Asset Location

[Raj]

This may be a basic questions for a lot of you, but i have been struggling with this for sometime now:

For those who have a "slice and dice" portfolio, for the following category of funds........

1. US market:

a) Total stock market or Predom Large cap/ S&P eg. VTSMX or VFIAX

b) Mid cap (for those who want a tilt) eg. VIMSX

c) Small cap (for those who want a tilt) eg. VISVX

2. International:

a) Total international eg. VGTSX

b) Emerging markets (for those who want a tilt) eg. VEMAX

3. REITS: VGSIX

..................................What is the preferred order of accounts to hold each of the category of funds (for max. tax efficiency)?

Roth Vs 401k/403b Vs Taxable

From my basic reading REITS go in Roth and Bonds could go either way (munis in taxable). What is the 1st preferred and the 2nd preferred type of account (if there is no space in the 1st preferred type of account) for the other categories mentioned above?

Thanks.

[PhysicianOnFIRE]

I would plug the funds into Morningstar to see what the dividends and turnover are for each fund.

I agree with REIT in Roth. I have US Stocks in all accounts. My placement of mid / small tilt has more to do with availability of quality funds in the tax-deferred accounts, so I have them in 401(k) and 457(b).

Last I checked, emerging markets were less tax-efficient than developed market and the developed market-heavy total international. I keep emerging markets in Roth and developed / total international in taxable. Keeping emerging markets out of taxable causes me to miss out on the tax benefit of foreign tax paid, so that is a caveat.  More on my portfolio and rationale here.

Best,

-PoF

 

 

 

[Lithium]

PhysicianOnFIRE wrote:

I would plug the funds into Morningstar to see what the dividends and turnover are for each fund.

I agree with REIT in Roth. I have US Stocks in all accounts. My placement of mid / small tilt has more to do with availability of quality funds in the tax-deferred accounts, so I have them in 401(k) and 457(b).

Last I checked, emerging markets were less tax-efficient than developed market and the developed market-heavy total international. I keep emerging markets in Roth and developed / total international in taxable. Keeping emerging markets out of taxable causes me to miss out on the tax benefit of foreign tax paid, so that is a caveat.  More on my portfolio and rationale here.

Best,

-PoF

 

 

 

Click to expand...

I love this thread on bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?t=188491

Its worth replicating for the individual investor.  For me, I found that emerging markets etf's were more tax efficient than developed due to lower dividends.  IEMG seemed to do the best.  This doesn't even account for the fact that emerging markets are easier to TLH.

you have to know the QDI ratios and your state and marginal tax ratios to really choose the best funds/etf's.

[The White Coat Investor]

It has to really be personalized. You don't mention what accounts you have. The answer to the question you actually asked (not the one you probably meant to ask, which is where should YOU locate these assets) is to put them all in a Roth account.

[Virajith Wijeweera]

You probably want to place the asset classes (i.e. Small Cap, Value, REIT's, International, EM) with highest growth potential into the Roth.  Although, lately International and EM have been lagging domestic equity, and large cap stocks have outperformed small cap.  Roth withdrawals are tax-free and there is no RMD requirement either (until the Roth is inherited).

Taxable Fixed Income funds should be in retirement accounts because the dividend distributions are non-qualified.  Same logic applies to REIT distributions as well (although some may be qualified).

If tax-efficiency is a main concern, you can also look into Tax-Advantage/Tax-Managed funds in the taxable account.

[Raj]

@WCI - Yeah the ability to put everything in Roth would have been great. Currently as a fellow my portfolio is all Roth (relatively small portfolio though). However as i start working as an attending (hospital employed) in August, things are going to change. I will have access to 403b, 457 and backdoor roth for me and spouse. I do not know my fund choices with 403 b and 457 yet. Hopefully i can find index funds with expense ratios <0.5%. I would have an effective federal tax rate of ~27% and marginal tax rate of 39.6% once on an attending's salary. No state tax. 

Every year, my new roth space (from backdoor IRA) would be <10% of my total savings for the year. Thus i would have to put most of my funds either in 403b or a taxable account. Thus trying to figure out where to locate funds. 

@PhysicianonFIRE- Good post on your AA. My target AA is similar to yours. You have created a good amount of Roth space.

This year i will have a relatively lower tax rate (effective 17%, marginal 28%) than the next year, as i am spending the first half of the year in a low paying fellowship. I am thinking about making my 403b contributions as roth for this year. That should help me get some extra roth space. Any comments?

@Lithium- Thanks for the link.

[Raj]

Virajith Wijeweera wrote:

You probably want to place the asset classes (i.e. Small Cap, Value, REIT’s, International, EM) with highest growth potential into the Roth.  Although, lately International and EM have been lagging domestic equity, and large cap stocks have outperformed small cap.  Roth withdrawals are tax-free and there is no RMD requirement either (until the Roth is inherited).

Taxable Fixed Income funds should be in retirement accounts because the dividend distributions are non-qualified.  Same logic applies to REIT distributions as well (although some may be qualified).

If tax-efficiency is a main concern, you can also look into Tax-Advantage/Tax-Managed funds in the taxable account.

Click to expand...

Thanks Virajith. My Roth accounts are not going to have space for all the high growth potential funds. Will have to stuff most of them in tax-deferred and taxable accounts.

[Josh0731]

Of course everyone here has given you good, accurate answers.  I would simply add that these are suggested guidelines to maximize tax efficiency. Don't stress yourself out about it.  Follow the guidelines in a general sense to maximize your returns, but we are talking about small percentage (or fractions of a percent) differences here.  If you're earning a decent salary and putting away a good amount of money then you won't have enough super-tax-protected space in which to put everything, so just stick it somewhere and go about the rest of your life.

[The White Coat Investor]

Virajith Wijeweera wrote:

You probably want to place the asset classes (i.e. Small Cap, Value, REIT’s, International, EM) with highest growth potential into the Roth.

Click to expand...

When giving this frequently given advice it is important that it be accompanied by the information that while doing this does increase your expected return, it does so by increasing the risk of your portfolio.

https://www.whitecoatinvestor.com/what-should-i-put-in-my-roth-friday-qa/

It's not a free lunch.