On Nov 10, 9:31 am, "Elle" <honda.lion...[at]nospam.earthlink.net> wrote:
- quote -

You are reading way too much into my simple announcement of the
parameters of each scenario. I did not combine both return and yield
together. The yield number was simply to describe how much of the
return was taxable each year versus how much was deferred until time
of sale. I absolutely did not combine return + yield together. Look at
the bond parameters where I state 5% return + 5% yield. If it was
combined together, the bond numbers would be way higher.

<wyu[at]talisys.com> wrote
- quote -

I think I understand why you are putting some emphasis on
stock yields (= dividend rate). It's because the tax rate is
often different on dividends than it is on capital gains.
But the notion that yields rise over the 20 years seems a
bit off. Also, I am not sure whether you are combining
principal returns and dividend yields to get total return;
if you are, that also seems off.

First, it's true that historically, the S&P 500's dividend
yield has averaged about 4-5%. But the dividend yield has
been below 3% for about the last twenty years.Second, the
much quoted historical return on stocks of about 10% already
takes into account the dividend yield. Lastly, in general
when dividend yield rises, the stock market has declined,
lowering cap gain returns. Thus any scenario you list where
stock return and yield exceed about 10% seems unrealistic.

So many unknowns exist that I might not lose too much sleep
over any of the options you listed. Perhaps one should go
with the one that seems best and be prepared to adjust.

First and foremost, always live within one's means, and
always plan for disaster, be it retirement needs or
unexpected illness.

On Nov 9, 9:33 am, "Elle" <honda.lion...[at]nospam.earthlink.net> wrote:
- quote -

Since I love to run numbers, let's do a 20 year project based on
increasing tax rates. In the first case run, both income and cap gain
taxes increase at 0.5% a year.

Option 1:

401K: 50K Bonds
5% return
5% yield
tax: year 1 = 30% increasing to year 20 = 39.5%
after tax balance: 80K

Taxable: 50K Stocks
10% return
2% yield
tax: year 1 = 22.5% increasing to year 20 = 32%
after tax balance: 235K

Combined Total: 315K

Option 2:

401K: 50K Stocks
10% return
tax: year 1 = 30% increasing to year 20 = 39.5%
after tax balance: 203K

Taxable: 50K Bonds
5% return
5% yield
tax: year 1 = 30% increasing to year 20 = 39.5%
after tax balance: 95K

Combined Total: 298K

Bonds in 401K/stocks in taxable continue to do better than the
inverse. Now let's see what happens if capital gain taxes increase
faster than income taxes until they both hit the same 39.5% in year
20.

Taxable: 50K Stocks
10% return
2% yield
tax: year 1 = 22.5% increasing to year 20 = 39.5%
after tax balance: 216K

Combined Total: 296K

296K just about matches the 298K number from holding stocks in 401K
and bonds in taxable. So if the yield remains the same, it would take
elimination of the LTCG/QDIV rate at the end of the 20 year period.
Now let's see what happens if the yield also increases to 5% by the 20
year period.

Taxable: 50K Stocks
10% return
yield: year 1 = 2% increasing to year 20 = 5%
tax: year 1 = 22.5% increasing to year 20 = 39.5%
after tax balance: 212K

Combined Total: 292K

2% downside if both yields & tax rates turn against you. 6% upside if
today's favorable conditions for stocks in taxable accounts remain in
place.

<wyu[at]talisys.com> wrote
- quote -

Or IMO, today's "low tax rates on stock dividends and
capital gains world." :-)

I have not checked all your math, but the general result is
consistent with the point Joetaxpayer and others make here
often lately: Taxing withdrawals from one's 401(k) at
ordinary income tax rates combined with the current low tax
rates on dividends and capital gains frequently argues for
using taxable accounts instead of 401(k)s. (Of course, the
matching of 401(k)'s still means one should contribute up to
the match of 401(k)'s. But after the match? This is
definitely something each individual should consider
carefully.)

wyu[at]talisys.com wrote:

- quote -

[snip nice analysis]

- quote -

Thanks to you and Tad both for some interesting ideas on the subject.
I'll review them carefully.

- quote -

Yes, in fact I have quite a bit of new money coming in. Right now I'm
maxing the 401(k), including catch-up. I can throttle that back to
increase the accumulation rate in the taxable account if needed for
rebalancing purposes.

