How much should I devote to a taxable mutual fund account?

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PhillyPhan
Posts: 23
Joined: Wed Nov 28, 2012 9:35 am

How much should I devote to a taxable mutual fund account?

Post by PhillyPhan » Thu Nov 29, 2012 10:10 pm

Current snap shot
31 - single , no children
Income 59K
Renter
401k- contribute 13% with a company match of 5% , Current balance - 47,000.00 - breakdown 50% US stock index , 15% international index , 30% smallmid cap index , 5% bond index , all mgmt fees waived and paid by my company on these index funds.
Roth - Just started one through Vanguard this year , 4,500.00 spread over VTSX and Target 2040. Will add additional 500$ and max for 2012.
ING - 48,000.00 balance in cash .75 % interest rate
I am living well below my means and contribute an additional 1500-1700 per month cash to my ING account.
I am not certain I am ready to purchase a home or residence at this time due to the fact that I would like to remain mobile for potential career advancement with my company. However I would feel comfortable holding onto 15-20 of my ING as an emergency fund and as a nest egg in case my personal situation changes and I decide to marry and buy a home.
That being said , would anyone offer suggestions on the type of allocation I should targeting for 25-30K of investments withing vanguard mutual funds? I would plan on holding these for 2-3 years at least.
Also , I wanted feedback on whether I should be maxing my 401K to take advantage of the pre tax savings and therefore I would be lowering current 1500-1700 per month savings plan.

Thanks!

DSInvestor
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Re: How much should I devote to a taxable mutual fund accoun

Post by DSInvestor » Thu Nov 29, 2012 10:37 pm

I suggest maxing out your contributions to 401(k) and IRA before investing in taxable accounts. Maybe increase your 401k contributions for December to max out for 17K. Use the money in ING account to meet expenses while your paychecks are reduced.

When you do start investing in taxable accounts, you should consider the IRA, 401k and taxable accounts as one portfolio and allocate accordingly. Tax efficient fund placement becomes an issue when you start investing in taxable accounts. See Wiki article link: Principles of Tax-Efficient Fund Placement

Johm221122
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Re: How much should I devote to a taxable mutual fund accoun

Post by Johm221122 » Fri Nov 30, 2012 9:40 am

I would definitely bump up 401 instead of taxable. Consider putting money in I bonds for emergency fund, keep up with inflation,tax efficient, government guarantee and can cash easily after one year holding period
john

retiredjg
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Re: How much should I devote to a taxable mutual fund accoun

Post by retiredjg » Fri Nov 30, 2012 10:10 am

Welcome to the forum!

To the extent possible, you should max out your 401k and an IRA (type to be determined) before investing money in a taxable account. The exception is if you are saving for a short term goal such as a home down-payment. Since you are undecided on the home thing, it is hard to say, but it is rarely a mistake to put money in a Roth IRA instead of a taxable account.

Your ordinary contributions to Roth IRA (but not earnings) are available any time for any reason. So that money could go to a house if you want. On the other hand, should you decide you do want the house, you could leave all your retirement accounts alone and simply save a lot of money very quickly from current income (reduce retirement savings for a year or so).

Any money that will be used in 2 to 3 years should not be put at risk unless your goal can wait 5 years or so if the market crashes. For money needed in 2 to 3 years - cash (high yield savings), CDs, money market, maybe some in short term bonds.

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AuDigit
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Location: Minneapolis, MN

Re: How much should I devote to a taxable mutual fund accoun

Post by AuDigit » Fri Nov 30, 2012 11:52 am

You are doing a great job at saving!
I can't and won't say what exactly to do based on the limited information, but I can share a strategy of how I would approach it.

Plan, then invest, in this order:
1) Contribute minimum amount to get 100% company match in 401k.
2) Max out Roth IRA.
==>> Even in challenging times, doing Steps 1 & 2 should be your hard minimum retirement goal each year. Always try to do 1 & 2.
3) If you can afford to invest more after expenses, you can choose to go back and add more to 401k up to IRS max. Remember, this money is penalized and taxed on early withdrawal.
4) If you can afford to invest more after expenses, you can choose to invest in taxable accounts. No penalty applies, providing flexibility.

I don't know what your expenses are each month, so I will conservatively estimate that you spend $1800/mo total (adjust as needed). For that estimate, that means a 12-month emergency fund of $25-30k would be prudent (adjust as needed). If you are wondering why $25-30K when 12x$1800=~$22K, remember that we are still working with estimates, and we should expect the unexpected (e.g. car breaks down, accidents, health issue, etc). You can move toward lower end of range depending on risk mitigation (e.g. new car warranty, lower insurance premium, good health checkup, etc). Money beyond this emergency fund balance, and after completing your minimum retirement goal (Steps 1 & 2), could be invested (Steps 3 and/or 4).

For investing in taxable accounts (Step 4), I would suggest investing the minimum (usually $3k), then dollar-cost averaging (DCA) in $200/mo to start. Try this, then you can adjust the DCA amount later based on your initial expense estimates.

Keep up the great work!

