Asset Location

[WildAboutHarry]

I've always thought it best to put higher risk assets into Roths and lower risk assets into regular IRAs/401(k)s.  You know, to get the highest possible tax-free payouts.  But Harry's rule #4 - No one can predict the future - would suggest that one should strive to put a mini-4x25 portfolio in each tax-treatment account type.

So, one PP allocation in Roth accounts, another in traditional IRA/401(k) accounts, another in taxable accounts, etc.  At least to the extent you can.  Obviously there are constraints to such an approach.  Physical gold is probably best in taxable, investment options in various plans could constrain flexibility, etc.

Does anyone do this?

[sophie]

Sounds like way too much effort for minimal benefit, and I see that you're tying yourself up in knots.  It's sort of like that old riddle about the three guys staying at a hotel with the dishonest bellboy:  you have to ask the question correctly.  It's not about trying to predict what the assets will do, it's about making sure the tax treatment of each asset is least injurious, and they are placed in a way that is most advantageous for you. 

For example, you probably keep some paper gold in a tax deferred account just in case you have to sell it to rebalance.  Conversely, physical gold in best in taxable, because the storage costs are lowest when it's under your direct control and it's unlikely you'll have to sell it.

Long bonds are a no-brainer to keep in tax-deferred, because the interest would otherwise suffer more than any other PP asset from taxes, and capital gains is only rarely an issue.  Similarly, short bonds would also do well in tax-deferred, although as long as the rates stay as low as they are now, it doesn't matter if they're in taxable.

Cash that you want for your emergency fund has to be someplace you can lay your hands on it quickly, which usually means in taxable but a Roth could work too.  I bonds are, by definition, in taxable space, although they function like a non-deductible IRA, only better.

The only outstanding question is where to put stocks.  If you have a very long time horizon it's probably a good idea to put them into a Roth, since over time they will appreciate more than other asset classes. They're not bad in taxable, because of the favorable treatment of dividends and capital gains (which may change soon though).  They probably end up in 401K plans by default, though, because of the need to work with limited investment options.  Which is a shame, because I think that may possibly be the worst place for them.

[Pointedstick]

That's exactly what I've done, as a matter of fact. My 401k is its own PP, my wife and my Roth IRAs combine to form a second PP, and I have a third taxable PP. Part of the reason why I did this was to diversify my exposure to different versions of the individual asset classes (VTI vs SCHO, EDV vs TLT, GTU vs IAU, etc), part of the reason was to diversify across brokerages, and part of the reason was a hedge against congress reducing or increasing the utility of any individual account type.

For example maybe congress will nationalize 401ks, maybe they'll dramatically reduce the Roth IRA income limit, or maybe (yeah right) they'll eliminate the capital gains and dividend taxes. I wanted to have a full PP ready to take advantage of or protect me from any of these events.

Also, it's nice to not have the headache of somehow transferring money between different account types with differing tax treatments come rebalancing time.

[dualstow]

...
 But Harry's rule #4 - No one can predict the future - would suggest that one should strive to put a mini-4x25 portfolio in each tax-treatment account type.

I'm not sure that Harry would agree. In his radio shows he talked about what he would put in tax-deferred in order of importance, though cash was actually earning decent interest when the show came out. I'm not positive, but I think it went:
1. Bonds
2. Cash
3. Stocks
4. Gold

Does anyone do this?

I'm moving in that direction, but only because my tax-deferred space did not grow quickly enough to keep up with my hunger for treasurys. As I divest myself of my stock-heavy vp, I have bought some long bonds in taxable -- in today's auction, in fact -- because the 401(k) is just full.

The 401(k) does have a little bit of stock in it, but instead of selling that to make room for bonds, I have left it alone. I've been entertaining the idea of putting a little GTU in there, getting closer to a mini-pp as you described, after the next annual contribution. But, I can't bring myself to put cash or gold in, so far. Seems like a waste of tax-deferred space. On the other hand, if I had to rebalance out of gold, tax-deferred would be the most advantageous place from which to sell. So...competing voices.

[sophie]

I started to go in that direction, with separate tax-deferred and taxable PPs.  Then I realized that I'd pay dearly for that luxury because of tax rates, as opposed to following HB's suggestions. 

For example, if I were to sell gold in my taxable account, I'd lose 39% of the gains to taxes.  The separation also means that most of your gold is paper rather than physical, which also costs in the long run.  Similarly, income from the long bonds would be decimated.  Better to focus attention on taking as much advantage of tax-advantaged space as you can.  Although, each person is different.  If you live in Alaska and are in the 15% tax bracket, it wouldn't matter so much.

[WildAboutHarry]

I will have to go back and listen to the Harry Radio show mentioned. 

