I have been debating where, ideally, each asset should be for tax purposes. Assuming one has decided how much of their portfolio they want in tax-deferred accounts, the next question is which assets you want there. Most would say LT bonds, cash, stocks, gold... in that order, should be preferred for one's tax-deferred accounts. I would agree on one level, but there are some factors that change my opinion:
1) It is preferable to have a fully (or close to fully) functioning PP that is liquid, so you're not seeing large swings in your accounts that are accessible at your young 40-year-old age. Also, if you truly have your accounts allocated % wise to tax-deffered vs liquid the way you want them, swings in the assets can scew your preferred liquid/retirement allocation
2) Cash and LT treasuries are a couple of the best assets, inially thought, to put in the retirement account, but here are my two exceptions.
2a) They may throw out taxable interest, but they are less likely to grow to a large balance over time than stocks. One would want the asset that is going to be taxed the most in its entirety to be in their tax-deferred account. This is especially true for stocks vs cash... cash is repeatedly "beaten" by the fed, and you are probably wasting your tax-deferred space on something that isn't going to be taxed that much by the time you retire because it simply doesn't return all that well.
2b) Cash and LT treasuries are extremely helpful during times where it may be much more likely one loses their job. Think of a PP allocation for a construction worker in 2008... sure would have been a bummer to have all his cash/LT in his 401(k) and his dwindling stocks are in a liquid account.
3) I think the increased desire for physical gold, its low outlook for return (IMO, though I only use this as a tax planning indicator, not to tilt/time my PP), its position in the PP of being an asset that does good when things go bad (and you need your liquid wealth), and its not throwing out of dividends/interest keeps that defininitely in the "taxable" account.
Just food for thought.
Tax Deferred VS. Taxable Accounts
Moderator: Global Moderator
Tax Deferred VS. Taxable Accounts
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Tax Deferred VS. Taxable Accounts
Since the historical interest of ST treasuries is greater than the dividend yield of stocks, it makes sense to have cash in tax deferred accounts. But I agree that a portion of the cash should be in accessible accounts for emergencies. And at the moment ST rates are less than the stock market yield, but I don't expect that to last too much longer.
Where things get more interesting is when a Roth is thrown into the mix. I can see an argument where you might want to put stocks and/or LT treasuries into a Roth account since the potential capital gain is larger for those assets.
Where things get more interesting is when a Roth is thrown into the mix. I can see an argument where you might want to put stocks and/or LT treasuries into a Roth account since the potential capital gain is larger for those assets.
"Machines are gonna fail...and the system's gonna fail"
Re: Tax Deferred VS. Taxable Accounts
Pkg Man,
The dividend yield isn't the only thing that's going to get taxed, though. Eventually, you're going to start selling and having to pay between 20% (15 & 5, fed & state), and 40% or maybe even more depending on tax rates on all your capital gains.
The roth vs traditional allocation is a good point and one I'll have to ponder.
The dividend yield isn't the only thing that's going to get taxed, though. Eventually, you're going to start selling and having to pay between 20% (15 & 5, fed & state), and 40% or maybe even more depending on tax rates on all your capital gains.
The roth vs traditional allocation is a good point and one I'll have to ponder.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Tax Deferred VS. Taxable Accounts
Also, considering the I-bond options out there, as well as the state non-taxabillity of treasury interest, I think there is even more of reason to not necessarily waste your tax-deferred space on an asset that most-likely won't grow as much as others.
Keep in mind, I'm using my "most-likely" standard ONLY for tax-planning purposes. I'm not trying to time or skew my portfolio, but simply us a probability system for tax-avoidance.
Keep in mind, I'm using my "most-likely" standard ONLY for tax-planning purposes. I'm not trying to time or skew my portfolio, but simply us a probability system for tax-avoidance.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Tax Deferred VS. Taxable Accounts
Some good thoughts, moda. I especially agree with having a very large portion of the cash outside of tax-deferred accounts. That is especially true in these very low interest rate environments. Savings bonds are a big help here.
