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How to Manage Your Asset Allocation With Multiple Accounts

Written by Nickel - 10 Comments

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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.

The problem

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.

The solution

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.

Published on March 27th, 2008 - 10 Comments
Filed under: Saving & Investing,Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. You could go over to the diehards forum and post your idea. There are some smart people there that will give perceptive tips.

    Comment by Anonymous — Mar 27th 2008 @ 9:11 am
  2. I have been using Microsoft Money for about 10 years now and I think it is an excellent way to look at the “big picture” of your finance. I have about six different equity accounts (Etrade, Schwab, Ameritrade, 401k, etc) and Money puts them all together and shows me what my TOTAL allocation is. It does not matter if one account is all cash, and the other all stocks, it’s my total allocation that I am be concerned with.

    Chris

    Comment by Anonymous — Mar 27th 2008 @ 9:33 am
  3. Chris: Quicken does the same thing (though I don’t think it allows you to split up things like Target Retirement Funds into their component parts). But…

    Knowing the percentages isn’t want I’m concerned about. I’m more concerned about managing them in the simplest and most tax efficient way possible. I don’t want to have to tweak seven different accounts to keep things in line.

    Comment by Nickel — Mar 27th 2008 @ 10:42 am
  4. The Diehards forum (http://www.diehards.org/) has a LOT of information on asset location most people have never thought of. I highly suggest every investor with serious money on the line frequent that forum. The beauty of tax-advantaged accounts is you can buy and sell as often as you want to get your asset allocation just how you want it without having to worry about taxes.

    Comment by Anonymous — Mar 27th 2008 @ 10:46 am
  5. This is a great way to allocate investment types. I’ve done it this way for a few years, but I ran into a small problem. I focused all my energy on the account with the largest holdings, and as such the others became stagnant. It’s easy to lose sight of the smaller accounts, so you have to be very disciplined when you take this allocation approach.

    Comment by Anonymous — Mar 27th 2008 @ 10:02 pm
  6. Hi Nickel,

    While your approach sounds promising for the reasons you mention, it seems that it might make it difficult to rebalance because you can’t easily rebalance across accounts. A big benefit of asset allocation in my mind is that it gives you the opportunity to rebalance in times when one asset class does well and another does poorly, e.g. a year in which bonds have increased in value, but stocks have decreased in value. By rebalancing you are systematically buying low and selling high, one of the basic tenets of successful investing.

    When one of your retirement accounts exclusively holds one asset class while another exclusively holds another asset class, rebalancing becomes difficult because now you MUST look at all of your accounts in order to rebalance, presumably in a third account. In that sense, it seems like the work you’ve saved yourself by requiring fewer rebalancing transactions in a subset of the accounts has increased the amount of work you have to do (evaluating all of the accounts together) to determine what transactions need to be made.

    On the other hand, you are wise to allocate between your taxable and tax advantaged accounts to minimize your overall tax burden.

    Comment by Anonymous — Mar 28th 2008 @ 11:30 am
  7. Little late to the party, but I love Morningstar’s Instant Xray–I just found it a couple of weeks ago, and breaks down stocks and mutual funds across several accounts into one big, easy to understand allocation analysis.

    http://portfolio.morningstar.com/NewPort/Free/InstantXRayDEntry.aspx?dt=0.7055475

    Comment by Anonymous — Oct 29th 2008 @ 6:12 pm
  8. I have also used this strategy to some extent to try to keep things simpler. However, some financial gurus suggest holding more conservative holdings in tax deferred accounts and save stocks for taxable accounts. The reasoning is that any losses can be counted against your income (and taxable gains)in a taxable account, where it cannot be in a tax deferred account.

    Comment by Anonymous — Feb 9th 2013 @ 9:46 am
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    Comment by Anonymous — Jul 26th 2013 @ 2:18 am
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