Wellesley in taxable account

[Lazyfabs]

I understand that it is not the best choice in a taxable account, but is is worth dealing w/ it's tax inefficiency vs not in a taxable account?

Also, does anyone hold it in a taxable account as a way to provide some principal protection while allowing some growth in a taxable account if there is no "space" to hold (doesnt fit it ones investment plan/allocation )it in a tax deferred account, but likes the fund or treated you well?

 

[obgyn65]

I am not sure what you are asking. Please can you clarify ?

I understand that it is not the best choice in a taxable account, but is is worth dealing w/ it's tax inefficiency vs not in a taxable account?

Also, does anyone hold it in a taxable account as a way to provide some principal protection while allowing some growth in a taxable account if there is no "space" to hold (doesnt fit it ones investment plan/allocation )it in a tax deferred account, but likes the fund or treated you well?

 

[ducky911]

I own it in both my taxed account and my taxed deferred account....I had been meaning to get rid of it in my taxed account until I found out that I am in the 2% tax bracket.

 

[Lazyfabs]

I am not sure what you are asking. Please can you clarify ?

Forgot to add if someone is in a hifpgh tax bracket 25%+ and Wellesley being a tax inefficient fund in a taxable account, is it worth holding it in a taxable account?

 

[Animorph]

I'd buy what you want for your AA and place it as best you can. You could run a fairly simple spreadsheet to see if it's really bad for you in a taxable account. But how much would you give up in gains just so they weren't taxable?

 

[FIRE'd@51]

The problem with holding Wellesley in a taxable account is that it holds about 60% in bonds. This means that more than 60% of the dividend distributions are interest income which is taxed as ordinary income.

 

[Midpack]

The problem with holding Wellesley in a taxable account is that it holds about 60% in bonds. This means that more than 60% of the dividend distributions are interest income which is taxed as ordinary income.

It may be worth noting that long term capital gains and qualified dividends are taxed at 0% on married filing jointly adjusted gross incomes up to $72,500 in 2013. Came as a very pleasant, almost embarrassing, surprise to me in 2012 (almost half our dividends were qualified).

However, if I am reading it correctly, only 38.6% of Wellesley dividends are "qualified" so the rest would indeed be taxed as ordinary income. FWIW...

 

[H2ODude]

It may be worth noting that long term capital gains and qualified dividends are taxed at 0% on married filing jointly adjusted gross incomes up to $72,500 in 2013. Came as a very pleasant, almost embarrassing, surprise to me in 2012 (almost half our dividends were qualified).

HUH? Never heard of such a thing! Because I've become very ignorant the last few years on taxes. Have an inexpensive and good accountant who does it all. I'm beginning to realize I need to wise up on the subject since taxes are one of the only things I have some control over. It's not like when I was working and I put max into 457, max into 401k, and whatever left over to taxable account and called it good. So it's time to wise up and just having him tally up the damages at the end of the year! Jeeesh. And I used to think I was fairly $ savvy! I was planning on Rothing some of the IRA. Anyway. Learning is good, that's why I come here.

 

[jimnjana]

I just started a taxable Wellesley account using excess cash flow. Not worried about the tax implications at this point. Aim is to put up to 5K per year for the next 5 or 6 years. First time since ER that we have "invested" new money.

 

[Midpack]

HUH? Never heard of such a thing! Because I've become very ignorant the last few years on taxes. Have an inexpensive and good accountant who does it all. I'm beginning to realize I need to wise up on the subject since taxes are one of the only things I have some control over. It's not like when I was working and I put max into 457, max into 401k, and whatever left over to taxable account and called it good. So it's time to wise up and just having him tally up the damages at the end of the year! Jeeesh. And I used to think I was fairly $ savvy! I was planning on Rothing some of the IRA. Anyway. Learning is good, that's why I come here.

If it makes you feel any better, I didn't realize the tax gift either until 2012 after paying taxes on cap gains & dividends year in and year out forever. See below...note first income bracket under LTCG and Qualified Dividends.

https://www.fidelity.com/viewpoints/personal-finance/taxpayers-guide

 

[ERD50]

If it makes you feel any better, I didn't realize the tax gift either until 2012 after paying taxes on cap gains & dividends year in and year out forever. See below...note first income bracket under LTCG and Qualified Dividends.

Can anyone explain how that works? Take the 0% LTCG & divs for joint AGI <=$72,500.

If I have $32,500 earned income and $40,000 divs (AGI $72,500), I would pay 0% on the divs, and a blend of 10% and 15% on the $32,500 minus deductions & exemptions, right?

But what if I had $32,500 plus $1 earned income and $40,000 divs (AGI $72,501)? Would I pay 15% on all the divs, or just that $1?

-ERD50

 

[Midpack]

Can anyone explain how that works? Take the 0% LTCG & divs for joint AGI <=$72,500.

If I have $32,500 earned income and $40,000 divs (AGI $72,500), I would pay 0% on the divs, and a blend of 10% and 15% on the $32,500 minus deductions & exemptions, right?

But what if I had $32,500 plus $1 earned income and $40,000 divs (AGI $72,501)? Would I pay 15% on all the divs, or just that $1?

-ERD50

Test as many scenarios as you like Tax Calculator - Estimate Your Income Tax for 2013

 

[ERD50]

Test as many scenarios as you like Tax Calculator - Estimate Your Income Tax for 2013

Thanks - it was immediately obvious I had my head screwed on backwards and my terms mixed up. The $72,500 limit on 0% LTCG is for taxable income, and I was thinking AGI (maybe from reading the Obama-care planning thread and MAGI).

