Put $3k in a Life Strategy Fund in a taxable account?

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Put $3k in a Life Strategy Fund in a taxable account?

Postby matti » Tue Jul 16, 2013 9:39 pm

Help me understand the Life Strategy Growth Fund (VASGX). If I wanted to invest $3k and, perhaps add $100/month or so, would VASGX be a good choice (taxable account)? I wouldn't plan to touch the money for ~20 years. I read that the Life Strategy and Target Retirement Funds aren't really good choices for a taxable account...not sure I understand why. Thanks in advance.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby LadyGeek » Tue Jul 16, 2013 9:47 pm

Welcome! The wiki can answer your tax question: Vanguard LifeStrategy Funds, under 2.1 Tax Inefficiency:

Because the LifeStrategy Funds all have a significant allocation to taxable bonds, they are most suitable for investors holding their entire portfolios in tax-advantaged accounts.

To explain further, it's because bonds are taxed at the full rate (your tax bracket, also called "ordinary income") while stocks are taxed less (called Capital gains).

You can find the gory details here: Principles of Tax-Efficient Fund Placement
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby Monkeyarms » Tue Jul 16, 2013 9:50 pm

Matti,
They are not the best taxable option because not all the funds contained in them are tax efficient. You generally want to leave your bond funds in tax deferred or advantaged accounts and Life Strategy has two bond funds, International Bonds and Total Bond Market (If I'm not mistaken). You want a low turnover stock fund in here with the exception of REIT distributions (they are classified as ordinary income not dividends so you you do not get the preferred rate for tax reasons). Picking a large, relatively stable index e.g FTSE minus US Index? Total Stock Market, Total International Stock Market reveals turnover ratios of less than 8% meaning they wont be creating lots of short-term capital gains by buying and selling securities.

If I may be so bold I suggest the Life Strategy fund might be better held in a Traditional IRA or Roth account because of the diversification it offers.
My opinion is offered from a place of altruism, please do not take my words as law or my intentions as malicious.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby matti » Tue Jul 16, 2013 10:03 pm

Monkeyarms wrote:Matti,
They are not the best taxable option because not all the funds contained in them are tax efficient. You generally want to leave your bond funds in tax deferred or advantaged accounts and Life Strategy has two bond funds, International Bonds and Total Bond Market (If I'm not mistaken). You want a low turnover stock fund in here with the exception of REIT distributions (they are classified as ordinary income not dividends so you you do not get the preferred rate for tax reasons). Picking a large, relatively stable index e.g FTSE minus US Index? Total Stock Market, Total International Stock Market reveals turnover ratios of less than 8% meaning they wont be creating lots of short-term capital gains by buying and selling securities.

If I may be so bold I suggest the Life Strategy fund might be better held in a Traditional IRA or Roth account because of the diversification it offers.


Thank you both so much for your quick replies. Perhaps I should give some more of my background. I have $106k total between a 401(a) and 403(b) and Roth IRA. Between those three, I am contributing about $23k/year. I realized that I wouldn't have access to that money before age 59.5 without penalty. So, I thought about investing in another fund with hopes for growth, but one that would allow me to withdraw the money earlier without penalty, if desired/needed. I'm 34yo.

Thanks for the clarification on the tax situation. I'm one who doesn't really want to get "too involved" in investing; that's why VASGX appealed to me. Would you have any potential recommendations for a single/simple fund mix that might accomplish what I'm looking for? Thank you!
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby joe8d » Tue Jul 16, 2013 10:10 pm

It's questions like this that make me wish, even more ,that VG would create a "stand alone" version of the LS / TR stock componet, 70% TSM, 30% TInt. Yes ,you would lose the FTC on the 30% Int, but possibly gain from the rebalancing bonus btween Domestic and International which I think is the area that would benefit most ( currency fluctuation) from the rebalancing procedure.
All the Best,
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby boggler » Tue Jul 16, 2013 10:49 pm

matti wrote:
Monkeyarms wrote:Matti,
They are not the best taxable option because not all the funds contained in them are tax efficient. You generally want to leave your bond funds in tax deferred or advantaged accounts and Life Strategy has two bond funds, International Bonds and Total Bond Market (If I'm not mistaken). You want a low turnover stock fund in here with the exception of REIT distributions (they are classified as ordinary income not dividends so you you do not get the preferred rate for tax reasons). Picking a large, relatively stable index e.g FTSE minus US Index? Total Stock Market, Total International Stock Market reveals turnover ratios of less than 8% meaning they wont be creating lots of short-term capital gains by buying and selling securities.

If I may be so bold I suggest the Life Strategy fund might be better held in a Traditional IRA or Roth account because of the diversification it offers.


Thank you both so much for your quick replies. Perhaps I should give some more of my background. I have $106k total between a 401(a) and 403(b) and Roth IRA. Between those three, I am contributing about $23k/year. I realized that I wouldn't have access to that money before age 59.5 without penalty. So, I thought about investing in another fund with hopes for growth, but one that would allow me to withdraw the money earlier without penalty, if desired/needed. I'm 34yo.

Thanks for the clarification on the tax situation. I'm one who doesn't really want to get "too involved" in investing; that's why VASGX appealed to me. Would you have any potential recommendations for a single/simple fund mix that might accomplish what I'm looking for? Thank you!