Let's assume you could place assets according to dualstow's post:

Bonds: 401(k)/tIRA
Cash: 401(k)/tIRA
Stocks: Roth
Gold: Taxable

If stocks got creamed you would lose much of those Roth tax-free distributions, assuming stocks took a while to recover (very bad for those in/near retirement).  You would also be forced to either liquidate gold, bonds, or cash and then locate stocks in different tax-treatment space (taxable and/or 401(k)/tIRA space).

If gold got creamed you could tax-loss harvest, but so what?  You would have no gains to offset.  Assuming LT bonds were skyrocketing at the same time, capital gains there couldn't be sheltered by the losses in gold.  And gold would then end up in either Roth or 401(k)/tIRA space.

Repeat for LTT...

I think Rule #4 might ultimately trump Harry's radio show comments on asset placement, but perhaps it also matters where you are in the investing life cycle.  Younger investors might benefit from an asset location that minimized taxes, older investors might want to move toward a 4x25 in each tax-type, to the greatest extent possible.

Further, having mini 4x25s in various tax treatments makes rebalancing a bit easier, from a tax standpoint.  You can sell/buy in combinations that minimize taxable gains.

[dualstow]

I think Rule #4 might ultimately trump Harry's radio show comments on asset placement, but perhaps it also matters where you are in the investing life cycle.  Younger investors might benefit from an asset location that minimized taxes, older investors might want to move toward a 4x25 in each tax-type, to the greatest extent possible.

Further, having mini 4x25s in various tax treatments makes rebalancing a bit easier, from a tax standpoint.  You can sell/buy in combinations that minimize taxable gains.

Although I have no idea why this stems from rule 4, I certainly agree that rebalancing from tax deferred is best. That's why it's so important to max out those retirement contributions. If I'm lucky enough to rebalance out of gold, as some here have already done 2 to 3 times, I'll happily pay my taxes in exchange for selling high and buying low. (Also, I'll be selling tax-friendly GTU and not my coins).
But, your thread does have me thinking that maybe I should try that gold-eagle-in-IRA deal offered by Fidelity.

[WildAboutHarry]

Although I have no idea why this stems from rule 4

The relationship between Rule #4 and asset location popped into my head kind of randomly (I hate it when that happens).

One of the main factors in considering asset location is predictions, guesstimates, WAGs, about future tax rates at account draw down.  If your future tax rates are going to be higher than at present, Roth is the way to go.  If otherwise, 401(k) or tIRA.  In essence optimizing distribution of assets among Roths, taxable accounts, and 401(k)s/tIRAs requires predicting the future.

But as Rule #4 suggests, you can't predict the future.  So cover all possible futures, to the greatest extent possible, by spreading the 4x25 around.

[dualstow]

Ah, gotcha.

I have an asset location question that that I often like to ask friends: is it possible to put too much into retirement accounts?
It's a serious question.
Due to the Solo 401(k) set-up, I am able to put a huge % of my earnings into tax-deferred. In fact, the only reason I can afford to do so is by cannibalizing my taxable account. I mean, after I pay my bills and put 5K into a Roth, there isn't enough left from my earnings to fund the 401(k), technically. Between dividends and occasional stock sales, I am able to come up with enough cash to fund the solo, however. I have been putting in the maximum.
But, with about 15 years to go before I hit age 65, I wonder if there's some point at which I should cool it and keep money/investments in taxable.

[KevinW]

I have an asset location question that that I often like to ask friends: is it possible to put too much into retirement accounts?
It's a serious question.

IMO, one needs to have an emergency-fund-sized chunk of cash in taxable, and holding some gold as physical bullion is a good idea. After that there is no such thing as too much deferral. There are so many ways of withdrawing money that I'm not really worried about it. There's the 72t, Roth contribution withdrawals, exceptions for buying a house or college, all the rollover tricks, etc. Also if push comes to shove you can always just pay the 10% early withdraw penalty, which is bad, but not *that* bad.

[dualstow]

That's good advice, Kevin. Thank you!

[HB Reader]

I have an asset location question that that I often like to ask friends: is it possible to put too much into retirement accounts?
It's a serious question.

IMO, one needs to have an emergency-fund-sized chunk of cash in taxable, and holding some gold as physical bullion is a good idea. After that there is no such thing as too much deferral. There are so many ways of withdrawing money that I'm not really worried about it. There's the 72t, Roth contribution withdrawals, exceptions for buying a house or college, all the rollover tricks, etc. Also if push comes to shove you can always just pay the 10% early withdraw penalty, which is bad, but not *that* bad.

Based on my experience, I tend to agree.  At a minimum, try to at first have a substantial (relative to your overall holdings) chunk of cash and physical bullion or coins completely free of any restrictions.

