Taxable account investing

[LastBoomer]

Hello,

Searching the forum not able to find a good discussion of my question, so here goes:

I have a recent lump sum in my taxable brokerage account I wish to invest. I am semi-retired with some income as well as cash to fund 2 years of expenses. I also have a couple years expenses in an intermediate bond fund (FXNAX) in my taxable account (I am 57, so can’t touch retirement accounts for a couple years).

In addition to my taxable account I have SEP, Trad, and Roth IRA accounts. My target AA is 70/25/5.

Most of my holdings—spread across all my accounts—are in FFNOX (Fidelity Four-in-One-Index Fund), even in my taxable account (where it may not be the most tax efficient to hold it, since I can’t sell only the bond portion, for example).

FFNOX is 85/15 AA (equity/bond); I have increased my bond allocation by simply supplementing it with FXNAX / AGG to achieve the 25% bond allocation.

I purchased the FFNOX in my taxable account more than a decade ago, and I have been pretty satisfied with its performance—no surprises, it does what its supposed to do, and pretty low-cost. But back then I didn’t fully think of the future issues of having this in a taxable account.

Q: FFNOX is still relatively tax-efficient—just buy more?

Q2: Or, purchase an S&P 500 index or total stock market index fund in my taxable account, then sell some FFNOX in my retirement account(s) and purchase bond index fund there, in order to get back to my target AA?

Q3: Consider something like Betterment for this new lump sum in my taxable account, taking advantage of its active tax loss harvesting strategy?

Q4: What do folks with target-date, or balanced funds, do, when they are in the decummulation phase? Do they first break them up into individual asset classes, then selectively sell those that are “up” for their income needs? Because this is the issue I will have with my large FFNOX holdings.

Whatever I do I will not sell the FFNOX in my taxable account, as I would incur large capital gains.

Any other thoughts from those experienced with these issues, especially investing in taxable accounts?

Thank-you for your consideration.

 

[TheWizard]

I'm in a different overall situation, but I only invest in stock funds in my taxable account. I do hold some fixed income funds, but only in my tax-deferred 403(b) account.

It's important to have a TLH strategy in mind even when times are good.
And also to have a LTCG strategy in mind if you plan to withdraw $40,000 to buy a new car every so often, as I do...

 

[TheWizard]

To clarify a bit more, I've been retired for several years, so what I have is excess retirement income going into my taxable account, especially for the past year when travel hasn't been feasible.

My taxable account AA is closer to 95/5, not 100% stocks, meaning that I keep a bit of cash in my settlement fund to take advantage of buying opportunities better.
Aside from that, the only other cash I hold is around $10k in checking; I'm not one of them Bucketeers...

 

[target2019]

In our taxable brokerage we have two broad index/ETF possible investments.
1) Dividend ETFs (we can absorb the tax impact of these)
2) Muni funds (one U.S. and one for our state)

We have a situation similar to your FFNOX with large capital gains, but it is an individual stock. When the NAV drops, I determine if I can offset it with a loss in other investment. Then I take the proceeds and buy from the two options above.

Also under consideration is a growth ETF.

 

[LastBoomer]

I should note I am single and combined annual income (dividends, interest, cap gains from passive changes in indices) from my portfolio, both retirement and taxable accounts, is still under $40,000, so I don’t as of yet have a tax problem with the taxable account income. I DO live in Minnesota, however, which has very unfriendly tax policy towards retirees (LT cap gains taxed at regular income rates, and MN is one of the 13 states that taxes social security).

 

[SecondCor521]

The theory with target date funds is that you wouldn't split them up; the target date you've chosen and the managers you've chosen have laid out a strategy to shift the AA for you from more aggressive to less aggressive along some sort of appropriate path. I personally don't use target-date funds.

The problem with splitting them up (or shifting AA in any way after a long time) is the embedded capital gains, as you've identified.

What I do is keep all of my bond allocation in my traditional IRA and rebalance to/from stocks inside my traditional IRA.

You must have something motivating you to change, otherwise you wouldn't have posted. So it sounds like your Q2 or Q3 is the way you want to go. Personally I'm not a fan of Betterment, so if I woke up in your shoes I'd probably do Q2.

