Starting Taxable Investing

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Topic Author
NotJen
Posts: 16
Joined: Thu Feb 09, 2012 2:07 pm

Starting Taxable Investing

Post by NotJen »

I'm paying off my mortgage in December, so I'm taking a look at how I plan to handle my investments going forward. I'm going to start maxing out my 401k starting in January, and I'm contemplating opening a taxable account. I've been a little scared of taxable because I'm risk averse in the short term (see -> paying off mortgage), and don't want to complicate my so-simple tax situation (was looking forward to 1040EZ for 2015!). But it's probably time.

Originally, once the mortgage was out of the way, I was going to save the extra money in my regular savings account for the eventual purpose of purchasing my next home and buying my next car (current one is only 2 years old). In 7 years, I'd probably have >$100,000 in savings, not doing anything. Lately, I've been thinking that I probably won't upgrade my home (ever?), and a car will be farther in the future, and a more flexible purchase (can be as cheap or expensive as is appropriate at the time). In short, I don't see much need for that much cash in the short term.

Instead, I'm much more likely to downgrade my job at some point and live on a lot less. I'm hoping an imminent change in work tasks will encourage me to keep it up at least a few more years so I can increase my investments first!

Here are my details.

Emergency funds: $30,000 (just under a year of un-reduced expenses)
Debt: Mortgage will be paid off by end of year ($7,300 balance @ 4%), no other debt
Tax Filing Status: Single
Tax Rate: 25% Federal (getting close to the top), 5% State
State of Residence: AL
Age: 35 (soon enough)
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks

Total portfolio ~ $200,000 (excluding EF)

Current retirement assets

Taxable - None

401k
21% Vanguard Index 500 (VFINX, 0.17)
11% Vanguard Emerging Mkts Stock Idx Sg (VERSX, 0.15)
10% Vanguard Developed Market Index Inv (VDVIX, 0.20)

Roth IRA at Vanguard
11% Vanguard Total Bond (VTBLX, 0.08)
09% Vanguard Total Stock (VTSAX, 0.05)
09% Vanguard Extended Market (VEXAX, 0.10)

SEP IRA at Vanguard
23% Vanguard Total Stock (VTSAX, 0.05)
06% Vanguard Total International (VTIAX, 0.14)

Total of All Accounts Together is 100%.

Contributions

New Annual Contributions
$28,000 401k (includes $10,000 profit sharing)
$ 5,500 Roth IRA
$12,000 Taxable

Available funds

Funds available in 401(k)
MetLife SV 25053 CL III 0
American Century Balanced Inv (TWBIX, 0.91)
American Funds Cap Inc Builder R4 (RIREX, 0.65)
DFA Inflation-Protected Sec I (DIPSX, 0.12)
Fidelity Select Energy (FSENX, 0.80)
Fidelity Select Gold (FSAGX, 0.92)
Fidelity Select Health Care (FSPHX, 0.77)
Fidelity Select Technology (FSPTX, 0.80)
Vanguard Developed Market Index Inv (VDVIX, 0.20)
Vanguard Emerging Mkts Stock Idx Sg (VERSX, 0.15)
Vanguard High-Yield Corporate (VWEHX, 0.23)
Vanguard Index 500 (VFINX, 0.17)
Vanguard Long-Term Bond Index (VBLTX, 0.20)
Vanguard Mid Cap Index (VIMSX, 0.24)
Vanguard Morgan Growth (VMRGX, 0.39)
Vanguard PRIMECAP (VPMCX, 0.45)
Vanguard REIT Index (VGSIX, 0.24)
Vanguard Small Cap Index (NAESX,0.24)
Vanguard Windsor II (VWNFX, 0.36)
Vanguard Target Retirement Income (VTINX, 0.16)
Vanguard Target Retirement 2055 (0.18)
Vanguard Target Retirement 2050 (0.18)
Vanguard Target Retirement 2045 (0.18)
Vanguard Target Retirement 2040 (0.18)
Vanguard Target Retirement 2035 (0.18)
Vanguard Target Retirement 2030 (0.17)
Vanguard Target Retirement 2025 (0.17)
Vanguard Target Retirement 2020 (0.16)
Vanguard Target Retirement 2015 (0.16)
Vanguard Target Retirement 2010 (0.16)

(401k fees total 0.63% annually)

Questions:

1. Any advice on making the leap to taxable? Looks like the consensus is to not reinvest dividends, and add them to my new contributions.

