When do I start taxable account?

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pepperz
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When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 9:17 am

First priority each year is to MAX our Retirement accounts.

We each have a Roth right now and are planning to open more as we are self employed. (so higher contribution limits for us)

Here is my question: assuming we have funded all IRA's and have money left over, I would think the only option left for contributing is in our cash brokerage account.

Am I correct in thinking this is the LAST place we want to go only after other IRA's are maxed out?

Also how does asset allocation play into you taxable account? IE - If we decided on 80% stocks / 20% bonds, would I make the exact same investments the same way I do in my retirement accounts? (80% SPY & 20% AGG)

What's throwing me off is that Retirement accounts can't be touched until 59 but cash accounts whenever you want... The Bogleheads idea is that we are saving as much money as we can for retirement correct? Even in your cash account?

Thanks

The Wizard
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Re: When do I start taxable account?

Post by The Wizard » Fri Feb 12, 2016 9:22 am

For now, just put stock index fund(s) in your taxable account, no bonds. Enable Specific Lot ID and disable auto-reinvest of dividends.
Do more bonds in tax-sheltered if this throws your AA way off.
Learn how to tax-harvest losses in your taxable account when they occur.

I'll be doing this myself this year due to income over-limit for direct Roth IRA contribs and existing tIRA making it awkward to do backdoor Roth...
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radiowave
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Re: When do I start taxable account?

Post by radiowave » Fri Feb 12, 2016 9:28 am

Think of your taxable (e.g. brokerage) account as another reservoir for your investments. You do you asset allocation across all accounts. See the wiki for tax efficient placement. Essentially, stock funds/ETFs are efficient in the taxable account, especially tax efficient funds like Vanguard total stock VTSAX/VTI because their value grows over time but you don't pay any taxes on them until you sell, hopefully later in life when you retire and are at a lower tax bracket. Also in taxable, total international stock funds and if you need more space for bonds, tax-exempt municipal bonds, e.g. VWIUX.

Also, search for some of the recent threads in setting up emergency funds and the different tiers, e.g. high yield savings accounts, short term bonds, CDs, etc. CDs are FDIC insured up to $250k per bank so if you want to keep cash safe that would be a good option.
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Re: When do I start taxable account?

Post by radiowave » Fri Feb 12, 2016 9:28 am

The Wizard beat me to it :)

+1
Last edited by radiowave on Fri Feb 12, 2016 4:37 pm, edited 1 time in total.
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pepperz
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Re: When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 9:37 am

The Wizard wrote:For now, just put stock index fund(s) in your taxable account
Thank you. Please help me understand the logic in this? It seems to me that taxable account is the last place you'd want your stocks?

Wouldn't the short term gains cause you to owe more taxes end of year? Or are you saying because there can equally be losses that will help your tax situation and even out the gains year to year?
Last edited by pepperz on Fri Feb 12, 2016 9:58 am, edited 1 time in total.

The Wizard
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Re: When do I start taxable account?

Post by The Wizard » Fri Feb 12, 2016 9:41 am

pepperz wrote:
The Wizard wrote:For now, just put stock index fund(s) in your taxable account
Thank you. Please help me understand the logic in this? It seems to me that taxable account is the last place you'd want your stocks?

Wouldn't the short term gains cause you to owe more taxes end of year? Or are you saying because there can equally be losses that will help your tax situation and even out the gains year to year?

Am I right in thinking there is no reason to touch taxable accounts until all IRA accounts have been maxed?
You don't pay any taxes on Unrealized Gains, short or long.
Specific lots allow you to manage those gains when time comes to sell.
Read the Wiki here on tax-efficient placement for more insight.

Also, many managed stock funds have good-sized Capital Gains Distributions some years which are unavoidably taxable that year. But index funds, especially TSM funds, almost never have CGDs...
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pepperz
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Re: When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 9:46 am

radiowave wrote:Think of your taxable (e.g. brokerage) account as another reservoir for your investments. You do you asset allocation across all accounts.
So if I am understanding you correctly, if my asset allocation is 80% stocks / 20% bonds, that doesn't mean each separate account needs to have that 80/20 allocation? (So long as the overall picture of all accounts together is at 80/20 on say my birthday each year)

Making each account the same does seem like the simplest / easiest way for me to balance my accounts each year but if it is not efficient for taxes it's not worth just for convenience.