 

[LastBoomer]

The theory with target date funds is that you wouldn't split them up; the target date you've chosen and the managers you've chosen have laid out a strategy to shift the AA for you from more aggressive to less aggressive along some sort of appropriate path. I personally don't use target-date funds.

The problem with splitting them up (or shifting AA in any way after a long time) is the embedded capital gains, as you've identified.

What I do is keep all of my bond allocation in my traditional IRA and rebalance to/from stocks inside my traditional IRA.

You must have something motivating you to change, otherwise you wouldn't have posted. So it sounds like your Q2 or Q3 is the way you want to go. Personally I'm not a fan of Betterment, so if I woke up in your shoes I'd probably do Q2.

Thanks. Yes, I am leaning toward my Q2 solution. I should note that FFNOX, with such a low bond allocation (15%), has tended to act more like an equity index.
Also, I have used the income in my taxable account (I directed dividends to be deposited into my cash account, rather than reinvested) the past few years to partially fund my semi-retired lifestyle (it pays for my winter travel during Jan/Feb). Combined income from both retirement and taxable accounts is pretty close to enough to fully fund my retirement lifestyle, even if I were to stop working entirely. I like the idea of not selling any shares, just living off their income. I know theoretically there isn’t any difference between that or simply selling shares with cap gains, but it does make me feel more secure not selling shares outright if I don’t have to.

 

[LastBoomer]

The theory with target date funds is that you wouldn't split them up; the target date you've chosen and the managers you've chosen have laid out a strategy to shift the AA for you from more aggressive to less aggressive along some sort of appropriate path. I personally don't use target-date funds.

The problem with splitting them up (or shifting AA in any way after a long time) is the embedded capital gains, as you've identified.

What I do is keep all of my bond allocation in my traditional IRA and rebalance to/from stocks inside my traditional IRA.

You must have something motivating you to change, otherwise you wouldn't have posted. So it sounds like your Q2 or Q3 is the way you want to go. Personally I'm not a fan of Betterment, so if I woke up in your shoes I'd probably do Q2.

My motivation is receiving the lump sum in my taxable account and trying to make a better decision about investing in that account than the one I made when I first purchased FFNOX. I really haven’t added to my taxable account the past few years, so just lived with the fact that I have a balanced find there that keeps growing. Since I haven’t had to sell any large chunk of it I have only had tax consequences on the ~2.7% yield it throws off annually.

 

[Ncc1701]

Well, you may be able to sell some of the FFNOX without realizing too many gains if you have higher cost basis lots. Nearly all firms by default use the average cost basis method when calculating the basis for shares you sell. However, some brokers like Schwab will allow you to change that to "versus purchase" so that you can pick and choose lots you want to sell. You may be able to reduce some holdings this way. I have done this with VTMFX which is a 50/50 allocation fund.

 

[LastBoomer]

Thank-you

 

[Surewhitey]

Maybe move residency to Wisconsin, then keep it simple with s&p index or VTSAX. Low divy distribution and LTCG are better (for now).

 

[bada bing]

When investing in index type investments in taxable accounts, ETF's are generally more tax efficient than mutual funds. Vanguard is the exception because of their patent on share classes.

https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency

Most index funds have ETF counterparts that are virtually identical in holdings and performance. An example is IVV (s&p500 index ETF) verses FXAIX (s&p500 index mutual fund) You probably could gain some tax flexibility by investing your choosen AA in ETFs for new money going forward.

 

[LastBoomer]

When investing in index type investments in taxable accounts, ETF's are generally more tax efficient than mutual funds. Vanguard is the exception because of their patent on share classes.

https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency

Most index funds have ETF counterparts that are virtually identical in holdings and performance. An example is IVV (s&p500 index ETF) verses FXAIX (s&p500 index mutual fund) You probably could gain some tax flexibility by investing your choosen AA in ETFs for new money going forward.

This is a good point. I have generally stuck with index funds, because I pretty much make a single purchase transaction then hold. Also, I have read the bid-ask spread can be higher with ETFs than funds, but probably not so much with large, widely-held-and-traded ETFs, such as those tracking the S&P500. However, it is interesting that Betterment uses ETFs.

 

[TheWizard]

With ETFs you can use Limit Orders for purchases with new money.
Each month, I move excess cash into my settlement fund and set up or modify a limit order 2% below the current price.
My strategy tends to vary a bit depending on price level vs all-time high and the amount in my settlement fund...