Reducing Tax Hit From VG Taxable Acct

[morsetaper2]

Still working, FIRE in 1-2 yrs +/- ? For years I have had my 401-k & Roth IRA contributions maxed out. Still managed to put a nice chunk of $$ into a VG Taxable acct., its at a little over $400,000 now.

Mix is approx:
$48k VMFXX MM,
$79k VG Tot Stk Indx
$262k VG Wellsley
$19k Totl World ex US Indx

That acct is generating a tax bill while I am still working. Is it just the cost of an appreciating investment?

If I were to sell portions of this to improve the asset alloc, or say put some in a tax free muni fund. I would get hit with a tax bill and its unlikely the tax free muni fund would appreciate as well as the above mix.

Once I stop working I plan to draw the taxable acct down first, as well as my RO IRA, 401-k, & Roth IRA to do my best to minimize tax hit.

But in the present time...should I just let the taxable acct be? Or do something else with it? The asset allocation leaves a bit to be desired. Just have been reluctant to sell any of it while I'm working because of the tax hit I would incur. Any advice, I'm all ears.

 

[RunningBum]

Yes, you're going to have some taxes on your taxable account unless you put it all in tax free munis, and as you say that may not be the best investment. Don't let taxes dictate your investments. Rather, decide on your ideal asset allocation (stocks/bonds/cash) and then assets to accounts in the most tax efficient way. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement is a great guide for this. Wellesley, for example, throws a lot of dividends (I think a lot of non-qualified too) and some CG distributions, so it may not be a great fund for taxable.

These last couple years before retiring are a good time to get your AA in order especially if you will be trying to manage income for an ACA subsidy. You don't want to be rearranging assets and taking large cap gains in a year when you want to use the subsidy. Also note tax free muni income counts towards MAGI for ACA calculations.

The tax hit for selling funds should be 15% unless you get into NIIT with higher income, or the 20% with really high income. You may be able to take LTCGs at 0% in retirement, but you can also use that space to do Roth conversions instead. You have to make a long term analysis of your situation to decide if it's worth it to position your assets now and take the tax hit, or defer it.

 

[pb4uski]

Qualified dividends and long-term capital gains get preferential rates... generally 0% if you are in the 12% tax bracket or lower and generally 15% if you are in the 22% tax bracket or higher. You can look at your 1099-DIV and see how much of your dividends are qualified. Wellesley is probably generating significant unqualified dividends in your case.

The first thing that you need to find out is the basis and unrealized gains for each of your positions... and if any purchase lots have unrealized losses. You can sell lots with losses and then sell lots with gains equal to the losses and end up wind up with no taxable gain.

I would reduce Wellesley to the extent that you can at a reasonable tax cost and for tax efficiency put your international equities in taxable... and once that is full put domestic equities in taxable.

You may want to look at https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

On your drawdown strategy, if you have penalty-free access to 401k money once you retire, I would concentrate on that first while you are in a low tax bracket to reduce future RMDs and the dreaded tax torpedo and let the taxable money grow.

 

[Closet_Gamer]

Seems reasonably tax efficient to me for a portfolio being positioned to deliver income in the near future.

Wellsley is spitting out taxable dividends, but to the cap gains point, you'd probably take a hit adjusting your portfolio and right at a time when you're about to really want those dividends.

Maybe move the MM funds into VTEB or something similar, but the tax load on the MM funds is likely a pittance.

 

[big-papa]

Still working, FIRE in 1-2 yrs +/- ? For years I have had my 401-k & Roth IRA contributions maxed out. Still managed to put a nice chunk of $$ into a VG Taxable acct., its at a little over $400,000 now.

Mix is approx:
$48k VMFXX MM,
$79k VG Tot Stk Indx
$262k VG Wellsley
$19k Totl World ex US Indx

That acct is generating a tax bill while I am still working. Is it just the cost of an appreciating investment?

If I were to sell portions of this to improve the asset alloc, or say put some in a tax free muni fund. I would get hit with a tax bill and its unlikely the tax free muni fund would appreciate as well as the above mix.

Once I stop working I plan to draw the taxable acct down first, as well as my RO IRA, 401-k, & Roth IRA to do my best to minimize tax hit.

