Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Regular Savings vs Taxable Savings - Educate Me
Old 09-13-2018, 03:27 PM   #1
Recycles dryer sheets
 
Join Date: Nov 2016
Location: Camas, WA
Posts: 392
Regular Savings vs Taxable Savings - Educate Me

I am familiar with standard savings accounts. First with my local bank, then I switched to a Discover online savings account earlier this year. The interest rate is fairly low (1.8% at the moment), but it's FDIC insured and I can add or withdraw money any time. Come tax time the bank sends me a 1099-INT so I can plug the numbers into my tax return. Easy Peasy.

I started looking at taxable investment accounts through Vanguard today and have to confess I'm confused. I choose investments, make contributions, and understand losses can occur (not FDIC insured). I assume I can take money out any time I want. However, I don't understand the tax side of things. What are dividends and capital gains, and how do they factor in come tax time? Do they send an equivalent 1099-INT statement, or would I have to track and fill out additional tax forms on my tax return?

New stuff is always scary...
__________________

mountainsoft is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-13-2018, 03:43 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 6,252
I'll respectfully suggest if you don't know what dividends and capital gains are, you have some reading to do. I'm not even sure what to suggest for this level. https://www.bogleheads.org/readbooks.htm is a start for a book list.

Mutual Funds 101 actually might be a good place to start for basics, and beyond. I've always found Fairmark to be well-written and understandable.

For a quick answer, yes, VG will send a 1099 consolidated form with all the various 1099s that apply to your tax situation, and it can be given to a tax preparer or imported into a tax program.
__________________

RunningBum is online now   Reply With Quote
Old 09-13-2018, 03:48 PM   #3
Recycles dryer sheets
 
Join Date: Dec 2017
Location: Honolulu
Posts: 425
If you have multiple accounts, VG will send an annual consolidated tax information statement. Mine includes the following forms: 1099-INT, 1099-DIV, Foreign Taxes Paid (international mutual funds), and Summary of proceeds from Broker and Barter Exchange Transactions.

The money market earnings actually show up on the 1099-DIV, as that's how you earn $ in VMFXX (VG Money Market Reserves).
HNL Bill is offline   Reply With Quote
Old 09-13-2018, 04:05 PM   #4
Recycles dryer sheets
 
Join Date: Nov 2016
Location: Camas, WA
Posts: 392
Quote:
Originally Posted by RunningBum View Post
I'll respectfully suggest if you don't know what dividends and capital gains are, you have some reading to do ... Mutual Funds 101 actually might be a good place to start for basics ... For a quick answer, yes, VG will send a 1099 consolidated form with all the various 1099s that apply to your tax situation, and it can be given to a tax preparer or imported into a tax program.
Thanks, respectfully accepted. The linked page was helpful. I knew some of the basics (in limited detail), but hadn't encountered these on the tax forms before. Sounds like it's not as bad as I was envisioning.
mountainsoft is offline   Reply With Quote
Old 09-13-2018, 04:12 PM   #5
Recycles dryer sheets
 
Join Date: Dec 2017
Location: Honolulu
Posts: 425
Quote:
Originally Posted by mountainsoft View Post
Sounds like it's not as bad as I was envisioning.
They are not. If you use Turbo Tax to do your taxes, you can import the forms directly from VG into your tax return...no need to even read or understand them...but you should, so you know the tax implications of your investment decisions!
HNL Bill is offline   Reply With Quote
Old 09-13-2018, 06:21 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 10,593
Quote:
Originally Posted by mountainsoft View Post
.........What are dividends and capital gains, and how do they factor in come tax time? ..........
This is actually kind of important. You pay taxes on interest the same as if you'd earned it in wages, but dividends and capital gains are taxed not at all for lower income and only at 15% for most people.



https://www.investopedia.com/ask/ans...ifferently.asp


One book I recommend to start with is the Bogleheads book.
__________________
Yes, I have achieved work / life balance.
travelover is online now   Reply With Quote
Old 09-13-2018, 07:00 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 18,986
^^^^ to be clear though, the 0% and 15% rate on qualified dividends only apply to certain equity (stock) fund or ETF dividends.... dividends on bond or money market funds or ETFs do not qualify.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 09-13-2018, 07:30 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 19,062
Quote:
Originally Posted by travelover View Post
This is actually kind of important. You pay taxes on interest the same as if you'd earned it in wages, but dividends and capital gains are taxed not at all for lower income and only at 15% for most people.



https://www.investopedia.com/ask/ans...ifferently.asp


One book I recommend to start with is the Bogleheads book.
Qualified dividends are taxed not at all for lower income and only at 15% for most people.

