Taxable Accounts

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Taxable Accounts

Postby devinjameskenzie » Thu Nov 29, 2012 8:26 am

I have some really basic questions. By way of background, I intentionally max out my 401(k) each year through my job; however, because of regulations on the 401k plan, I end up being refunded 5-6K from the administrator at the end of the year. My accountant says thats because others at job don't contribute enough and plan fails IRS regulations. So, I have money that I would like to invest ( and also add some other funds too through the year). My Wife and I also have Roth's through Vanguard that we max out each year. I have read the Boglehead books and ( I think) I am ready to open a taxable Vanguard Account. We have no debt and a well funded emergency fund. I want to know how to open a Vanguard taxable account and what is required if you know? Can I use the Account that my Roth's are through or must I open a new and separate account? Also, I understand that I should choose mutual funds with low/qualified dividends, low turn over(such as tax efficient index funds and/or tax managed funds.) The book suggests Vanguard Total Stock Market Index Fund and Tax managed International Funds. Are these still the best funds or would you suggest another fund(s)? Also, which is better the TSM index fund or the tax managed fund, or should I open both funds in the taxable account? Finally, my wife works a pt job and only makes about 1-2k per year, can she open a taxable account too? Please help! Thanks
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Re: Taxable Accounts

Postby Grt2bOutdoors » Thu Nov 29, 2012 8:41 pm

devinjameskenzie wrote:I have some really basic questions. By way of background, I intentionally max out my 401(k) each year through my job; however, because of regulations on the 401k plan, I end up being refunded 5-6K from the administrator at the end of the year. My accountant says thats because others at job don't contribute enough and plan fails IRS regulations. So, I have money that I would like to invest ( and also add some other funds too through the year). My Wife and I also have Roth's through Vanguard that we max out each year. I have read the Boglehead books and ( I think) I am ready to open a taxable Vanguard Account. We have no debt and a well funded emergency fund. I want to know how to open a Vanguard taxable account and what is required if you know? Can I use the Account that my Roth's are through or must I open a new and separate account? Also, I understand that I should choose mutual funds with low/qualified dividends, low turn over(such as tax efficient index funds and/or tax managed funds.) The book suggests Vanguard Total Stock Market Index Fund and Tax managed International Funds. Are these still the best funds or would you suggest another fund(s)? Also, which is better the TSM index fund or the tax managed fund, or should I open both funds in the taxable account? Finally, my wife works a pt job and only makes about 1-2k per year, can she open a taxable account too? Please help! Thanks


Hello and welcome to the forum!

You can open a Vanguard taxable account direct using Vanguard.com or calling them on the phone for a prospectus and application form. You can not use a ROTH IRA account to open a taxable account - Individual Retirement Accounts (IRA) are specifically for retirement only - you must open a new separate account, however when you log on to Vanguard.com, you will see all of your accounts housed under one umbrella or screen that lists all accounts held by you either individually or jointly with your wife - you wife's IRA will not appear under your name - it's her account, even if you are listed as beneficiary.

Have you and your wife developed an asset allocation plan? - % Equity/%Fixed Income totals 100%
Domestic Equity % + International Equity totals 100% of Equity % selected. A typical example might be a 70/30 Equity Fixed Income split, you might select 75% Domestic Equity and 25% in International.

For simplicity purposes we suggest the use of Total Stock Market Index, Total International Index and depending on tax bracket you are in - either a taxable bond index fund or a tax-free bond fund.
If you list your tax bracket in a follow-up post, we can advise what bond fund may be appropriate to hold in a taxable account.

Finally, you and your wife may open a taxable account with a joint registration with rights of survivorship, as tenants in common (equal owners but not with rights of survivorship) or you may each own your own account - individually in your own names.

Hope that helps.
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Re: Taxable Accounts

Postby jsl11 » Thu Nov 29, 2012 9:57 pm

The only thing you need to open a taxable account at Vanguard is enough money to meet the minimum funding requirement for one of the funds. Most funds have a $3000 minimum, but there are some with a $1000 minimum, as well as some that are higher. The more complicated question deals with location. That is, what funds do you want in your taxable account and which ones in your tax deferred or tax free accounts.

Anyone can open or close a taxable account at any time. There are no restrictions. However, there may be taxes involved. Vanguard may limit the purchase of a fund if it has been recently sold from the same account.

