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    Financial Independence Daily FI discussion thread - Wednesday, December 08, 2021

    December 08, 2021

    Financial Independence Daily FI discussion thread - Wednesday, December 08, 2021

    Daily FI discussion thread - Wednesday, December 08, 2021

    Posted: 08 Dec 2021 02:02 AM PST

    Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply!

    Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked.

    Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts.

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    Tax efficiency of asset and account allocation- Discussion

    Posted: 07 Dec 2021 12:02 PM PST

    A diversified portfolio is considered useful to reduce risk. This means exposure to both domestic and international stocks, bonds, etc. Many on here are using the same index funds across all accounts.

    Of course, certain assets carry tax advantages in certain accounts over others. Some examples:

    • Domestic stocks with low dividends are best in taxable accounts, as you don't pay taxes on them other than the dividends, and when you sell.

    • International stocks are most efficient in taxable accounts, because you can claim the foreign tax credit on dividends withheld, whereas in a 401k or IRA, you can't claim the credit on those taxes.

    • Anything with high income is more efficient in a retirement account, because it isn't taxed until withdrawn(or if roth, never taxed), whereas in a taxable, the taxes are a constant drag on growth. This makes dividend stocks and corporate bonds very good in Roth IRAs.

    • The exception to the previous rule is that tax exempt municipal bonds are best in taxable accounts. This tax benefit it priced in to yields, making them inefficient in accounts where the exemption is irrelevant.

    • REITs are very effective in Retirement accounts. This is because they don't pay corporate taxes, but their high distributions are taxed as ordinary income. This is priced in, which is why REITs have outperformed the S&P500 historically, before taxes.

    With all of this considered, the most tax-efficient portfolio would be:

    Taxable:

    • International stocks and low-dividend domestic stocks

    • Tax free municipal bonds

    Retirement accounts:

    • Corporate bonds

    • High dividend domestic stocks

    • REITs

    • Any active trading strategy would technically be most tax-efficient in a Roth where you aren't generating short term capital gains(if applicable, if you only index then ignore this)

    The advantage of shifting your assets into tax-efficient accounts is of course higher after-tax returns, and faster growth of net worth.

    The downside of this is of course that one account may outperform the other due to differences in allocation, but you won't know which. This leads to new challenges. Additionally, tax law can change, requiring you to update your plans.

    Any thoughts on this?

    submitted by /u/skilliard7
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    Weekly Self-Promotion Thread - December 08, 2021

    Posted: 08 Dec 2021 02:00 AM PST

    Self-promotion (ie posting about projects/businesses that you operate and can profit from) is typically a practice that is discouraged in /r/financialindependence, and these posts are removed through moderation. This is a thread where those rules do not apply. However, please do not post referral links in this thread.

    Use this thread to talk about your blog, talk about your business, ask for feedback, etc. If the self-promotion starts to leak outside of this thread, we will once again return to a time where 100% of self-promotion posts are banned. Please use this space wisely.

    Link-only posts will be removed. Put some effort into it.

    submitted by /u/AutoModerator
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    Daily FI discussion thread - Tuesday, December 07, 2021

    Posted: 07 Dec 2021 02:02 AM PST

    Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply!

    Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked.

    Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts.

    submitted by /u/AutoModerator
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