How often should I contribute to my taxable account?

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susleni
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How often should I contribute to my taxable account?

Post by susleni »

I recently got a raise that allows me to max out my 401k, Roth IRA, and HSA, and I've opened a taxable Vanguard account with indexed mutual funds to which I plan on contributing approximately $1,000 per month. I've read that contributing monthly can lead to a major headache when filing tax returns in the future when taking distributions. Would it be more advantageous to contribute to the taxable account quarterly versus monthly? Disadvantages?

Any guidance is appreciated!
fundseeker
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Re: How often should I contribute to my taxable account?

Post by fundseeker »

Congratulations on the raise! It will not create any headaches when you sell, since Vanguard will do the math for you. And you get to select which method they use when you sell.
dbltrbl
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Re: How often should I contribute to my taxable account?

Post by dbltrbl »

Do it monthly automatically. Human inertia is inevitable. Vanguard does the cost for you. They are required by law now.
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ruralavalon
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Re: How often should I contribute to my taxable account?

Post by ruralavalon »

Congratulations on your raise.

I always invested whenever I had money available to invest, and tried to set it up automatically if that was practical.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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flamesabers
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Re: How often should I contribute to my taxable account?

Post by flamesabers »

If you're salaried, I would suggest setting an automatic contribution to your taxable account however frequent you're paid. If you're paid hourly, I would recommend contributing to your taxable account when you get paid by your employer.
bloom2708
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Re: How often should I contribute to my taxable account?

Post by bloom2708 »

Invest early and often.

We get paid 2 times per month. I add to Roth/Taxable 2 times per month. The amounts may vary depending on our short term spending.

Balance investing with short term saving. Emergency fund, car fund, taxes fund, vacation fund. Give every dollar a purpose even if the funds are mixed in a single savings type account.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
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goingup
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Re: How often should I contribute to my taxable account?

Post by goingup »

susleni wrote:I've read that contributing monthly can lead to a major headache when filing tax returns in the future when taking distributions.
Not true. Your broker/custodian tracks your transactions. Is the goal to accumulate wealth? If so, monthly contributions to a taxable account work great!
CppCoder
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Re: How often should I contribute to my taxable account?

Post by CppCoder »

I invest in taxable every two weeks on the day my direct deposit hits my bank. The exception might be the first few weeks of the year when I fund my IRAs for the year.
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wander
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Re: How often should I contribute to my taxable account?

Post by wander »

I contribute it automatically every month.
Theoretical
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Re: How often should I contribute to my taxable account?

Post by Theoretical »

It depends on what you're investing into the taxable account. If you're just going to keep 1 fund in it (make sure it's different than your IRAs to avoid wash-sale problems), such as Total Stock Market or Total International, then I'd say monthly is fine with reinvested dividends. If you're going to have multiple funds in taxable (say a large, small, and emerging markets - slice and dice), then a better approach is to not reinvest the dividends and let your monthly funds accumulate for 3 months and then make the purchase on the quarter, after all dividends have been paid. That allows you to rebalance (if you so choose) without selling to top off the asset category you're low in.

This is Rick Ferri's preferred approach to managing a taxable account.
Topic Author
susleni
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Re: How often should I contribute to my taxable account?

Post by susleni »

Thanks everyone for your help! Looks like we'll be putting it on auto-pilot.

Thanks again!
pasadena
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Re: How often should I contribute to my taxable account?

Post by pasadena »

I also invest bi-weekly, on the day my direct deposit hits my account.

Just set up your account so dividends are not automatically invested, and invest them yourself with your monthly contribution. You will have 12 lots a year, that's not too hard to track, and as others said, Vanguard should do the legwork for you when you sell.
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whodidntante
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Re: How often should I contribute to my taxable account?

Post by whodidntante »

Brokers are now required to track cost basis for you.
DSInvestor
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Re: How often should I contribute to my taxable account?

Post by DSInvestor »

I used an automatic transaction to add to my taxable account once a month.
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PFInterest
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Re: How often should I contribute to my taxable account?

Post by PFInterest »

Did every paycheck in 2016. Doing monthly this year. Does not matter either way.
robertalpert
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Re: How often should I contribute to my taxable account?

Post by robertalpert »

I prefer direct deposit -- directly from employer payroll department to Vanguard money market in taxable account every week.

Then whenever I get around to it, I exchange from money market to (50:50) Total-stock-market and Limited-term-tax-exempt.
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Artsdoctor
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Re: How often should I contribute to my taxable account?

Post by Artsdoctor »

susleni wrote:Thanks everyone for your help! Looks like we'll be putting it on auto-pilot.

Thanks again!
Not so fast.

There are two distinct benefits of a taxable account: being able to tax-loss harvest and being able to donate appreciated shares. In order to take advantage of these benefits, I'd consider choosing Specific Lot ID as your method of calculating cost basis.

While there is no unique, best way of doing it, I would consider making a monthly contribution of $1000 to your money market account and also, directing your mutual fund dividends to that money market account as well. If you do that, you'll be in full control of not having to worry about wash sale rules if you tax-loss harvest. You can still make your contribution to wherever it's needed most in the taxable account, but it will allow you to TLH more efficiently.
WildBill
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Re: How often should I contribute to my taxable account?

Post by WildBill »

Artsdoctor wrote:
susleni wrote:Thanks everyone for your help! Looks like we'll be putting it on auto-pilot.

Thanks again!
Not so fast.

There are two distinct benefits of a taxable account: being able to tax-loss harvest and being able to donate appreciated shares. In order to take advantage of these benefits, I'd consider choosing Specific Lot ID as your method of calculating cost basis.