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Re: Taxable Accounts

Postby bulldog1 » Thu Nov 29, 2012 10:13 pm

What tax bracket do you start to consider investing in municipal bonds vs taxable bonds in a taxable account? Is 25% usually the starting point?
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Re: Taxable Accounts

Postby devinjameskenzie » Fri Nov 30, 2012 8:06 am

Usually 25% Tax Bracket...this year however, will most likely be 28%. We do have an allocation plan. We have S&P 500 index fund in my Roth and Wife has Total Stock Market Index in her Roth. My 401k is allocated between stocks, bonds and international. I am still a little uncomfortable with the bond funds issue, can you explain why it as opposed to a index fund?. Also the Bogelhead book says to be careful of distribution dates when purchasing a fund because of tax consequences, is that something I should be diligent about looking at if I choose the TSM index fund in the taxable account? And is it better (or does it even matter) if a put money in each pay or should i do periodically like one or twice a year. I know these are stupid questions, but I don't want to screw up. Thanks.
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Answer to questions

Postby Taylor Larimore » Fri Nov 30, 2012 8:24 am

devinjameskenzie

The book suggests Vanguard Total Stock Market Index Fund and Tax managed International Funds. Are these still the best funds or would you suggest another fund(s)? Also, which is better the TSM index fund or the tax managed fund, or should I open both funds in the taxable account? Finally, my wife works a pt job and only makes about 1-2k per year, can she open a taxable account too? Please help!


In The Bogleheads Guide to Investing we recommend Vanguard's Total International Stock Market Index Fund for international exposure in all our suggested portfolios. We still think it is the best International fund for most investors. Total Stock Market Index Fund is Mr. Bogle's favorite domestic stock fund--and our favorite too. Use either one, or both, for maximum diversification with tax-efficiency.

Unless you have a special reason for separate husband and wife accounts, it is usually better (for simplicity) to open a single, jointly owned, taxable account.

Best wishes.
Taylor
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Re: Taxable Accounts

Postby devinjameskenzie » Fri Nov 30, 2012 10:05 am

What about distribution issue/ tax consequences as stated in my earlier post?
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Re: Taxable Accounts

Postby SpringMan » Fri Nov 30, 2012 10:34 am

devinjameskenzie wrote:What about distribution issue/ tax consequences as stated in my earlier post?

The general rule is to avoid the distribution date when investing new money in taxable accounts. The distribution is taxable and the fund will generally drop in value immediately after a distribution occurs. You do not want to have to pay tax that you otherwise would not have to.
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Re: Taxable Accounts

Postby House Blend » Fri Nov 30, 2012 11:03 am

Why S&P500 in your Roth and TSM in hers? Why not TSM or S&P500 in both?

I would suggest using Total International in your taxable account, and reduce your allocation to International in your 401K. Few 401Ks offer international funds as good as TISM. (Maybe yours is an exception.)

Also, this avoids the potential for wash sales. If you held TSM in taxable, and reinvested dividends in TSM in her Roth, then there would be only four 30 day windows per year when you could sell shares of TSM at a loss in your taxable account without creating a wash.
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Re: Taxable Accounts

Postby devinjameskenzie » Fri Nov 30, 2012 11:59 am

No specific reason for S&P in my Roth and TSM in her Roth. Just want to make sure I choose the right index, tax efficient account for the taxable account I plan to open and avoid distribution issue? I can certainly reduce internation allocation in 401K (b/c it is not that good), but is the TISM fund better or the TSM better for the taxable account, or both? Any thoughts?
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Re: Taxable Accounts

Postby Taylor Larimore » Fri Nov 30, 2012 12:11 pm

devinjameskenzie:

Is the TISM fund better or the TSM better for the taxable account, or both? Any thoughts?

TISM (Total International) is slightly preferred because it does not get the Foreign Tax Credit in retirement accounts.

Best wishes.
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Re: Taxable Accounts

Postby devinjameskenzie » Sat Dec 01, 2012 7:59 am

I think I have decided to pull the trigger on the taxable account and use the Total Stock Market Index Fund AND Total International Stock Index Fund. The only question I have is after the account is opened how do I go about making sure my desired allocation into the taxable account is accomplished? For example, say I want to put 30% into international fund and 70% into TSM fund? Also, does anyone know of the distribution date for either of these funds?
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Re: Taxable Accounts

Postby dbr » Sat Dec 01, 2012 10:22 am

devinjameskenzie wrote:I think I have decided to pull the trigger on the taxable account and use the Total Stock Market Index Fund AND Total International Stock Index Fund. The only question I have is after the account is opened how do I go about making sure my desired allocation into the taxable account is accomplished? For example, say I want to put 30% into international fund and 70% into TSM fund? Also, does anyone know of the distribution date for either of these funds?


You DON'T make SURE that it is accomplished. As time goes by the values will drift anyway. You can even things up if you are making future contributions. Otherwise if things get out of balance by too much, say 5 percentage points, you sell something and buy something somewhere in your total array of accounts to make the overall portfolio allocation approximate what you want.
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Re: Taxable Accounts

Postby devinjameskenzie » Sat Dec 01, 2012 1:04 pm

Do you know whether you can allocate your new monies in percentages into each fund in the Vanguard Taxable Account or must it be separate checks for each account?
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Re: Taxable Accounts

Postby devinjameskenzie » Tue Dec 11, 2012 7:53 am

I read that it is best to not have your dividends from your taxable account automatically reinvested, but rather have placed into your bank account. Why is this? And, can it be any bank account or is it preferable to have a MMA Fund set up in the taxable account in addition to the other index funds?
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Re: Taxable Accounts

Postby livesoft » Tue Dec 11, 2012 8:02 am

devinjameskenzie wrote:I read that it is best to not have your dividends from your taxable account automatically reinvested, but rather have placed into your bank account. Why is this? And, can it be any bank account or is it preferable to have a MMA Fund set up in the taxable account in addition to the other index funds?

