index funds. I have looked at portfoliovisualizer.com but was wondering if there are any other tools out there that could help create a balanced portfolio. I don't mind a moderately complex setup but would like to be mostly hands off after everything is setup. The AA will not change though I do plan to simplify the bond holdings. And yes she has asked for my help.
If the target AA is 75(stocks)/25(bonds) then sell 1.05M in stocks in the TIRA and move this into bonds (VBTLX) in the TIRA. (4.2M x .25 = 1.05M).
Will she be comfortable at 75% stocks as she ages?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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iceport
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by iceport »

gtg970g wrote: Mon Jun 14, 2021 10:09 pm Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account.
Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general. Hold an allocation long enough (as presumably your mom has already) — even an extreme one — and it's likely its performance will begin to converge with many other allocations. (See signature line. :wink: )

But the added risk of holding individual stocks doesn't go away.

I went through the equivalent exercise with my mom a while ago, though the stakes were far, far lower. The first thing that surprised me at the time was how strong a value tilt the portfolio had, similar to what was typically advocated here at the time, once all the stocks and other fund holdings were entered into M* instant x-ray. But the other thing that struck me was the risk of holding a handful (far less than your mom's 30 stocks) of individual stocks. So I set about selling them.

Unfortunately, one of my siblings vetoed one sale. It was a high quality blue chip company that was kicking off 6% in dividends. To my sibling, that was just too appealing to abandon. :greedy

A month or two later, the BP Deepwater Horizon oil spill happened, and the value of the stock was slashed in half! :annoyed

With all that said, I understand it's probably not even remotely practical to trim those taxable holdings. So if, in your OP, when you talk about complementing the taxable holdings, if you meant counteracting some idiosyncratic single company stock risks, I agree with that objective. I wonder if it would be possible or worth attempting to balance some of the largest individual stock risks in the taxable account with some kind of hedge in tax-advantaged? (Don't ask me what that might look like...)
"Discipline matters more than allocation.” ─William Bernstein
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gtg970g
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by gtg970g »

iceport wrote: Wed Jun 16, 2021 1:05 pm Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general. Hold an allocation long enough (as presumably your mom has already) — even an extreme one — and it's likely its performance will begin to converge with many other allocations. (See signature line. :wink: )

But the added risk of holding individual stocks doesn't go away.

I went through the equivalent exercise with my mom a while ago, though the stakes were far, far lower. The first thing that surprised me at the time was how strong a value tilt the portfolio had, similar to what was typically advocated here at the time, once all the stocks and other fund holdings were entered into M* instant x-ray. But the other thing that struck me was the risk of holding a handful (far less than your mom's 30 stocks) of individual stocks. So I set about selling them.

Unfortunately, one of my siblings vetoed one sale. It was a high quality blue chip company that was kicking off 6% in dividends. To my sibling, that was just too appealing to abandon. :greedy

A month or two later, the BP Deepwater Horizon oil spill happened, and the value of the stock was slashed in half! :annoyed

With all that said, I understand it's probably not even remotely practical to trim those taxable holdings. So if, in your OP, when you talk about complementing the taxable holdings, if you meant counteracting some idiosyncratic single company stock risks, I agree with that objective. I wonder if it would be possible or worth attempting to balance some of the largest individual stock risks in the taxable account with some kind of hedge in tax-advantaged? (Don't ask me what that might look like...)
You understand my concerns exactly. I can trim a little around the edges by selling some assets with smaller gains (bought more recently with dividends) but it won't move the needle much. If possible I would like to balance the individual stocks in taxable with assets held in the tax advantage space since I can trade there tax free. The purpose wouldn't be to "juice returns" but rather to reduce the overall risk. She is just now starting to understand that owning the market is less risky than individual stocks but definitely better late than never.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by grabiner »

iceport wrote: Wed Jun 16, 2021 1:05 pm
gtg970g wrote: Mon Jun 14, 2021 10:09 pm Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account.
Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general.
But holding 30 large-company stocks, with none more than 5% of the portfolio, isn't a significant risk. From what you have said, her individual stock portfolio is likely to behave like a value index, which suggests complementing it with a growth index fund.

If any one stock is more than 5% of the portfolio, she might consider selling it (or donating to charity if she is so inclined).
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iceport
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by iceport »

grabiner wrote: Wed Jun 16, 2021 9:34 pm
iceport wrote: Wed Jun 16, 2021 1:05 pm
gtg970g wrote: Mon Jun 14, 2021 10:09 pm Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account.
Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general.
But holding 30 large-company stocks, with none more than 5% of the portfolio, isn't a significant risk. From what you have said, her individual stock portfolio is likely to behave like a value index, which suggests complementing it with a growth index fund.