But in the present time...should I just let the taxable acct be? Or do something else with it? The asset allocation leaves a bit to be desired. Just have been reluctant to sell any of it while I'm working because of the tax hit I would incur. Any advice, I'm all ears.

Withdrawing taxable first isn't always the best answer. Oftentimes withdrawing some from taxable and some from 401K/RO IRA before age 70 1/2 helps to prevent a large tax hit from starting once you begin RMD's. A couple of tools to help you with that as well as Roth conversions.

https://www.i-orp.com/bequest/index.html
Be sure to use the "extended" version - button is further down on the page

From Bogleheads:
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

Good luck!

 

[Masquernom]

You might want to take a look at Vanguard Tax Managed fund.

 

[walkinwood]

+1 on RunningBum's advice not to let taxes dictate your investments. Start with determining your AA across all accounts. Then determine location of assets (eg. bonds go into T-IRA/401K first - lots of papers on this). Then determine investment vehicle.


If I were to start again, I wouldn't slice & dice much and would stick to very diversified index funds like Vanguards Total Market + Vanguard's Total International for example. Compare their distributions to those of active funds or even a combination of say Large company index + Small company index.


Put a lot of thought into investment vehicles (which funds, how many) because as time passes, the unrealized cap gains increase and it becomes very expensive to change funds.

 

[LOL!]

I learned not to earn any taxable interest in my taxable account. I use tax-deferred accounts for investments that would pay non-qualified dividends and taxable interest.

Thus in my taxable account, there is no way I would have CDs, a savings account, a money market fund, a balanced fund, nor a taxable bond fund. I would have all of those in a traditional IRA or a 401(k).

So for someone annoyed with taxes in a taxable account, I would suggest not using VMMXX nor Wellesley. Those 2 funds are $310K or 76% of the presented assets. If one didn't want to sell them, then I would at least no longer add to them and certainly would not reinvested their distributions back into them.

If you want Wellesley, then use it in your IRA.

The above is not the tax tail wagging anything. You can still use the same investments, but locate them tax efficiently and reduce your tax burden.

One may claim that the performance of Wellesley is worth it, but one can be fooled because the performance should be calculated after-tax. Typically, investors do not withdraw from Wellesley to pay the income taxes that it creates, too. Instead, they pay the taxes from a paycheck or a savings account or some place else. That's the same as paying the tax from Wellesley, then contributing back into Wellesley the amount of tax paid. That's a hidden way to make Wellesley look even better than it really is.

 

[frank2009]

You might want to take a look at Vanguard Tax Managed fund.

Consider this instead of Wellesly. I'm not sure of the tax hit of selling Wellesly though.

 

[COcheesehead]

I learned not to earn any taxable interest in my taxable account. I use tax-deferred accounts for investments that would pay non-qualified dividends and taxable interest.

Thus in my taxable account, there is no way I would have CDs, a savings account, a money market fund, a balanced fund, nor a taxable bond fund. I would have all of those in a traditional IRA or a 401(k).

So for someone annoyed with taxes in a taxable account, I would suggest not using VMMXX nor Wellesley. Those 2 funds are $310K or 76% of the presented assets. If one didn't want to sell them, then I would at least no longer add to them and certainly would not reinvested their distributions back into them.

If you want Wellesley, then use it in your IRA.

The above is not the tax tail wagging anything. You can still use the same investments, but locate them tax efficiently and reduce your tax burden.

One may claim that the performance of Wellesley is worth it, but one can be fooled because the performance should be calculated after-tax. Typically, investors do not withdraw from Wellesley to pay the income taxes that it creates, too. Instead, they pay the taxes from a paycheck or a savings account or some place else. That's the same as paying the tax from Wellesley, then contributing back into Wellesley the amount of tax paid. That's a hidden way to make Wellesley look even better than it really is.

+1

 

[audreyh1]

You index funds are generating low capital gains distributions, so don’t worry about those.

Yes, you could switch your MM fund to a tax exempt one without tax consequences.

The big question is what to do about Wellesley. If you are going to need income from it once you retire you might want to leave it alone. Otherwise you have to look at the tax hit for changing it to something more tax efficient.