Plenty of mutual funds pay dividends that are not qualified: bond funds, REIT funds, money market funds, etc. And non-qualified dividends are treated just like interest income for tax purposes.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 09-13-2018, 09:23 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 10,593
Quote:
Originally Posted by audreyh1 View Post
Qualified dividends are taxed not at all for lower income and only at 15% for most people.

Plenty of mutual funds pay dividends that are not qualified: bond funds, REIT funds, money market funds, etc. And non-qualified dividends are treated just like interest income for tax purposes.
Yes, you are correct. I was trying to keep it simple and emphasize that the way different investments are taxed is important and can be used strategically. Those specifics are in the investopedia link.
__________________
Yes, I have achieved work / life balance.
travelover is online now   Reply With Quote
Old 09-14-2018, 07:42 AM   #10
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 4,661
Quote:
Originally Posted by mountainsoft View Post
I choose investments, make contributions, and understand losses can occur (not FDIC insured).
Losses are only losses if you sell that stock when it's low. A drop in stock price is a 'loss' but not really.

Within your context, a stock loss like Enron going belly-up and the stock vanishing would be a true loss and not covered by FDIC.

As others have noted, some good heavy homework might be in order.
__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko is online now   Reply With Quote
Old 09-14-2018, 07:53 AM   #11
Recycles dryer sheets
 
Join Date: Jan 2008
Posts: 395
Quote:
Originally Posted by mountainsoft View Post
... and I can add or withdraw money any time. Come tax time the bank sends me a 1099-INT so I can plug the numbers into my tax return. Easy Peasy.
Keep in mind that withdrawing money / selling funds can be a taxable event when you realize any capital gains, assuming that fund has grown.
JoeDreaming is offline   Reply With Quote
Old 09-14-2018, 08:00 AM   #12
Recycles dryer sheets
 
Join Date: Nov 2016
Location: Camas, WA
Posts: 392
Which funds would you recommend in a taxable account? I would want a fund that minimizes taxes, provides better returns than the 1.8% I get with my regular savings account, but less risk than I have in my traditional IRA account.

Two I was looking at are:
VTMFX - Vanguard Tax-Managed Balanced Fund Admiral Shares.
VASIX - Vanguard Life Strategy Income Fund
mountainsoft is offline   Reply With Quote
Old 09-14-2018, 08:49 AM   #13
Thinks s/he gets paid by the post
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 1,987
Well, to minimize taxes you do not want to be earning interest income -- which both of these funds do. You want a passive equity fund. I favor VTWSX, which is a total world fund, but you may prefer a mix of a total US stock market fund like VTSMX and an international fund like VGTSX. This latter approach allows you to "tune" your international exposure. 30% seems to be a popular point. VTWSX is about 45% IIRC.


Hold the income funds in your tax sheltered accounts.
OldShooter is offline   Reply With Quote
Old 09-14-2018, 08:57 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 1,565
Quote:
Originally Posted by OldShooter View Post
Well, to minimize taxes you do not want to be earning interest income -- which both of these funds do. You want a passive equity fund. I favor VTWSX, which is a total world fund, but you may prefer a mix of a total US stock market fund like VTSMX and an international fund like VGTSX. This latter approach allows you to "tune" your international exposure. 30% seems to be a popular point. VTWSX is about 45% IIRC.


Hold the income funds in your tax sheltered accounts.
The exception being muni bond funds. Those will work in a taxable account.
COcheesehead is offline   Reply With Quote
Old 09-14-2018, 09:22 AM   #15
Thinks s/he gets paid by the post
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 1,987
Quote:
Originally Posted by COcheesehead View Post
The exception being muni bond funds. Those will work in a taxable account.
True, but it is necessary to carefully evaluate the muni fund yield versus the net after taxes for non-exempt options. It is not at all uncommon for people to become enthralled with the no-taxes aspect and end up with a smaller net than they would have had with a taxable alternative. Risk is another factor; high-yielding munis are riskier than more vanilla taxable options.