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Re: When do I start taxable account?

Post by jackholloway » Fri Feb 12, 2016 9:51 am

pepperz wrote:
radiowave wrote:Think of your taxable (e.g. brokerage) account as another reservoir for your investments. You do you asset allocation across all accounts.
So if I am understanding you correctly, if my asset allocation is 80% stocks / 20% bonds, that doesn't mean each separate account needs to have that 80/20 allocation? (So long as the overall picture of all accounts together is at 80/20 on say my birthday each year)

Making each account the same does seem like the simplest / easiest way for me to balance my accounts each year but if it is not efficient for taxes it's not worth just for convenience.
Yes, your total allocation is what matters. If each account follows it, you do not need to worry about how to account for tax to be paid on traditional iras, but you pay more taxes than you would if short term gains and large non qualified dividends happen only in retirement accounts.

I have some of each asset in each type of account, but do some tax efficient placement.

pepperz
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Re: When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 9:57 am

Thanks guys. Am I right in thinking there is no reason to touch taxable account until all IRA accounts have been maxed for the year

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ruralavalon
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Re: When do I start taxable account?

Post by ruralavalon » Fri Feb 12, 2016 10:02 am

pepperz wrote:First priority each year is to MAX our Retirement accounts.

We each have a Roth right now and are planning to open more as we are self employed. (so higher contribution limits for us)

Here is my question: assuming we have funded all IRA's and have money left over, I would think the only option left for contributing is in our cash brokerage account.

Am I correct in thinking this is the LAST place we want to go only after other IRA's are maxed out?

. . . . .

What's throwing me off is that Retirement accounts can't be touched until 59 but cash accounts whenever you want... The Bogleheads idea is that we are saving as much money as we can for retirement correct? Even in your cash account?

Thanks
I am a little confused.

In addition to your Roth IRAs, have you looked into SEPs, SIMPLE IRAs and solo 401ks? Do that first before thinking about taxable account investing.

Generally max out all of your tax-protected accounts before using taxable accounts, unless you have some specific non-retirement investing goal in mind which requires access to your money sooner. Do you have some specific non-retirement investing goal?

There are some provisions for withdrawal from retirement accounts before age 59.5.
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pepperz
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Re: When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 10:17 am

ruralavalon wrote:In addition to your Roth IRAs, have you looked into SEPs, SIMPLE IRAs and solo 401ks? Do that first before thinking about taxable account investing.
Yes sorry that's what I meant. We are planning to open and maintain all the IRA's that we can before thinking of the taxable account.

You bring up a good point about short term goals. We are saving for a down payment on a home in hopefully 3 years but I hadn't considered investing that.. If we did, that would go into taxable with much more conservative stock allocation right? Like 80% bonds 20% stocks just for that?

radiowave
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Re: When do I start taxable account?

Post by radiowave » Fri Feb 12, 2016 10:33 am

If you have a specific goal, e.g. downpayment for a house, you want to be cautious how you invest, e.g if you take you downpayment and invest in say total stock market (VTSAX for example) in your taxable account, what would happen if it lost 50% of its value in 3 years? (think 2008). For a short time horizon, you may be better off with a 3 year CD at say 1.3% annual interest and it will be there when you need it. On the other hand, we could have another bull market and stock funds appreciate in value by 10% or more (2014 for example). So better to keep short term needs in high yield saving, CDs and maybe short term bonds.
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Re: When do I start taxable account?