If any one stock is more than 5% of the portfolio, she might consider selling it (or donating to charity if she is so inclined).
That was going to be my question to the OP:

How large a percentage of the portfolio does the largest single stock comprise? Or the top 5?

This still feels like guessing about the current allocation to me, because I don't have a feel for where the overweights fall in terms of stock style, and we don't yet know the magnitude of any overweights.

The analysis still starts with a trip to Morningstar. I don't know anywhere else that provides such detailed data on stocks and funds, all for free (temporarily).

David, do you know a better way to analyze the current holdings, as a first step in identifying what changes might be needed?
"Discipline matters more than allocation.” ─William Bernstein
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celia
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by celia »

Uhmmm... Where are her Roth accounts?

Does she know that RMDs will be required in the year she turns 72? If her IRA holds $2.5M, her RMD will be about $100K. When that is withdrawn, she won't have to spend it but at least pay taxes on it.

Now get this. The value of the IRA could easily double in 10 years from now, while at the same time the percentage to be withdrawn each year increases. So in 10 years from now, her RMD alone, would be over $200K, which is near the top of the current 32% tax bracket for Singles. And this isn't even taking into account that the tax brackets are scheduled to revert to 2017 levels come 2026 unless Congress does something in the meantime to our current historically-low tax brackets.

What to do???
I suggest you and she read this thread and follow my links there. The first one will help you determine if you need to do Roth conversions. (The answer is a resounding YES.) The second link will show an example of how to determine how much you should convert each year.

If you find that you are just “treading water” by having the tax-deferred balance remain basically the same each year, you should be able to prevent that by doing larger Roth conversion in the early years.

I know this Roth conversion detour isn't what you were asking about, but it is "the elephant in the room" and will end up being more important than your re-balancing questions. Since you aren't near retirement age, I will assume you never even considered that this could be a problem. But we retired folks talk about it a lot and you can find lots of threads about "Roth conversions in early retirement".


Note that when she does Roth conversions, she should put stock shares in the Roth, where she can start to maximize some tax-free growth. She doesn't have to keep the same stocks either. Feel free to change out anything that is needed in tax-deferred or Roth since there are no tax implications there. But the Roth should hold the assets that are expected to grow the most while the tax-deferred should hold all the bonds she needs, which will help slow down the growth there.

If she is currently taking SS on her own work record, I suggest she put a "hold" on it until age 70. This will give her more room in the tax brackets for her to do Roth conversions, while increasing her age 70 monthly benefit.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by sureshoe »

celia wrote: Wed Jun 16, 2021 11:57 pm Uhmmm... Where are her Roth accounts?
I'm still a long way from needing to do this, but I was wondering this. I just recently started understanding Roth Ladders, and was waiting for someone to chime in on this.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by sureshoe »

gtg970g wrote: Wed Jun 16, 2021 4:22 pm You understand my concerns exactly. I can trim a little around the edges by selling some assets with smaller gains (bought more recently with dividends) but it won't move the needle much. If possible I would like to balance the individual stocks in taxable with assets held in the tax advantage space since I can trade there tax free. The purpose wouldn't be to "juice returns" but rather to reduce the overall risk. She is just now starting to understand that owning the market is less risky than individual stocks but definitely better late than never.
If you're really just looking to diversify with minimal tax gains, rather than rip the bandaid, I'm assuming you have stopped reinvesting dividends on the individual stocks.

The other way to reduce risk and generate income that I don't see on this site much is to use Options. Maybe this is too advanced or hands-on, but there are ways to do it. For example, you could sell long, out of the money covered calls on those individual stocks. It generates income, which can be used to buy index funds. You're limiting your upside and basically betting on a "flatter" market, not really boglehead-ish.

For downside protection, you could always sell puts or put in stop loss orders.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by CyclingDuo »

grabiner wrote: Wed Jun 16, 2021 9:34 pm
iceport wrote: Wed Jun 16, 2021 1:05 pm
gtg970g wrote: Mon Jun 14, 2021 10:09 pm Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account.
Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general.
But holding 30 large-company stocks, with none more than 5% of the portfolio, isn't a significant risk. From what you have said, her individual stock portfolio is likely to behave like a value index, which suggests complementing it with a growth index fund.
Good points on complementing the holdings, grabiner!

