Taxable account investing

[aaronc879]

I have very little experience investing in after tax accounts. I am planning to start putting at least $1000/mo into a Vanguard taxable account and have a couple questions. I want to keep it fairly simple. I will probably invest 80 or 90% in VOO or VTI(equities) and the rest in BND(bonds). I can switch back and forth between VOO and VTI without any penalties because they are not identical funds, correct? What fund is most similar to BND that I could switch to for bonds? Any dividends or LT capital gains are not taxed unless they put me above the 12% tax bracket, right? So I could just contribute enough to my 401K to keep me under $51,000(single)? Any tips? Thanks

 

[OldShooter]

Do not let the tax tail wag the investment dog. Reducing your retirement savings in order to save a few tax dollars strikes me as a very bad idea. Be sure to run all the numbers before making such a decision.


Re funds, VOO is only the S&P 500 and hence is really a sector bet. VTI is the whole US market, but still a sector bet because it includes no non-US equities. Here is a worthwhile video: https://famafrench.dimensional.com/videos/home-bias.aspx by one of the top dogs in the world of investments.

 

[aaronc879]

Do not let the tax tail wag the investment dog. Reducing your retirement savings in order to save a few tax dollars strikes me as a very bad idea. Be sure to run all the numbers before making such a decision.

Not sure what you mean by this. Both the 401K and the taxable account are retirement savings. I would contribute enough to my 401K to stay in the 12% bracket but no more since the funds in my 401K are not good at all. Then I would contribute to a ROTH IRA, then anything left over would go to the taxable account.

 

[bingybear]

I think you have overly simplified some of this.

I can switch back and forth between VOO and VTI without any penalties because they are not identical funds, correct?

Yes you can do this. Note that switching too often can create STCG instead of LTCG which would be taxed as normal income. Note if you would sell one at a loss and buy it back say in your roth within the +/-31 day window, then you would end up with a wash sale were you could not ever use the loss.

I would expect VOO and VTI would distribute mostly qualified dividends, but may distribute some ordinary dividends that will be taxable as income. BND likely distributes ordinary dividends too.

What are your thoughts for wanting to switch between VOO and VTI? capturing losses?

 

[OldShooter]

Not sure what you mean by this. Both the 401K and the taxable account are retirement savings. I would contribute enough to my 401K to stay in the 12% bracket but no more since the funds in my 401K are not good at all. Then I would contribute to a ROTH IRA, then anything left over would go to the taxable account.

Well, I don't have your big picture, like age, other assets, etc. but in general most believe (including me) that all tax-sheltered account opportunities should be maximized before putting money in taxable accounts. The taxable account is a much less tax-efficient way to save than the 401K, Roth, HCRA if available, etc. so it is the last choice.

 

[aaronc879]

What are your thoughts for wanting to switch between VOO and VTI? capturing losses?

Yes, to take advantage of any and all tax breaks.

 

[aaronc879]

Well, I don't have your big picture, like age, other assets, etc. but in general most believe (including me) that all tax-sheltered account opportunities should be maximized before putting money in taxable accounts. The taxable account is a much less tax-efficient way to save than the 401K, Roth, HCRA if available, etc. so it is the last choice.

THat makes sense but in my position I want to have more money that I have access to before 59.5. I am recovering from a total hip replacement and don't know how long I can do my physical labor job. I want to save what I can outside of tax deferred accounts while also taking all of my match and keeping taxes in 12% bracket. It seems like a good strategy for my personal situation. Maybe not best as a general rule.

 

[OldShooter]

M

THat makes sense but in my position I want to have more money that I have access to before 59.5. I am recovering from a total hip replacement and don't know how long I can do my physical labor job. I want to save what I can outside of tax deferred accounts while also taking all of my match and keeping taxes in 12% bracket. It seems like a good strategy for my personal situation. Maybe not best as a general rule.

Makes sense. Be careful, though. "keeping taxes in 12% bracket" should not be the goal. The goal should be to end up with as much spendable money as possible. A lot of people get very attracted to reducing or eliminating taxes and, as a result, compromise the real objective. If you get more money, you should not care if the government gets more money too.

 

[bingybear]

Yes, to take advantage of any and all tax breaks.

OK, so you want to harvest LTCG to the top of the 12% bracket (I guess). Now BND will be kicking out ordinary dividends which are taxed as ordinary income. Would it be better to have BND in a qualified account (IRA, roth, 401k)?

THat makes sense but in my position I want to have more money that I have access to before 59.5. I am recovering from a total hip replacement and don't know how long I can do my physical labor job. I want to save what I can outside of tax deferred accounts while also taking all of my match and keeping taxes in 12% bracket. It seems like a good strategy for my personal situation. Maybe not best as a general rule.

