As I noted the other day, we’ve been reconsidering our asset allocation. Setting aside the finer details of how much we want in which type of investment, we also need to get a handle on how to structure our holdings across accounts.
Our situation is perhaps more complex than that of the average family, in that we have seven different investment accounts of various flavors. This includes two Roth IRAs, a SEP-IRA, a 403(b), a 457(b), another work-related retirement account, and a taxable investment account.
Unfortunately, we can’t consolidate any of these accounts (at least not until I leave my current job) so we’re stuck with the complexity. Nonetheless, I’m committed to treating the whole ball of wax as a single pot of money for allocation purposes. After struggling with how best to manage things, I finally had an epiphany.
While we have a specific allocation in mind, there’s no reason that each individual account needs to look anything like our desired overall allocation. Rather, we can “lock in” certain accounts (particularly those with lower balances) with a single investment type such that we won’t have to deal with re-balancing them in the future. Rebalancing then becomes a matter of tweaking our holdings in a subset of accounts. Of course, we still have to make judicious choices when it comes to choosing a location for each asset type.
The guiding principles
- Tax inefficient (i.e., income-generating) investments need to go in tax-advantaged accounts.
- Our taxable account should hold only tax efficient investments.
- Since Roth IRA withdrawals are be tax-free, we want to maximize the value of those accounts.
Putting it all together
With the foregoing in mind, our entire bond portfolio will go into one or more tax-deferred accounts. Likewise, if/when we decide to add REITs, they will go into a tax deferred account. In contrast, our Roth IRAs will be 100% in stocks to maximize growth. Similarly, our taxable account will be 100% in stocks to minimize our tax burden.
The beauty of our current setup is that, while we have a lot of different accounts, my SEP-IRA is relatively large and we’re making regular (and fairly substantial) contributions to this account. As such, I suspect that we’ll be able to lock down all six of our other accounts with a single investment type in each (at least for the forseeable future) and then balance things out by holding a mix of assets types in my SEP-IRA.
The cornerstones of this strategy will be total stock market, total bond market, and total international index funds. These funds will primarily come from Vanguard, although there will be a bit of Fidelity and TIAA-CREF in the mix because of where two of our accounts are held.