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Bogleheads University 101 2023 - Minimizing Taxes on Your Investments with Mike Piper


Whisper Transcript | Transcript Only Page

00:00:00.000 | (audience applauding)
00:00:03.160 | - So we're on to our last module of the day
00:00:08.980 | before the Q&A session.
00:00:10.760 | Mike Piper earlier covered
00:00:12.840 | investing in tax-advantaged accounts.
00:00:16.060 | In this session, he'll talk about
00:00:17.540 | how to invest tax efficiently
00:00:19.680 | in non-tax-advantaged accounts,
00:00:22.180 | like taxable brokerage accounts.
00:00:24.200 | We'll bring Mike up here,
00:00:25.240 | and then we'll do a Q&A after that.
00:00:27.040 | If you do have a question you'd like to submit,
00:00:29.160 | it looks like we've been getting a ton.
00:00:30.800 | Gauri is collecting them,
00:00:32.400 | and you can just drop off your question with him.
00:00:35.040 | Thank you.
00:00:36.580 | - All right, so last time we talked about
00:00:39.400 | the different types of tax-advantaged accounts,
00:00:41.360 | and Alan and Rick both talked with you
00:00:43.520 | about minimizing your investment costs.
00:00:46.920 | And in that case, they were talking about
00:00:48.480 | the expense ratios that you pay on your mutual funds.
00:00:51.480 | But one of the biggest expenses that most investors pay
00:00:55.160 | on their investments are the taxes.
00:00:57.720 | So what we're going to talk about here
00:00:58.960 | are the three most impactful things
00:01:00.640 | that you can do to minimize that investment cost,
00:01:03.560 | to minimize the investment taxes
00:01:05.320 | that you're going to be paying.
00:01:07.400 | The first one is pretty straightforward.
00:01:09.560 | Max out your retirement accounts
00:01:10.800 | if you have enough cash flow to do that.
00:01:13.480 | Second one is fill your Roth accounts
00:01:15.680 | with the assets that have the highest expected returns.
00:01:19.000 | And finally, when you're investing in taxable accounts,
00:01:22.200 | try to fill them with things that are tax-efficient.
00:01:24.560 | So let's go through these one by one.
00:01:26.640 | Max out your retirement accounts.
00:01:28.320 | The idea here, generally speaking,
00:01:31.520 | is to make the maximum contribution every year
00:01:33.200 | to a Roth IRA, or if your income is too high,
00:01:36.200 | then we're looking at maximum backdoor Roth IRA contribution
00:01:39.800 | if that's available to you.
00:01:41.160 | And if you have access to a plan at work
00:01:45.040 | and you have enough cash flow
00:01:46.280 | to max out that contribution as well, do that.
00:01:49.240 | And the idea here, the reason for this,
00:01:52.840 | is exactly what I was talking about
00:01:54.760 | last time I was standing here,
00:01:56.520 | which is that taxable accounts incur tax drag,
00:01:59.440 | meaning there's taxes that are dragging down
00:02:01.480 | the returns that you earn every year,
00:02:03.440 | because you're paying tax on the interests,
00:02:04.960 | you're paying tax on the dividends,
00:02:06.160 | and you're paying tax on the capital gains
00:02:08.200 | every single year, with the net result being
00:02:11.160 | that taxable accounts, they literally earn
00:02:13.400 | a lower rate of return than retirement accounts.
00:02:16.720 | And just like Rick was showing you,
00:02:20.440 | even a relatively small difference in the annual return
00:02:25.920 | has a huge impact when we compound it
00:02:28.600 | over an entire investing career.
00:02:30.520 | And so we max out retirement accounts
00:02:35.120 | simply because retirement accounts don't have tax drag.
00:02:37.880 | You get to keep the full rate of return every year,
00:02:40.440 | and that's a really big deal.
00:02:41.920 | Now, one thing that somebody will always ask
00:02:45.280 | if you tell a room full of people
00:02:46.600 | to max out their retirement accounts
00:02:48.760 | is what if I'm planning to retire early, right?
00:02:51.640 | 'Cause there's the age 59 and a half rule,
00:02:54.360 | so there might be a 10% penalty.
00:02:55.640 | So what if I'm planning to retire at age 50, right?
00:02:58.080 | Should I still max out my retirement accounts?
00:03:00.600 | And the answer, in almost every case
00:03:03.040 | where I've done a serious analysis, the answer is yes.
00:03:06.040 | It still makes sense to make the maximum contributions
00:03:08.960 | if you can, if you're planning to retire early.
00:03:11.600 | And there's a few reasons for that,
00:03:13.840 | so let's go through them.
00:03:15.640 | Reason number one is that in order to retire early,
00:03:20.280 | you have to save and invest a whole lot of money every year.
00:03:22.760 | That's how early retirement happens.
00:03:24.440 | You have fewer years to accumulate,
00:03:26.320 | so fewer years to save,
00:03:27.880 | and fewer years to earn investment returns,
00:03:30.120 | and more years of retirement to pay for.
00:03:32.480 | So the only way to make that happen
00:03:34.880 | is by saving a whole darn lot every year.
00:03:37.560 | And usually what that looks like
00:03:39.600 | is maxing out your IRA, maxing out your 401(k),
00:03:44.120 | and saving more than that.
00:03:46.200 | And so in that scenario,
00:03:48.120 | the more than that pile, the pile number three,
00:03:51.560 | that's in a taxable account,
00:03:53.280 | so you'll have some assets that you can tap into
00:03:55.280 | that aren't in retirement accounts in the first place.
00:03:58.640 | The second reason that it still makes sense
00:04:00.800 | to max out retirement accounts
00:04:02.200 | even if you plan to retire before 59 1/2
00:04:05.800 | is this thing that I keep saying, 'cause it's important,
00:04:08.040 | is that Roth IRAs, you can take your contribution back out,
00:04:12.640 | tax-free, penalty-free, at any age.
00:04:14.120 | You just don't have to be 59 1/2.
00:04:15.880 | That's not a rule.
00:04:17.560 | And so you'll have access to this money early.
00:04:21.560 | And then similarly, a lot of people don't realize this,
00:04:24.320 | but with Roth 401(k) and Roth 403(b) plans,
00:04:27.400 | after you separate from service,
00:04:28.960 | so after you've left the employer
00:04:30.760 | with whom you had that Roth 401(k),
00:04:33.000 | you can roll that Roth 401(k) or Roth 403(b),
00:04:36.000 | you can roll it over to a Roth IRA,
00:04:38.400 | and then from that point going forward,
00:04:40.320 | all the money that had been Roth 401(k) contributions
00:04:44.240 | or Roth 403(b) contributions,
00:04:46.760 | now it counts as if it had been
00:04:48.080 | Roth IRA contributions the whole time.
00:04:50.400 | So again, tax-free, penalty-free access,
00:04:53.840 | regardless of your age.
00:04:55.720 | And so you're going to be accumulating
00:04:58.480 | a significant amount of money
00:04:59.800 | where there's just no 10% penalty to begin with.
00:05:02.280 | And then there's also the age 55 rule.
00:05:05.400 | The way this works, so it's specifically
00:05:07.040 | for traditional 401(k) and traditional 403(b) plans,
00:05:10.440 | and this rule basically says
00:05:11.600 | that if you separate from service
00:05:13.720 | in a year that you turn 55 or older,
00:05:18.280 | then from that point forward,
00:05:20.240 | you can take money out of that 401(k)
00:05:22.520 | or that 403(b) without a 10% penalty.
00:05:25.440 | So it's another way to get money out
00:05:27.040 | before 59 and a half without a penalty.
00:05:30.280 | And then we're not gonna go through all of them
00:05:32.200 | because there's just a really long list
00:05:34.400 | of all of the exceptions,
00:05:35.680 | and Congress adds more and more and more things
00:05:37.760 | to this list every couple of years.
00:05:39.640 | So the reality is that most of the time,
00:05:42.960 | you're gonna have access to money penalty-free
00:05:45.400 | even if you retire before 59 and a half.
00:05:47.560 | You just have a whole lot of options.
00:05:50.360 | So that's it for our first item,
00:05:52.000 | max out your retirement accounts.
00:05:53.800 | Items two and three, fill your Roth accounts
00:05:56.320 | with the highest returning assets,
00:05:58.240 | and when you're investing in a taxable account,
00:06:00.920 | fill those accounts with tax-efficient stuff.
00:06:03.800 | I highlighted them both together
00:06:05.800 | because together they have a name,
00:06:08.320 | and that name is asset location.
00:06:11.480 | And the idea of asset location
00:06:13.920 | is basically after you've decided your asset allocation,
00:06:16.440 | so what Christine and Jim were just talking about,
00:06:18.200 | so it's this much in US stocks
00:06:20.040 | and that much in international stocks
00:06:21.400 | and then that much in bonds,
00:06:23.160 | then take some time to think about what goes where,
00:06:27.520 | which thing in which account.