In a situation where you have to sell stock, the first line of defense would be the advice you gave a few weeks back on making the most of capital losses. Smart tax-loss harvesting will help here.
The second line of defense is to (when practical) focus on buying up lagging assets to avoid the consequences of a rebalance-triggered sale.
The third line of defense would be to use the stock purchased at the highest basis (that qualifies for long-term gains) to minimize the tax bite when it comes.
The fourth line of defense might be to have a slice of stock held in a tax-deferred account. (I don't have this set up and hadn't really planned to.) Is this what you are suggesting? Maybe enough for one rebalance? It's an interesting idea when you also include the benefit of deferring taxes on the dividends from this slice as well. Not in my immediate plans but I could see the appeal.
I'm not sure that I follow why the total balance is really all that important when there are no immediate tax consequences. The thing about LT bonds that makes me stuff them in my tax-deferred accounts is that they pay off a (relatively speaking) high interest rate, yielding tax consequences that I can't control. With stocks, I'll only face tax consequences when I sell (due to striking a rebalancing band.)moda0306 wrote: 2a) They may throw out taxable interest, but they are less likely to grow to a large balance over time than stocks. One would want the asset that is going to be taxed the most in its entirety to be in their tax-deferred account. This is especially true for stocks vs cash... cash is repeatedly "beaten" by the fed, and you are probably wasting your tax-deferred space on something that isn't going to be taxed that much by the time you retire because it simply doesn't return all that well.
In a situation where you have to sell stock, the first line of defense would be the advice you gave a few weeks back on making the most of capital losses. Smart tax-loss harvesting will help here.
The second line of defense is to (when practical) focus on buying up lagging assets to avoid the consequences of a rebalance-triggered sale.
The third line of defense would be to use the stock purchased at the highest basis (that qualifies for long-term gains) to minimize the tax bite when it comes.
The fourth line of defense might be to have a slice of stock held in a tax-deferred account. (I don't have this set up and hadn't really planned to.) Is this what you are suggesting? Maybe enough for one rebalance? It's an interesting idea when you also include the benefit of deferring taxes on the dividends from this slice as well. Not in my immediate plans but I could see the appeal.
Re: Tax Deferred VS. Taxable Accounts
My post was more focused, in spirit, on cash in the tax-deferred space than LT bonds. I was simply stating that if something is likely to grow more, (ignoring tax implications of the different types of assets in a taxable account), one would want this in their tax-deferred account. Since stocks are likely to grow more than the other assets, one would want to at least consider that as a factor when deciding where it should go.
For me, if my ideal taxable vs tax-deferred portfolio was 50/50, I'd probably keep my defensive plays (gold/cash) in my taxable accounts and my offensive plays (stocks/bonds) in my tax-deferred... mostly because I think the growth of stocks (and dividends) are going to bite me, especially w/ today's rates. Contributing and rebalancing would have to be done in an organized and systematized way to avoid the problems of having my PP out of wack and my taxable/tax-deferred allocation too far out of wack.
Further, remember, if this is money you CAN'T afford to lose, the two main reasons for that are 1) unemployment, and 2) retirement.
I'd think that with unemployment being the main reason I'd need to access my liquid assets, I would not want too much of that to be stocks.
For me, if my ideal taxable vs tax-deferred portfolio was 50/50, I'd probably keep my defensive plays (gold/cash) in my taxable accounts and my offensive plays (stocks/bonds) in my tax-deferred... mostly because I think the growth of stocks (and dividends) are going to bite me, especially w/ today's rates. Contributing and rebalancing would have to be done in an organized and systematized way to avoid the problems of having my PP out of wack and my taxable/tax-deferred allocation too far out of wack.
Further, remember, if this is money you CAN'T afford to lose, the two main reasons for that are 1) unemployment, and 2) retirement.
I'd think that with unemployment being the main reason I'd need to access my liquid assets, I would not want too much of that to be stocks.
Last edited by moda0306 on Mon Feb 21, 2011 9:30 am, edited 1 time in total.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine