Which Vanguard Fund for Small Taxable Account

[Katsmeow]

All of our investment funds have been in tax deferred accounts. We are in the withdrawal phase so usually will be withdrawing some from those accounts. Our income is Social Security (for both DH and I) plus IRA withdrawals. For future years I expect that SS will cover between 65% and 70% of our expenses most years. For this year, we took a withdrawal from some IRAs at the start of this year and do not expect to need to make any other significant withdrawals this year.

I recently received money from the sale of my deceased mother's house. Part of that money has been transferred to a separate taxable account at Vanguard (I live in a separate property state). It represents a little under 10% of the total portfolio. I have to decide how to invest this money. I can move around other investments to keep my allocation balanced however I want to.

I know that in general you want to keep down taxable income in a taxable account. My first thought was to buy something like the Total Stock Market index fund and just hold onto it. I would not reinvest dividends. Potentially I would not be selling these funds for a long time, if ever.

Currently for this year we are slated to not owe any income tax or a minimal amount as most of our SS income is not taxable. Going forward I expect to be in the 10% bracket most years.

However -- if there was something that would occur this year or next which required us to withdraw a large amount of money that is not anticipated, withdrawing it from the IRA and having it be taxable could end up making much more of the SS taxable and could have a significant effect. For example, an extra withdrawal of $20,000 next year would lead to over $4k in extra taxes even though it would only move us to the 12% tax bracket. This is due to the excess effect on SS taxes.

So -- if something like that were to happen rather than withdraw the $20k from the IRAs I would probably just sell part of the taxable account as only the gain would be taxable.

So -- the possibility is that I don't touch this taxable money for years (except for dividends). That would suggest I just put it in the Total Stock Market or some other equity fund.

But, in the event of an unanticipated large expense I might prefer to pay for it out of this money rather than increasing taxable withdrawals. Given that -- does that change my investment choice?

[swakyaby]

Why not do a little of both? Increase your emergency cash allocation in a prime money market at Vanguard and put the rest in the Total Stock Market index fund with the dividends and capital gains directly deposited to your bank account.

I am facing a similar scenario as you. DM passed last year and her estate is still in the process of being distributed to the heirs. Since my only income is from my investments, I plan to put another year’s worth of spending in my Vanguard Prime money market account. The remainder will go to my existing tax-efficient equity funds: Vanguard tax-managed Capital Appreciation Fund and Vanguard Tax-Managed Small Cap Fund, from my prior high income tax days.

[pb4uski]

I hold international and domestic equities in my taxable accounts. They generate qualified dividends that are 0% or 15% for most people, and the small amount of ordinary tax on non-qualified dividends are offset by the foreign tax credit. All together, my effective tax rate on these holdings is negative because the foreign tax credit exceeds the ordinary tax on non-qualified dividends.

If you need to liquidate as long as you can wait for a year any LTCG would be 0% or 15% too.

If you expect to need to liquidate and can wait a year then VMMXX would be a good choice.

[VanWinkle]

Quote:

Originally Posted by swakyaby Why not do a little of both? Increase your emergency cash allocation in a prime money market at Vanguard and put the rest in the Total Stock Market index fund with the dividends and capital gains directly deposited to your bank account. I am facing a similar scenario as you. DM passed last year and her estate is still in the process of being distributed to the heirs. Since my only income is from my investments, I plan to put another year’s worth of spending in my Vanguard Prime money market account. The remainder will go to my existing tax-efficient equity funds: Vanguard tax-managed Capital Appreciation Fund and Vanguard Tax-Managed Small Cap Fund, from my prior high income tax days.

+1, this is how I handle it also. I make sure not to buy the same fund I hold in my IRA to make sure I can Tax loss harvest without worries of wash sales.

[Katsmeow]

I have a fair amount of cash elsewhere. We are going to be doing some home remodeling so I have more than enough money out to cover that and probably any unusual expenses for the next year. That is why I would be reluctant to put this money in a money market. This is the money that I want to invest. It would only be in a really unanticipated situation that I would withdraw from it within the next year. Given that perhaps buy equity fund.

I was thinking of Total Stock Market but could consider others if there are others that would reduce taxable income more in terms of dividends.

[VanWinkle]

Quote:

Originally Posted by Katsmeow I have a fair amount of cash elsewhere. We are going to be doing some home remodeling so I have more than enough money out to cover that and probably any unusual expenses for the next year. That is why I would be reluctant to put this money in a money market. This is the money that I want to invest. It would only be in a really unanticipated situation that I would withdraw from it within the next year. Given that perhaps buy equity fund. I was thinking of Total Stock Market but could consider others if there are others that would reduce taxable income more in terms of dividends.

A total stock market index fund (VTSAX) or the Fidelity equivalent would work fine to keep dividends and capital gains low.

[Masquernom]

Since it's a taxable account, take a look at Vanguard Tax Managed mutual fund. Wish I had more in that account, and less in Wellington when tax time comes..