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Is this a good idea?? (talk me out of it)
Old 02-17-2012, 05:26 PM   #1
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Is this a good idea?? (talk me out of it)

I have a 401K and Roth that is maxed out, so additional income has been going into a taxable account.

Right now that taxable account is holding Vanguard Tax-Managed Small-Cap Fund Admiral Shares and Vanguard Total International Stock Index Fund Admiral Shares. Of course these are a portion of my overall asset allocation across taxable and non-taxable accounts.

I could move the taxable accounts into an actively-managed investment firm (Country Trust), where I also happen to have car/home insurance. The fee is 1.25%. The management firm uses individual stocks/bonds/etc to manage this in a tax-advantaged manner. So the idea is that moving into active management for this account would be done, despite the higher fees, for tax advantage purposes. I would go into a "growth" type category which has a typical allocation for this type of thing (80% stock, 20% bond/cash).

So...why not?

One problem is the taxes I'd incur from selling the Vanguard funds...but over long term that cost would be mitigated by the supposed advantage of the active management.

Thanks!
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Run Away.....
Old 02-17-2012, 06:13 PM   #2
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Run Away.....



RUN AWAY!!!!!

Quick math...

$1MM portfolio.
1.25%
= $12,500 in Fees

That's alot of taxes to save.

Let's say you get 5% return on $1MM or $50,000. Taxes at LT rates (15%) will be $7500. Can't manage that away for $12,500.

Let's say the gains are all short term and you are in the 25% tax bracket. Taxes would be $12,500. They would have to make it all go away, just to break even.

My 2 Cents.
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Old 02-17-2012, 06:19 PM   #3
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eryx, I'll invest your money (very actively!) for you for only 1%. Send me a PM and I'll tell you how to set up the funds transfer.
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Old 02-17-2012, 06:23 PM   #4
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Consider yourself talked out of it.
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Old 02-17-2012, 06:27 PM   #5
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Quote:
Originally Posted by REattempt View Post
Quick math...

$1MM portfolio.
1.25%
= $12,500 in Fees

That's alot of taxes to save.

Let's say you get 5% return on $1MM or $50,000. Taxes at LT rates (15%) will be $7500. Can't manage that away for $12,500.

Let's say the gains are all short term and you are in the 25% tax bracket. Taxes would be $12,500. They would have to make it all go away, just to break even.

My 2 Cents.
That should be enough to talk you out of it...
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Old 02-17-2012, 06:49 PM   #6
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The amounts are smaller than your example, but I really appreciate seeing the math that you posted (and the monty python!). I'd be moving 130K total out of the 2 funds, and adding some cash to it to reach 200K. So the fees would be $3000 / yr while my account is in that price range -- which makes the 5% return / 25% tax equal $2500.

The flat fee is more appealing than the typical churn-based fees. This taxable account wouldn't reach $1MM for the reasons below...unless I worked for a really long time, which isn't the point of this forum .

I guess the more fundamental problem I'm trying to solve is that I can put 22K/year into the tax advantaged accounts, and am trying to figure out what to do with 45K/yr that I have available for investing after that. I've also been reading up on life insurance policies with guaranteed payouts (and non-guaranteed payouts above that) and how those are also tax efficient. I have no dependents at this time so I'm researching it as a consideration for FIRE.

EDIT-Added:
So let's say over the next 10 years I'll be investing $450K taxable vs $220K tax-advantaged. Of course things can change (salary, life choices, etc)-- but for now I'm trying to figure out a plan for that large chunk of taxable. The only debt is mortgage: 100K at a low 3.5%, so not too exciting there.
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Old 02-17-2012, 06:58 PM   #7
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"Where are the Customer's Yachts??"

Simple question. Can this adviser show you his customer's yachts?
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Old 02-17-2012, 07:00 PM   #8
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First you ask about actively managed investments and now life insurance as an 'investment'.

Any chance you're going for a hat trick and the next subject will be equity indexed annuities?
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Old 02-17-2012, 07:20 PM   #9
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Originally Posted by eryx View Post
I guess the more fundamental problem I'm trying to solve is that I can put 22K/year into the tax advantaged accounts, and am trying to figure out what to do with 45K/yr that I have available for investing after that. I've also been reading up on life insurance policies with guaranteed payouts (and non-guaranteed payouts above that) and how those are also tax efficient. I have no dependents at this time so I'm researching it as a consideration for FIRE.
Find out if you can 1) make after-tax contributions to your 401k; and 2) are allowed in-service withdrawals of after-tax contributions from your 401k. Not many 401k plans offer this flexibility, but if yours does, you are golden. In this case, you would make up to $33K/yr in after-tax contributions (the maximum amount is tax-law and 401k plan dependent) and then immediately (e.g., that year) roll the after-tax contributions into a Roth IRA. This is known as a "backdoor Roth," although it is usually described in terms of making after-tax contributions to a traditional IRA and rolling them over to a Roth. Note that if you cannot perform the in-service withdrawals, making after-tax contributions by themselves is probably not tax efficient.

