I am 50 and likely towards the peak of my earning years, but I am really starting to think about when I begin drawing on our retirement investments in 10-15 years. I have read that the most typical order for drawing down on investments in retirement is:
First - Taxable & Reserve Cash
Second - Tax Deferred
Third or maybe never - Roth
From the way I understand it, this makes sense in that you are reducing your tax burden by keeping the tax advantaged accounts growing as long as possible. I assume that I will have a lower income in retirement, so this seems pretty logical. In thinking about AA placement while still in the accumulation phase, I am curious about strategies. My wife is 4 years younger than me. Right now our portfolio is roughly split into thirds with taxable, deferred, and Roth. I am rolling over an old 401K into my wife's traditional IRA, and I'm about to rebalance everything into what I hope will be a smart plan. In relation to the order of drawing down in the list above, does my thinking make sense as a logical strategy?
Taxable Account - No Bonds - While having some emergency cash, I don't want to pay taxes on bond dividends. That is what I have seen the most as conventional wisdom on this board and in the Wiki. I do have a little bit of I Bonds, because I like that they can be used for education without the growth being taxed. Otherwise, I would think that I can keep the taxable account at 100% stocks, and just draw down on that first while rebalancing in the tax advantaged accounts to maintain my desired AA at the time.
2. Tax Deferred - 90?% to 100% of Bond Allocation - I read recently here that it makes sense to keep all (or maybe most) of your bonds in Tax Deferred as this slows down the growth that will be a tax burden when used. Rebalancing into bonds in the Roth while drawing on tax deferred gives the stock in the Roth more time to grow. I thought this was interesting and really made sense.
3. Roth - 0% to 10% Bond Allocation - This is what's at the heart of my question - about placing bonds into Traditional vs. Roth. It is somehow overly risky to keep no bonds in the Roth? If I am most likely to be drawing on the Roth last, wouldn't I want it to be in the most aggressive of the categories?
For example, let's say I had a 750K portfolio and wanted a 75/25 AA, and each category (taxable, traditional ira & 401K (deferred), Roth) had 250K. It would break down roughly into $562K in stocks and $187K in bonds.
250K - Taxable, 100% Stock
250K - Traditional IRA / Deferred 401Ks - 63K Stock / 187 Bonds
250K - Roth IRA - 100% Stock
I would like to rebalance into the 3 categories, but I am also thinking of upcoming contributions for 10-15 years. Is there any reason to have bonds in the Roth in this situation before drawing down (and rebalancing to keep AA)? Should future tax deferred money be used to buy more bonds to maintain AA so that the taxable account is the smallest of the categories at some point? I will likely not be able to completely max out all of the tax advantaged account every year for a while, so no new money will be going into taxable. I realize there is Social Security, Health Care expenses, etc, to consider, but I'm hoping to just get some thoughts on bond placement amounts the taxable, deferred, and Roth.
Hope I've made sense - thanks!
First - Taxable & Reserve Cash
Second - Tax Deferred
Third or maybe never - Roth
From the way I understand it, this makes sense in that you are reducing your tax burden by keeping the tax advantaged accounts growing as long as possible. I assume that I will have a lower income in retirement, so this seems pretty logical. In thinking about AA placement while still in the accumulation phase, I am curious about strategies. My wife is 4 years younger than me. Right now our portfolio is roughly split into thirds with taxable, deferred, and Roth. I am rolling over an old 401K into my wife's traditional IRA, and I'm about to rebalance everything into what I hope will be a smart plan. In relation to the order of drawing down in the list above, does my thinking make sense as a logical strategy?
Taxable Account - No Bonds - While having some emergency cash, I don't want to pay taxes on bond dividends. That is what I have seen the most as conventional wisdom on this board and in the Wiki. I do have a little bit of I Bonds, because I like that they can be used for education without the growth being taxed. Otherwise, I would think that I can keep the taxable account at 100% stocks, and just draw down on that first while rebalancing in the tax advantaged accounts to maintain my desired AA at the time.
2. Tax Deferred - 90?% to 100% of Bond Allocation - I read recently here that it makes sense to keep all (or maybe most) of your bonds in Tax Deferred as this slows down the growth that will be a tax burden when used. Rebalancing into bonds in the Roth while drawing on tax deferred gives the stock in the Roth more time to grow. I thought this was interesting and really made sense.
3. Roth - 0% to 10% Bond Allocation - This is what's at the heart of my question - about placing bonds into Traditional vs. Roth. It is somehow overly risky to keep no bonds in the Roth? If I am most likely to be drawing on the Roth last, wouldn't I want it to be in the most aggressive of the categories?
For example, let's say I had a 750K portfolio and wanted a 75/25 AA, and each category (taxable, traditional ira & 401K (deferred), Roth) had 250K. It would break down roughly into $562K in stocks and $187K in bonds.
250K - Taxable, 100% Stock
250K - Traditional IRA / Deferred 401Ks - 63K Stock / 187 Bonds
250K - Roth IRA - 100% Stock
I would like to rebalance into the 3 categories, but I am also thinking of upcoming contributions for 10-15 years. Is there any reason to have bonds in the Roth in this situation before drawing down (and rebalancing to keep AA)? Should future tax deferred money be used to buy more bonds to maintain AA so that the taxable account is the smallest of the categories at some point? I will likely not be able to completely max out all of the tax advantaged account every year for a while, so no new money will be going into taxable. I realize there is Social Security, Health Care expenses, etc, to consider, but I'm hoping to just get some thoughts on bond placement amounts the taxable, deferred, and Roth.
Hope I've made sense - thanks!
Statistics: Posted by brocker — Thu Oct 03, 2024 5:53 pm — Replies 3 — Views 243