Order in which to keep assets tax sheltered

[DragonJoey3]

Hey guys, I've been on this forum for a while lurking, but couldn't find the answer to my question, so I figured I would just register and ask.

What order should I keep my assets in tax free accounts?  By that I mean which is the most important asset to keep tax free, and what is the least important.  So if I only get to keep 1/4 of my assets in IRA's for example, should I make that the Bond portion, or stock portion, or what?

I was hoping for a simple ordered list of least to greatest in terms of tax benefits.

MY GUESS is:

1. Stocks (dividends are heavily taxed so make sure this is tax free account if I can)
2. Bonds (again for the dividends)
3. Gold (cause the special tax rate is higher)
4. Cash (cause the yield stinks)

Of course that seems to assume that cash's yield will continue to be low going forward.  What do you guys think?  Is there a set order of assets to place in tax free accounts first?

PS. Hoping to get the new book for Christmas

[melveyr]

Yeah the two things to look at are the taxable income that you are forced to take (through dividends or interest income) combined with your thoughts about the expected return of the asset class.

Your post highlighted the first element, but some people make an argument for the second. For example, have you heard about wealthy investors accumulating huge mega Roths? They loaded up these accounts with extremely high expected return assets because it gives them a huge pool of money that they can later withdraw at a later date tax free.

As an example, even if emerging market stocks paid no yield one might make an argument that putting them in a Roth would make sense over the 30 year Treasury.

It's an interesting complication that makes deciding what to do even harder 

[Libertarian666]

I would NOT count on the appreciation in Roth accounts remaining tax-free forever. That will be a very big pile of money that I doubt the government will keep their hands out of.

[melveyr]

I would NOT count on the appreciation in Roth accounts remaining tax-free forever. That will be a very big pile of money that I doubt the government will keep their hands out of.

If you were really concerned about the government running out of money, wouldn't it be more realistic in your narrative to assume that income tax rates would rise dramatically? In that case money in a held in a Roth that was already taxed at low rates would be a huge benefit.

[Libertarian666]

I assume that all tax rates will rise and that all government promises will be broken.

[kobe1]

Hi DragonJoey and welcome to the forum.

I had the same questions when I began my PP.  There was a current thread that discussed this topic and all participants seemed to agree on which assets should go into what types of accounts.  So I took their advice.  As it turns out, there is more to this decision then just considering tax efficiency.  You need to plan for rebalancing in the future.  I recommend the concept of mini PP's in each type of account.  If you have two tax sheltered accounts, it is not necessary to have two separate PP's.  I would just make sure that you have all assets represented in sheltered and non sheltered accounts.  You might choose to have the assets distributed unequally between the two types of accounts depending on your predictions about the future.

The thread that I saw advised putting gold in taxable accounts because it did not generate any taxable events until it was sold.  So that is what I did.  The good news is that gold went up significantly since I bought it.  The bad news is that I needed to sell some to rebalance and  I had to pay capital gains which I would not have if I had some gold in tax sheltered accounts.  The real question is if you bought 10K worth of gold in an IRA and therefore could not shelter 10K worth of bonds, would the taxes generated by the bonds be more than the capital gains you would have to pay on the gold if it were in the taxable account instead. 

This is the point where I start to get lost, so perhaps others here will be able to share some scholarly insight.

[notsheigetz]

I'm 7 years away from having to take minimum distributions so it makes me nervous when I see my traditional IRA growing a lot faster than my other accounts (long-term taxable investments and Roth IRA). So I've been gradually shifting assets around in the hope they will come out like this....

Traditional IRA (ordinary income rate, probably highest tax)              = lowest growth assets  =  first spent
Taxable (capital gains rate, hopefully lower than ordinary income)    = middle growth              = second spent
Roth IRA (no tax)                                                                                = highest growth              = last spent


This means I have to make some predictions about long term growth but I don't think it is an unsafe bet to assume that gold and stocks are going to do better over time than cash and bonds. And if I happen to guess wrong I don't see much of a downside.

I know this flies in the face of most advice but it makes sense to me. If anybody sees a big hole in my thinking I'm happy to hear it.

