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Originally published Saturday, December 28, 2013 at 8:02 PM

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When saving more, think about taxes | Scott Burns

When IRA accounts and 401(k) accounts were created, everyone assumed that savers would be putting the money aside and deferring taxes at a high rate but would take money out later at a lower tax rate. Many upper-middle-income workers are finding it no longer works that way.


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Investing

Q: About $5,000 just fell into my lap. I already have savings for a rainy day and beyond. At 59½, does it make good financial and tax sense for me to do a 401(k) catch-up?

A: This is something you’ll have to work out with your tax accountant, because the answer depends on your current marginal tax rate while working and your future marginal tax rate when retired.

When IRA accounts and 401(k) accounts were created, everyone assumed that savers would be putting the money aside and deferring taxes at a high rate but would take money out later at a lower tax rate.

That, however, was before the taxation of Social Security benefits pushed retirees into higher tax brackets.

Today, many upper-middle-income workers are finding it no longer works that way — the money they take out of these accounts is being taxed at the same, or higher, rate than the rate when the money was saved.

Q: My wife and I are in our mid-60s and (mostly) retired. We have $2 million in investment assets. Why wouldn’t we simply put half of our assets in Vanguard’s Wellesley Fund and the other half in Vanguard’s Wellington Fund?

That would result in 50 percent equities and 50 percent fixed-income — and very low expense ratios. Is this a foolish idea? Note: We are both waiting to age 70 to take Social Security.

A: That’s not crazy or foolish at all. Indeed, I’ve suggested it a few times. It would get you a 50/50 portfolio of equities and fixed-income in two five-star-rated funds whose performance has been inside the top 10 percent over the last decade, measured against their peer funds.

And you’d get management at a near-index-fund cost level — 0.17 percent a year for Wellington Admiral shares and 0.18 percent for Wellesley Admiral shares.

There are fine hairs to split, however. Since both funds are mixes of stocks and bonds, you would lose the opportunity to do some tax and performance management.

For instance, if you had your investments divided between a pure equity fund and a pure fixed-income fund, you could make withdrawals from the all-stock fund in really good years and make withdrawals from the fixed-income fund in years that were bad for equities.

Another fine hair is expense.

While the cost of your plan is minimal, some would suggest that using two exchange-traded funds could reduce it still further, one for equities, the other for fixed-income. This would save another 0.10 percent or so.

Would it be worth it? Probably not, although the annual savings on $2 million would be about $2,000.

Questions: scott@scottburns.com

Copyright 2013,

Universal Press Syndicate



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