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When to purchuse funds, when using taxable to fund roth?
Old 11-14-2017, 12:23 PM   #1
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When to purchuse funds, when using taxable to fund roth?

Hi Guys and Gals,

I've been reading a bit about, "Don't buy the dividend..." and I'm curious what the thoughts are for establishing positions in closed end and bond funds that have a dollar or so share of capital gains waiting to be distributed? I fund my Roth out of my taxable account, so staking a position before or after is a curiosity to me whether it is possible to net out ahead.

I'm looking for a vehicle that I can grow up to around 100k in taxable, without a huge swing in price so I don't end up stuck in a catch22 of having capital gains that haven't already been paid along the way.

I'm 30 with 48k income, I put 14k into 401k this year just due to not having a high enough % off the paycheck through the spring. Bumped it up to 35%. In years prior I just matched the company match...

Next year will be 18k.

If my math is accurate, I'll be looking at a adjusted gross income for next year (no raises in the projected future...) of 30k, that would leave me 8k in investment income to play inside of before bumping into the 25% tax bracket on said investment income. The 100k example would be the yield of PDI, less the end of year capital gains part of the discussion.

Am I correct in thinking that I can play around with some small positions in funds that spool off straight taxable income up to the difference?

Current asset allocations:

401k = 40k in 100% SP500 index.
Roth = 30k in 100% Vanguard Wellington
Taxable = 14k in High Yield municipal.
$1500 month to month working cash as a buffer, and sweep $500 to the taxable account when touching $2000.

The gist of it, is to see if setting up a taxable account to try to earn a little more interest as I'll be using the taxable to fund the Roth each year.

I'm looking at Pimco PIMIX (PONAX for my uses... mor minimum investment) ) and PDI as two that I'm interested in taking on a position, perhaps with the $5500 going into the Roth, or the 10k left in taxable once I fund the Roth in January.

PIMIX is enticing because it is lower volatility and higher reinvested returns than Wellington and smells like a bond. PDI is enticing because of the monthly yield giving some downside protection rather quickly against the position... and lack of correlation to the S&P through MBS securities.

My taxable bucket currently is in high yield municipal bonds, simply because I wanted to drop it into something without bumping around my adjusted gross income on the off chance I could qualify for a saver tax credit.

I've read that some folks just use the taxable bucket in Pimix in my tax rate. It seems like more people gravitate there than they do high yield municipal bonds.

I realize I'm talking about a $20 a month keeping it in muni's, and $36 in pimix and $63.5 in PDI in yield on $10k, but I'm eternally hopeful that with enough nose to the grindstone and occasional couple hours of extra over-time that it won't be quite as small a nugget every month.

To an extent, I'm stuck in a moment where I don't have a lot more that I can cut out of the budget... I can come up with the $5,500 for the roth, but that is about it. Even quit the beer...

I make just enough that my taxable account isn't quite big enough that adding a little juice for a little risk in a 25% drop, wouldn't mean much other than dropping 401k contributions for a month and building it back up if it comes to that and switching vehicles. Not ideal... But at least a plan, I suppose.


Thanks for reading along! I'm mainly trying not to develop any positions at this point that later turn into a tax headache!
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Old 11-14-2017, 12:55 PM   #2
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At age 30.... go 100% equities... something like VTSAX and/or VTIAX depending on what your Roth is invested in. No need for bonds at age 30 IMO.

Seems like perhaps you have not considered that qualified dividends and long-term capital gains are tax-free for those in the 15% tax bracket and lower.

While some of VTIAX's dividends are not qualified, you will get a foreign tax credit that IME more than makes up for it.

If you end up with any headroom in the 15% bracket, you could gains trade, pay zero tax but increase your basis.
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Old 11-14-2017, 01:21 PM   #3
Recycles dryer sheets
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Quote:
Originally Posted by pb4uski View Post
At age 30.... go 100% equities... something like VTSAX and/or VTIAX depending on what your Roth is invested in. No need for bonds at age 30 IMO.

Seems like perhaps you have not considered that qualified dividends and long-term capital gains are tax-free for those in the 15% tax bracket and lower.

While some of VTIAX's dividends are not qualified, you will get a foreign tax credit that IME more than makes up for it.

If you end up with any headroom in the 15% bracket, you could gains trade, pay zero tax but increase your basis.
In other words, sell and realize the capital gain at 0%, and repurchase the same fund with a new cost basis that is higher than before. This is a good way to harvest capital gains if you think you will be in a higher tax brkt in the future(which 30 year old is likely to increase his earned income over time)

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