Post by radiowave » Fri Feb 12, 2016 10:44 am

An additional comment on cash management and taxable accounts. Are you using cash rewards credit cards? How do you link your normal checking/cash accounts with your taxable investments, e.g. do you have a brokerage account? Two examples, Bank America and Merrill Edge links checking with brokerage account; Fidelity has a cash management account you can link to a brokerage account. So depending on your investment plan, if you are trying to achieve say 65% equity 30% bond and 5% cash/equivalents, filling our your tax deferred space first, Roth then taxable, how can you meet the goals of your plan? How will cash flow into the various buckets? If you have say $1000/month after maxing retirement and savings, do you have a long term investment goal, e.g. retiring early say 10-15 years from now and living off your taxable investments for a year or so to take advantage of low marginal tax rates to convert stock funds in taxable to cash at 0% long term gain tax?
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dbCooperAir
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Re: When do I start taxable account?

Post by dbCooperAir » Fri Feb 12, 2016 10:58 am

Taxable is not the only option after retirement accounts (IRA's, 401K, 403B, etc.), some fill up with Ibonds then taxable after that.

Sounds like you are married, ibonds could give you another $20k of space + $5k if you want to mess with your tax return. Keep in mind ibonds need to fit in your plan.
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Re: When do I start taxable account?

Post by Toons » Fri Feb 12, 2016 11:06 am

Start your taxable account after ,
you have fully funded tax sheltered accnt.
and paid off debt excluding house(work on that one) :happy
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Re: When do I start taxable account?

Post by dsmil » Fri Feb 12, 2016 11:48 am

I agree with some of the comments above that for retirement money, you should definitely be putting everything into tax-advantaged accounts before touching taxable. If you can save more than what is needed for retirement, and you have shorter-term goals in mind, I think it is perfectly fine to place this money in taxable accounts, using tax-friendly funds.

pepperz
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Re: When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 11:57 am

radiowave wrote:How do you link your normal checking/cash accounts with your taxable investments, e.g. do you have a brokerage account? Two examples, Bank America and Merrill Edge links checking with brokerage account
This is exactly what we are doing. Our BOA checking accounts link with Merril Edge brokerage account. (Merril Edge is where our CMA is located.

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Re: When do I start taxable account?

Post by ruralavalon » Fri Feb 12, 2016 12:02 pm

pepperz wrote:
ruralavalon wrote:In addition to your Roth IRAs, have you looked into SEPs, SIMPLE IRAs and solo 401ks? Do that first before thinking about taxable account investing.
Yes sorry that's what I meant. We are planning to open and maintain all the IRA's that we can before thinking of the taxable account.

You bring up a good point about short term goals. We are saving for a down payment on a home in hopefully 3 years but I hadn't considered investing that.. If we did, that would go into taxable with much more conservative stock allocation right? Like 80% bonds 20% stocks just for that?
In my opinion for a down-payment in 3 years you could just stick with federally insured short-term CDs or a high credit quality short-term bond fund, whichever gives you a better return.
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pepperz
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Re: When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 12:07 pm

ruralavalon wrote:
pepperz wrote:
ruralavalon wrote:In my opinion for a down-payment in 3 years you could just stick with federally insured short-term CDs or a high credit quality short-term bond fund, whichever gives you a better return.
A "bond fund" would be purchased through my brokerage account, correct? For example, putting our down payment money into the ticker "AGG" bond fund? Or is there a different way to buy bonds I should entertain?

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Re: When do I start taxable account?

Post by vas » Fri Feb 12, 2016 12:14 pm

If a high deductible health care plan makes sense for you and your family then you have access to an HSA. The HSA can be used for some additional long term tax free (or deferred) savings as well.

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Re: When do I start taxable account?

Post by SeeMoe » Fri Feb 12, 2016 2:47 pm

When working , we funded our DCP's and kept 6 months in emergency savings (mm) in the event of job loss, etc. (later increased to 18 months, then 2 years.) Always had zero balance in bills, credit card (1 card only!), a mortgage (paid off before retiring in early 50's), car payments were paid down STAT, and later cash only. Taxable account slowly grew as we aged with 60/40 AA between it and DCPs. Kept, still do, the emergency " short term" folio (aka " bucket") separate from the other AA accounts. (Current AA is 45/55, + short term emergency fund is over 2 years worth of MM's now in retirement.)
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Re: When do I start taxable account?