In the old days before pencils and paper were invented, folks had to keep track of the cost basis of their shares in their heads or perhaps on a rock with chalk. So if one re-invested dividends that meant they bought more shares and had to find a piece of chalk to record that information. They needed to know that on December 28, 2003 they bought 3.129 shares at a price of $81.77 each, so that when they sold those shares in a 2009 in a tax-loss-harvesting move that's what the cost basis was.

Nowadays, with the better education system that we have and with new tools like annual statements, computers, spreadsheets, and so on, one doesn't have to remember what their cost basis is and they don't have to use chalk to keep track of these things. Someone or something else will calculate the cost basis for them.

One can take the money from dividends and use it to purchase shares of the asset class that needs more shares in an act of rebalancing. But if the cash from dividends just sits in a cash sweep account or a money market fund, then that defeats the purpose. In that case, it is probably better to automatically re-invest the dividends.

Furthermore, sometimes reinvested dividends can interfere with clear thinking on tax-loss harvesting moves.

So there you have it: Some reasons for why one may wish to consider not automatically re-investing dividends. That written, it is no big deal if one does automatically re-invest dividends.
Last edited by livesoft on Tue Dec 11, 2012 8:03 am, edited 1 time in total.
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Re: Taxable Accounts

Postby sscritic » Tue Dec 11, 2012 8:03 am

devinjameskenzie wrote:Do you know whether you can allocate your new monies in percentages into each fund in the Vanguard Taxable Account or must it be separate checks for each account?

I would expect that most people don't write checks. You login at Vanguard. Set up your bank checking account under banks. Once you have some of each fund, after your login, go to balances and holdings and click on buy. Select the funds; buy the dollars you want; select your bank as the source of funds. I am not sure if you can buy both at the same time or you have to do one after the other.

If you want to use checks, you can send a check to a money market fund. Once the money is in the money market fund, go to balances and holdings and exchange money from your mmf to the funds you want to add to.
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Re: Taxable Accounts

Postby BBL » Tue Dec 11, 2012 8:13 am

folks had to keep track of the cost basis of their shares in their heads or perhaps on a rock with chalk. So if one re-invested dividends that meant they bought more shares and had to find a piece of chalk to record that information.


Ahhhh. The good old days. In the winter months I often found it difficult to locate my chalk so I keep my basis info written in the snow. Needless to say one year we had an early thaw and a nightmare for me soon unfolded. That was a toughie.
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Re: Taxable Accounts

Postby sscritic » Tue Dec 11, 2012 8:22 am

livesoft wrote:Nowadays, with the better education system that we have and with new tools like annual statements, computers, spreadsheets, and so on, one doesn't have to remember what their cost basis is and they don't have to use chalk to keep track of these things. Someone or something else will calculate the cost basis for them.

I prefer myself to someone or something else. At the very least, trust and verify (who said that? - Victoria knows); keep your records on your computer. When Vanguard tells your gain or loss is XXX, you should be able to duplicate the calculations or discover that it was really YYY, in which case you get to go a round with Vanguard. Actually, nobody really cares about Vanguard, but if they give the incorrect information to the IRS, you have to give the IRS the correct information and wait to see if you go a round with them.
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Re: Taxable Accounts

Postby devinjameskenzie » Tue Dec 11, 2012 5:53 pm

Since I am unclear: If I open a VG taxable account with Total Stock Market and Total International Stock Market Index Funds, is it better to reinvest dividends or put into a separate account? Thoughts.
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Re: Taxable Accounts

Postby livesoft » Tue Dec 11, 2012 7:04 pm

It doesn't matter. It is a personal decision. Why don't you automatically re-invest dividends in one of those funds and in the other don't. And it doesn't matter which one you pick to do what. And you can always change your mind later.
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Distributions into a money market fund?

Postby Taylor Larimore » Tue Dec 11, 2012 7:18 pm

devinjameskenzie wrote:Since I am unclear: If I open a VG taxable account with Total Stock Market and Total International Stock Market Index Funds, is it better to reinvest dividends or put into a separate account? Thoughts.


DevonJames:

In my opinion, it is usually best to put taxable fund distributions into a money market fund.

* Every reinvestment has a new tax basis. The fewer tax calculations the better.
* Less paperwork
* Distributions (dividends & capital-gains) in the money fund will be available for rebalancing.
* We run every portfolio transaction through our money market fund. This provides one statement for all transactions during the year. Very convenient.
* The money market fund is available for cash needs.
* The money market fund can be used for automatic contributions and withdrawals.

There is more than one road to Dublin.

Best wishes.
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