I am trying to work out what my asset allocation should be and how to minimize taxes when it comes to my assets and I don't really know what I am doing. Any advice on the allocation, the re-balancing strategy or (most importantly) the tax considerations would be appreciated.
Some notes:
- I have a good CPA and fee-only planner but I still want to understand this stuff myself first, THEN ask for advice.
- I'm 36 and married with young children (2,5,7).
- I am the sole income earner, although we would consider having my wife work for somewhere with a 401k just enough to put all of the earnings in the plan if that is possible.
- (Big one) I got stupidly lucky and have roughly three million dollars in vested ISO options in a company that is going to IPO this year. Some will get long-term capital gains treatment due to exercising them early but most will not.
- (Other big one) I have over a million in cash from a liquidity event a few months ago. Currently earning 2.2% in a pair of different savings accounts (due to 500k FDIC limit) until I get this stuff figured out. $350k of that is set aside for taxes.
- W2 income is a bit over $200k.
- Mega-backdoor Roth isn't possible at the moment due to plan limitations.
- I max out ($18.5k + $9.25k match) my 401k each year.
- We max out two backdoor Roth IRAs each year ($11k).
- We live in a state with no income tax.
- 400k left on our mortgage. Plan is to pay that off either immediately or right after the 1st of the year depending on tax implications. No other debt.
- We'd like about 150k per kid in a 529 plan for college. Plans are set up with 5k in each of them.** I'd like advice on whether or not to count these as assets in terms of my asset allocation plans.**
- I am a dual UK/US national. Most of my family is in the UK and my children are also citizens. We visit a couple of times a year and as a result I would like to have a UK bank account (savings at least) and be somewhat invested in the UK stock market. I may buy a small rental property in the UK and rent it out then stay there in the summer.
- I don't plan on retiring completely post-IPO but will likely work a lot less (say $100K, keeping a 401k and health insurance) and spend my other working hours on charity/non-profit work that I care deeply about. I'd like to be able to contribute each year to those charities as well.
Asset Allocation
I want roughly the following asset allocation (excluding a paid off home, cars etc.):
- * 5% cash (3.5% in USD, 1% in UK Pounds and 0.5% in crypto or Euros)
- * 5% speculative (varies - could be collectibles or bitcoin or a new business or specific stocks or real estate etc. )
- * 60% stocks (10% UK stocks, 35% US stocks, 15% world)
- * 30% bonds (3% UK, 17% US, 5% TIPS, 5% world)
The reason for the 60/30/5/5 split is that I want to preserve capital (I doubt I'll ever get another windfall like this) while getting enough growth to live decently until we're 100 (!). The "speculative" portion is because occasionally I want to take a risky bet on something that I feel very strongly is a good investment. Initially that means keeping 5% of the money in shares of the post-IPO company, assuming I continue to believe they are on the right track.
Rebalancing:
The plan is to keep the main 60/30/5/5 split indefinitely, re-balancing when stocks or bonds move by 5% overall in relation to the other. I want to maintain roughly 15% of our assets in the UK and denominated in pounds but will only actively re-balance this split if it goes below 10% or over 20% of total assets.
I mostly want to use the lazy re-balancing method (http://optimalrebalancing.tk/) but given that future contributions will be lower than current, I am not sure if this will be optimal.
Tax questions:
- Cash - if I get interest income from a regular high-yield savings account, is this taxable as long-term capital gains, regular income, or something else.
- Currency changes - if I get a big gain or loss relative to the dollar from crypto or UKP, do I pay anything on that?
- Foreign interest - I plan on having cash and stocks in UK accounts. Does this change anything for tax reasons and if so, what?
- For tax purposes, what assets should be in the 401k? What assets should be in the Roth IRAs?
- If bonds are in a taxable account, do they count as long-term gains or regular income or something else?
- Is there anything else that I can do to reduce my tax burden, both in the initial IPO sale and, later, on investments? Perhaps real estate?
- If I count the 529 plans as assets to be balanced, what should I store in them given that the money isn't needed for 10 or 15 years and given the tax advantages?
- Am I missing anything else?
I know this is a lot but I felt it was best to consider the complete picture. Let me know if I should be posting this somewhere other than this sub.
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