VTWSX / VT (ETF). Doesn't have bonds, but is very well diversified.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby KyleAAA » Tue Jul 16, 2013 11:38 pm

What's your tax bracket? If you're in the 15% or lower bracket, the Lifestrategy fund is a fine choice. If you're in the 28% bracket or above, it's suboptimal. Suboptimal doesn't mean it's not worth doing, though, if you REALLY value simplicity. Thing is, you could build your own 3-fund portfolio with muni bonds in taxable without much extra work. At the 25% bracket, it's almost a toss-up but still probably suboptimal. Personally, I don't hold any bonds at all in taxable and I'd like to keep it that way as long as possible.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby Monkeyarms » Wed Jul 17, 2013 12:39 am

VGTSX and VTSMX (Total International and Total Stock Market) would be good options for a taxable account.
My opinion is offered from a place of altruism, please do not take my words as law or my intentions as malicious.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby matti » Wed Jul 17, 2013 8:22 am

KyleAAA wrote:What's your tax bracket? If you're in the 15% or lower bracket, the Lifestrategy fund is a fine choice. If you're in the 28% bracket or above, it's suboptimal. Suboptimal doesn't mean it's not worth doing, though, if you REALLY value simplicity. Thing is, you could build your own 3-fund portfolio with muni bonds in taxable without much extra work. At the 25% bracket, it's almost a toss-up but still probably suboptimal. Personally, I don't hold any bonds at all in taxable and I'd like to keep it that way as long as possible.


Thank you. I'm in the 25% tax bracket.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby grabiner » Wed Jul 17, 2013 8:36 pm

I don't like the LifeStrategy fund in a taxable account because it probably won't be the right fund for you later. If you stil have the fund when you approach retirement, you'll want to switch to Moderate Growth, and that will require selling the whole fund and paying an unnecessarily large tax bill. In contrast, if you hold 80% stock in an individual fund and want to switch to 60% stock, you need only sell 1/4 of your stock.

Target Retirement funds will adjust for your needs on their own, but only if your needs continue to follow the glidepath. If you are in Target Retirement 2035, and then take early retirement in 2025 or find that you need to keep working until 2045, you'll have the same problem as with the LifeStrategy funds.

Either fund is fine for an IRA, as you can switch freely if your needs change.
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Withdrawing Roth contributions.

Postby Taylor Larimore » Wed Jul 17, 2013 8:53 pm

I have $106k total between a 401(a) and 403(b) and Roth IRA. Between those three, I am contributing about $23k/year. I realized that I wouldn't have access to that money before age 59.5 without penalty.

Matti:

You can withdraw 100% of your contributions in your Roth IRA at any time without tax or penalty.

Best wishes.
Taylor
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Re: Withdrawing Roth contributions.

Postby boggler » Wed Jul 17, 2013 9:01 pm

Taylor Larimore wrote:
I have $106k total between a 401(a) and 403(b) and Roth IRA. Between those three, I am contributing about $23k/year. I realized that I wouldn't have access to that money before age 59.5 without penalty.

Matti:

You can withdraw 100% of your contributions in your Roth IRA at any time without tax or penalty.

Best wishes.
Taylor


What's the best way to keep track of this for tax/penalty purposes?
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Tracking Roth contributions

Postby Taylor Larimore » Wed Jul 17, 2013 9:12 pm

Boggler wrote:
What's the best way to keep track of this for tax/penalty purposes?

Boggler:

We had this prior Conversation which should answer your question:

Roth IRA basis

Best wishes.
Taylor
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Re: Tracking Roth contributions

Postby boggler » Wed Jul 17, 2013 9:44 pm

Taylor Larimore wrote:Boggler wrote:
What's the best way to keep track of this for tax/penalty purposes?

Boggler:

We had this prior Conversation which should answer your question:

Roth IRA basis

Best wishes.
Taylor


Perfect - thanks.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby matti » Wed Jul 17, 2013 10:20 pm

Thanks again everyone. I decided to start a taxable account with the $3k, all into the Vanguard Total Stock Market Index (VTSMX). Here's another possibly silly question: if I set up an automatic investment schedule from a bank account (say $100/month), do I have to pay any fees every time I invest that $100 in the account? Thanks.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby DSInvestor » Wed Jul 17, 2013 10:36 pm

matti wrote:Thanks again everyone. I decided to start a taxable account with the $3k, all into the Vanguard Total Stock Market Index (VTSMX). Here's another possibly silly question: if I set up an automatic investment schedule from a bank account (say $100/month), do I have to pay any fees every time I invest that $100 in the account? Thanks.

No fees for automatic purchases if the fund is held at Vanguard. Make sure you sign up for electronic document delivery at vanguard. If your fund is held outside of vanguard, commissions will apply.
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Re: Put $3k in a Life Strategy Fund in a taxable account?

Postby M_to_the_G » Thu Jul 18, 2013 1:23 pm

I have VASGX in an inherited non-spouse ROTH IRA, and I'm holding on to it because A) it just happens to track my AA +/- a few percentage points AND I am pursuing a fixed AA for life plan (that just so happens to be roughly 80/20), thus it works for me, and B) it is in a ROTH. I can't think of any other reason I would own it.
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