Asset Allocation & Taxes

Comments on “Minimizing Taxes With Asset Allocation,” by Stephen E. Wilcox, in the September 2017 AAII Journal:

I agree with the author when he states “there is a strong preference for holding income-oriented investments in tax-advantaged accounts and holding growth-oriented investments in taxable accounts.” Following that reasoning, it would seem preferable to put cash and taxable bonds, which are taxed as ordinary income, into tax-advantaged accounts and putting equities (beyond what can be stashed in tax-advantaged accounts) into taxable accounts where they can benefit from lower capital gains and qualified dividend tax rates.
—G. Smith from Virginia

I am a holder of regular IRA, a Roth IRA and a regular brokerage account and utilize the stocks in the AAII Stock Superstars Report and Dividend Investing portfolios. I enjoy reading any articles concerning investment allocations and their tax implications when selecting an investment for each type of account.
—Tim Wheeler from Michigan

When to Start Required Withdrawals

Comments on “Briefly Noted: Take RMDs Early or Late in the Year?” by Charles Rotblut, CFA, in the September 2017 AAII Journal:

This article does not address tax consequences. Federal and state withholding should/must be done at time of withdrawal. Waiting until December allows tax money withheld to grow.
—Jack Wilkinson from Ohio

In my view capital gains and dividend/interest income when realized within a traditional IRA are tax-deferred until withdrawn, when they are subject to ordinary income tax rates. They are not tax-free.
—Warren W. from North Carolina

Investment Costs & Portfolio Returns

Comments on “The Impact of Expense Ratios on Retirement Income,” by Craig Israelsen, in the September 2017 AAII Journal:

Truly one of the best expositions on the demonstrable effect that investment costs have on portfolio growth and, ultimately, retirement income. The data tables make the results of the study both conclusive and useful. What too many folks do not seem to comprehend is the effect of advisory fees (usually 100 basis points per year) and how eliminating them alone can dramatically improve one’s results.

Of further dissecting interest would be contrasting moving to low-cost ETFs and mutual funds in taxable accounts versus tax-advantaged accounts. I would surmise that doing so very early in retirement (or better yet, in the five or so years before retirement) would mostly offset the taxes incurred by the fees eliminated and thus saved. Even so, just adjusting things in tax-advantaged accounts alone would no doubt make a difference down life’s road, and benefit one’s heirs as much as anyone.
—Craig Borgardt from Wisconsin

Does this assume that the actively managed, higher-fee portfolio produces the same returns as the index? What if your active, higher-fee managers are outperforming the index after fees?
—Brandon Kremer from Ohio