RMD and after-tax(taxable) investing at Vanguard

[Tadpole]

We are beginning to have a lot of RMD funds dumping into our Brokerage accounts at Vanguard. I pay the tax on the RMD from my bank account so the entire RMD goes to the after tax Brokerage accounts. I currently just divide it between Wellington and Wellesley (W & W) but I know they are not good funds for taxable accounts. On the other hand, we are ages 68 and 70 so we still need a balanced fund. What Vanguard funds would be better than W & W in an taxable account but still perform at a similar risk level?

 

[audreyh1]

Any balanced fund will generate taxable income similar to W & W.

You would have to invest in municipal bonds and or equities to limit taxable income.

If I really didn't need the income from my RMD and wanted to invest for the long term, I would probably invest the funds in a dividend ETF like VIG. much more volatile though. But if you don't need the funds do you care?

It will pay you slightly above 2% in qualified dividends. Should be all or most qualified.

 

[Tadpole]

If I really didn't need the income from my RMD and wanted to invest for the long term, I would probably invest the funds in a dividend ETF like VIG. much more volatile though. But if you don't need the funds do you care?

Thanks for the suggestion. You are right that we don't need the money right now but I do want to kind of keep up with inflation which is much lower than medical inflation which would require much to much risk to keep up with. My husband comes from a family that lives to their late 90s and has Parkinson's so his expenses may reach a point where he does need the money.

 

[travelover]

You could shuffle your funds so you keep your bond allocation in the pretax accounts and just invest the RMDs proportionately in an all stock fund or ETF. That would give you better tax efficiency and maximize growth in the after tax account.

You can pick from the bond and stock funds in the lazy portfolio list.

https://www.bogleheads.org/wiki/Lazy_portfolios

 

[Tadpole]

That idea will certainly be on my list. I would need to unbundle his Rollover IRA target retirement investment to get that much versatility.

 

[ejman]

Any balanced fund will generate taxable income similar to W & W.

You would have to invest in municipal bonds and or equities to limit taxable income.

If I really didn't need the income from my RMD and wanted to invest for the long term, I would probably invest the funds in a dividend ETF like VIG. much more volatile though. But if you don't need the funds do you care?

It will pay you slightly above 2% in qualified dividends. Should be all or most qualified.

Index funds however generally don't generate quite as much in cap gains as W/W. Depending on the OP's tax bracket the cap gains may or may not be taxable under current law.

 

[Tadpole]

We are currently in the 25% bracket but, since I optimized our non-investment cash flows to keep his income at about the same level as our joint income, he will move to the 28% tax bracket when I am gone.

 

[Sunset]

Any balanced fund will generate taxable income similar to W & W.

You would have to invest in municipal bonds and or equities to limit taxable income.

If I really didn't need the income from my RMD and wanted to invest for the long term, I would probably invest the funds in a dividend ETF like VIG. much more volatile though. But if you don't need the funds do you care?

It will pay you slightly above 2% in qualified dividends. Should be all or most qualified.

I have VIG.
I also like VTI and even a little in VXUS (thinking someday the rest of the world will catch up).

All are ETF's , and are very tax friendly while generating dividends and growing in value.

 

[Accidental Retiree]

We own some dividend payers, including VIG and VYM, in our IRAs -- done mostly before we knew better -- and each year we transfer "in kind" whatever we can to our after-tax accounts.

We expect to continue this process a little ways into the RMD years, paying taxes with separate funds.

 

[Tadpole]

We own some dividend payers, including VIG and VYM, in our IRAs -- done mostly before we knew better -- and each year we transfer "in kind" whatever we can to our after-tax accounts.

We expect to continue this process a little ways into the RMD years, paying taxes with separate funds.

But what is your investment strategy for your after tax money that you transferred (if you don't spend it)?

 

[audreyh1]

Index funds however generally don't generate quite as much in cap gains as W/W. Depending on the OP's tax bracket the cap gains may or may not be taxable under current law.

She was looking for a balanced fund. There aren't any balanced index funds.

 

[pb4uski]

Check into https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

If you keep your equities in taxable accounts then qualified dividends and long-term gains would be taxed at 15% (rather than 25% or 28%)... then hold bonds in your tax-deferred accounts. In my case I balance to my target AA by holding some equities in my tax-deferred accounts as well... but when it flips the other way and I need to hold bonds in my taxable accounts then I'll probably use tax-free munis.

 

[Accidental Retiree]

But what is your investment strategy for your after tax money that you transferred (if you don't spend it)?