While there is no unique, best way of doing it, I would consider making a monthly contribution of $1000 to your money market account and also, directing your mutual fund dividends to that money market account as well. If you do that, you'll be in full control of not having to worry about wash sale rules if you tax-loss harvest. You can still make your contribution to wherever it's needed most in the taxable account, but it will allow you to TLH more efficiently.
This is a good point about TLH, but the solution is not the one I would recommend.

Definitely set it and forget it.

Setting automatic investments on a monthly basis into several low cost funds takes advantage of inertia, which I am convinced is the most powerful force for good in personal finance. Over time it will make you rich. It worked for me.

If you are sticking the money in another MM fund and then deciding periodically where to stick it, you lose the benefits of automation and inertia and introduce decision making and judgement into it, which I am absolutely convinced is harmful to accumulation.

You are not going to TLH all that frequently and you can avoid it by suspending or redirecting contributions temporarily on the rare occasions that you do. Also, the penalty on the wash sale of a $500 to $1000 purchase is usually fairly insignificant. Not recommending it, but it is not illegal nor is it particularly harmful as long as the wash sale is small.

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
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Artsdoctor
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Re: How often should I contribute to my taxable account?

Post by Artsdoctor »

^ This is true. Running afoul of the wash sale rule is unlikely to amount to a lot of bucks. And I do like to idea of set-it-and-forget-it.

However, habits that are learned now could pay off in the future. Perhaps the monthly contributions will increase. And if you lived through the 2008-2009 meltdown with a taxable account, you were most likely tax-loss harvesting A LOT.

I will admit that is a personal decision. I have always put contributions where they're needed most. But I acknowledge that for most, an automatic approach is a very worthwhile endeavor.
Last edited by Artsdoctor on Sun Apr 16, 2017 7:39 pm, edited 1 time in total.
WildBill
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Re: How often should I contribute to my taxable account?

Post by WildBill »

Howdy again.

To be clear, there is no "penalty" on a wash sale. You just get less of a tax loss harvest than you thought because a portion of the sale has its basis readjusted if you have purchased the fund 30 days on either side of the sale.

I have had these often because I never worried about suspending automatic investments when TLH ing, which I may have do once a year on average. They have never amounted to much.

Again it is one of the things the financial firm will track and report for you.

Happy automatic investing

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
wolf359
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Re: How often should I contribute to my taxable account?

Post by wolf359 »

It's more important to automate the contributions than it is to worry about the implications of tax loss harvesting. You don't actually TLH that often. Times like 2008-9 when you did it more are rare, and you'll want to still automate your contributions at that time as much as possible.

When you actually tax loss harvest, you'll also find that you'll be clearing out all those little tax lots and replacing them with bigger lots, simplifying your tax accounting over time.

I keep my taxable account very simple, typically contributing to only one or two funds at a time. Dollar cost averaging is more effective on equity funds, so I usually DCA only into those. I rebalance into the bond funds about once a year. (My contributions are small relative to my overall balance, so it doesn't move the bar there much.)
Bacchus01
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Re: How often should I contribute to my taxable account?

Post by Bacchus01 »

Keeping it simple is probably the best approach to start out. Understanding TLH rules is important. There are threads and threads on "when should I tax loss harvest?" My answer is that I do it whenever I can.

For me, I have a complicated spreadsheet (of course) that tells me when to invest after tax. It takes into account all of our emergency funds that are invested via ROTH, HSA and cash. It also sets a floor on our cash account and then gives me a number "to invest." Whenever it is positive after a payday, I invest. Sometimes it's a little and sometimes it's a lot. My pay varies greatly through the year. From Jan to Dec my pay can change as much as 50% as I roll off FICA (around March) and hit max on 401k (around May). Then I make adjustments down for withholding (around June). Raises confidence me in April and sometimes October. Long story short: I can't auto pilot as the amount of excess to contribute changes dramatically through the year.
Bacchus01
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Re: How often should I contribute to my taxable account?

Post by Bacchus01 »

wolf359 wrote:It's more important to automate the contributions than it is to worry about the implications of tax loss harvesting. You don't actually TLH that often. Times like 2008-9 when you did it more are rare, and you'll want to still automate your contributions at that time as much as possible.

When you actually tax loss harvest, you'll also find that you'll be clearing out all those little tax lots and replacing them with bigger lots, simplifying your tax accounting over time.

I keep my taxable account very simple, typically contributing to only one or two funds at a time. Dollar cost averaging is more effective on equity funds, so I usually DCA only into those. I rebalance into the bond funds about once a year. (My contributions are small relative to my overall balance, so it doesn't move the bar there much.)
Interesting. I TLH probably 4-5 times a year.
wolf359
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Re: How often should I contribute to my taxable account?

Post by wolf359 »

Bacchus01 wrote:
wolf359 wrote:It's more important to automate the contributions than it is to worry about the implications of tax loss harvesting. You don't actually TLH that often. Times like 2008-9 when you did it more are rare, and you'll want to still automate your contributions at that time as much as possible.
Interesting. I TLH probably 4-5 times a year.
The difference is probably because we hold different assets in taxable. You may also be willing to TLH at smaller dollar amounts than me. I have discovered that the less manual control I exert, the better my overall performance (because I'm less tempted to market time by slow rolling a purchase.) I don't want to pick up nickles in front of a steamroller.

My taxable is primarily TSM and a municipal bond fund. In the last year, TSM dropped last January-February, but it's been mostly up since then.

I used to have lots of TLH opportunities in Total International Stock Market, but I haven't been regularly purchasing that, so everything I currently hold is in positive territory.

I probably would have had more opportunities recently, except I had diverted funds to savings for the past few months (for a home improvement project). This had the coincidence that I didn't buy at the recent market highs.

My most significant drops have been in REITs, but I hold those in tax advantaged accounts.
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