Given the OP's relative lack of expertise and goal of simplicity in this area I would suggest that trying to evaluate muni options is probably not a good idea.
OldShooter is offline   Reply With Quote
Old 09-14-2018, 09:44 AM   #16
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 1,565
Quote:
Originally Posted by OldShooter View Post
True, but it is necessary to carefully evaluate the muni fund yield versus the net after taxes for non-exempt options. It is not at all uncommon for people to become enthralled with the no-taxes aspect and end up with a smaller net than they would have had with a taxable alternative. Risk is another factor; high-yielding munis are riskier than more vanilla taxable options.


Given the OP's relative lack of expertise and goal of simplicity in this area I would suggest that trying to evaluate muni options is probably not a good idea.
I was just clarifying statements you made that appeared to be more general then what the OP asked. Tax free income is still possible in a taxable account. Evaluation of quality and return is still needed as always.
Carry on.
COcheesehead is offline   Reply With Quote
Old 09-14-2018, 11:29 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 18,986
Quote:
Originally Posted by mountainsoft View Post
Which funds would you recommend in a taxable account? I would want a fund that minimizes taxes, provides better returns than the 1.8% I get with my regular savings account, but less risk than I have in my traditional IRA account.

Two I was looking at are:
VTMFX - Vanguard Tax-Managed Balanced Fund Admiral Shares.
VASIX - Vanguard Life Strategy Income Fund
Your best choices for tax efficiency are international and domestic stocks... like Vanguard Total International Stock Fund and Vanguard Total Stock Insex Fund or their ETF equivalents. For most people, qualified dividends are taxed at preferential rates of 0% or 15% depending on your income level and you can take a tax credit for any foreign taxes paid.

Then load your tax-deferred accounts with bonds and stocks as needed to get to your target AA.

See https://www.bogleheads.org/wiki/Prin...fund_placement for more details.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 09-14-2018, 11:40 AM   #18
Recycles dryer sheets
 
Join Date: Nov 2016
Location: Camas, WA
Posts: 392
Quote:
Originally Posted by pb4uski View Post
Your best choices for tax efficiency are international and domestic stocks... like Vanguard Total International Stock Fund and Vanguard Total Stock Index Fund
Those have too much risk for my comfort level. I can't tap into my IRA for another five years, and I wouldn't want to lose half our savings if the market tanks just as we have an unplanned situation.
mountainsoft is offline   Reply With Quote
Old 09-14-2018, 11:48 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 10,593
Quote:
Originally Posted by mountainsoft View Post
Those have too much risk for my comfort level. I can't tap into my IRA for another five years, and I wouldn't want to lose half our savings if the market tanks just as we have an unplanned situation.
That is exactly why you have a mix of stocks and bonds. You need the growth of stocks to offset inflation and bonds to draw from when stocks are down. I "lost" almost half my stock investment value in the great recession, but because I did not sell any stocks / stock funds, I didn't lose a dime.
__________________
Yes, I have achieved work / life balance.
travelover is online now   Reply With Quote
Old 09-14-2018, 11:53 AM   #20
Recycles dryer sheets
 
Join Date: Nov 2016
Location: Camas, WA
Posts: 392
Quote:
Originally Posted by travelover View Post
That is exactly why you have a mix of stocks and bonds. You need the growth of stocks to offset inflation and bonds to draw from when stocks are down.
If I only have stocks in my taxable account and the market tanks before I can access the bonds in my tax deferred IRA account for five years, wouldn't my only option be to sell stocks?
__________________

mountainsoft is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
LED Christmas Lights, please educate me. My Dream Other topics 45 01-15-2016 12:30 PM
Please Educate Me about WiFi Extenders kaneohe Other topics 20 07-20-2014 09:05 AM
Camper Shells: Educate Me TromboneAl Other topics 35 01-22-2014 02:51 PM
Educate Yourself: Interest Only Loans Tommy_Dolitte Young Dreamers 1 07-10-2005 09:05 PM
Hold regular bond in 401k or muni in taxable? soupcxan FIRE and Money 9 04-07-2005 04:54 PM

» Quick Links

 
All times are GMT -6. The time now is 07:15 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.