I think I'm getting close to a plan here. I should have mentioned that
I'm an engineer, so plans are important




Brian

On Nov 8, 3:59 pm, Tad Borek <bore...[at]pacbell.net> wrote:
- quote -

Today's low yield world:

Option 1: Hold bonds in 401K, stocks in taxable

401K: 50K Bonds
5% return
30% income tax
after-tax total: 93K

Taxable: 50K Stocks
10% return
2% yield
22.5% tax (15% LTCG, 5% state, 2.5% non-LTCG)
after-tax total: 284K

Combined balance: 377K

Option 2: Hold stocks in 401K, bonds in taxable

401K: 50K Stocks
10% return
30% income tax
after-tax total: 235K

Taxable: 50K Bonds
5% return
5% yield
30% tax
after-tax total: 103K

Combined balance: 338K

A resounding victory for Bonds in 401K and Stocks in Taxable if stock
yields remain in the 2% range.

-----

Let's now try this same scenario if stocks returned back to historic
5% yields.

401K: 50K Bonds
5% return
30% income tax
after-tax total: 93K

Taxable: 50K Stocks
10% return
5% yield
22.5% tax (15% LTCG, 5% state, 2.5% non-LTCG)
after-tax total: 265K

Combined balance: 358K

Bonds in 401K still win if yields go up to 5%. It would take dividend
yields to be 9% to finally hit the same 338K

-----

What if long term cap gains & qualified dividends was bumped up to
20%?

401K: 50K Bonds
5% return
30% income tax
after-tax total: 93K

Taxable: 50K Stocks
10% return
5% yield
27.5% tax (20% LTCG, 5% state, 2.5% non-LTCG)
after-tax total: 245K

Combined balance: 338K

So the combination of both 5% yields and and increasing LTCG/QDIV rate
would do it. But if we also saw corresponding increases on the regular
income tax rate, that would tilt it back in favor of bonds in 401K.

-----

Rebalancing would be an issue if you were in a state with no inflow/
outflow. During accumulation, you can direct new contributions to
rebalance. During drawdown, you can sell the asset classes out of
balance for your living expenses.

On Nov 8, 2:43 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

Ok, there's a tiny bit of turnover but for most broad-based indexes,
it's neglible. Often it is zero with offsets from losses in previous
years. I'm in 8 different Vanguard stock index funds and not a single
one of them had capital gain distributions last year. Index ETFs would
be even more efficient that index funds since other shareholders
selling would not cause turnover.

Default User wrote:
- quote -


On this first point - EM was just an example, it applies to others too.
The problem is that the bonds just aren't going to grow much, barring
substantial changes in interest rates. It's just not possible. You
listed many other asset classes with higher expected returns. If they
grow as expected over the long term, your mix is going to get out of
whack because of that "dead money" (relatively speaking) in the 401k.
And selling is going to trigger taxes that may be much larger in
magnitude than the taxes you're avoiding on the bonds.

Take the five-years-ago example and start with $100k...$5k in EM, 30k
Intermediate bonds, 25k International, 40k S&P 500 and use the lipper
data I mentioned before for these categories. Ignoring taxes, the
returns in each (5-yr annualized) were 36.79%, 3.88%, 22.62%, and
14.84%. This is an example of a strong period for stocks and a weak one
for bonds so it skews the example, of course, but it makes the point.

Still ignoring taxes I think (check my math) you'd have ended up with
$23,950, $36,300, $69,300, and $79,900 for those four asset classes,
respectively - total of $209,450. But now you have 11% EM, 17% bonds,
33% Intl, 38% S&P which is way off the original target. And it's 5 years
closer to retirement so maybe you're shooting for more like 60/40 now?
If so you'd need to do a lot of selling. 60/40 would require about 48k
shifted from stocks to bonds, with perhaps 10k of realized/taxable gains
just from EM? But at least your 3.88% on bonds ($6300 over five years)
wasn't taxed. Hmmm.

And of course, this is after only 5 years - you can imagine how it could
look after 10, 15 year periods.

You mentioned fund availability as a limiting factor in the 401k - it
usually is...but consider whether this same issue applies in other asset
classes. Also...if the whole point is tax deferral with bonds, what
about savings bonds or Munis rather than the 401k?

-Tad

Tad Borek wrote:


- quote -

Two things. The EE is still only 5% of the overall, versus 30% for the
bonds.

Also, there isn't an EE fund available in the 401(k). The closest I can
get is with the actively managed Large International, which shows about
25% in EE.

If I try to use that fund, then I have to change my allocations
somewhat. I'd planned International Large, Int Large Value, and EE all
at 5% of the equity portion. I'm not even sure how the rest of the fund
breaks down as far as growth/value. The info sheet shows regional
information. I assume that it's essentially JETIX
<http://finance.yahoo.com/q/pr?s=jetix> which is listed as "Foreign
Large Blend".



