[Grace]

Question about asset allocation:
I know the Choose FI podcast and other personal finance sources recommend keeping bonds in tax sheltered accounts so their dividends won’t add to your taxable income.

But if my goal is to retire early, I’ll need to access funds which would be my taxable brokerage account.

Wouldn’t I want at least some bonds in there to add stability, especially since that’s the account I’ll be using the soonest?

[Scott]

No, you can asset swap. If you want to sell bonds for cash and they are all in your IRA (a) sell equities in your taxable account for cash and (b) sell the same amount of bonds in your IRA for equities (being mindful of wash sale rules).

Overall you now have the same $ in equities, you have more cash and fewer bonds.

Keep in mind if you are retiring early with very low income (a) the LTCG may be at the 0% bracket and (b) if needed the LTCG will be AGI that can get you on ACA not Medicaid.

[Cody]

You need to consider both tax optimization and liquidity.
Stability isn’t necessarily needed in the same account type you’re withdrawing from.

Consider the “total portfolio” idea separate from having each account earmarked for a specific purpose.

Early retirees who have enough room to hold their fixed income (beyond months of income in checking/savings) within pre-tax retirement accounts should consider doing that, for two reasons:

1. Reducing ordinary taxable income from bond interest allows more control over taxable income and its desired source (vs. Roth conversions, etc.).

2. Holding a larger fixed income position (thus a smaller equity position) within pre-tax retirement accounts reduces its growth, which can limit future RMDs and the need for more aggressive Roth conversions.

As others have mentioned, you can sell equities within taxable brokerage accounts with favorable LTCG (or capital loss) tax treatment, even when they’re down.

Simultaneously, you can sell fixed income to buy equities within your tax-deferred accounts to rebalance your desired (total) asset allocation.

There’s no change to the total asset allocation while reducing unfavorable ordinary income sources.

[Bill]

Yes, but you also have a point. You need some mechanism to actually access the “safe” money.

You can’t just sell stock in your brokerage and rebuy in your 401k unless you have such a large brokerage account that there is no risk of running out even in a down market.

Fortunately, there are a couple ways of accessing your retirement accounts early. Eg 72t and Roth ladders.

You’ll still likely want some safe money in a money market or similar, but it doesn’t have to be your entire bond allocation.

[Frank]

You should think of all of your assets as one big portfolio and do not restrict yourself from only pulling from one place in the future.

You may be using methods such as 72t/SEPP to access retirement accounts early.

[Ron]

Honestly, I think it’s a minor tax optimization in general to only keep bonds in traditional accounts. I’m retired early since 2014, then fully retired at some point (collecting SS now).

I have maintained between $55 and $70K on the taxable side since 2014.

Much of it is in a golden butterfly portfolio, which includes treasuries, and overall I’m 20% some type of bond (LT & ST treasuries), so say $10K-ish in bonds.

I had $1000 in dividends last year, almost half of it qualified. So, $500 or so in unqualified dividends, mostly from the treasuries/bonds.

You can scale up my numbers for higher level spending/cash needs, but hopefully early retired you are in relatively low tax brackets.

The treasuries have a yield about equal to a HYSA, which is what many people keep their spending money in or emergency funds.

Not sure what percentage of bonds you are considering on the taxable side, but I’d do the math and determine if it’s worth sweating about totally cleansing your taxable accounts of anything generating ordinary income on the taxable side for the optimization benefits.

What I’ve come down to is holding a diversified portfolio on taxable and selling strategically. Note I have about $10K only in bonds.

I’m typically at a 0% tax rate, but even if I were in the first or second bracket, 10 or 12%, my $500 in ordinary dividends by holding bonds is only $50 or $60 in tax.

I’m just giving you some of my numbers so you can mentally work out what the impact might be for you.

[Author]

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