00:06:29.240 | And so we call that asset location
00:06:31.400 | as opposed to asset allocation.
00:06:33.760 | And the two most important points here
00:06:35.240 | are fill your Roth accounts
00:06:37.080 | with the stuff you expect to grow the fastest
00:06:39.360 | and try not to own anything in a taxable account
00:06:42.280 | that's tax-inefficient
00:06:43.280 | or try to stick with things that are tax-efficient.
00:06:45.600 | So to go through those one by one,
00:06:48.080 | highest returning assets in Roth.
00:06:50.120 | The idea here, there's two reasons we wanna do this.
00:06:52.960 | Reason number one, Roth accounts grow tax-free.
00:06:55.960 | We don't have to pay tax on it every year.
00:06:57.880 | And if you meet the appropriate requirements,
00:07:00.040 | you never have to pay tax on all of the growth.
00:07:02.080 | So that's a good thing.
00:07:04.080 | Reason number two is that unlike tax-deferred accounts,
00:07:07.800 | Roth accounts don't have RMDs at all.
00:07:10.520 | You're never forced to take the money out
00:07:12.400 | during your lifetime.
00:07:13.920 | And so with those two points combined,
00:07:16.760 | the takeaway is that if you could choose one type of account
00:07:20.520 | that you would want to grow the fastest,
00:07:22.760 | you would want your Roth accounts to grow the fastest.
00:07:25.120 | Like if you could have a pile of money
00:07:26.640 | in one type of account, Roth account, that's the answer.
00:07:29.960 | And so really all this means
00:07:32.520 | is that you wanna fill your Roth accounts with stocks
00:07:34.520 | because that's what grows the fastest.
00:07:35.760 | So the reasoning might be complicated,
00:07:37.520 | but the to-do list item is really easy.
00:07:39.520 | You just have a total stock market index fund
00:07:41.160 | in your Roth accounts
00:07:42.080 | or total international or a combination thereof.
00:07:43.960 | That's basically the gist of it.
00:07:46.440 | The third item, when investing in taxable accounts,
00:07:49.120 | use tax-efficient funds.
00:07:50.680 | There's a little more going on here,
00:07:52.360 | so we have to dig into this one.
00:07:53.960 | Basically, there's a few characteristics that are good
00:08:00.000 | and a few characteristics that are bad
00:08:02.000 | for a taxable account.
00:08:03.480 | One thing that's good is low turnover
00:08:07.360 | in the portfolio of the mutual fund.
00:08:10.440 | So portfolio turnover is just what it sounds like.
00:08:12.800 | It's when the fund sells something to buy something else,
00:08:15.760 | that's turnover.
00:08:17.280 | And the reason that that's so important
00:08:18.680 | in a taxable account
00:08:20.000 | is that if you own a mutual fund in a taxable account,
00:08:23.480 | if the fund sells something for a gain,
00:08:26.920 | so the fund sells an investment
00:08:28.240 | for more than what the fund paid for it,
00:08:30.600 | if you're a shareholder of that fund,
00:08:33.000 | you have to pay tax on your share of the gain.
00:08:35.520 | So even though you didn't sell anything at all,
00:08:38.000 | the fund sold something and now you have a tax cost.
00:08:41.920 | So the more often the fund is selling stuff,
00:08:44.720 | the more often you'll have those tax costs.
00:08:47.200 | And we call those capital gain distributions.
00:08:51.080 | That's just the tax term for the capital gains
00:08:53.000 | that you have to pay tax on
00:08:54.520 | even though you didn't sell anything.
00:08:56.920 | And the other important point here
00:08:58.720 | is that the higher the rate of the turnover
00:09:00.440 | within the portfolio of the mutual fund,
00:09:02.560 | the more likely it is that the capital gains
00:09:06.520 | will be short-term capital gains.
00:09:08.440 | So remember that's when an investment is sold
00:09:11.320 | after being owned for one year or less,
00:09:13.600 | that's a short-term gain.
00:09:14.920 | And those are taxed at higher tax rates than long-term gains.
00:09:18.000 | So the more frequently the fund is selling stuff,
00:09:21.080 | the more often, just that's the way the math works,
00:09:23.080 | the more often the capital gains will be short-term
00:09:25.440 | and you're gonna have to pay a higher tax rate.
00:09:27.480 | And so two examples here,
00:09:30.760 | at the very tax efficient end of the spectrum,
00:09:33.520 | we have total stock market funds, index funds and ETFs,
00:09:36.720 | because they've got a super low rate of turnover.