We're not transferring money; we're transferring ETFs from our IRAs to our brokerage account, so we're keeping the same asset allocation.

We can either take the dividends in cash or reinvest them in those same ETFs, just as we have done when they were in our IRAs.

When my DH gets to RMD age in a few years, and say his RMD is $10,000, we'll either cash out a CD or sell something if we need cash, or transfer $10k of an ETF from his IRA into our joint brokerage, paying taxes with other funds and keeping the investment and allocation intact.

 

[ejman]

She was looking for a balanced fund. There aren't any balanced index funds.

Well, I own some Vanguard Retirement income which is made up of individual stock and bond index funds in fixed ratios . Don't understand your comment.

 

[Tadpole]

Check into https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

If you keep your equities in taxable accounts then qualified dividends and long-term gains would be taxed at 15% (rather than 25% or 28%)... then hold bonds in your tax-deferred accounts. In my case I balance to my target AA by holding some equities in my tax-deferred accounts as well... but when it flips the other way and I need to hold bonds in my taxable accounts then I'll probably use tax-free munis.

I originally put his rollover in a target retirement because if something happened to me he wouldn't be able to manage his retirement funds. But it looks like I need to serious think about a different strategy. (Or give up any hope of tax efficiency in the taxable account.) Now that more than one person has suggested a solution like this I will seriously look it, for sure. Thanks.

 

[Tadpole]

We're not transferring money; we're transferring ETFs from our IRAs to our brokerage account, so we're keeping the same asset allocation.

Thanks. Sorry I misunderstood that you weren't transferring money.

 

[pb4uski]

I originally put his rollover in a target retirement because if something happened to me he wouldn't be able to manage his retirement funds. But it looks like I need to serious think about a different strategy. (Or give up any hope of tax efficiency in the taxable account.) Now that more than one person has suggested a solution like this I will seriously look it, for sure. Thanks.

Similar to you, my DW would be lost on these things if I get hit by a beer truck. And I'll concede that I have things a bit more complicated than they probably need to be but i like it that way.

If I have some notice of my demise then I will simplify/restructure prior to my passing. If I do get hit by a beer truck, then I have a document on my laptop "If I get hit by a beer truck" that includes explaining the current approach and how to simplify it once I am gone... among other things.

 

[audreyh1]

Well, I own some Vanguard Retirement income which is made up of individual stock and bond index funds in fixed ratios . Don't understand your comment.

Good point as those are made up of index funds. But since they rebalance, unlike an index fund, that will generate more capital gains/taxable income. The posters recommending to keep the taxable proceeds in equity funds and IRA funds in bonds, is a better idea for tax efficiency without changing the overall risk profile.

 

[Tadpole]

Similar to you, my DW would be lost on these things if I get hit by a beer truck. And I'll concede that I have things a bit more complicated than they probably need to be but i like it that way.

If I have some notice of my demise then I will simplify/restructure prior to my passing. If I do get hit by a beer truck, then I have a document on my laptop "If I get hit by a beer truck" that includes explaining the current approach and how to simplify it once I am gone... among other things.

Thanks, I already have a letter that I update yearly. You know - how to get everything in his single name, where and what everything is, advice to let Comcast replace modem and router with equipment they manage, passwords, etc. I will need to go into more detail about the investments, I guess.

 

[Tadpole]

Good point as those are made up of index funds. But since they rebalance, unlike an index fund, that will generate more capital gains/taxable income. The posters recommending to keep the taxable proceeds in equity funds and IRA funds in bonds, is a better idea for tax efficiency without changing the overall risk profile.

Thanks, and, yes, I was hoping for a magic fund for taxable but I guess there isn't one.

 

[swakyaby]

What do you think about some of Vanguard's Tax-Managed funds? There is a Tax-Managed Balanced Fund Admiral Shares (VTMFX) that has about half in municipal bonds and the other half in mid- and large-cap stocks which are managed to minimize taxable dividends. Expense ratio 0.11%.

 

[Tadpole]

What do you think about some of Vanguard's Tax-Managed funds? There is a Tax-Managed Balanced Fund Admiral Shares (VTMFX) that has about half in municipal bonds and the other half in mid- and large-cap stocks which are managed to minimize taxable dividends. Expense ratio 0.11%.

Well, that certainly takes cared of the bond dividend taxes! Thanks. I'll need to compare the after-tax estimates to see if this fund is better. You would think that with equities and muni, it should be in most years.