OP wrote: "She is definitely overweight railroads, pharmaceuticals, and utilities."

If the OP posted up the ticker symbols we would know for sure the best way to complement the 30.

There are links to some studies for the OP at the Boglehead Wiki Page on passively managing individual stocks here:

https://www.bogleheads.org/wiki/Passive ... ual_stocks

Surz and Price study

While one individual stock has a standard deviation of 45% and the entire market has 14.5%, portfolios of 30 stocks are shown to eliminate 97% of the excess (diversifiable) standard deviation. A 60 stock portfolio eliminates 98% of excess standard deviation.

Ikenberry, Shockley and Womack study

They found that for 35-stock portfolios, where the stocks are randomly chosen from the S&P 500 index and equally weighted, the average yearly median portfolio return lags the mean by 0.22%. This number goes down to 0.14% for 50-stock portfolios, 0.09% for 75-stock portfolios, 0.06% for 100-stock portfolios, and 0.03% for 150-stock portfolios.

CyclingDuo
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by iceport »

CyclingDuo wrote: Thu Jun 17, 2021 9:00 am OP wrote: "She is definitely overweight railroads, pharmaceuticals, and utilities."

If the OP posted up the ticker symbols we would know for sure the best way to complement the 30.
And percentages.

Otherwise, we're all in the dark.

The magic number 30 seems to convey a degree of purposefulness about the individual stock selections that we just don't know exists. Does a single stock holding or two dwarf all the rest? (That's the way my mom's dozen or so individual stocks were: dominated by one or two holdings that must have done really well over the prior 50 years.)
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by celia »

sureshoe wrote: Thu Jun 17, 2021 7:20 am
celia wrote: Wed Jun 16, 2021 11:57 pm Uhmmm... Where are her Roth accounts?
I'm still a long way from needing to do this, but I was wondering this. I just recently started understanding Roth Ladders, and was waiting for someone to chime in on this.
She doesn't need a Roth ladder as she is already old enough to be able to access (withdraw from) any account she wants. But she does need to start Roth conversions (like 8 years ago) as a way to spread the tax hit over more years and minimize the "tax explosion" at age 72.

I can't believe the conversation is continuing on changing some of her assets as the train is heading her way..... :oops:
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by iceport »

celia wrote: Thu Jun 17, 2021 5:08 pm I can't believe the conversation is continuing on changing some of her assets as the train is heading her way..... :oops:
I can't speak for others, but I'm letting the expert (you!) cover that issue.

I might have some ideas about the portfolio AA*, but you are one of the best equipped around here to discuss Roth conversions. :wink:

*Actually, I'd have a lot more to say if I had a clue about what the portfolio holds and in what percentages.

I hope the OP comes back. There's a lot of help being offered here.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by sureshoe »

celia wrote: Thu Jun 17, 2021 5:08 pm
sureshoe wrote: Thu Jun 17, 2021 7:20 am
celia wrote: Wed Jun 16, 2021 11:57 pm Uhmmm... Where are her Roth accounts?
I'm still a long way from needing to do this, but I was wondering this. I just recently started understanding Roth Ladders, and was waiting for someone to chime in on this.
She doesn't need a Roth ladder as she is already old enough to be able to access (withdraw from) any account she wants. But she does need to start Roth conversions (like 8 years ago) as a way to spread the tax hit over more years and minimize the "tax explosion" at age 72.

I can't believe the conversation is continuing on changing some of her assets as the train is heading her way..... :oops:
This is where I frankly don't understand the difference. I mean, I know what a conversion is, of course. I just didn't understand there was a nuance in the words that a Roth Ladder isn't the same thing. I haven't read up on it yet (as I am currently in a punishing tax bracket). Anyhoo... someday.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by rossington »

celia wrote: Thu Jun 17, 2021 5:08 pm
sureshoe wrote: Thu Jun 17, 2021 7:20 am
celia wrote: Wed Jun 16, 2021 11:57 pm Uhmmm... Where are her Roth accounts?
I'm still a long way from needing to do this, but I was wondering this. I just recently started understanding Roth Ladders, and was waiting for someone to chime in on this.
She doesn't need a Roth ladder as she is already old enough to be able to access (withdraw from) any account she wants. But she does need to start Roth conversions (like 8 years ago) as a way to spread the tax hit over more years and minimize the "tax explosion" at age 72.

