Vanguard LifeStrategy in Taxable Account - exchange?

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stlbrucefan
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Joined: Tue Feb 28, 2017 10:31 am

Vanguard LifeStrategy in Taxable Account - exchange?

Post by stlbrucefan » Tue Feb 28, 2017 10:48 am

Hi All,

New to Bogleheads and would appreciate some advice. My wife and I have been investing in the Vanguard LifeStrategy Moderate Growth fund in a taxable account for about a year and a half now with approximately $17k in the account currently. I have not taken any money out of the account since we opened it. This is non-retirement money for us that we would use for bigger purchases such as buying a car, home improvement, etc. We both currently max out our Roths and my wife contributes to her 401k. (I do not contribute to a 403b as I have a pension). We have an emergency fund in an online savings account that covers about 4-5 months of expenses. Both of our jobs are currently secure.

I've researched the LifeStrategy funds quite a bit and have realized that they are not great funds for taxable accounts. I'm looking for advice as to what to do with this account? I've been looking at splitting the money between the Vanguard Total Stock (VTSMX) and Vanguard Tax-Managed Balanced Fund (VTMFX). I'm certainly open to other options as well. Is the tax-hit on an exchange worth it now?

I appreciate any advice you can give me! Thanks in advance.

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Vanguard LifeStrategy in Taxable Account - exchange?

Post by rkhusky » Tue Feb 28, 2017 12:15 pm

stlbrucefan wrote: (I do not contribute to a 403b as I have a pension).
I try to take advantage of all tax-advantaged accounts that I can, but that depends on how much money you have available to invest each year.
stlbrucefan wrote: I'm looking for advice as to what to do with this account? I've been looking at splitting the money between the Vanguard Total Stock (VTSMX) and Vanguard Tax-Managed Balanced Fund (VTMFX). I'm certainly open to other options as well. Is the tax-hit on an exchange worth it now?
I don't think that Tax-Managed Balance Fund has international stocks, if that is important to you. You could roll your own with Total Stock Market, Total International, and Intermediate Tax Exempt.

Note that if you are in the 15% tax bracket, you may be better off with a taxable bond fund. In that case, LifeStrategy Moderate would be fine.

If you want to move away from LifeStrategy Moderate, you should at least stop reinvesting dividends/cap gains. You could leave it alone and start to invest in something else, waiting for the market to fall, so that you can sell without incurring cap gains.

Note that while you are in the 15% bracket, the cap gain rate is 0% (though cap gains can push you out of the 15% bracket).

The tax hit depends on what bracket you are in. If you are in a high bracket, then $17K is likely inconsequential and you could easily pay the cap gain tax in order to simplify your portfolio. If you are in a low bracket, where $17K might be a significant amount, then your cap gain tax rate may be 0% for some or all the gains.

stlbrucefan
Posts: 46
Joined: Tue Feb 28, 2017 10:31 am

Re: Vanguard LifeStrategy in Taxable Account - exchange?

Post by stlbrucefan » Tue Feb 28, 2017 12:33 pm

Thank you for the input! Appreciate your help. We are in the 25% tax bracket. What do you recommend for that bracket?

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Vanguard LifeStrategy in Taxable Account - exchange?

Post by rkhusky » Tue Feb 28, 2017 3:04 pm

stlbrucefan wrote:Thank you for the input! Appreciate your help. We are in the 25% tax bracket. What do you recommend for that bracket?
25% is typically the dividing line between using tax exempt and taxable bonds (i.e. the return on the taxable bonds is usually higher, such that the after tax return is about the same in the 25% bracket). So, you can go either way and not be too far off. I use tax exempt, but my marginal rate is 30% due to child tax credit phaseout.

For comparison, the SEC yield for Intermediate Tax Exempt is 2.0% versus 2.5% for Total Bond and 2.7% for Intermediate Bond (latter two Admiral shares). The after-tax yield for the latter are 1.9% and 2.0%, respectively, in the 25% bracket. Total Bond is considered slightly safer than Intermediate Bond. At this point in time, it is a wash.

What would be the tax hit in dollars if you did sell (15% of the gains in the account)? You'll have to decide whether that is an appropriate amount to pay for a simpler portfolio, if you were to switch. I would probably just let it sit until there was a market correction and then sell, if I intended to do so. But if it bothers you to have taxable bonds and the cost is only a couple hundred dollars, you might as well switch.

Minot
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Re: Vanguard LifeStrategy in Taxable Account - exchange?

Post by Minot » Tue Feb 28, 2017 10:21 pm

stlbrucefan wrote:Hi All,

New to Bogleheads and would appreciate some advice. My wife and I have been investing in the Vanguard LifeStrategy Moderate Growth fund in a taxable account for about a year and a half now with approximately $17k in the account currently. I have not taken any money out of the account since we opened it. This is non-retirement money for us that we would use for bigger purchases such as buying a car, home improvement, etc.
The replies you've gotten so far have focused on taxes, but I'd like to suggest that a 60% equity fund may not be a good idea for an account meant for buying cars, home improvements, etc. If we hit a serious downturn just as you're getting ready to buy that new car, your account could lose as much as 30% of its value. Bogleheads usually recommend that accounts such as your be either high-yield savings accounts, CDs that mature around the time you think you'll need the money, or possible short-term bonds.

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grabiner
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Re: Vanguard LifeStrategy in Taxable Account - exchange?

Post by grabiner » Wed Mar 01, 2017 11:05 pm

stlbrucefan wrote:I've researched the LifeStrategy funds quite a bit and have realized that they are not great funds for taxable accounts. I'm looking for advice as to what to do with this account? I've been looking at splitting the money between the Vanguard Total Stock (VTSMX) and Vanguard Tax-Managed Balanced Fund (VTMFX).
If you are going to hold munis in the taxable account, hold separate stock and bond funds, rather than Tax-Managed Balanced. The problem with Tax-Managed Balanced is that you can't sell stocks and bonds separately; if you want to spend bond money, or switch to a different type of bonds, or hold bonds in your IRA instead, you have to sell the balanced fund for a capital gain.

The same principle applies to the LifeStrategy fund; this may not be the fund you want later in your taxable account. Therefore, I would recommend not adding anything new to this fund. It's OK to keep what you have, but only if the investment is appropriate for your purposes; if you want to buy a car from your taxable account, you should have almost enough in bonds alone (40% of this fund) to buy the car, so that you can still buy if the stock market crashes.
Wiki David Grabiner

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