Disclaimer: we are not professional financial planners. See a certified planner with fiduciary responsibility or do your own research before making important money decisions.
Once/If we stop hemorrhaging money spending on things like new cars and water filtration systems, we may need to start filling up taxable accounts with what we don’t spend. When you aren’t filling up all of your tax-advantaged accounts, it makes sense to put both stocks and bonds in there, adjusted for your risk preferences and how close you are to needing to withdraw money. Once you start filling these up, however, and start putting excess money into taxable accounts, it makes sense to think about tax advantages when deciding what to put where. In general, you’ll want to put things with high expected earnings in accounts (like Roth accounts) where the earnings come out tax free, while you’ll want things with less risk and lower earnings to be in accounts that aren’t tax-advantaged. If you are not in this situation yet and don’t want to deal with the complications, it’s fine to just pick a target-date fund and set and forget. Satisficing is better than doing nothing!
Tax advantaged Roth (including dual-advantage):
Roth accounts are taxed when the money goes in, but the earnings are not taxed. Dual-advantage are things like HSAs in which the money that goes in is not taxed and the earnings are not taxed. In both of these cases, you want to put your highest earning funds over the long term. So this will be a good place to put your Nasdaq stock index funds/ETFs and then after that any other broad-based stock index fund that is going to go up over the long term.
Tax advantaged non-Roth (aka Traditional):
These have the earnings taxed when the money comes out, but provide a tax advantage when the money goes in. If you are not close to retirement, these are long-term funds that you can’t take out without a penalty. You probably don’t want to play any tax-loss harvesting games here because you don’t really get the benefits of the loss right away unless you’re converting the funds to Roth funds. This is a good place for putting funds that are going to go up over the long term but aren’t going to go up as much as the stuff you put in your Roth accounts.
Taxable accounts:
Taxable accounts are good for shorter term investing (assuming you’re not close to age 55.whatever) because you don’t have to wait until you’re old enough to tap them without penalty.
If you own individual stocks that might take a loss, this is a good place for them because you can claim that loss against your taxes.
Municipal bonds are tax advantaged themselves, so there’s no point in putting them in a tax-protected fund.
Annuities? I have no idea.
Bonds, while bonds will have taxable earnings, they’ll generally be lower than those of stocks, so if you’ve maxed out your tax-advantaged funds with stocks, putting some taxable money into bonds is not a terrible idea. Plus, if you think you’re likely to lose your job during a recession and have to tap into your savings, bonds are better to tap during that time than are stocks.
Have we done any of this? Nope. In the past we first didn’t have much tax-preferred investing room, and then we weren’t able to fill up our tax-preferred investing so we didn’t add to any new taxable stocks. Now that we have so much more invested and we’re maxing out our tax-preferred funds we should think more about what we put where. It’s a mess. Because of transaction costs and tax hassles (and the fact that I like that Target Date funds are set and forget so at least a portion of our savings has a reasonable stock/bond/etc. ratio even though they’re not optimal!), I’m probably not going to do much buying/selling of what we have already. I don’t want to pay capital gains on our taxable stuff right now, especially if we’re just going to reinvest it in a different asset class. But I will be a little bit more careful going forward. I’ll continue to fill up our work fidelity accounts with Spartan stock indexes, my 457 with the Vanguard S&P 500 index (their lowest cost option). If/when I decide we need more bond funds, those will go into taxable.
When we start withdrawing money 15-35 years from now, I will also try to do better when thinking about what we should sell and when.
Do you pay attention to which savings/investment vehicles you put in which type of account?
