Question about PP across IRA, Roth IRA, and Brokerage?

[timerscraw]

I currently have my IRA and Roth IRA with Fidelity, while I have a brokerage account at Vanguard.

They all have a variety of ETF's currently ranging from VTI to BND to IWO, IYR and more.

My question is

1. If I wanted to implement PP tomorrow, and say go with VTI, SHY, TLT, and some gold ETF, I would have to sell all of my positions (many of which are currently down based on how the markets have performed recently). So Id have to sell all of this positions and take the losses, any other way to go about this?

2. Sort of in line with that, and the fact that with the Fidelity accounts, Ive already met my limits in contributions for the year, I cant re-balance too easily there. How would you break down the 4 ETF holdings across these 3 accounts?

I know HB would recommend TLT and SHY in tax deferred accounts like the IRA and ROTH IRA, while Gold seems okay in taxable so long as Im not selling and getting hit with capital gains. VTI I've heard is efficient either way. Is that how you guys would do it? Just have the ROTH IRA and IRA only holding TLT and SHY, while the brokerage has gold and VTI?

Looking for advice there. This forums great, thanks in advance!

[moda0306]

I've done recent work on this, and in a low-interest-rate, high-dividend (relatively... 1.9% div vs .crap% on shy) environment, you definitely will be better off trying to get your stocks into an IRA or (preferably) Roth.  TLT should be in the IRA, unless you think it will outperform stocks in the next 5-10 years.  Gold and even cash at this point are fine options for your taxable accounts.

It really helps to look at taxable, Roth, and Traditional IRA accounts the following way to help visualize the benfits of the latter-two over a long time period, especially when you consider the liquidity offered within a roth for periodic "dips" you need to make into your wealth before retirement:

Let's make the following assumptions for contributions to these accounts:

1) They're perfectly tax efficient to avoid having to factor in the "income" tax savings along the way.. think of a 0% dividend growth stock fund with 0% turnover (I know... it doesn't exist... bare with me).

2) To compare apples to apples, in each, you contribute a "net" $10k... you'll see what I mean when I get to the IRA.

3) Each will grow 10x by retirement... so $10k in this fund will grow to $100k when you "reanalyze" what you have.

Taxable Account

Here you put in $10k, and it will grow to $100k in a purely tax-efficient manner, and assuming we still have preferred tax-rates in 30 years for capital gains, will benefit even more than otherwise when sold.  There will be $90k of taxable gain, and at 20% tax (15% + 5% state estimate), this investment will have a NRV (net realizable value) at that time of $82,000.

Roth IRA

I do this one next because its the more logical "next-step" from a taxable account.  Here, you put in the same $10k, and it will grow, likewise, to $100k, but unless congress really gets grabby, it will have a NRV of $100k.  $18k/$82k = 22% higher NRV for having had it grow in a Roth vs a taxable account.  MAYBE there will be a much lower tax rate on cap gains at that point, but that will only reduce your benefit, not reverse it.  Keep in mind, we pretended this was a perfectly tax-efficient stock fund, which don't exist, that didn't pay income or realize capital gains.

Traditional IRA

Think of a Traditional IRA as a Roth IRA with a tax-rate arbitrage component.  In this scenario, assuming a 33% combined tax bracket at contribution, you would have put $15k in the account and gotten $5k back from taxes, netting to a $10k contribution.  If you're in the same tax bracket in retirement as you are now (most people are in a lower bracket), you'll see $150k in that account as the balance, but have to recognize a 33% tax, resulting in a $100k NRV, just like the Roth.

So obviously you can see where this is going.... let's assume you're able to keep yourself in a 20% combined tax bracket in retirement... that $150k in the IRA will have a NRV of $120k.  That means you can actually increase the net return on your investments within an IRA... now the catch 22 is that for some people what helps make this work is having accessible funds in a Roth IRA that aren't taxable in retirement and thus keeps your marginal tax-rate down... but I'd say most Americans will be in a lower bracket in retirement even if they contribute only to an IRA, with 0 going into a Roth.

So, in conclusion, when deciding what to put in these accounts, realize what they can do for you.  It may seem like a "tax-efficient" asset should remain outside your IRA, but if you can contribute $10k, and later it will turn $100k into $120k, (as opposed to the much lower bump-up you'll get from compound cash returns along with tax-rate arbitrage) you'll want as much "muscle" behind that tax-rate arbitrage as possible, not even considering the situation with super low interest rates right now and relatively high dividend rates on VTI.

[moda0306]

Further, it seems you're quite the saver, so at the point that you feel comfortable with your cash-cushion, use I-bonds and ee-bonds as tax-deferred instruments within your taxable accounts that yield far superior (today, and historically) to 1-3 year treasuries.

Lastly, consider an HSA with a high-deductible health plan if you and your family are healthy... these are usually a good bet for young healthy folks, and act as a quasi-IRA if not used for medical expenses by retirement, plus they reduce your FICA & medicare tax if done through an employer.

[timerscraw]

Thank you for both responses Moda, really appreciated.

So I'll look to put TLT and VTI type funds in the IRA/ROTH IRA, while putting Gold and SHY/cash in brokerage.

That seems simple enough.

Thank you.