Should I switch my CDs and Treasuries to my Roth or traditional IRA?

[disneysteve]

Until last year, this situation wasn't relevant but once I received the final payout from my cousin's estate coupled with rising rates it has become an issue.

We now have over $600,000 in our taxable Vanguard brokerage account invested in brokered CDs and Treasuries (and a couple of agency bonds). That's great except they're throwing off a ton of interest that is all taxable - almost $16,000 for the first half of 2023.

It occurred to me that it would be better to have those things in a tax-sheltered account like a Roth or traditional IRA. As CDs/bonds mature in the brokerage account, would it make sense for me to use that cash to buy something like VTI rather than buying new CDs/bonds and then simultaneously sell shares of VTI currently held in my Roth and use the proceeds to buy the CD/bond in there? VTI is certainly more tax-efficient so would generate less taxable income in the brokerage account.

[Jluke]

If you have VTI in your Roth account you might not want to use VTI in your taxable account because it will be a real pain to tax loss harvest.

Maybe VOO or SPY (SP500) or ITOT or Schwab equivalent (SCHB, I believe) in your taxable

[disneysteve]

If you have VTI in your Roth account you might not want to use VTI in your taxable account because it will be a real pain to tax loss harvest.

Maybe VOO or SPY (SP500) or ITOT or Schwab equivalent (SCHB, I believe) in your taxable

So other than the specific fund/ETF choice, is my thinking otherwise on target? Transition the income-generating holdings into the tax-sheltered account.

I can't change it quickly as I have a 3-year ladder in place but every 3 months as things mature I can gradually change over.

[Jluke]

Yeah that makes sense.

you may want to read this too.

I’ll call out specifically the section Assigning Asset Classes to Different Accounts. But the whole wiki page is good to read through.

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

[kork13]

Traditional wisdom says "yes absolutely." Any asset that throws off alot of interest is prime for tax-advantaged accounts -- as you said, stocks are way more tax-efficient than income-producers. Just shifting around what vehicle within which you're investing stocks vs. cash/bonds will make a noteworthy difference, even if you keep your overall AA identical. I say do it!

[srblanco7]

Traditional wisdom says "yes absolutely." Any asset that throws off alot of interest is prime for tax-advantaged accounts -- as you said, stocks are way more tax-efficient than income-producers. Just shifting around what vehicle within which you're investing stocks vs. cash/bonds will make a noteworthy difference, even if you keep your overall AA identical. I say do it!

Concur that the move, in general, makes sense. A potential exception would be if the Roth is most likely to be earmarked for an inheritance to a child/children, rather than for your retirement living expenses. In that case, I'd tend toward having the Roth fully invested in stocks and manage to my stock/bond allocation exclusive of the Roth.

[bjl584]

That sounds like a good plan. There are endless stocks and funds you can invest in. But as you said, the fundamental thinking is sound.

[disneysteve]

Concur that the move, in general, makes sense. A potential exception would be if the Roth is most likely to be earmarked for an inheritance to a child/children, rather than for your retirement living expenses.

I honestly don't know at this point so I'm treating it as future spending for us.

[LivingAlmostLarge]

Here's the thing, are you using that $16k as part of your spending? If you are and not reinvesting it then i'd leave it taxable because it's easier to harvest from a roth and tap when needed than in a taxable. Instead you can preserve the basis and live off the proceeds it's not a bad deal. You harvest the roth as you need special spending and it's non-taxable.

[Like2Plan]

I try to favor equities in Roth/taxable and bonds in pretax. It isn’t always possible because I might not have the right kind of tax advantaged space available in order to achieve the target asset allocation, but that is my goal.

I want to see the most tax advantaged gains in the Roth. So, to accomplish this I plan to do 2 things: pull from Roth last- (if needed) in order to achieve the longest time horizon. And, equities in Roth so as to have the most growth potential.

If I could get a bond that paid 10% interest, I might change things up.

[srblanco7]

I honestly don't know at this point so I'm treating it as future spending for us.

This week I listened to a podcast by The Retirement Answer Man (aka Roger Whitney) and he discussed the utility of Roth accounts in retirement. Likely not new information for you as a savvy individual, but a good reminder. Could be worth a listen as part of your decision making process.

[LivingAlmostLarge]

But you can use it to supplement your current income without generating capital gains

[disneysteve]

But you can use it to supplement your current income without generating capital gains

Generating capital gains isn't necessarily a bad thing as they may be taxed more favorably than other income.

For right now, I think I'm going to leave things as they are. Since I cut back on work, we have been drawing from our portfolio at a rate of about $1,000/week so we're slowly reducing our cash reserves. The income from the taxable investments will replenish that money as I want to maintain a couple of years of cash. It's been a bit under a year since I cut back so we're still settling in to our new income and spending situation. I don't want to go locking up money or intentionally cutting down income only to find out in 6 months or a year that we really would have been better off keeping it where it was. Yes that may cost us more in taxes but it also gives us better flexibility with our portfolio.

And of course, it doesn't have to be an all or nothing change. Maybe we don't need 600K in short term investments and some of that could get re-positioned for better tax efficiency while the rest stays where it is as long as we have adequate cash flow.

[Jluke]

Thanks for that update.

two sayings:

Don’t let the tax tail wag the dog.

stand there, don’t do something.