Whatever you do look at what the tax situation might be once you retire to avoid messing that up now.

 

[big-papa]

Put a lot of thought into investment vehicles (which funds, how many) because as time passes, the unrealized cap gains increase and it becomes very expensive to change funds.

+1000 on that! I made a switch to index funds a long time ago. Cleared out a managed fund in my rollover IRA and replaced it with my chosen index funds. But also owned some of it in my taxable account. And unrealized cap gains in it are pretty substantial. And even though it's only about 8% of my total portfolio, the dollar amount of the two distributions was pretty large in 2018. I'm at least redirecting those into some index funds I hold, so as a percentage of my portfolio it will continue to drop. Once retired, I'll nibble on it till it's gone.

 

[RunningBum]

I learned not to earn any taxable interest in my taxable account. I use tax-deferred accounts for investments that would pay non-qualified dividends and taxable interest.

Thus in my taxable account, there is no way I would have CDs, a savings account, a money market fund, a balanced fund, nor a taxable bond fund. I would have all of those in a traditional IRA or a 401(k).

Good advice in general but never say never.

I'm 57 and retired, with the majority of my money in taxable. I manage my income to get the ACA subsidy, and would come somewhat close to exceeding that from the dividends on index funds I hold in taxable. Those dividends aren't enough for me to live on (the way I want to live). So I'd need to sell some of those funds to make ends meet, and I have no losers left in my funds, so I'd incur pretty good capital gains.

To bridge the gap, in 2017 I gave up the subsidy and stockpiled enough cash to make up the difference in dividends and what I spend. I keep that in CDs in my taxable account. The CD interest addition to MAGI pushes me closer to the cliff edge but shouldn't be over. It's not changing my AA as I just hold more equities in my Roth.

I don't see another good way to manage my MAGI for the next 7.5 years. I could take distributions from my Roth but I don't think that's better.

 

[24601NoMore]

Wellesley is an all around great fund (I own as well, albeit in tax deferred and it's one of my top / favorite funds) but as you've found, generates a good amount of income and cap gains.

A very good alternative for your taxable allocation is VTMFX - Vanguard Tax Managed Balanced. It has a somewhat similar approach with a slightly higher equity allocation but beats VWIAX in the YTD, 1, 3, 5 and 10 year periods. (VWIAX/VWINX wins in the 15 year period). Most importantly, it's managed to minimize distributions (including not having paid a Capital Gain since inception in 1994 and runs at least a full point if not more less Yield, with most distributions being Qualified Dividends) so that you don't incur as much of a tax burden.

Risk is slightly higher with a .9 - 1.3 additional Standard Deviation, depending on period.

Would definitely suggest pulling a Morningstar report on it, and comparing to VWINX/VWIAX.

Both are IMHO very good choices for Balanced funds. I'd just put VTMFX in after-tax and VWIAX/VWINX in tax deferred.

 

[Animorph]

I wouldn't worry about taxable distributions for just two years, if the capital gains would be worse. In two years you'll want to start selling in the taxable account anyway and you can start balancing out distributions/AA changes versus gains. Ideally you might be in the 0% CG tax bracket, so it could really pay to wait if that's the case.

I revamped my tIRA/Roth portfolio to hold a simple mix of four broad index funds. But the capital gains hit was too high to do the same thing for my old slice-and-dice mix in the taxable accounts. I've been selling off the taxable funds considering CG's, size of distributions, and AA. That's my only income for now. But I've also been doing large Roth conversions, so no 0% CG taxes yet. Two more years of maximum Roth conversions and then I'll switch over to 0% CG taxes for a few years. Pretty much have to look at taxes for every year in retirement to try to optimize that.

 

[mrfeh]

As taxable accounts grow in size, there will be a larger tax bill associated with it. That is life.

I don't know how tax efficient the Wellsly fund is; that is something you could investigate.

 

[jebmke]

As taxable accounts grow in size, there will be a larger tax bill associated with it. That is life.

I don't know how tax efficient the Wellsly fund is; that is something you could investigate.

Even with index funds. The first quarter dividend on Vanguard's Total Stock Market index increased 36% over the same quarter last year. This is really irritating.