2. I think I might want to keep half of my EF in my 401k. I saw that option in the Wiki, and it seems like a good idea. That way, I can put $15k into a taxable account upfront, while saving up my new taxable contributions throughout the year, and investing those once or twice a year instead of monthly (does this make record keeping easier?).

Having $15k in regular old savings should be enough for me to feel secure (and it will be more while I'm accumulating the taxable contributions).

Here's my proposed breakdown after adding taxable and EF space:

Taxable
07% Total Stock (VTSAX, 0.05)
Roth
12% Total Stock (VTSAX, 0.05)
17% Total International (VTIAX, 0.14)
SEP
23% Total Stock (VTSAX, 0.05)
07% Total Bond (VTBLX, 0.08)
401k
34% Target Retirement 2050 (VFIFX, 0.18)
---- MetLife SV 25053 CL III *EF, not included in total percentages*

I'm not sure about that stable value fund in my 401k. No ER is listed, but in the fund document, it looks like it has a 0.67% expense ratio with about 2.5% return lately. I also have the option of using the Vanguard Money Market in my SEP.

3. I haven't decided if I want to put some of my $18k into a Roth 401k. I haven't in the past. The only reason I'm thinking about using the Roth option is that I can roll it over into my Roth IRA when I leave my job, and have access to my contributions earlier than 59.5, if I "retire" early.

I've looked into it, and I think I could put $8k into the Roth option, keep myself eligible for a Roth IRA, and still have enough in my paycheck (i.e, I don't need the tax savings) to meet my taxable goals. Does this sound like a reasonable plan? I'd re-evaluate this every time my income changes, and shift more to traditional 401k so I can contribute to the Roth IRA as long as possible.

Thanks for your comments!
User avatar
Dale_G
Posts: 3466
Joined: Tue Feb 20, 2007 4:43 pm
Location: Central Florida - on the grown up side of 85

Re: Starting Taxable Investing

Post by Dale_G »

I am not going to have many suggestions. You seem to have a very good handle on what you want to do and you are well on your way to having nice pile when you decide to cut loose from the rat race.
NotJen wrote: ... snip ...
Questions:

1. Any advice on making the leap to taxable? Looks like the consensus is to not reinvest dividends, and add them to my new contributions. It is fine to start a taxable account. I have dividends sent to the Money Market account and then invest them in whatever is lagging. Vanguard keeps track of individual purchases (tax lots) these days, so frequent purchases or reinvesting dividends is not much of a hassle these days

2. I think I might want to keep half of my EF in my 401k. I saw that option in the Wiki, and it seems like a good idea. That way, I can put $15k into a taxable account upfront, while saving up my new taxable contributions throughout the year, and investing those once or twice a year instead of monthly (does this make record keeping easier?).See above re: monthly or quarterly purchases

... snip again ...


I'm not sure about that stable value fund in my 401k. No ER is listed, but in the fund document, it looks like it has a 0.67% expense ratio with about 2.5% return lately. I also have the option of using the Vanguard Money Market in my SEP. The expense ratio doesn't count for much - the 2.5% return is net of fees. With present low interest rates on most bonds funds, I might opt for the SV fund, but you should look to see what it is invested in

3. I haven't decided if I want to put some of my $18k into a Roth 401k. I haven't in the past. The only reason I'm thinking about using the Roth option is that I can roll it over into my Roth IRA when I leave my job, and have access to my contributions earlier than 59.5, if I "retire" early.