If you don't have this flexibility in your 401k, you are likely to get the most tax-adjusted bang for your investment buck by doing what you are already doing. That is, invest in low-cost index funds with Vanguard.
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Old 02-17-2012, 07:21 PM   #10
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First you ask about actively managed investments and now life insurance as an 'investment'.

Any chance you're going for a hat trick and the next subject will be equity indexed annuities?
I am really just reading about this stuff-- I think I should at least know what is out there! Had to google "equity indexed annuities"...seems like the devil is in the details on those. Less risk but smaller returns with high cost, and a long commitment that is expensive to break out of-- if only life were predictable!
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Old 02-17-2012, 07:46 PM   #11
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Find out if you can 1) make after-tax contributions to your 401k; and 2) are allowed in-service withdrawals of after-tax contributions from your 401k. Not many 401k plans offer this flexibility, but if yours does, you are golden. In this case, you would make up to $33K/yr in after-tax contributions (the maximum amount is tax-law and 401k plan dependent) and then immediately (e.g., that year) roll the after-tax contributions into a Roth IRA. This is known as a "backdoor Roth," although it is usually described in terms of making after-tax contributions to a traditional IRA and rolling them over to a Roth. Note that if you cannot perform the in-service withdrawals, making after-tax contributions by themselves is probably not tax efficient.

If you don't have this flexibility in your 401k, you are likely to get the most tax-adjusted bang for your investment buck by doing what you are already doing. That is, invest in low-cost index funds with Vanguard.
Thanks! I will look into this for my 401K, I know we have #1 (but don't know the limits), not sure about #2. Seems like the sort of legal "backdoor" that will be closed when it gets too popular-- so in a few years we'll need a different approach!
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Old 02-17-2012, 07:58 PM   #12
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Don't do it. 1.25% is a lot.
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Old 02-17-2012, 08:43 PM   #13
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Don't do it. 1.25% is a lot.
Yes it is compared to the .2% from Vanguard!
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Old 02-17-2012, 09:23 PM   #14
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Don't let the tail wag the dog. Don't let taxes or tax advantaged investments drive your investments. Forget about taxes!!

Max out your two tax advantaged vehicles, and put your additional savings into an account at a financial services company. Allocate the money in those three accounts according to your risk tolerance and time horizon and forget about taxes.

Tax advantaged funds are for the birds. Why? Because the managers of those funds primary goal is to minimize taxes, not make money. They do not decide upon making or keeping an investment by evaluating the potential and the return of that investment, but rather whether that investment will increase your tax burden. That is not a good way to go if you want your money to work for you in the stock market.
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Old 02-17-2012, 09:23 PM   #15
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What tax bracket are you in (marginal tax rate)?

I would go with a VG equity index fund. I would be skeptical that Country Trust will be able to consistently outperform an index fund given that they start the year at a 1% disadvantage (plus transaction costs).
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Old 02-17-2012, 09:58 PM   #16
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What tax bracket are you in (marginal tax rate)?

I would go with a VG equity index fund. I would be skeptical that Country Trust will be able to consistently outperform an index fund given that they start the year at a 1% disadvantage (plus transaction costs).
Why do you ask? It is 28%.
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Old 02-17-2012, 10:25 PM   #17
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Why do you ask? It is 28%.
I asked because it might be relevant to understanding the potential savings.

I would think a Vanguard equity index fund would be best in that your tax rate on any earnings and capital gains would only be 15%, so if the fund averages an 8% return then the after-fees return would be 7.8% (assuming a 20 bps ER) and the after-fees after-tax return would be 6.6%

Let's say that the other guys can also generate the same 8% return. Your after-fees return would be 6.8% and the after-fees after-tax return would be 5.8%

Let's say you put in 40k a year. With VG at the end of 10 years you would have $542k and with the other guys you would have $522k so to some extent it isn't much of a big deal.
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Old 02-17-2012, 10:27 PM   #18
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Don't let the tail wag the dog. Don't let taxes or tax advantaged investments drive your investments. Forget about taxes!!

Max out your two tax advantaged vehicles, and put your additional savings into an account at a financial services company. Allocate the money in those three accounts according to your risk tolerance and time horizon and forget about taxes.

Tax advantaged funds are for the birds. Why? Because the managers of those funds primary goal is to minimize taxes, not make money. They do not decide upon making or keeping an investment by evaluating the potential and the return of that investment, but rather whether that investment will increase your tax burden. That is not a good way to go if you want your money to work for you in the stock market.
Interesting thought. I looked up VTMSX (for asset allocation I was looking for a small cap, although at this point it is true that I could have small cap in 401K instead for the asset allocation) and it is doing just as well as its benchmarks. Not sure how others are doing in comparison, perhaps I just got lucky.
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Old 02-17-2012, 11:11 PM   #19
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Thanks pb4uski! I was coming to the same conclusion-- may as well keep it simple because the potential savings are not a big deal. And I can control the costs, I can't control the potential savings.
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Old 02-18-2012, 12:21 AM   #20
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if only life were predictable!
In this case, it is. I predict you will get screwed if you do any of these harebrained things.
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