Failing to understand taxable acct strat

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Avolition
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Failing to understand taxable acct strat

Postby Avolition » Sun Mar 19, 2017 2:29 pm

Sorry, I'm new at trying to understand this, and its a lot all at once.

Trying to start moving money into a taxable account. Still not sure what best to put in it. Been picking through other threads and I see a lot of talk of funds like TSM. I do roughly get why an index fund is a better choice than say a managed stock fund or bonds. Would people (around here) normally end up with just one fund in their taxable account? (I know choosing is mostly a function of AA and how much room you have to fit everything else into your tax-advantaged accounts.) Our 401k is much larger than the taxable will be to start, so we can easily rebalance the AA via that account if I could just figure out how to begin with the taxable account.

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slayed
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Re: Failing to understand taxable acct strat

Postby slayed » Sun Mar 19, 2017 2:33 pm

Avolition wrote: Would people (around here) normally end up with just one fund in their taxable account?


That's what I do. 100% VTSAX in taxable.

livesoft
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Re: Failing to understand taxable acct strat

Postby livesoft » Sun Mar 19, 2017 2:56 pm

I just want to own tax-efficient funds in taxable. One should learn the characteristics of tax efficient funds, then will not look at fund names, but their characteristics.

Some characteristics:

1. Low distributions, as low as possible.
2. If there are distributions, then no capital gains distributions if possible.
3. If there are dividends, then as low as possible, but also the highest percentage of qualified dividends such as 100% and the lowest percentage of non-qualified dividends such as 0%.
4. If a bond fund, then tax-exempt dividends if the taxpayer is in a high enough tax bracket.

I own the following in my taxable accounts (you will have to look up what the ticker symbols are to see if they are tax-efficient or not):
VTI
VV
VLCAX
VBR
IJS
VEA
VEU
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2015
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Re: Failing to understand taxable acct strat

Postby 2015 » Sun Mar 19, 2017 9:23 pm

Livesoft, is the reason you own this many funds in taxable (regardless of balance) related to replacement funds for the purpose to TLH?

livesoft
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Re: Failing to understand taxable acct strat

Postby livesoft » Sun Mar 19, 2017 9:24 pm

Yes, more or less.
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Peter Foley
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Re: Failing to understand taxable acct strat

Postby Peter Foley » Sun Mar 19, 2017 9:47 pm

I hold only total stock market in a taxable brokerage account and balance out my AA elsewhere. There are many who post here who advise holding total international as well. If I were starting over, I would do either total US or a combination of the two.

Avolition
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Re: Failing to understand taxable acct strat

Postby Avolition » Tue Mar 21, 2017 4:17 pm

Thanks to everyone for the feedback!

The follow-up question/reassurance becomes... if I hold something like TSM in the taxable account, and Vanguard Target Retirement 2035 Fund (VTTHX) (which is ~50% TSM) in an IRA, then I shouldn't have a wash sale issue, right?

pkcrafter
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Re: Failing to understand taxable acct strat

Postby pkcrafter » Tue Mar 21, 2017 6:19 pm

Avolition, I don't how you would have an issue with a wash sale if you aren't selling anything. But to be sure we are all on the same page, what did you mean by "moving money to a taxable account"?

You also didn't mention you were holding a TR fund, and that's going to make rebalancing difficult, because you want to rebalance in tax-deferred.

Paul
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Avolition
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Re: Failing to understand taxable acct strat

Postby Avolition » Tue Mar 21, 2017 7:23 pm

pkcrafter wrote:Avolition, I don't how you would have an issue with a wash sale if you aren't selling anything. But to be sure we are all on the same page, what did you mean by "moving money to a taxable account"?

You also didn't mention you were holding a TR fund, and that's going to make rebalancing difficult, because you want to rebalance in tax-deferred.

Paul


Sorry, will try to clarify. "Moving" money - I just meant moving it out of cash. The wash sale concern was just planning ahead ("just in case") if we needed/wanted to TLH in the taxable account (that doesn't exist yet). The TR is in IRAs, and we do plan to do all our rebalancing in our IRAs.

pkcrafter
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Re: Failing to understand taxable acct strat

Postby pkcrafter » Tue Mar 21, 2017 7:39 pm

Sorry, will try to clarify. "Moving" money - I just meant moving it out of cash. The wash sale concern was just planning ahead ("just in case") if we needed/wanted to TLH in the taxable account (that doesn't exist yet). The TR is in IRAs, and we do plan to do all our rebalancing in our IRAs.


Side Note: Just for clarification, in your original post, you mentioned a 401k, and now you said IRAs. Posters here catch things like that because they are different types of accounts.

Do you have other assets in the 401k than just the TR fund? If not, how are you going to rebalance?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Taylor Larimore
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Total Stock Market Index Fund as a First Investment

Postby Taylor Larimore » Tue Mar 21, 2017 8:20 pm

Avolition wrote:Sorry, I'm new at trying to understand this, and its a lot all at once.