PhillyPhan
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Joined: Wed Nov 28, 2012 9:35 am

Re: How much should I devote to a taxable mutual fund accoun

Post by PhillyPhan » Fri Nov 30, 2012 2:04 pm

Thank you for all of the feedback.
I have a question regarding I Bonds.
One poster mentioned the tax advantages of these , I am not sure I follow, how are these tax advantaged if they are subject to 25% tax rate ?
Also , if I max my 401K and cease investing into a cash or taxable more fluid account , would my total net worth eventually be too heavily skewed towards retirement , specifically my 401K ?

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telemark
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Re: How much should I devote to a taxable mutual fund accoun

Post by telemark » Fri Nov 30, 2012 2:26 pm

I have about 50K in a taxable account at Vanguard, bought when I had a truly abysmal 401K plan. It's in a 8-way slice and dice (Fundadvice Ultimate Buy and Hold, minus bonds and REIT). If I had it to do over I'd just go with Vanguard's Total Stock Market and Total International funds: the expense ratios are lower and I think they're better choices for a taxable account.

retiredjg
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Re: How much should I devote to a taxable mutual fund accoun

Post by retiredjg » Fri Nov 30, 2012 5:51 pm

PhillyPhan wrote:I have a question regarding I Bonds. One poster mentioned the tax advantages of these , I am not sure I follow, how are these tax advantaged if they are subject to 25% tax rate ?

Why do you think they are subject to 25% tax rate? Maybe you mean that the taxes are not deferred on the contributions so you would pay 25% now because you are in the 25% bracket? I Bonds are a good place for money that is going to be taxed anyway. Why put money into a savings account when you can put it in something that will keep up with inflation?

You don't pay any taxes on the earnings of this money until you withdraw it. Most people are in a lower tax bracket when they retire, so many people would benefit from I Bonds. They can also be used (tax free) by some people to pay for education.

Did you see this Wiki article? Wiki article link: I Savings Bonds

Also , if I max my 401K and cease investing into a cash or taxable more fluid account , would my total net worth eventually be too heavily skewed towards retirement , specifically my 401K ?

The suggestion to use your 401k is assuming the money you are talking about savings is for retirement. So, no, it would not be skewed. If you are talking about saving money for other goals, your 401k may not be the best place to put it. Since you don't know what you want to do, the 401k is a good bet - you save on taxes now. If you decide you want a house (or whatever) you can save that money outside the 401k. But you don't want to waste your available tax-advantaged space each year by saving in a taxable account instead of the tax-deferred account when there is no definite use for the money.

You know you're going to take vacations or buy a car or whatever. Save that money in something more available and liquid.

Johm221122
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Re: How much should I devote to a taxable mutual fund accoun

Post by Johm221122 » Fri Nov 30, 2012 7:22 pm

If or when you do get married/buy house you can may be able to get 401 loan,withdrawal from Roth or use emergency fund(then use Roth for emergency fund to you rebuild) for house.Your new spouse may even have the money for down payment. As long as you Max out Roth and have descent emergency fund ,I would put as much in 401 as I could instead of taxable (unless I had a definite other than retirement goal)
John

Johm221122
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Re: How much should I devote to a taxable mutual fund accoun

Post by Johm221122 » Sat Dec 01, 2012 9:08 am

PhillyPhan wrote:Thank you for all of the feedback.
I have a question regarding I Bonds.
One poster mentioned the tax advantages of these , I am not sure I follow, how are these tax advantaged if they are subject to 25% tax rate ?
Also , if I max my 401K and cease investing into a cash or taxable more fluid account , would my total net worth eventually be too heavily skewed towards retirement , specifically my 401K ?

Not tax advantaged,tax efficient, you don't pay tax every year like CD, so you earn interest on all your money and not pay tax till you cash them in,hopefully 30 years from now
John

YDNAL
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Re: How much should I devote to a taxable mutual fund accoun

Post by YDNAL » Sat Dec 01, 2012 9:24 am

PhillyPhan wrote:ING - 48,000.00 balance in cash .75 % interest rate
I am living well below my means and contribute an additional 1500-1700 per month cash to my ING account.
I am not certain I am ready to purchase a home or residence at this time due to the fact that I would like to remain mobile for potential career advancement with my company. However I would feel comfortable holding onto 15-20 of my ING as an emergency fund and as a nest egg in case my personal situation changes and I decide to marry and buy a home.
That being said , would anyone offer suggestions on the type of allocation I should targeting for 25-30K of investments withing vanguard mutual funds? I would plan on holding these for 2-3 years at least.

For 2-3 year money, you want return OF the money and not return ON the money.

PhillyPhan wrote:Also , I wanted feedback on whether I should be maxing my 401K to take advantage of the pre tax savings and therefore I would be lowering current 1500-1700 per month savings plan.
PhillyPhan wrote:Also , if I max my 401K and cease investing into a cash or taxable more fluid account , would my total net worth eventually be too heavily skewed towards retirement , specifically my 401K ?

In life, we make lemonade with the lemons we have. If you can't handle both goals (assuming taxable savings have a goal) with your current salary, then you are doing fine by getting a 5% company match while you contributed another 13% yourself.
PhillyPhan wrote:Income 59K

401k- contribute 13% with a company match of 5% , Current balance - 47,000.00
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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