00:09:39.960 | And that's simply just because if you think about
00:09:42.040 | the investment strategy of a total stock market fund,
00:09:46.280 | it's just buy all of the stocks and that's it,
00:09:49.320 | that's the whole strategy.
00:09:50.520 | And that requires very little selling every year,
00:09:53.520 | almost none in fact.
00:09:55.200 | And so total stock market funds have very low turnover
00:09:59.160 | and they're very tax efficient,
00:10:00.600 | they're a good fit for a taxable account.
00:10:03.240 | And then at the other end of the spectrum,
00:10:04.640 | something that's really bad for a taxable account
00:10:07.160 | is an actively managed fund
00:10:08.440 | with a really high rate of turnover.
00:10:10.200 | So the classic example there, if you imagine,
00:10:12.800 | it's a mutual fund and the fund manager
00:10:14.160 | is just trying to own the stocks that he or she thinks
00:10:16.240 | are the very best ones right at this minute.
00:10:18.800 | And so they're just constantly buying and selling
00:10:20.440 | and buying and selling and buying and selling,
00:10:22.080 | there's gonna be a ton of capital gains every year,
00:10:24.440 | a bunch of them are gonna be short-term
00:10:26.000 | and it's gonna create a ton of costs
00:10:27.640 | if you own it in a taxable account.
00:10:29.360 | And moving on to the bond side of the portfolio,
00:10:34.440 | the general rule is that safer bonds have lower yields,
00:10:39.120 | because riskier bonds have to pay a higher interest rate
00:10:41.440 | to get people to buy them.
00:10:42.600 | So safer bonds have lower yields,
00:10:44.720 | which means less taxable income,
00:10:47.040 | which means less tax,
00:10:48.400 | which means they're more tax efficient.
00:10:49.960 | So safer bonds tend to be more tax efficient
00:10:52.520 | than riskier bonds.
00:10:53.640 | And so short-term bonds tend to be more tax efficient
00:10:58.760 | than long-term bonds because short-term bonds
00:11:00.440 | usually pay a lower rate of interest.
00:11:02.960 | There are exceptions and we are currently living
00:11:04.840 | in one of those exceptions,
00:11:06.200 | but typically short-term bonds have a lower interest rate
00:11:08.480 | than long-term bonds,
00:11:09.320 | which usually makes them a better fit
00:11:11.200 | for a taxable account.
00:11:12.320 | And then with regard to credit quality,
00:11:15.240 | so the credit rating of the bond,
00:11:17.440 | the higher the credit rating,
00:11:19.600 | the lower the interest rate
00:11:21.360 | and therefore the lower the taxable income that it creates
00:11:24.080 | and the lower the tax costs.
00:11:25.800 | So bonds with better credit ratings are more tax efficient
00:11:29.080 | than bonds with worse credit ratings.
00:11:30.920 | And so treasury bonds,
00:11:34.560 | those are the bonds that have
00:11:35.440 | the very highest credit rating of all,
00:11:37.640 | they tend to be really tax efficient
00:11:39.040 | relative to other bonds.
00:11:40.720 | In addition, treasury bonds are exempt
00:11:42.880 | from state income tax,
00:11:43.840 | or specifically the interest that you get on treasury bonds
00:11:45.960 | is exempt from state income tax.
00:11:47.560 | So if you live in a state where you're paying
00:11:49.120 | a significant income tax rate,
00:11:51.120 | that's another point in favor of treasury bonds
00:11:53.280 | being a good fit for a taxable account.
00:11:55.800 | And then lastly, we have municipal bonds,
00:11:57.480 | AKA muni bonds.
00:11:59.200 | And those are bonds that are issued
00:12:02.520 | by state and local government entities.
00:12:05.400 | And the interest on them is exempt from federal income tax.
00:12:08.800 | And in many cases,
00:12:10.680 | if you buy muni bonds from within your own state,
00:12:13.940 | then that interest is going to be exempt
00:12:16.120 | from your state income tax also.
00:12:17.760 | Now granted, there's some risk involved, right?
00:12:20.300 | Because muni bonds have some credit risk
00:12:22.680 | much more than treasury bonds.
00:12:23.960 | And if you're specifically limiting it
00:12:25.400 | to only ones in your state,
00:12:27.200 | you're kind of compounding that risk
00:12:28.560 | 'cause there's a little bit less diversification
00:12:30.000 | going on there.
00:12:31.200 | But they can be a very tax efficient choice.