Brian

Default User wrote:
- quote -

I wonder how you came to put all your bonds in the 401k. As you roll
forward 5, 10+ years, will that still make sense? Keep in mind the "tax
events" aren't just fund distributions, there's also the inevitable
sales for rebalancing & changes in asset-class mix as you enter
retirement and draw from the accounts.

Example for one asset class (Lipper data reported in WSJ.com) - for the
period ending 9/30/07, Intermediate-term bond funds returned 3.88%,
annualized, over the past 5 years (21% total return, before tax).
Emerging Markets returned 36.79%, annualized, over the same period (379%
total return, before tax).

So just look at those two pieces of your allocation, imagining you'd
done this 5 years ago and gone with bonds in 401k, EM in taxable
accounts. You'd be 5 years closer to retirement and might want to pare
back your EM fund, because it's well over your 5% target allocation, or
because you want to shift to a lower-risk asset allocation, or both. But
that would trigger substantial, taxable gains...perhaps more "tax drag"
than all those years of bond interest combined? Plus, all that growth
happened outside the tax-advantaged accounts so less of your net worth,
as a percentage, is in a 401k/Roth.

That's the basic idea and you'd need to look at each asset class and
make similar comparisons. Point being, in today's low-yield world...is
avoiding tax on ~4-5% interest the best use of a 401k's tax deferral?
Not just this year, but over the looooong life of these investments?

Also...part of the decision relies on the low rate on long-term capital
gains. It's worth considering the possibility that capital gains rates
will be higher in the future - they're historically low now.

-Tad

wyu[at]talisys.com wrote:
- quote -

Don't index funds still have the turnover from the companies being
added/deleted to/from the index? Small %, I agree, for some indexes, but
wouldn't even an SPY have a cap gain distribution based on that turnover?
JOE

On Nov 8, 10:21 am, Will Trice <wwtr...[at]paragondynamics.com> wrote:
- quote -

Default User prefers index funds so there is no turnover. Hence it is
only the dividend yield that counts. Value funds are 1.5%-2.5%
compared to 0.5% for growth funds.

For actively-managed funds, you could find *some* value funds that
keep their turnover down but it's hit and miss. I was in Mutual
Qualified (LCV) for a decade and it had not only a decent dividend
rate but plenty cap gain distributions.

- quote -

Value funds probably have consistent dividends, where as a growth
index probably would not have much turnover.

wyu[at]talisys.com wrote:

- quote -

Is this true? I would have thought that growth funds would be less tax
efficient than value funds due to higher turnover. ?

-Will

On Nov 6, 6:09 pm, "Default User" <defaultuse...[at]yahoo.com> wrote:
- quote -


* 55% 401K
* 5% Roth IRA
* 40% Taxable

Let's tackle the easy part first:

* 5% Roth IRA - REITs
* 30% 401K - Total Bond Market

Leaving you with available space:

* 25% 401K
* 40% Taxable

Value fund are less tax efficient than Growth or Blend so now let's
fill in your 401K with LCV and SCV with taxable holding the remainder.

* 14% 401K - Large Value
* 7% 401K - Small Value
* 10.5% Taxable - Large Blend
* 7% Taxable - Small Blend
* 3.5% Taxable - Intl Large Blend
* 3.5% Taxable - Intl Large Value
* 3.5% Taxable - Intl Small Blend
* 3.5% Taxable - Intl Small Value
* 3.5% Taxable - Intl RE
* 3.5% Taxable - Emerging Markets
* 3.5% Taxable - Commodities

To be honest, that taxable portion now looks a bit ugly and
rebalancing would be tax inefficient. We can approximate it by
collapsing a few classes together and then offset with the available
401K 4%:

* 12% Taxable - Total Stock Market
* 12% Taxable - EAFE
* 4% Taxable - Emerging Markets
* 4% Taxable - Intl Small Value
* 4% Taxable - Intl RE
* 4% Taxable - Commodities

Putting it all together, we end up with the following percentages that
will be close enough to your original plan:

* 5% Roth IRA - REITs
* 30% 401K - Bonds (Bond Market Index)
* 14% 401K - Large Value
* 7% 401K - Small Value
* 4% 401K - Small Blend (Russell 2000)
* 24% Taxable - Global Market
* 4% Taxable - Emerging Markets
* 4% Taxable - Intl Small Value
* 4% Taxable - Intl RE
* 4% Taxable - Commodities

jIM wrote:


- quote -

Well, I probably won't. I've been with this company 26 years.

- quote -

I have little in the way of IRA capacity, only about 10% of the funds
outside of the 401(k). That's why I've decided not to just try to apply
the asset allocation scheme separately to the 401(k) and the other
accounts. So, for instance, all the bonds go into the 401(k). I'll put
what REITs I can into the available Roth space.