I can't believe the conversation is continuing on changing some of her assets as the train is heading her way..... :oops:
Hey Celia, just curious... the Mom is 68...how much are you recommending should be converted of the 2.5M each year to reach what you would consider an optimum TIRA balance (at 72)? She is in the 24% tax bracket now and will be taxed on conversions as ordinary income.

Also the OP states that the target AA is 75/stocks and 25/bonds.

Thanks.
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by celia »

iceport wrote: Thu Jun 17, 2021 5:47 pm
celia wrote: Thu Jun 17, 2021 5:08 pm I can't believe the conversation is continuing on changing some of her assets as the train is heading her way..... :oops:
I can't speak for others, but I'm letting the expert (you!) cover that issue.

I might have some ideas about the portfolio AA*, but you are one of the best equipped around here to discuss Roth conversions. :wink:

*Actually, I'd have a lot more to say if I had a clue about what the portfolio holds and in what percentages.

I hope the OP comes back. There's a lot of help being offered here.
We might have to wait a bit for the OP, as the OP comprehends this enough to explain it to mom. After all, it is not OP's money and they probably need to talk to mom. Mom may also have some thoughts about sharing this online, although it is anonymous.


OP, We hope you return. Our recommended portfolio analysis format is here, preferably added to the bottom of the original post. If mom doesn't agree with that, the minimum we need is something like:


Mom is 68 and her SS will be $12,345 starting at age 70. Her only other income is $22,000 in Qualified Dividends each year.

Taxable account $1,700,000 divided as:
25% in stock A (don't even need to tell us the companies, if you don't want to)
20% in stock B, with 2/3 of it being capital gains
6% in stock C, with 1/3 of it being capital gains
5% in stock D
5% in stock E
...
0.5% in stock Y
0.4% in stock Z
10% in a bond fund #1

TIRA $2,300,000
25% in stock AA
4% in stock BB
....
12% in bond fund #2

Inherited tIRA $55,000 has only one holding:
8% in stock CC

Note that all the percentages need to total 100%. If you want to put down an approximate dollar amount for each holding and dollar amount of capital gains, that would also help, else we'll have to calculate it. Seeing the percentage as well as the dollar amounts are useful for seeing if "progress" is being made and for estimating the taxes.

We will work on Roth conversions while also changing all bonds to be in tax-deferred. The taxes owed can come from any account, but anything sold in Taxable for a gain, will have the gain be taxed, but at a favorable rate compared to pension or SS income.

--------------------------------
sureshoe wrote: Thu Jun 17, 2021 10:29 pm
celia wrote: Thu Jun 17, 2021 5:08 pm She doesn't need a Roth ladder as she is already old enough to be able to access (withdraw from) any account she wants. But she does need to start Roth conversions (like 8 years ago) as a way to spread the tax hit over more years and minimize the "tax explosion" at age 72.

I can't believe the conversation is continuing on changing some of her assets as the train is heading her way..... :oops:
This is where I frankly don't understand the difference. I mean, I know what a conversion is, of course. I just didn't understand there was a nuance in the words that a Roth Ladder isn't the same thing. I haven't read up on it yet (as I am currently in a punishing tax bracket). Anyhoo... someday.
A Roth conversion is just a transaction. The REASON why someone is doing the Roth conversion tells you:

1) they are building a bridge to access their money early (because they are not old enough to withdraw it yet without penalty) by using the "Roth ladder" method of starting a series of 5-year clocks --or--

2) they have room in their early retirement years to start Roth conversions before the balance grows too much, causing large RMDs at 72.

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rossington wrote: Fri Jun 18, 2021 5:00 am Hey Celia, just curious... the Mom is 68...how much are you recommending should be converted of the 2.5M each year to reach what you would consider an optimum TIRA balance (at 72)? She is in the 24% tax bracket now and will be taxed on conversions as ordinary income.
The TIRA withdrawals will be taxed as ordinary income no matter what she does with them (except donate them as QCDs). She must put the withdrawal into taxable, or withhold it for taxes, or convert it. Each of these dollars will be taxed the same. But if she waits until age 72, there will only be MORE of those dollars to withdraw and pay taxes on. In addition, there will also be SS taking up some room in her tax brackets.

With only 4 years to do Roth conversions before RMDs start, there is only so much that can be withdrawn before RMDs start. But it will certainly help, if she converts some of the fastest growing stocks and have future growth happen in the Roth instead. I would try to aim to convert $1M, but some luck would help, such as a bear stock market. Since she's going to be at the top of the 32% tax bracket anyway, if she doesn't do Roth conversions, she might as well start there for her Roth conversions.