00:12:35.320 | Now, one thing you'll have to decide
00:12:37.400 | if you have taxable assets
00:12:39.400 | is do you want stocks or bonds in the taxable account?
00:12:42.520 | And one very important factor here
00:12:46.080 | is that the returns you get from stocks
00:12:48.360 | are dividends and capital gains, right?
00:12:50.960 | Those are the two ways that stocks provide returns.
00:12:53.520 | And both of those things have tax advantaged treatment,
00:12:57.800 | right?
00:12:58.640 | There's lower tax rates for dividends
00:13:00.160 | and long-term capital gains
00:13:01.240 | than there are for most other types of income.
00:13:04.200 | And so, in general, stocks tend to be a better fit
00:13:08.320 | than bonds for a taxable account,
00:13:09.840 | although there are some exceptions.
00:13:12.400 | Now, moving on to things
00:13:13.240 | that we specifically want to avoid in a taxable account.
00:13:16.120 | One of them, Jim talked about this, all-in-one funds.
00:13:19.000 | So that's anything that owns stocks and bonds altogether.
00:13:22.320 | They're not, so a target date fund,
00:13:23.960 | balanced fund, that sort of thing.
00:13:25.840 | They generally aren't a good fit for a taxable account,
00:13:28.160 | although there are some exceptions,
00:13:29.600 | just like most of the stuff I'm saying.
00:13:31.280 | And the reason for that, number one,
00:13:33.240 | is that the bond side of the portfolio
00:13:36.720 | is going to include some corporate bonds,
00:13:38.960 | which have a higher rate of interest,
00:13:40.880 | more taxable income, more tax.
00:13:43.000 | And so, basically, the idea here
00:13:44.240 | is that they own some stuff
00:13:45.320 | that you'd rather not own in a taxable account,
00:13:47.720 | so it's not a great fit.
00:13:49.080 | The other point, and Jim also mentioned this,
00:13:53.280 | is that sometimes the outer layer of fund,
00:13:56.120 | the all-in-one fund itself,
00:13:57.920 | creates another level of turnover.
00:14:00.400 | So if you think about, for instance,
00:14:02.080 | Vanguard target date fund,
00:14:03.720 | most of them own four underlying mutual funds.
00:14:06.560 | You've got a total U.S. stock fund,
00:14:08.960 | a total international stock fund,
00:14:10.960 | a total U.S. bond fund,
00:14:12.240 | and a total international bond fund.
00:14:14.640 | And so each of those four funds
00:14:17.520 | will have its own level of turnover,
00:14:18.880 | whatever it happens to be,
00:14:20.680 | and you'll have whatever tax cost you have from that.
00:14:23.600 | But then the target date fund itself
00:14:26.040 | is going to have some turnover,
00:14:27.560 | because sometimes it sells one of those four funds.
00:14:30.760 | And that could be just the little rebalancing
00:14:33.480 | from day-to-day, but the bigger issue
00:14:35.400 | is what we saw from Vanguard a couple of years ago,
00:14:38.040 | where they just changed their mind.
00:14:39.840 | They decided, all right, we're kicking out this fund
00:14:41.600 | and adding this other one instead,
00:14:43.960 | and people weren't expecting that,
00:14:45.440 | and so anyone who owned it in a taxable account
00:14:47.520 | had a big tax cost every year.
00:14:49.240 | There were lawsuits about it.
00:14:51.520 | And that's not only Vanguard, by the way.
00:14:53.640 | Any fund company could do that,
00:14:55.040 | and sometimes does do that.
00:14:56.600 | So if you have a fund like a target date fund,
00:14:59.880 | you're exposing yourself to that risk
00:15:01.480 | that they're just going to change their mind,
00:15:04.080 | and then you've got some taxes to pay.
00:15:06.400 | So all-in-one funds are not usually a great fit
00:15:08.560 | for a taxable account.
00:15:09.680 | Real estate investment trusts, REITs,
00:15:13.240 | Jim talked about those.
00:15:14.520 | They're just stocks in the real estate industry.
00:15:16.840 | They typically aren't a good fit for a taxable account,
00:15:19.560 | because they generally pay a higher level of dividends
00:15:21.960 | than most stocks, so more taxable income.
00:15:24.240 | And those dividends are taxed at a higher tax rate
00:15:27.520 | than other dividends.
00:15:28.920 | So more income, higher tax rate, not a great fit.
00:15:32.840 | They are a perfectly fine thing to own.