So it looks like the LTCG is 'stacked' on top of any reg income, and the amount over $72,500 is taxed at 15%. A few examples:

MFJ, 2 exempt
Reg Income = (salary, interest, ordinary dividends, short-term capital gains)

-------------------------------------
$32,000 Reg Income
$60,600 LTGC (and/or Qual Divs)

$72,600 Taxable Income

 $1,200 Tax on Reg Income
    $15 Tax On LTGC/QD
-------------------------------------

-------------------------------------
$92,600 Reg Income
     $0 LTGC (and/or Qual Divs)

$72,600 Taxable Income

$10,008 Tax on Reg Income
     $0 Tax On LTGC/QD
-------------------------------------

-------------------------------------
     $0 Reg Income
$92,600 LTGC (and/or Qual Divs)

$72,600 Taxable Income

     $0 Tax on Reg Income
    $15 Tax On LTGC/QD
-------------------------------------

-ERD50

 

[Animorph]

That's $72,500 taxable income, not AGI, so even better.

The portion of CG's and qualified dividends that exceeds the top of the 15% bracket is taxed at 15%, whatever fits between the regular taxable income and the top of the bracket is taxed at 0%. There's not a big cliff, though there is a marginal tax hit if you add $1 in regular income taxed at 15% and it knocks out a $1 of CG that is then taxed at 15%.

 

[Midpack]

That's $72,500 taxable income, not AGI, so even better.

The portion of CG's and qualified dividends that exceeds the top of the 15% bracket is taxed at 15%, whatever fits between the regular taxable income and the top of the bracket is taxed at 0%. There's not a big cliff, though there is a marginal tax hit if you add $1 in regular income taxed at 15% and it knocks out a $1 of CG that is then taxed at 15%.

Correct, sorry for the confusion above...

 

[ESRwannabe]

Putting a balanced fund in your taxable account is fine. I wouldn't let taxes dictate everything. Just keep them in mind. If you are comfortable with Wellessley and want to invest in it then I would go for it.

What I do is put all of my bonds in my 401k. I use my Roth IRA for REITs and my taxable account for stocks.

 

[pb4uski]

I think it depends on what other tax-deferred accounts you have, your tax marginal rate, your AA, etc. Usually, you want to have bonds in your tax-deferred accounts, and international equities in your taxable accounts (if you can use the foreign tax credit).

See Principles of Tax-Efficient Fund Placement - Bogleheads

 

[Lazyfabs]

we in the ~28% tax bracket, AA is ~65% stock; 35% bonds in our taxable, can't contribute to ira/roth due to income limits and max out 401ks. in our taxable accounts aa is in the ~50/50, besides cash and tax exempt fund, we have a consumer staple etf (held it for several years and tax efficient according to morningstar) and wellesley (also have had it for several years). we have all dividends/capital gains sent to mm. we currently also put equal amounts of money in monthly to all four holdings in our taxable account holdings. slowly the aa is tilting to a less stock heavy type of allocation and more towards a cash/tax-exempt tilt.

aware of the inefficiencies of holding taxable type bonds in taxable accounts, but wellesley has held up since we started putting money into it and did so w/o really knowing the boglehead way of fund placement. we haven't sold any shares, continue to put money into it monthly. concern is as it grows would be more wise to just let it sit and let it go at some point or continue to put money into it and some day have a nice little pot of $ to play w/ after FIRE.

thinking is keeping taxable somewhat on the defensive side of the investment equation and allow some growth. we move money in and out of mm in a semi-frequent manner.

 

[audreyh1]

So it looks like the LTCG is 'stacked' on top of any reg income, and the amount over $72,500 is taxed at 15%.
-ERD50

Yep! Sweet, huh?

 

[pb4uski]

Your reply is confusing. One usually only has one AA across all investment accounts (other than perhaps special purpose accounts for college savings, etc.).

What I do is I have my entire fixed income in my tax-deferred accounts, so if I were you I would have all my fixed income in my 401k (and I would probably use stable value funds if they are available to you in your 401k to mitigate interest rate risk of bonds). My 401k exceeds my total fixed income allocation so it also includes some equities. My taxable accounts holds all my international equities since most of the dividends are qualified and I can use the foreign tax credit. My domestic equities fill up the remainder of my tax-deferred, taxable and tax free (Roth) accounts as they generate mostly qualified dividends.

So for example, let's say that one has $1,000k; $500k in tax-deferred, $100k in tax-free (Roth) and $400k in taxable accounts and an AA of 40% fixed income ($400k) and 60% equities [comprising of 15% international equities ($150k) and 45% domestic equities ($450k)]. Your accounts would look as follows:

Taxable; $150k international equities + $250k domestic equities
Tax-deferred; $400k fixed income and $100k domestic equities
Tax-free; $100k domestic equities

With this configuration the least tax-efficient investments (fixed income) are tax deferred and most tax-efficient investments (international equities because of the foreign tax credit) are taxable.

 

[ERD50]

Yep! Sweet, huh?

Yeah, it's 'sweet' alright! At least for Uncle Sam.

I was thinking - OK, so a combo of income and LTGC took me over the taxable income threshold, so once I'm over, the LTGC tax will apply to those gains as a percentage of their contribution. But nooooooo! Those LTGC go to the 'top of the class'!

I guess all those lines in the Sched D and worksheets play out this little game with a bunch of subtract line x from line y, carry over to line z, multiply by zzy%, etc.

-ERD50