Maximizing qualified accounts is good to a point (ok, everything in a roth may be an exception). I have found that taxable assets have been good for me in ER (age <59.5). It allows for roth conversions with tax from aft tax $. It allows living expenses without 72T or penalties on TIRA withdraws. It is also a tool for managing taxes by not having to take all income from potentially taking all income from TIRA/401k.

 

[bingybear]

one other thought, if you are just trying to capture gains, there would be no reason to swap between funds. You can sell a position and buy it back on the same day. There is not a wash sale rule for gains. Just make sure you have enough to cover your purchases and fees.

 

[aaronc879]

one other thought, if you are just trying to capture gains, there would be no reason to swap between funds. You can sell a position and buy it back on the same day. There is not a wash sale rule for gains. Just make sure you have enough to cover your purchases and fees.

Is it correct that there are no fees if I buy Vanguard ETFs at Vanguard but there would be if I bought them at TD Ameritrade?

 

[GalaxyBoy]

BND pays ordinary dividends monthly, so I keep it in my tax-sheltered accounts.

 

[aaronc879]

BND pays ordinary dividends monthly, so I keep it in my tax-sheltered accounts.

I have Wellesley in my ROTH so maybe I will just go 100% equities in my taxable.

 

[braumeister]

Is it correct that there are no fees if I buy Vanguard ETFs at Vanguard but there would be if I bought them at TD Ameritrade?

True.
But you can buy many others for free at TDA.
https://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp

 

[scrabbler1]

I remember when I began focusing more on an ER, I then reduced my 401k contributions. This began in my 7 part-time working years. At first, I began contributing more than the maximum pre-tax dollars eligible for company match to offset for the annual salary reduction. But once I began looking more at ER, I cut that back to the maximum for company match.


A few years later, when I made a second reduction to my weekly hours worked, I became ineligible for any company match on the 401k contributions. Between that and needing more after-tax dollars to pay for COBRA (I became ineligible for subsidized group health insurance, too), I eliminated all 401k contributions.


I agree with you, Aaron, that you need to focus on taxable account balances to get you from a super-early ER to age ~5.5, when you gain unfettered access to an IRA. This has been my plan, made possible in large part by cashing out my company stock using NUA to lessen the tax bite, while leaving the rollover IRA (from the 401k) intact. I would have hated liquidating the 401k and losing nearly half of it to taxes and early withdrawal penalties.

 

[ESRwannabe]

I have very little experience investing in after tax accounts. I am planning to start putting at least $1000/mo into a Vanguard taxable account and have a couple questions. I want to keep it fairly simple. I will probably invest 80 or 90% in VOO or VTI(equities) and the rest in BND(bonds). I can switch back and forth between VOO and VTI without any penalties because they are not identical funds, correct? What fund is most similar to BND that I could switch to for bonds? Any dividends or LT capital gains are not taxed unless they put me above the 12% tax bracket, right? So I could just contribute enough to my 401K to keep me under $51,000(single)? Any tips? Thanks

As far as tax efficiency the best thing to keep in taxable is foreign equities. So you can get the foreign tax credit. Don't know if you invest in foreign equity or not.

Currently in taxable I have Vanguard's high dividend yield indexes (US and Foreign) which are VHDYX and VIHAX, split 50/50. My 401k is almost 100% vanguard's total bond index. Roth IRA is Vanguard's Managed Payout fund.

If I add bonds to taxable it will probably be the etf XMPT or maybe the cef HTD which is all qualified dividends, 50/50 preffered stocks and utility common. Or maybe Vanguard's tax managed balanced fund.

 

[pb4uski]

I have very little experience investing in after tax accounts. I am planning to start putting at least $1000/mo into a Vanguard taxable account and have a couple questions. I want to keep it fairly simple. I will probably invest 80 or 90% in VOO or VTI(equities) and the rest in BND(bonds). I can switch back and forth between VOO and VTI without any penalties because they are not identical funds, correct? What fund is most similar to BND that I could switch to for bonds? Any dividends or LT capital gains are not taxed unless they put me above the 12% tax bracket, right? So I could just contribute enough to my 401K to keep me under $51,000(single)? Any tips? Thanks

If you plan to stay in the 12% tax bracket (actually the 0% taxable gains/qualified dividends limit for 2018 is $100 less that the top of the 12% tax bracket... thank you Congress ) ... so total income of $50,600 in 2018 ($38.600 + $12,000 standard deduction).

I would put my international stock allocation in taxable and then once that is full put in domestic equities. With international in taxable, not only will a large portion of dividends be tax-free but you will also be able to take advantage of the foreign tax credit... which becomes worthless for international equities in tax-deferred or tax-free accounts. For me, the foreign tax credit actually exceeds the tax on the small amount of non-qualified dividends so the effective tax rate is actually negative... a net benefit!

Also, if you have losses, you can flip between VXUS or VTIAX and VFWAX to create tax losses since they are IMO dissimiliar enough to avoid wash sale treatment. YMMV.

Keep your bonds in tax-deferred for tax efficiency.