Post by TheGipper » Fri Feb 12, 2016 3:04 pm

I am a fan of holding bonds in taxable account (municipal bonds if in higher tax brackets) for two reasons:
1) Your taxable account will likely have shorter term goals to cover (i.e cars, kids weddings, part of college savings, tier of emergency fund), so my taxable account AA would logically have a more conservative, bond heavy tilt than my retirement accounts.
2) Many have convincingly crunched the numbers and demonstrated that keeping higher returning equities in tax protected accounts trumps the tax inefficiency of holding bonds in taxable account.

I would preferentially hold total international index funds (ie VTIAX) in taxable as they are simultaneously tax-efficient, volatile which will help with tax-loss harvesting, and allow you to claim the foreign tax credit.

I would keep my Roth space 100% in equities for maximal growth and plan to spend down last.

There are often better choices to fund before taxable accounts (ie HSA, Ibonds, employer defined benefit plans, 457bs, etc...) but its often nice to get started with a taxable account anyway, as having one will help you with tax minimization/diversification and Roth conversions in retirement among other things.

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Re: When do I start taxable account?

Post by dratkinson » Fri Feb 12, 2016 3:18 pm

Preferred investing order (generic).
Employers' 401k/403b/... to get the full match. It's free money.
Personal IRA. Probably best (broadest index, lowest-cost) option. Roth is preferred option.
Spousal IRA. Ditto. Allowed if spouse unemployed.
Employers' 401k/403b/... to maximum. Maximize annual TA (tax-advantaged) space.
Taxable account investing. If you have more to invest after maximizing all annual TA space.


Recommended long-term retirement investing choices.
See: https://www.bogleheads.org/wiki/Three-fund_portfolio
See: https://www.bogleheads.org/wiki/Princip ... _placement

However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund. The 3-fund portfolio is recommended for all account types: employer tax-advantaged (401k,...), personal tax-advantaged (IRA,...), and personal taxable. It can be replicated in each account, or spread across all, guided by your investment options’ availability/costs. Your choice.

For taxable accounts and if in the 25+% fed tax bracket, substitute an intermediate-term national municipal bond fund for the 3-fund's recommended TBM.

Research "death spiral states" before investing in a single-state muni. Then if you go this route, restrict your single-state muni investment to be half of your total bonds in your taxable account.

Last year, the stock funds of the 3-fund portfolio produced the majority of their return as QDI, FTC, and a small amount of ordinary income, so most tax-efficient. Coupled with appropriate muni bonds makes for a low tax bite in our taxable space.

Ditto: turn off reinvested distributions, turn on specific ID cost basis, and study the requirements for TLHing and protecting QDI income.

N.B. (1) If you have the same funds in taxable and in tax-advantaged, also turn off reinvested distributions in tax-advantaged. (2) Or change to own unique funds in taxable and tax-advantaged; this is where owning an all-in-one fund in tax-advantaged can help. Either method accomplished the same goal: avoiding the "replacement shares" issue that causes a problem with TLHing.
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jayhawkerbeef
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Re: When do I start taxable account?

Post by jayhawkerbeef » Fri Feb 12, 2016 3:32 pm

dratkinson wrote:The 3-fund portfolio is recommended for all account types: employer tax-advantaged (401k,...), personal tax-advantaged (IRA,...), and personal taxable. It can be replicated in each account, or spread across all, guided by your investment options’ availability/costs.
Sort of off topic but since it was mentioned... is the Boglehead consensus to allocate across all accounts as opposed to individual, or in other words, treat all accounts as one portfolio?

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Re: When do I start taxable account?

Post by packet » Fri Feb 12, 2016 3:55 pm

jayhawk wrote:... is the Boglehead consensus to allocate across all accounts as opposed to individual, or in other words, treat all accounts as one portfolio?
I can't speak for all Bogleheads... but I'll say yes, your asset allocation should consider your entire portfolio across all accounts, not each account seperately.

I reserve the right to be wrong.