- quote -



I hope not. I'm finishing up the overall strategy.



Brian

- quote -

I've caught what you are trying to do, I think you are trying to put a
round peg into a square hole.

With a heavy enough hammer, anything is possible.

Index funds inside 401ks are OK. I think you are letting the account
type tail waive the selection dog.

You need to have an allocation. From what I've read you know what
this is.

Having two distinct large cap indexes (one value, one growth) seems
overkill to me... why not just get one extended market index fund and
be done with choices? If you are trying to stick with index funds,
then keep it simple, choose a broad index fund, and let that fill 2 or
4 of the style boxes (extended/total market would fill 4, S&P 500
index would fill only two).

With International, use the broad international fund in the 401k, then
be done with selections.

If you want a REIT fund in 401k, but 401k does not have one, then I
think you need to re-evaluate what you are doing.

I think the IRA should be the core allocation you are after.
The 401k compliments this- even if the 401k has more money.

Here's my logic:

The IRA will last your whole life if you do things right. You may
have 4-5 401ks in your life, and you'll roll these into the IRA when
you switch jobs. The IRA is the true core, even if the amount in it
now is smaller.

So the allocation for the IRA can be quite specific.

10% large value
10% small value
10% large growth
10% small growth
5% REIT
20% bond
10% international value
10% international growth
5% emerging market
10% cash

or whatever it is you've already figured out.

The 401k compliments this closely, but based on selections might not
be exact. make 401k 20% large cap- S&P 500 index would be good
enough, for example (most 401ks have this), then 20% small cap (choose
best small cap fund in 401k, or extended market index), 20% broad
international fund. If no Emerging markets fund, or REIT fund or cash
choice was available, make a guess (like move cash into a bond index
fund, move REIT into an equity income fund...).

IMO you have paralysis from analysis. You have gone so deep in the
forest you only see the trees, but cannot see the forest.

I hope my comments help, I am not trying to confuse you.

jIM wrote:


- quote -

There's no explict Emerging Market, although the Large Companies
International Fund is about 25% EM (it's the Julius Baer II). Also not
available in the 401(k) are the US Small Value, Commodities,
International Large Value (except as may be part of the LCIF), and
International Small Value

- quote -

I'm sticking to index funds where possible, and the S&P Index wouldn't
be a good candidate for a tax-advantaged account, I think.

- quote -

I'm not trying to get that allocation scheme just for the 401(k), but
spread the scheme over all accounts. I want to cover things as
specifically as possible, so if something is unavailable in the 401(k)
it will be taken care of in the external account.

- quote -

That information is in the list I provided, if you knock out the
subcategories (and I realize I made a mistake, listing International
Equity twice), so:

Bonds(30%)
Stocks(70%)
Domestic 70.00%
International 30.00%

However, the specifics are what I'm after. That is, which of my
available funds in the 401(k) are best to use achieve some aspect of
the overall allocation, either due its tax-deferred status or the lower
expenses. For instance, all the bond exposure for the entire portfolio
will be in the 401(k), accounting for about half its money. So the
other half needs to cover some allocations from the list.

I fear I'm not explaining things well.



Brian

On Nov 7, 11:29 am, "Default User" <defaultuse...[at]yahoo.com> wrote:
- quote -

Only piece I saw missing was the REIT fund and maybe the international
small cap.

In this case Ignore the REIT and add to the domestic large cap
position for 401k.
For international small cap and emerging markets, just add this
position into a total international index position. You'll have some
of the style box covered with the index, then use other accounts to
diversify appropriately.

IMO, I think your allocation is very detailed. Get a more general
allocation and it might be easier to apply a general allocation to the
situation.

General like 70% equity-30% bond
or General like 40% domestic equity, 30% international equity, 30%
bond.

Then choose 40% domestic funds in 401k
Then choose 30% international equity in 401k
Then choose 30% bond in 401k.

If you are missing a desired piece, use the IRA to add this piece in.

My IRA is much more diversified and specific than my 401k.

For example, my 401k has only 1 international fund, where as my IRA
has 5 international funds.

401k has international value
Roth IRA has international value, international growth, world
technology, small cap and emerging markets.

jIM wrote:


- quote -

I've shown my desired overall asset allocation. A bit more than half of
all investment funds are in a 401(k). All my bond allocation will go in
there, which uses up about half the funds there. So what should the
remaining 401(k) funds be used for within the overall allocation. Not
all categories are available in the 401(k), so there's a list of what
is available.

Sorry for any confusion.



Brian