Note that at this time, these suggestions do not necessarily apply to the OP's Mom's portfolio, which we haven't seen, but they are generic suggestions applied to a generic question.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Carol88888
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by Carol88888 »

As a single tax payer she can reap $40,000 a year in either dividends or capital gains and owe no tax.

Have you figured out the amount of dividend income she gets every year? If it is more than $40,000 you might want to trim those dividend payers.
Or not.

In a low rate environment it is sort of nice to get income through stocks.
bradpevans
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by bradpevans »

grabiner wrote: Wed Jun 16, 2021 9:34 pm
iceport wrote: Wed Jun 16, 2021 1:05 pm
gtg970g wrote: Mon Jun 14, 2021 10:09 pm Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account.
Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general.
But holding 30 large-company stocks, with none more than 5% of the portfolio, isn't a significant risk. From what you have said, her individual stock portfolio is likely to behave like a value index, which suggests complementing it with a growth index fund.

If any one stock is more than 5% of the portfolio, she might consider selling it (or donating to charity if she is so inclined).

This ^^^

And, ironically, selling off some but not all of the individual stocks probably increases the risk and the volatility

It would be interesting to compare her mini-fund performance to various benchmarks
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iceport
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by iceport »

bradpevans wrote: Sun Jun 20, 2021 11:57 am
grabiner wrote: Wed Jun 16, 2021 9:34 pm
iceport wrote: Wed Jun 16, 2021 1:05 pm
gtg970g wrote: Mon Jun 14, 2021 10:09 pm Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account.
Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general.
But holding 30 large-company stocks, with none more than 5% of the portfolio, isn't a significant risk. From what you have said, her individual stock portfolio is likely to behave like a value index, which suggests complementing it with a growth index fund.

If any one stock is more than 5% of the portfolio, she might consider selling it (or donating to charity if she is so inclined).

This ^^^

And, ironically, selling off some but not all of the individual stocks probably increases the risk and the volatility

It would be interesting to compare her mini-fund performance to various benchmarks
So, how do you know that a single stock doesn't comprise 20% of the portfolio? I still say folks are reading too much into that number. We don't know that it was a carefully selected — and maintained — basket of 30 stocks, or just a random jumble of purchases with wildly varying values.
"Discipline matters more than allocation.” ─William Bernstein
bradpevans
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by bradpevans »

iceport wrote: Sun Jun 20, 2021 12:01 pm
bradpevans wrote: Sun Jun 20, 2021 11:57 am
grabiner wrote: Wed Jun 16, 2021 9:34 pm
iceport wrote: Wed Jun 16, 2021 1:05 pm
gtg970g wrote: Mon Jun 14, 2021 10:09 pm Her after tax account is heavily invested in ~30 dividend paying stocks and I would like to change her pretax investments to compliment the after tax account if possible. She is definitely overweight railroads, pharmaceuticals, and utilities in the after tax account.
Thinking about this a bit more, I'd be more worried about the risks associated with holding individual stocks than with the overall allocation not resembling the broad market in general.
But holding 30 large-company stocks, with none more than 5% of the portfolio, isn't a significant risk. From what you have said, her individual stock portfolio is likely to behave like a value index, which suggests complementing it with a growth index fund.

If any one stock is more than 5% of the portfolio, she might consider selling it (or donating to charity if she is so inclined).

This ^^^

And, ironically, selling off some but not all of the individual stocks probably increases the risk and the volatility

It would be interesting to compare her mini-fund performance to various benchmarks
So, how do you know that a single stock doesn't comprise 20% of the portfolio? I still say folks are reading too much into that number. We don't know that it was a carefully selected — and maintained — basket of 30 stocks, or just a random jumble of purchases with wildly varying values.

I was not in favor of selling off..

FWIW, While non-bogleheadish, I own a great number of individual stocks
Most hang near the middle/ the index. A few duds. But a few huge winners tilt the scale
delamer
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Re: creating balanced portfolio with individual stock heavy taxable account

Post by delamer »

When I Inherited a taxable portfolio that was too heavy in certain sectors, I sold when I could and bought a couple Vanguard sector funds to get the industry representation of the portfolio to be closer to the overall S&P 500 weightings by industry. (I did not receive a step-up in cost basis on the inherited assets, so I couldn’t start from scratch.)

You could do something similar within the IRA to balance out the overweighting in the taxable account.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
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