Tax-Efficient Investment Placement Over Time

Since I don’t let myself actually fidget with my investments, I instead make a lot of spreadsheets about them. My latest spreadsheet shows how I would ideally split my investments across multiple accounts as my portfolio grows in size and my target asset allocation shifts. With this spreadsheet, by 2025, I hit a target of a 50/50 asset allocation split and decide to leave it there for a while. This is honestly the most mentally helpful spreadsheet I’ve made about allocating investments so far and I will try to do it justice.

Some assumptions in the making of this summary table:

  1. 401(k) maximum stays at $17,500/year and Roth IRA maximum at $5,500/year.
  2. My employer matching doesn’t increase. (Which it actually does with my salary.)
  3. 5% returns on the overall portfolio, year-over-year.
  4. I have access to the same funds as I do now in my 401(k) for the next 12 years.
  5. My income 2015 and beyond is stable at around $160,000 gross and my expenses stay stable at ~$36-40k/year until the mortgage is paid off and then $24-28k/year after that.
  6. I didn’t calculate any of the Series I Savings Bond interest.

Other notes about the table:

  1. I’m maxing out my 401(k) and Roth IRA each year and either investing or paying down the mortgage with my surplus.
  2. VEXMX (Vanguard Extended Market Index fund, investor shares) is kept in an 80/20 ratio with the S&P 500 index fund in my 401(k) until that becomes < $3,000 and not worthwhile.
  3. The mortgage gets paid off in 2018, which is why the portfolio starts going up by a lot more in 2019.

Investment Allocations over time

Okay, so that table is pretty big. I took out the part below it where it shows that with a safe withdrawal rate (SWR) of 4% I should have enough in investments by 2021 (if I use retirement accounts) and assuming a SWR of 2%, I should be good around 2026.

I mostly made this spreadsheet because I was curious to see how my portfolio would change if it was larger. You can see that as my portfolio gets bigger, fund placement shifts a bit.

  • Things start shifting a lot once the mortgage is paid off (~2018) since I’m then putting a disproportionate amount of money in taxable versus my 401(k) and Roth IRA:
  1. The portion of my 401(k) in Total International gets smaller and smaller each year until 2019 when it’s gone entirely.
  2. Starting in 2019, the S&P 500 index funds in my 401(k) get shifted towards the stable value fund and the extended market funds in my Roth IRA towards Total Stock Market (TSM).
  3. I add shares of TSM in taxable in 2019.
  4. By 2021, there’s no more need to have the extended market funds in my Roth IRA and by 2022, the S&P 500 index fund in my 401(k) is no more.
  5. I start adding to Total Bond Market (TBM) in 2022.
  6. By 2025, my 401(k) and Roth IRA (i.e. all of my tax-advantaged funds) are fully in fixed income. My taxable account now accounts for more than 50% of my investment portfolio, so it definitely needs some fixed income. I recognized that this would happen back in 2022 and started adding some more Series I Savings Bonds, but in 2025, I finally add a tax-exempt bond fund.

Tax-efficient fund placement doesn’t seem all that important with a $100,000 portfolio, let alone the $50,000 portfolio that I had last year, but with a $1 million portfolio, it sure seems a lot more important doesn’t it? My absolute favorite Bogleheads wiki is on this topic. I’ve also read a lot of the Ask a Boglehead posts on the forum to learn more about how people suggest structuring portfolios. I’ve definitely studied this like a crazy person in preparation for one day having a multi-hundred thousand dollar taxable investment portfolio. In my case, this isn’t that hard since my 401(k) has good funds for all cases, except that there is no Total Stock Market fund, “just” a S&P 500 index one.

I had a separate worksheet in my Excel spreadsheet for each year and I started fresh, placing funds in this order:

  1. My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. As much of my remaining fixed income allocation to the stable value fund in my 401(k) as possible
  4. As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  5. If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  6. Any other fixed income went to a tax-exempt bond fund in taxable.
  7. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  8. Next, I added any of the remaining international allocation into my 401(k).
  9. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  10. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  11. The remaining Roth IRA funds went to Total Stock Market.
  12. The remaining taxable funds went to Total Stock Market.