[Pointedstick]

notsheigetz, could you do a Roth conversion and transform your traditional IRA into a Roth? You'd take the tax hit, but at least you could do it now and not have to worry about it in the future. You could also structure it strategically so you do it in a low or no income tax state and when your income tax rate is low (i.e. you've just retired).

[notsheigetz]

notsheigetz, could you do a Roth conversion and transform your traditional IRA into a Roth? You'd take the tax hit, but at least you could do it now and not have to worry about it in the future. You could also structure it strategically so you do it in a low or no income tax state and when your income tax rate is low (i.e. you've just retired).

Thankfully, I live in FL which has no income tax but I still haven't given too much thought to the Roth conversion. I'm in the twilight of my career and my wife's career is just starting to take off (she's 17 years younger, BTW) so we're probably pretty close to our peak income years and thus our top tax bracket. I don't know what the tax bite on the Roth conversion would be but I suspect it would be very painful to consider at this time even without the state income tax bite.

I understand you don't have to do the whole conversion at one time so I will definitely be looking into a gradual Roth conversion process when I retire in a few years (assuming this is still allowed). I was planning on trying to delay SS benefits until I'm 70 to get the highest possible benefit and I'm thinking this might even give me an added incentive.

(Off the subject, isn't this a perfect example of what they call a "perverse incentive", how the progressive tax system plus the need to qualify for government benefits forces one to work on strategies to MINIMIZE their income? This seems to have become such a permanent fact of life for most Americans, both rich and poor, that we don't even give much thought to it.)

[yankees60]

Hi DragonJoey and welcome to the forum.

I had the same questions when I began my PP.  There was a current thread that discussed this topic and all participants seemed to agree on which assets should go into what types of accounts.  So I took their advice.  As it turns out, there is more to this decision then just considering tax efficiency.  You need to plan for rebalancing in the future.  I recommend the concept of mini PP's in each type of account.  If you have two tax sheltered accounts, it is not necessary to have two separate PP's.  I would just make sure that you have all assets represented in sheltered and non sheltered accounts.  You might choose to have the assets distributed unequally between the two types of accounts depending on your predictions about the future.

The thread that I saw advised putting gold in taxable accounts because it did not generate any taxable events until it was sold.  So that is what I did.  The good news is that gold went up significantly since I bought it.  The bad news is that I needed to sell some to rebalance and  I had to pay capital gains which I would not have if I had some gold in tax sheltered accounts.  The real question is if you bought 10K worth of gold in an IRA and therefore could not shelter 10K worth of bonds, would the taxes generated by the bonds be more than the capital gains you would have to pay on the gold if it were in the taxable account instead. 

This is the point where I start to get lost, so perhaps others here will be able to share some scholarly insight.

As I've learned along the way it is issues like the above that reinforces (for me) that implementing AND maintaining a classic Permanent Portfolio is not as simple as some seem to believe. Or, (for me) not something to rush into and then later have to redo certain aspects of it once I finally realize all the full implications of maintaining it.

I want to know them all ahead of time, have considered them, set up the plan with knowledge of how I'm going to maintain it. No having to research and make decisions in the future.

[yankees60]

Yeah the two things to look at are the taxable income that you are forced to take (through dividends or interest income) combined with your thoughts about the expected return of the asset class.

Your post highlighted the first element, but some people make an argument for the second. For example, have you heard about wealthy investors accumulating huge mega Roths? They loaded up these accounts with extremely high expected return assets because it gives them a huge pool of money that they can later withdraw at a later date tax free.

As an example, even if emerging market stocks paid no yield one might make an argument that putting them in a Roth would make sense over the 30 year Treasury.

It's an interesting complication that makes deciding what to do even harder 

Of course we have all heard about this recently....

The Billion-Dollar Roth IRA — How One Guy Did It

https://www.irafinancialgroup.com/learn ... -roth-ira/

This is the extreme example of the principle that one should put into a Roth IRA that investment that one expects to have the most growth. Of the four it seems to be the stock investment portion which would be the most likely to do so (keeping in mind Sophie's constant reminding us that gold sales do not get the benefit of capital gains taxation)?

Of course investing it in something like an index fund like Vanguard's Total Stock Market (recently being discussed elsewhere).....one will never come close to accumulating a "huge mega" Roth. But, still, the point is well taken.