I've looked into it, and I think I could put $8k into the Roth option, keep myself eligible for a Roth IRA, and still have enough in my paycheck (i.e, I don't need the tax savings) to meet my taxable goals. Does this sound like a reasonable plan? I'd re-evaluate this every time my income changes, and shift more to traditional 401k so I can contribute to the Roth IRA as long as possible.

To Roth or not ... that is the question. :twisted: - Anyway, good luck

Thanks for your comments!
Volatility is my friend
User avatar
Sammy_M
Posts: 1935
Joined: Sun Nov 25, 2007 7:30 am

Re: Starting Taxable Investing

Post by Sammy_M »

Concur w Dale_G. Only minor consideration I'd offer is whether you want to put the Total Intl within taxable vs. Roth. Allows you to take advantage of the foreign tax credit.

Taxable
07% Total International (VTIAX, 0.14)

Roth
19% Total Stock (VTSAX, 0.05)
10% Total International (VTIAX, 0.14)
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: Starting Taxable Investing

Post by bhsince87 »

Sounds like you're on the right track. You might also want to take fellow Boglehead Harry Sit's excellent advice on setting up your cost basis here:

http://thefinancebuff.com/change-cost-b ... ation.html
Time is what we want most, but what we use worst. William Penn
Topic Author
NotJen
Posts: 16
Joined: Thu Feb 09, 2012 2:07 pm

Re: Starting Taxable Investing

Post by NotJen »

bhsince87 wrote:Sounds like you're on the right track. You might also want to take fellow Boglehead Harry Sit's excellent advice on setting up your cost basis here:

http://thefinancebuff.com/change-cost-b ... ation.html
Thanks - I was planning on using specific id - nice to have another reference if needed.

I might put Total International in taxable - I read some about the foreign tax credit, but it seems like the benefit vs extra hassle might not be worth it. I plan to look at the tax forms and see what's involved before I make a final decision.
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: Starting Taxable Investing

Post by bhsince87 »

NotJen wrote: I might put Total International in taxable - I read some about the foreign tax credit, but it seems like the benefit vs extra hassle might not be worth it. I plan to look at the tax forms and see what's involved before I make a final decision.
Years ago it could be a hassle. Now it's painless.

I use TurboTax. I can import everything directly from Vanguard's website, and the software knows where to put what. Boom, done in 10 seconds.

Of course, it's always good to check it by looking at the forms! That can take a while....
Time is what we want most, but what we use worst. William Penn
User avatar
OZAR
Posts: 118
Joined: Sat Aug 21, 2010 4:06 pm
Location: Las Vegas

Re: Starting Taxable Investing

Post by OZAR »

Do you have the option of a HSA (Health Savings Account)
You could have an additional $6,550 a year in tax deferred account.

-Grows tax free
-You can invest the money
-Use for medical expenses tax free anytime
-And after 65 you can withdraw penalty free for non-medical reasons and just pay income tax on it.
Topic Author
NotJen
Posts: 16
Joined: Thu Feb 09, 2012 2:07 pm

Re: Starting Taxable Investing

Post by NotJen »

bhsince87 wrote:
NotJen wrote: I might put Total International in taxable - I read some about the foreign tax credit, but it seems like the benefit vs extra hassle might not be worth it. I plan to look at the tax forms and see what's involved before I make a final decision.
Years ago it could be a hassle. Now it's painless.

I use TurboTax. I can import everything directly from Vanguard's website, and the software knows where to put what. Boom, done in 10 seconds.

Of course, it's always good to check it by looking at the forms! That can take a while....
Yeah, I'm the kind of person who does my taxes by hand before plugging in the numbers to e-file (I've been using the free online versions, not TurboTax). I like knowing what's going on in our screwy tax system.
Topic Author
NotJen
Posts: 16
Joined: Thu Feb 09, 2012 2:07 pm

Re: Starting Taxable Investing

Post by NotJen »

OZAR wrote:Do you have the option of a HSA (Health Savings Account)
I don't at this time.
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