00:15:35.960 | It's just if you own them,
00:15:36.960 | you want them in a retirement account
00:15:38.440 | and not in a taxable account.
00:15:39.960 | So just to summarize here.
00:15:43.120 | Things that are tax-efficient.
00:15:44.320 | We've got total stock market funds.
00:15:46.280 | They have a very low rate of turnover,
00:15:48.280 | 'cause the fund hardly ever has to sell anything.
00:15:51.320 | So that low rate of turnover makes them very tax-efficient.
00:15:55.000 | Treasury bonds are typically tax-efficient as bonds go,
00:15:57.920 | because their high credit rating
00:16:00.680 | makes for relatively less taxable income,
00:16:02.920 | and because their interest is exempt from state income tax.
00:16:06.240 | Municipal bonds are a good fit for a taxable account,
00:16:09.120 | because their interest is exempt from federal income tax
00:16:11.280 | and potentially state income tax
00:16:13.080 | if you buy bonds from within your own state.
00:16:15.960 | And shorter-term bonds tend to be more tax-efficient
00:16:20.400 | than longer-term bonds,
00:16:21.320 | because they typically pay a lower rate of interest.
00:16:24.080 | And then stuff you want to avoid in a taxable account,
00:16:26.560 | things that are tax-inefficient.
00:16:28.320 | Number one, actively managed stock funds with high turnover.
00:16:31.760 | All of that buying and selling creates costs
00:16:34.320 | to you as the investor,
00:16:35.360 | because you have to pay tax
00:16:36.440 | every time they sell something for a gain,
00:16:38.000 | and you've got no control over it.
00:16:39.680 | High-yield bonds, junk bonds.
00:16:42.520 | They pay a lot of interest.
00:16:43.880 | That's a lot of taxable income.
00:16:45.560 | That's not good.
00:16:47.240 | All-in-one funds, again, not a great fit,
00:16:49.240 | because they own some bonds with higher yields,
00:16:51.000 | which you'd rather not own in a taxable account,
00:16:53.240 | and because you don't have control over the turnover.
00:16:55.480 | The fund can sell something,
00:16:57.120 | can sell one of the underlying funds,
00:16:58.760 | and then you've got a big tax cost to pay.
00:17:01.720 | And real estate investment trusts,
00:17:03.160 | just because relative to other stocks,
00:17:05.000 | they pay more dividends,
00:17:06.200 | and those dividends are taxed at a higher tax rate.
00:17:09.160 | So the way this whole asset location thing typically looks,
00:17:13.480 | you've got your Roth account,
00:17:15.640 | and you fill it up with the highest returning asset, stocks.
00:17:18.560 | And again, that doesn't have to be complicated.
00:17:20.840 | Total stock market fund, and you're done.
00:17:22.360 | Or total international, or total world, whatever,
00:17:25.040 | just a basic stock fund and call it a day.
00:17:28.440 | And then the tax-deferred account
00:17:30.560 | usually owns a mix of stocks and bonds.
00:17:33.240 | And the reason for that is that, remember,
00:17:35.200 | our rules are highest returning assets in Roth,
00:17:38.760 | tax-efficient stuff, and taxable.
00:17:41.640 | There's no rules about tax-deferred.
00:17:44.600 | Anything is a fine fit for tax-deferred.
00:17:47.320 | So the job of the tax-deferred accounts
00:17:49.200 | is basically just to own whatever else we need to own
00:17:53.120 | to get the overall asset allocation for the portfolio
00:17:56.640 | to be what we want it to be.
00:17:58.440 | So because we filled up the Roth account with stocks,
00:18:01.880 | so there's no bonds there,
00:18:03.240 | and we probably want some bonds in the portfolio,
00:18:05.800 | we put bonds in the tax-deferred account.
00:18:07.440 | And then if there's also more space,
00:18:08.720 | we put some more stocks in there.
00:18:09.680 | That's basically the idea.
00:18:11.520 | And then in the taxable account,
00:18:12.760 | we want to stick with things that are tax-efficient.
00:18:15.080 | So low turnover funds, like total stock market funds.
00:18:18.800 | And with regard to bonds,
00:18:20.320 | treasury bonds, because of their lower rate of interest
00:18:22.400 | and their exemption from state income tax.
00:18:24.640 | And muni bonds, because of their exemption
00:18:26.280 | from federal income tax and potentially state income tax.
00:18:29.360 | So that's it.
00:18:31.880 | (audience applauding)
00:18:36.040 | (audience cheering)
00:18:39.040 | [BLANK_AUDIO]