VFORX to start taxable account [Target Date Retirement 2040]

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TarHeel2002
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VFORX to start taxable account [Target Date Retirement 2040]

Post by TarHeel2002 » Thu May 18, 2017 1:03 pm

I will be starting a taxable account in a few months and I was thinking of making monthly deposits into a Vanguard Target Retirement Date 2040 fund (VFORX). I realize that Vanguard Total Stock Market fund (VTSAX) may be more tax efficient but VFORX will take care of my asset allocation for me automatically. Are there any major downfalls to this? I am in my mid 30s and all tax advantaged accounts will be maxed out as well. Thanks!

lack_ey
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Re: VFORX to start taxable account

Post by lack_ey » Thu May 18, 2017 1:15 pm

Maybe in 10 years you want to change your asset allocation (maybe to buy a house, or there's a large medical or legal expense; or to change investing strategy) and you want to sell bonds separately from all the stocks with capital gains, but you can't.

Maybe in 20 years you're in a higher tax bracket and you really wish you had muni bonds rather than taxable bonds in your taxable account, and you can't switch. Could be that interest rates are quite a bit higher by that time.

Maybe in 30 years you're managing asset location and withdrawals for tax efficiency and you wish you could move your bonds here into tax-advantaged accounts and you can't.

mikep
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Re: VFORX to start taxable account

Post by mikep » Thu May 18, 2017 1:52 pm

Maybe you want to claim the foreign tax credit from holding international in a separate fund but can't.

goingup
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Re: VFORX to start taxable account

Post by goingup » Thu May 18, 2017 2:00 pm

Not recommended for a long term investment in a taxable account. Why? Because the TR fund contains bonds which spit out interest which is taxed as income. Your taxable account should hold tax-efficient index funds for the long haul. Total stock market funds are recommended.

TarHeel2002
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Re: VFORX to start taxable account

Post by TarHeel2002 » Thu May 18, 2017 2:17 pm

Thank you very much for the sound advice. I will go VTSAX for long term investing in taxable. To balance my bond allocation would you recommend I-bonds? I am not well versed in bond investments. Perhaps I should just go 100% VTSAX?
Thanks.

retiredjg
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Re: VFORX to start taxable account

Post by retiredjg » Thu May 18, 2017 3:32 pm

Unless you want your taxable account to be different from your portfolio, I'd put the money into Total Stock, Total International, and a Bond fund (the bond depends on your tax bracket) in the same ratios as your target fund. Total Bond for lower brackets, an Intermediate Term Tax Exempt bond fund for higher tax brackets.

goingup
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Re: VFORX to start taxable account

Post by goingup » Thu May 18, 2017 3:53 pm

Typically you would try to hold any bonds in tax-deferred, such as a 401K or tIRA. If there are no good options there you could hold tax-exempt muni bond funds in the taxable account.

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grabiner
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Re: VFORX to start taxable account

Post by grabiner » Fri May 19, 2017 10:28 pm

TarHeel2002 wrote:Thank you very much for the sound advice. I will go VTSAX for long term investing in taxable. To balance my bond allocation would you recommend I-bonds? I am not well versed in bond investments. Perhaps I should just go 100% VTSAX?
Thanks.
You should have one allocation across all of your accounts. Total Stock Market is fine as your sole taxable holding, with your bonds and international stock in your other accounts.

I-Bonds are good for a taxable account because the interest is tax-deferred (for up to 30 years) and exempt from state tax (presumably NC for you, which does have a high state tax). Other than that, it's usually better to hold bonds in tax-deferred accounts as long as your 401(k) has a good bond fund (or enough other good options that you can hold all your bonds in your IRA).
David Grabiner

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Re: VFORX to start taxable account [Target Date Retirement 2040]

Post by LadyGeek » Fri May 19, 2017 10:38 pm

This thread is now in the Investing - Help with Personal Investments forum (portfolio help). I also retitled the thread to help with the ticker symbol.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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