Friday, February 22, 2019

Got very lucky with a startup. Need advice on Asset Allocation and tax implications for FIRE.

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:

  1. 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.
  2. Currency changes - if I get a big gain or loss relative to the dollar from crypto or UKP, do I pay anything on that?
  3. Foreign interest - I plan on having cash and stocks in UK accounts. Does this change anything for tax reasons and if so, what?
  4. For tax purposes, what assets should be in the 401k? What assets should be in the Roth IRAs?
  5. If bonds are in a taxable account, do they count as long-term gains or regular income or something else?
  6. 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?
  7. 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?
  8. 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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