After that, just try to have two or more asset classes within each tax-holding category (i.e., regular holdings, 401K, IRA, Roth IRA).  That way no extreme move in any investment market will completely devastate a particular holding category within your portfolio.  Sometimes you might want to be a little creative (like using some zero coupon Treasuries across categories to goose up your overall bond investments, or slightly altering your current mix of 401K contributions versus IRA or regular investments) to keep things balanced, but in general you'll probably end up better off putting as much as possible into tax-deferred categories.  If something really unexpected happens (like losing your job, or a debilitating illness), you might have to pay some penalties, but it probably won't be the end of your investment world.  When dealing with taxes and related matters, you can't organize your life and investments to come out absolutely perfect under every conceivable contingency.  Just try to organize things in accordance with what you think is likely, but such that you won't be devastated (i.e., not in debt or with heavy liability) in the event of extreme unexpected events.     

In hindsight, I think this was most vexing challenge in maintaining a PP that I ran into during the 1980s and 90s.  It is the only aspect of my financial life that I think I might have actually improved somewhat by thinking about the future.  Not that I could've foreseen market developments or my future in any reliable way, but that after settling into a particular career I could have anticipated the probability (and organized my investment thinking around the idea) that a large or major portion of my future savings would likely end up in tax-deferred categories.

Just some thoughts.  I hope they make sense to some of you.

[WildAboutHarry]

... just try to have two or more asset classes within each tax-holding category

While I think the ideal is probably a perfect mini 4x25 in each type of tax treatment, two or three in each accomplishes nearly the same thing and is more likely to be practical given the investment restrictions imposed by various account providers and investment types.

After that there is no such thing as too much deferral.

I always like paying taxes later versus now, so I maximize deferrals over funding taxable investment accounts.  If possible, though, having some taxable investments (in addition to emergency cash and physical gold) outside of tax-deferred space is a good idea, if you can pull it off.

One deferral decision is whether to Roth or not.  I live in a high-tax state and intend to retire in a state with no state income tax.  Roths make less sense in those circumstances than a regular 401(k) or tIRA since you would never pay state income tax on those withdrawals.  But since the future is unknowable, I still pop a bit into Roths, just in case  

[dualstow]

FYI, that quote above is from KevinW, not me.  :)

The amount I can put into a Roth ($5K) is so small that I just fund it every year without a second thought. My 401(k) is a solo that allows me to put much more in. There will probably come a time when I will have to reduce contributions if I want to keep some cash and gold in taxable. But, it's a high class problem, for sure.

[WildAboutHarry]

Oops.  Not enough coffee.

On your Solo 401(k) do you have a Roth option?  If so, how do you decide which route to take?

[BearBones]

Ah, gotcha.

I have an asset location question that that I often like to ask friends: is it possible to put too much into retirement accounts?
It's a serious question.
Due to the Solo 401(k) set-up, I am able to put a huge % of my earnings into tax-deferred. In fact, the only reason I can afford to do so is by cannibalizing my taxable account. I mean, after I pay my bills and put 5K into a Roth, there isn't enough left from my earnings to fund the 401(k), technically. Between dividends and occasional stock sales, I am able to come up with enough cash to fund the solo, however. I have been putting in the maximum.
But, with about 15 years to go before I hit age 65, I wonder if there's some point at which I should cool it and keep money/investments in taxable.

I was advised by my accountant that it is nice to have savings distributed among both taxable and tax deferred accounts. We cannot predict what tax rates will be at the time of withdrawal, and it might be nice to have the option of not withdrawing from tax deferred space.

[BearBones]

I created a thread on a similar topic in January of last year. Lots of good advice.
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=8

It is easy to figure out where assets should go now, but it is impossible to predict where they should be in the future. If asymmetrically distributed based on current conditions (e.g., LTTs in tax deferred account), one of the "asset spaces" could get decimated. And if this is a tax deferred space, it may become impossible to add enough money to it for it to become functional again.

[dualstow]

Oops.  Not enough coffee.

On your Solo 401(k) do you have a Roth option?  If so, how do you decide which route to take?

Does a Roth option mean the option to convert everything to a Roth? I don't know, but I'll definitely be reviewing the rules with my new accountant this winter. At this point, all I know is that I can contribute to both, so that's what I've been doing. A Roth, in my opinion, is the best kind of account. I wish I could put as much in there as I do in the solo. If I could, I wouldn't even bother with a 401(k).

[sophie]

If asymmetrically distributed based on current conditions (e.g., LTTs in tax deferred account), one of the "asset spaces" could get decimated.