Trying to start moving money into a taxable account. Still not sure what best to put in it. Been picking through other threads and I see a lot of talk of funds like TSM. I do roughly get why an index fund is a better choice than say a managed stock fund or bonds. Would people (around here) normally end up with just one fund in their taxable account? (I know choosing is mostly a function of AA and how much room you have to fit everything else into your tax-advantaged accounts.) Our 401k is much larger than the taxable will be to start, so we can easily rebalance the AA via that account if I could just figure out how to begin with the taxable account.

Avolition:

You ask a very important question I am happy to try and answer.

When opening your first taxable account, it is extremely important to use only low-cost, tax-efficient funds that can be held 'forever."

Two primary reasons:

1. You want a tax-efficient fund to minimize annual taxable distributions (dividends and capital gains).

2. You want to hold your first fund 'forever' because if your fund is profitable, and you later exchange to another fund, you are likely to pay a capital-gain tax on the profit -- leaving that much less to reinvest.

Total stock market index funds are recommended for taxable accounts because the majority of their dividends are "Qualified." This means that their dividends are taxed at a low long-term capital-gain tax rate rather than the higher tax rate for an individual's ordinary income. Also, because total stock market index funds have minimum turnover, they generate few capital-gains.

In my opinion, a Total Stock Market Index Fund is ideal as a first taxable investment. This article by Kent Thune explains:

http://investorplace.com/2015/05/vangua ... NHPU2grIuE

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

sschoe2
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Re: Failing to understand taxable acct strat

Postby sschoe2 » Tue Mar 21, 2017 8:27 pm

Taxable accounts should contain stocks and tax exempt bonds ie munie bonds if you are in the 25% or greater tax bracket. Reit's precious metals, corporate bonds and other investment vehicles that are fully taxed should be put in a 401k or IRA.

My taxable portfolio is
60% Total stock index
20% tax managed small cap index
20% total international stock index

I'm only 36 which is why I am being so aggressive. Eventually I'll probably add intermediate tax exempt bond fund or similar when interest rates stabilize.

WallStreetPhysician
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Re: Failing to understand taxable acct strat

Postby WallStreetPhysician » Tue Mar 21, 2017 8:42 pm

Avolition wrote:Sorry, I'm new at trying to understand this, and its a lot all at once.

Trying to start moving money into a taxable account. Still not sure what best to put in it. Been picking through other threads and I see a lot of talk of funds like TSM. I do roughly get why an index fund is a better choice than say a managed stock fund or bonds. Would people (around here) normally end up with just one fund in their taxable account? (I know choosing is mostly a function of AA and how much room you have to fit everything else into your tax-advantaged accounts.) Our 401k is much larger than the taxable will be to start, so we can easily rebalance the AA via that account if I could just figure out how to begin with the taxable account.


I like TSM funds such as VTSAX for taxable accounts because you know they will always be a core part of your portfolio. It is very important to not meddle with your taxable account as you will have to pay taxes on any gains when you sell. You can play around with tilts and the popular hot new index fund of the day in your retirement accounts, but stick with plain vanilla TSM funds for your taxable. My two cents.

-WallStreetPhysician

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Dale_G
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Re: Failing to understand taxable acct strat

Postby Dale_G » Tue Mar 21, 2017 8:45 pm

Avolition wrote: .... The follow-up question/reassurance becomes... if I hold something like TSM in the taxable account, and Vanguard Target Retirement 2035 Fund (VTTHX) (which is ~50% TSM) in an IRA, then I shouldn't have a wash sale issue, right?


The potential for a wash sale only arises if the funds "are substantially identical". TSM and a Target Retirement fund are not substantially identical, hence no possibility of a wash sale no matter what you do.

Dale
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SGM
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Re: Failing to understand taxable acct strat

Postby SGM » Tue Mar 21, 2017 8:54 pm

The total stock market and possibly total international are the two funds I would put in taxable. I also use intermediate and long term muni funds in the same account. Any new money I have goes into these funds pretty much.

I wouldn't make it more complicated than that unless you are convinced that tilting is going to be helpful. That is very debatable.

jh-1391
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Re: Failing to understand taxable acct strat

Postby jh-1391 » Wed Mar 22, 2017 6:52 am

Would an S&P 500 fund be a terrible idea in taxable? I'm not too far into investing into Schwab's S&P index fund so I could switch strategies to total stock/total international if total stock would be substantially better.

I realize it would expose me to small and mid cap companies more, but I'm just talking about the tax efficiency side of it.

deltaneutral83
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Re: Failing to understand taxable acct strat

Postby deltaneutral83 » Wed Mar 22, 2017 8:15 am

jh-1391 wrote:Would an S&P 500 fund be a terrible idea in taxable? I'm not too far into investing into Schwab's S&P index fund so I could switch strategies to total stock/total international if total stock would be substantially better.

I realize it would expose me to small and mid cap companies more, but I'm just talking about the tax efficiency side of it.


I don't see any difference in the tax efficiency between an S&P fund and the total stock market fund from VG. Without looking, don't they both go Ex-Div for about the same yield?


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