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packet

Edit: It really can be done within each account, there's nothing wrong with that. But even then, you want to ensure the entire portfolio is balanced as you want it. For example, if you like buckets, you may have one account with 80/20 and another account with 40/60... that's fine as long as the overall portfolio is what you want (money is fungible).
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packet
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Re: When do I start taxable account?

Post by packet » Fri Feb 12, 2016 4:00 pm

OP,

I'm with others here... fill those advantaged accounts first, then look to taxable. Once you do that, you then have to concern yourself with tax efficiency of placement etc. This applies to retirement saving only (long term). Other goals require other thoughts...

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packet
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dratkinson
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Re: When do I start taxable account?

Post by dratkinson » Fri Feb 12, 2016 4:24 pm

jayhawk wrote:
dratkinson wrote:The 3-fund portfolio is recommended for all account types: employer tax-advantaged (401k,...), personal tax-advantaged (IRA,...), and personal taxable. It can be replicated in each account, or spread across all, guided by your investment options’ availability/costs.
Sort of off topic but since it was mentioned... is the Boglehead consensus to allocate across all accounts as opposed to individual, or in other words, treat all accounts as one portfolio?
Treat all accounts as one family portfolio. But give consideration to using the lowest-cost broadest-index options available in each of our accounts. Assuming our employer's plan has the most restrictive options (poorer choices, higher costs), then begin our selection process there by selecting the best-of-the-worst options. Then round out our "one family portfolio" by filling in from the available choices in our IRA(s) and taxable space.

Options. Some advocate placing all bonds in tax-advantaged space. As bonds are low-growth, 100% bonds could relegate our TA space to low growth. Others advocate shooting for the moon (using only equities) in our TA space, and muni bonds in taxable. Or you can mix the two positions and spread equities/bonds evenly across all accounts. Your choice.
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Re: When do I start taxable account?

Post by ruralavalon » Fri Feb 12, 2016 4:34 pm

pepperz wrote:
ruralavalon wrote:
pepperz wrote:
ruralavalon wrote:In my opinion for a down-payment in 3 years you could just stick with federally insured short-term CDs or a high credit quality short-term bond fund, whichever gives you a better return.
A "bond fund" would be purchased through my brokerage account, correct? For example, putting our down payment money into the ticker "AGG" bond fund? Or is there a different way to buy bonds I should entertain?
IShares Core U.S. Aggregate Bond ETF (AGG) (average effective duration = 5.4 years) is an intermediate-term bond fund, not a short-term bond fund.

Yes, buy your short-term bond fund through a taxable brokerage account. You want to buy with no commissions or transaction costs.

Where is your taxable brokerage account located, and what short-term bond funds or ETFs do they offer no fee trades on?
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pepperz
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Re: When do I start taxable account?

Post by pepperz » Fri Feb 12, 2016 4:51 pm

ruralavalon wrote:IShares Core U.S. Aggregate Bond ETF (AGG) (average effective duration = 5.4 years) is an intermediate-term bond fund, not a short-term bond fund.Yes, buy your short-term bond fund through a taxable brokerage account. You want to buy with no commissions or transaction costs.

Where is your taxable brokerage account located, and what short-term bond funds or ETFs do they offer no fee trades on?
My brokerage account is with Merril Edge. We get 30 free trades/month there and can invest in any ETF as far as I'm aware.

I'm confused because "AGG" is a bond index fund that I can buy / sell at anytime. There is no minimum length of time I am required to hold it for right? It sounds like there are other kinds of bonds you can buy (maybe not indexes) where you have to hold them for a certain time like bank CD accounts?

Excuse my ignorance as I try to understand all this.

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Re: When do I start taxable account?

Post by radiowave » Fri Feb 12, 2016 4:59 pm

At Merrill Edge, you can pretty much buy any publically traded ETF, but not all mutual funds such as Vanguard Admiral funds (e.g. VTSAX total stock) but you can buy the ETF equivalent VTI.
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Re: When do I start taxable account?