Indeed.  I tried to put at least two non-cash assets into each tax-advantaged account for exactly that reason, plus to make for convenient rebalancing.  Since the PP assets are mutually negatively correlated over long periods of time, it's unlikely (though not impossible) for an account to get decimated.  And, you're way better off than the poor soul who fills a tax-advantaged account with individual stocks.

There's an interesting chart in HB's "Best Laid Plans" book showing the benefits of deferring taxes on investment contributions.  Until I saw that chart, I thought 401K's were sly device to increase your taxes - which they could be depending on your tax situation.  For me it's a no-brainer to maximize my contributions, but if you live in a state with no income taxes, then you could really hurt yourself if you end up converting capital gains (15% at the moment) to a 28% federal tax liability.  If you figure you will be mainly in the 15% tax bracket after retirement, though, then it's a wash.  There is, though, a benefit from allowing the money to compound tax free, which is where HB's chart came into the picture.  That assumes a long time horizon though.  15 years may be long enough.

Regarding the Great Roth Debate:  I see no reason not to fund one to the maximum if you're eligible.  You have paid the taxes already, and now it's a question of whether you will also pay taxes on the earnings.  A Roth conversion is a different story of course.  I had the misfortune to do that right before the 2000 crash (long painful story omitted).  You can withdraw any contributions that have been fermenting in the Roth for at least 5 years, so you can tap it as a source of emergency funds if need be, as long as you keep records of your contributions.  It's true, though, that you don't get to harvest any capital losses....unless, can you shift securities out of the Roth in order to score the loss? 

However, note that if you rebalance out of an asset, it will have gained, not lost.  This is true whether you're rebalancing due to hitting a band, or because you're drawing off cash in retirement - as long as you're not burning up the principle.

[BearBones]

If you figure you will be mainly in the 15% tax bracket after retirement, though, then it's a wash.  There is, though, a benefit from allowing the money to compound tax free, which is where HB's chart came into the picture.  That assumes a long time horizon though.  15 years may be long enough.

Regarding the Great Roth Debate:  I see no reason not to fund one to the maximum if you're eligible.  You have paid the taxes already, and now it's a question of whether you will also pay taxes on the earnings.  A Roth conversion is a different story of course.

Good point! I have about 10-15 years 'till retirement and will likely be in high bracket. Right now, I put away maximum. Wonder if I should stop or do a Roth conversion. Any suggestions?

[sophie]

Quote from: BearBones on Today at 11:24:57 AM
Quote from: sophie on Today at 10:32:50 AM
If you figure you will be mainly in the 15% tax bracket after retirement, though, then it's a wash.  There is, though, a benefit from allowing the money to compound tax free, which is where HB's chart came into the picture.  That assumes a long time horizon though.  15 years may be long enough.

Regarding the Great Roth Debate:  I see no reason not to fund one to the maximum if you're eligible.  You have paid the taxes already, and now it's a question of whether you will also pay taxes on the earnings.  A Roth conversion is a different story of course.

Good point! I have about 10-15 years 'till retirement and will likely be in high bracket. Right now, I put away maximum. Wonder if I should stop or do a Roth conversion. Any suggestions?

If you are in a high bracket now, put away as much as possible in a traditional IRA or 401[k] and take the tax break.  Take the money [tax break] and run.

I suggest doing both if you can.  I agree that the tax deduction for the 401K is worth taking especially if your marginal tax rate is high.  You can contribute to the Roth in addition if you meet the income limits, or use the backdoor method if you don't already have a deductible IRA.

Who knows what the shysters in congress will do to the tax treatment of Roths 15 years from now when they are even more broke.

The worst they can do is start taxing earnings, which I could see them doing for income over certain limits, say.  You've already paid taxes on the contributions. But that's still no worse than simply leaving the money in taxable.

[WildAboutHarry]

Does a Roth option mean the option to convert everything to a Roth? I don't know, but I'll definitely be reviewing the rules with my new accountant this winter. At this point, all I know is that I can contribute to both, so that's what I've been doing. A Roth, in my opinion, is the best kind of account. I wish I could put as much in there as I do in the solo. If I could, I wouldn't even bother with a 401(k).

I think a solo 401(k) can either be the Roth flavor or regular, but probably depends on who set up your plan.

[BearBones]

A bit off topic from initial post, but on topic with recent posts: At some point in one's career, it seems that it would make sense not to add to tax deferred acts, right? Depends on the number of years for compounding, the current tax rates compared to historical, and the current bracket compared to anticipated tax bracket at retirement. Given the current federal debt plus unfunded liabilities, the probable need for ongoing stimulus, and the historically low tax rates at present, I am suspicious that I may be kicking myself for continuing to defer on any taxes. In fact, I wonder if I should do Roth conversion for entire 401k and pay taxes now. Any thoughts?