Am I using my taxable account for the right reasons?

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tumbleweed1993sf
Posts: 12
Joined: Thu Dec 13, 2012 12:55 am

Am I using my taxable account for the right reasons?

Post by tumbleweed1993sf » Tue Jan 07, 2014 9:57 pm

Hi all,

I am a 20 year old college student who will be graduating in June and starting a full time job soon after which pays in the mid 5-figures. I currently have a Roth IRA which I have maxed out in the past 3 years, which holds only VTTSX. I still had some money left over, so I decided to open a taxable account with Vanguard as well, and I purchased $10000 of VTMFX. My thinking for both of these accounts is that I would eventually break them down into 3- or 4- fund constituents once I have enough to buy admiral shares of each. The thinking was that I would use the IRA for my retirement savings, and I would use the taxable account to gain higher interest on some money that I had earmarked for a down payment in roughly 10 years (with moderate risk-tolerance). Is this an appropriate vehicle for saving money for a down payment? I was considering adding more to the taxable account, but I don't want to go overboard. I plan on leaving about $14k for initial moving expenses + used car purchase + 6 month emergency fund for June, does this sound appropriate? Thanks for the help.

investor1
Posts: 1040
Joined: Thu Mar 15, 2012 8:15 pm

Re: Am I using my taxable account for the right reasons?

Post by investor1 » Tue Jan 07, 2014 10:36 pm

That doesn't sound bad. Congratulations on starting so early!

There is no real reason to wait to use a three fund portfolio if that's what you want to do. If you want to keep expenses low, just use the ETFs rather than the mutal funds. They have the same expense ratios as the admiral shares.

You might not want to use a three fund'er in the taxable account. Bonds are not tax efficient, so a lot of people don't want to hold them there. Read the wiki on tax efficient placement. If you choose not to hold bonds there, you could use I Bonds or TIPS instead. It isn't as easy to rebalance (especially if you aren't putting new money in), but it is something to consider.

Since you are ten years out from purchasing a home, buying stocks/bonds seems fine. You'll probably want to pull them out or at least be much more conservative with these funds once you are within the five year mark.

tumbleweed1993sf
Posts: 12
Joined: Thu Dec 13, 2012 12:55 am

Re: Am I using my taxable account for the right reasons?

Post by tumbleweed1993sf » Tue Jan 07, 2014 10:47 pm

investor1 wrote:That doesn't sound bad. Congratulations on starting so early!

There is no real reason to wait to use a three fund portfolio if that's what you want to do. If you want to keep expenses low, just use the ETFs rather than the mutal funds. They have the same expense ratios as the admiral shares.

You might not want to use a three fund'er in the taxable account. Bonds are not tax efficient, so a lot of people don't want to hold them there. Read the wiki on tax efficient placement. If you choose not to hold bonds there, you could use I Bonds or TIPS instead. It isn't as easy to rebalance (especially if you aren't putting new money in), but it is something to consider.

Since you are ten years out from purchasing a home, buying stocks/bonds seems fine. You'll probably want to pull them out or at least be much more conservative with these funds once you are within the five year mark.
Thanks for the help! I think I have a decent grasp on tax-efficient placement, but just chose to go with VTMFX so that I didn't mess it up. Should I just re-allocate across both accounts and go with total-bond and maybe a little bit of total-international stock in the IRA and total-domestic stock in my taxable? I guess my two issues are that:
1) I am having trouble figuring out my desired allocation across both accounts -- I figured I would keep my IRA allocation about 90/10 since I won't be touching it for a while, but I have my taxable at roughly 50/50. When I re-allocate across both, should I just split the difference and go something like 80/20 or 70/30? 2) If I exchange a fund within my taxable account, is this a taxable event? Or are the unrealized gains transferred? Is there a waiting period before exchanging (I remember reading it was 60 days, is that correct?)

tumbleweed1993sf
Posts: 12
Joined: Thu Dec 13, 2012 12:55 am

Re: Am I using my taxable account for the right reasons?

Post by tumbleweed1993sf » Tue Jan 07, 2014 10:56 pm

Also I don't really understand the difference between ETFs and mutual funds. I see that a lot of funds on Vanguard have ETF equivalents and they usually have lower expense ratios. Does that mean it is ALWAYS a better choice to go the ETF route?

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nirvines88
Posts: 391
Joined: Thu Dec 29, 2011 5:38 pm

Re: Am I using my taxable account for the right reasons?

Post by nirvines88 » Tue Jan 07, 2014 11:46 pm

tumbleweed1993sf wrote:Also I don't really understand the difference between ETFs and mutual funds. I see that a lot of funds on Vanguard have ETF equivalents and they usually have lower expense ratios. Does that mean it is ALWAYS a better choice to go the ETF route?
I prefer mutual funds, but see these links and decide for yourself:

http://www.bogleheads.org/wiki/Investin ... or_ETFs.3F

http://www.bogleheads.org/wiki/ETFs_vs_Mutual_Funds
"Beware of little expenses, a small leak will sink a great ship" - Poor Richard

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