Taxable Account Question

[davemck21]

Just wondering if anyone has any advice for investing in a taxable account. My wife and I have maxed out all tax advantaged accounts and began funding a taxable account several years ago. Our combined asset allocation is 28% US equity (VTI, IWV,VIG and IJS), 20% Taxable Bonds/Muni's (BND, TIP, PCY, MUB, HYD, PZA and FAGIX), 15% International (VEA, IDV and SCZ), 10% emerging markets (VWO, DGS), 17% Real Estate (VNQ, RWX) and 10% Commodities (IAU and DBC). All positions are in the appropriate accounts (i.e, Bonds, REITs and commodities in tax advataged and US/international equity in both tax advantaged and taxable, muni's taxable). Our problem is we are running out of room in the tax advantaged accounts to maintain our current AA. I have to keep some US/international in the tax advataged accounts for rebalancing purposes. I have done a couple of sector plays with XBI, PJP, PAGG, XHB and PBS (taxable account) but it is throwing my AA way off. We have a 2.875% mortage (14 years left) and no other debt. We have 529's for our kids that we continue to fund. We also have a emergency cash account with 10 months living expenses. My question is what to do with new money? Is it ever OK to invest tax inefficient investment like bonds, commodities (K-1, ugh) and REITs in a taxable account to maintain current AA? Would love to pay off the house but at 2.875 I can't justify it. I have been a DIY investor for about 3 years with any extreme distrust of financial adivsors due to 15 years of really bad advice and really high fees. I would rather take the money and head to Vegas than call an advisor again. Any suggestions would be appreciated.
Thanks.

 

[pb4uski]

If I understand your question correctly your fixed income allocation exceeds the amounts in your tax-deferred (tIRA, 401k,529) and tax-free (Roth, HSA) accounts.

How about muni bonds?

 

[brewer12345]

Oh, what a terrible problem!

Yes, go ahead an invest in less tax efficient instruments in your taxable account if that is what your AA and portfolio constraints call for. I own some junk bonds in a taxable account, for example. Its not a sin.

 

[davemck21]

Thanks for the input. What do you think of a balanced fund? If so any recommendations?

 

[W2R]

Brewer is 100% right.

In my case, my tax advantaged accounts are all in bond funds but they did not have enough room for the 55% bonds specified in my asset allocation. So, in taxable I have the usual equity index funds, but I also have total bond market index and Wellesley.

Seems to work nicely enough for me, and my state+federal income taxes were not that bad at all. A quick/rough estimate is 10% of my AGI last year.

 

[pb4uski]

Thanks for the input. What do you think of a balanced fund? If so any recommendations?

I like them. Vanguard Star is one of my favorites, but Wellington, Balanced and others are good choices too.

 

[RockyMtn]

there are a variety of tax efficient equity ETF's and mutual funds out there. As for additional bonds you could always go the muni route.

 

[FIRE'd@51]

I own some junk bonds in a taxable account, for example. Its not a sin.

No sin at all. Especially since any long term capital gain is taxed at preferential rates (currently 15% max).

 

[target2019]

Tax-free bond fund. Check Vanguard site for your state.

 

[RobLJ]

I agree with target and pb--a good muni bond fund (or two or three) is one obvious.

You could also look at an MLP for bond-like income but they will be more volatile like stocks. The midstream MLPS are pipeline companies, so they will be affected by oil prices somewhat but not nearly to the extent of oil/gas companies. Some will consider returns as return of capital, which will avoid most annual taxes, but involve taxes on sale. This is not advice, obviously, and you indicate you already have munis. Strip bonds like I bonds is another option, but you can only invest a small amount per year.

 

[MooreBonds]

While these may not effect your current holdings that much, it may effect future purchases, depending on which particular stocks/funds they are:

REITs - ROC - Note that some REITs distribute return of capital in addition to dividends and realized capital gains. This is valid for both individual REITs as well as CEFs/ETFs/Mutual Funds holding them. My guess is that Vanguard's REIT ETF may not be distributing much ROC from the REITs, but keep in mind that the full distribution from your REIT individual stocks/funds is non-taxable....but if you're holding it in a tax-deferred account, you'll eventually pay income taxes on that return-of-capital that would otherwise not be taxable.

Foreign funds - If you own foreign stocks, dividend payments made to you almost always have foreign income tax withheld from the dividend...which are then used as a tax credit (not a deduction, a credit) on your federal taxes. With mutual/Exchange-traded Funds, they should also be passing along some, depending on the net dividends they receive. Hold them in a tax-advantaged account, and you lose that tax credit (if any).

 

[jerome len]

Thanks for the input. What do you think of a balanced fund? If so any recommendations?

You should take a look at Vanguard's tax managed balanced fund. It holds intermediate muni bonds.....very low taxes and has done well for me.

 

[Animorph]

Don't let the tax tail wag the portfolio dog.

I'm happy to place a little more of the income-producing assets into tax-advantaged accounts. But is it good to have all your slow growing stuff in those accounts and the fast growing stuff in taxable accounts?

I ended up loosely following my AA in taxable, IRA/401k, and Roth accounts. This will make it a little easier to spend down the taxable account early in retirement, without making changes in the tax advantaged accounts to keep the overall AA on target.

 

[Tyro]

I like them. Vanguard Star is one of my favorites, but Wellington, Balanced and others are good choices too.

You should take a look at Vanguard's tax managed balanced fund. It holds intermediate muni bonds.....very low taxes and has done well for me.

I've used Vanguard STAR Fund for retirement accts. for many years, and am just now made aware of Vanguard Tax-Managed Balanced Fund.

I found a comparison of the two kind of interesting. Thinking of using the latter in taxable acct. where I've used the former in tax-defferred accts.

Edit: A direct link to Vanguard's comparison of the two funds doesn't seem to work (cookie indigestion, I surmise) but going to https://personal.vanguard.com/us/FundsByName, selecting the two funds, and clicking on the Compare button should work.

Tyro

 

[csgraff]

there are a variety of tax efficient equity ETF's and mutual funds out there. As for additional bonds you could always go the muni route.

Ex: MITFX