What should go where when you’re investing?

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?


22 Responses to “What should go where when you’re investing?”

  1. yetanotherpfblog Says:

    I pretty much follow what you outline, except I put bonds in my Traditional IRA/401k accounts instead of taxable. I don’t like getting hit with the recurring bond interest at ordinary income tax rates.

  2. jasonedwards57 Says:

    I am totally 100% stocks at the moment, but to lower my AGI I primarily do taxable accounts and max it out. I have a Roth IRA, but only put about $2k annually instead of $5500.

  3. becca Says:

    I have a hard time deciding what to do with my HSA money- unknown-term savings for medical expenses are very much at cross purposes with long term retirement supplement. My goal is to stick two years of deductibles in there in bonds and then let the rest of it be stocks, but it may be by the time I get there I may have enough cash I’m not worried about it. With a match it’s easy to justify taking the HSA route, but I kinda hate them on policy grounds (i.e. people forgoing both necessary and unnecessary care).

  4. Debbie M Says:

    I’m in the not-maximizing tax-advantaged accounts situation.

    I nevertheless do have a few dividend-growth stocks in a taxable account because I wanted to maximize my Roth IRA with index funds and there wasn’t an affordable way to do this in 457s or 403bs. Dividends are taxed at a lower rate than earned income or capital gains (and, in fact, 0% at my level), so that works out. Except when a stock no longer fits my requirements and I have to replace it. Oops.

    One strategy that you might like is to switch your target date fund to one with a higher percentage of stocks (pretend you are retiring at a later date than you really plan to) to give yourself space to put all/mostly bonds in your taxable account while keeping the same percentages.

  5. gasstationwithoutpumps Says:

    I keep most of my savings in tax-advantaged plans. I should have started my Roth IRA much earlier, as it looks like my tax rate in retirement will be as high as during employment (and possibly higher, if we ever replace the borrow-and-spend Republicans with politicians with an ounce of financial integrity), so just deferring the taxes was not such a big win.

    The money that I don’t have in retirement accounts is mostly in a California tax-free bond fund—not because the after-tax return is better than taxable savings, but because it makes the tax forms easier. (This is the first year in a long time that I filed my tax forms early rather than months late—I really hate finding all the records needed for doing taxes.)

  6. rose Says:

    As an older and retiree I can say there is reason to be careful to not put too much faith in any ‘tax saving in the future’ plan. Things will continue to change. Also, always keep some (depending on your specific situation) in growth, not just ‘one date for retirement’ is a good plan because inflation is real….. and retirement is only running and leaping in increased costs and will continue to do so. The state of the stock market/economy is and will remain one of change and risk and fluctuation these days. ABOVE ALL: VOTE. Remind people to be sure they are registered and voting NOW. Also Make those calls and write those letters because …. read the news.

    • nicoleandmaggie Says:

      Target date funds are neat because they automatically adjust the stock/bond mix to what some group of experts recommends based on the retirement date. So they keep stuff in stocks, just more bonds as time goes on.

  7. Leigh Says:

    You can always use funds that no longer fit into your investment preferences to fund donations. That seems to be a common reason people set up Donor Advised Funds.

    As I said in a recent post, my strategy has always been to keep stock index funds in taxable and Roth accounts, specifically my Roth IRA is almost entirely US stock index funds and taxable is both international and US. Then I’ve kept bond index funds in my 401(k), plus international index funds and a bit more of US stocks so there is an account that has everything in it, for easier rebalancing. Moving forward, we will add bonds in taxable because at 30, I don’t want our 401(k)s to be more than 35-40% bonds.

  8. Revanche @ A Gai Shan Life Says:

    I’m completely satisficing at the moment – focusing on putting money away at all in the absence of a tax advantaged plan for myself.

    Making sure that we’re doing it smarter is on the list of Should Do. It feels like I’m being particularly dense about it, though, and is one of the few times I wish I could just hand it to PiC and say “make a decision.”

    We also really need to add bonds because our portfolio has shifted drastically to stocks in recent months. That’ll all be new money investing since I’m not prepared to sell our stock holdings yet.

  9. Omdg Says:

    Question: I know I’m supposed to pick index funds over mutual funds. And I’m supposed to look at the cost of the fund and what index the fund is tied to. But how do I pick a bond fund?

  10. bogart Says:

    I understand and mostly try to follow the system you lay out here, but being a satisficer am not as diligent about it as I might be — and of course, errors compound when accounts accrue value. Since the vast majority of what I have saved so far is in tax-privileged accounts, my main shortcoming is that I don’t have the risky/not-as-risky stuff as well dispersed (in terms of having the right risk in the right place) across my Roth/non-Roth accounts.

    But — I figure that if I need to take $## out, and I want to take $## out of cash (and avoid selling other stuff) I can sell $## in stocks (converting to cash) from the other account, buy $## in stocks in the Roth, and then take the cash out from where it makes sense to do so … right? I mean, yes, given that I am dealing with TIAA-Cref’s somewhat clunky web system, it’s possible that the buy-here-sell-there strategy wouldn’t happen at exactly the same instant in time and thus that I might lose (or, I suppose, gain) from the delay in timing but in the overall scheme of things it seems to me that this achieves the same goal as planning ahead. Am I missing something?

    • nicoleandmaggie Says:

      Yes, you can rebalance. When rebalancing you might lose out on market gains or benefit from market losses and you might have to pay fees to rebalance. If you’re doing this outside of Roth accounts you can benefit from market losses so long as you’re not purchasing a fund that is “substantially the same.” Also if you’re playing with taxable accounts or even traditional IRAs there’s irritating tax stuff going on whenever you sell because of cost-basis. Companies are supposed to keep track of that now, but it hasn’t been that many years that they have.

      • bogart Says:

        Sounds good. I have almost nothing except some cash outside of 403bs, Roth 403bs, and Roths. So those other accounts/situations are, for now, the least of my worries.

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    […] in order to sell losers for tax purposes.  I’m only just now starting to think about which kinds of investments should go in tax-advantaged vs. taxable funds.  I don’t get any joy from gambling and I don’t […]

  12. Ask the grumpies: How to find a smart fee-only financial planner, or should we just give up and do it ourselves? | Grumpy Rumblings (of the formerly untenured) Says:

    […] In addition, there’s a wide range of acceptable even given your personal risk tolerances.  There really isn’t one optimal mix given uncertainty and our uncertainty about how certain we are.  Because you are smart and have the basics down, if you do it yourself with the help of online calculators there won’t be much that a financial advisor can add.  If you’ve exhausted your annual retirement savings and have space for taxable, here’s our thoughts on what should go where when you’re investing. […]

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