Post by ruralavalon » Fri Feb 12, 2016 8:25 pm

pepperz wrote:
ruralavalon wrote:IShares Core U.S. Aggregate Bond ETF (AGG) (average effective duration = 5.4 years) is an intermediate-term bond fund, not a short-term bond fund.Yes, buy your short-term bond fund through a taxable brokerage account. You want to buy with no commissions or transaction costs.

Where is your taxable brokerage account located, and what short-term bond funds or ETFs do they offer no fee trades on?
My brokerage account is with Merril Edge. We get 30 free trades/month there and can invest in any ETF as far as I'm aware.

I'm confused because "AGG" is a bond index fund that I can buy / sell at anytime. There is no minimum length of time I am required to hold it for right? It sounds like there are other kinds of bonds you can buy (maybe not indexes) where you have to hold them for a certain time like bank CD accounts?

Excuse my ignorance as I try to understand all this.
For a short-term bond ETF from. Vanguard you could consider:
Vanguard Short-term Bond ETF (BSV)
Vanguard Short-term Corporate Bond ETF (VCSH)
Vanguard Short-term Government Bond ETF (VGSH).
There is no minimum time you have to hold these.

You might get better rates of return on short-term CDs, so see what you can find. Try http://www.bankrate.com . Also on the Vanguard website they show CDs available.
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Re: When do I start taxable account?

Post by whonoze » Fri Feb 12, 2016 10:33 pm

The Wizard wrote:For now, just put stock index fund(s) in your taxable account, no bonds. Enable Specific Lot ID and disable auto-reinvest of dividends.
Interesting thread. Could you please tell me why you recommend disabling auto-reinvest?
TIA
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Re: When do I start taxable account?

Post by packet » Sat Feb 13, 2016 9:47 am

pepperz wrote:...I'm confused because "AGG" is a bond index fund that I can buy / sell at anytime. There is no minimum length of time I am required to hold it for right?...
Right, no minimum or maximum or any time requirement.
Mutual Funds and Exchange Traded Funds both hold multiple equities, bonds, or a combination of both. You can buy/sell AGG anytime due to the nature of ETFs. AGG holds many individual bonds (and cash).

Just like individual stocks, you can buy individual bonds yourself... this is where you need to know the nature of that individual bond, such as holding time etc.

I'd provide a more complicated and detailed answer... but I don't know one... :)

Hope that helps.

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packet
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Re: When do I start taxable account?

Post by packet » Sat Feb 13, 2016 9:51 am

whonoze wrote:
The Wizard wrote:For now, just put stock index fund(s) in your taxable account, no bonds. Enable Specific Lot ID and disable auto-reinvest of dividends.
Interesting thread. Could you please tell me why you recommend disabling auto-reinvest?
TIA
This will make tax loss harvesting (TLH) easier in the future. Search around Bogleheads (forum and wiki) for TLH for more info.

A couple readings:

... Tax loss harvesting
... TLH for absolute dummies [Tax Loss Harvesting]
... (apologies for the "dummies" reference, I don't mean to imply anything... :) ... )

:beerCheers,
packet
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canga
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Re: When do I start taxable account?

Post by canga » Sat Feb 13, 2016 11:29 am

packet wrote:
whonoze wrote:
The Wizard wrote:For now, just put stock index fund(s) in your taxable account, no bonds. Enable Specific Lot ID and disable auto-reinvest of dividends.
Interesting thread. Could you please tell me why you recommend disabling auto-reinvest?
TIA
This will make tax loss harvesting (TLH) easier in the future. Search around Bogleheads (forum and wiki) for TLH for more info.

A couple readings:

... Tax loss harvesting
... TLH for absolute dummies [Tax Loss Harvesting]
... (apologies for the "dummies" reference, I don't mean to imply anything... :) ... )

:beerCheers,
packet
By directing dividends to a money market or sweep account, you can use the dividends towards rebalancing without causing additional taxable events. This is especially true for year end distributions, and especially true if you have several different funds in taxable accounts. Simplicity (i.e. less funds) in taxable will be easier to keep in line with your asset allocation.

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