I could have easily chosen to put Total International in my Roth IRA and more S&P 500 index fund in my 401(k), but this way will eventually eliminate the Extended Market index fund from my Roth IRA and make rebalancing even simpler. This exercise showed me that managing a multi-hundred thousand dollar portfolio isn’t that much more complicated than managing a $100,000 portfolio if you set things up nicely and it shouldn’t be that hard to keep up going forward.

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15 thoughts on “Tax-Efficient Investment Placement Over Time

  1. I’m not ready for taxable accounts yet but I will certainly note and remeber this when I am there. Awesome post, thanks Leigh!

    • Glad to help! Doing taxable accounts correctly has definitely caused me some worry since it’s harder to undo than tax-advantaged accounts!

  2. Leigh, your interest in tax efficiency had really helped me think through where I’ve got my investments. Most times ill read a book a out investing and all they say is use tax advantaged funds, but what does that mean? Its cool to see an actual example.

    It sounds like you don’t have to worry about growing your income anymore, as long as you invest prudently you should be FI quite young.

    • Glad to help! Yeah books are only helpful to a certain point. I need to actually *see* the math for it to make sense and to project it out into the future. Let me know if you want to see more examples! I have more spreadsheets :)

      I do need to work to keep my income at the very least. And only my base salary is guaranteed. The $160,000 figure assumes some bonuses each year.

      • I personally love spreadsheets and wished we could share them all! Would be cool too if readers could share their spreadsheets….if there was such a thing as an upload button on WordPress!?!?

        • Google docs are probably the easiest way to share spreadsheets online. I use that with friends sometimes. It can be hard to share spreadsheets since they have so many custom calculations. This one I made off the fly, so it would be easier to share. Maybe I’ll make a Google docs version tonight and add it up as a link.

          If people ever want to write a guest post and share spreadsheets, I’m totally cool with that! (Only for spreadsheets, haha.)

  3. This is great, I need to think a little more strategically about our taxable account.

    On a side note, I mentioned to a friend last week that I had a savings spreadsheet that projects our saving out for the next 10 years and she looked at me like I was crazy. Glad to know I’m not the only person who does this!

    • I’m trying to think strategically about mine before it gets very big.

      How are you supposed to plan the future without projecting your savings out for many years??? That affects everything, including how much you can spend on cars, vacations, how much you can save for retirement, how much you can pay down the mortgage. I have my net worth forecasted out until I think I’ll hit FI + one year. It helps me not be that concerned about paying off the mortgage since it’s only a few short years.

  4. I just started skimming the wiki and wanted to say I’ve heard conflicting advice on what to put in taxable vs non taxable accounts. I’ve heard the argument for putting growthier investments in tax advantages- specifically Roth IRA accounts as you want these accounts to have the largest values in the long term since you won’t need to pay taxes on this amount.

    • But, you’re paying your marginal income tax rates on non-tax-exempt bonds in taxable. Tax-exempt bonds tend to be lower yield, so having higher yielding bonds in tax-advantaged accounts is a better overall return. I’ll definitely keep this in mind though when I need to put bonds in my Roth IRA or in my taxable account.

      I really like that with stock index funds in taxable, you only pay capital gains rates. Plus, most of the dividends are qualified (well international is only about 75% usually I think) and you get a slight foreign tax credit for having international in taxable. Last year, it was worth about $20 for me and with a larger taxable account this year, it’ll be worth even more. Not a lot, but every bit helps, especially as my income eases possibly towards the 33% federal tax bracket.

  5. Even with DH’s job (and corresponding 50-oddK of tax-advantaged retirement room) gone, I’ve got a ways to go before I get to start worrying about tax efficient investments!

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