ETF vs Index mutual fund for taxable account

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reaper070
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ETF vs Index mutual fund for taxable account

Post by reaper070 » Fri Sep 01, 2017 6:17 pm

Hello Bogleheads,

I am 26 years old and currently working at a company that does not offer a 401k Plan. I have been maxing out my Roth IRA for past 2 years at Fidelity using the following allocation.

60% US total stock market (FSTMX)
30% Total international stock market (IXUS)
10 % Total Bond market index (AGG)

Since, I do not have a 401k Plan offered at work, I was planning on opening a Taxable account to supplement my Roth IRA.
For the taxable account, I am planning to fill it with U.S Total stock market index, since it is the most tax efficient. My question is should I go for an index fund or an ETF ? Which one is more tax efficient among the two ?

Thanks!

alex_686
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Re: ETF vs Index mutual fund for taxable account

Post by alex_686 » Fri Sep 01, 2017 6:19 pm

ETFs are more tax efficient than mutual funds. FYI, Vanguard funds have both mutual fund and ETF share classes so they get the best of both worlds.

livesoft
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Re: ETF vs Index mutual fund for taxable account

Post by livesoft » Fri Sep 01, 2017 6:27 pm

Most ETFs are index funds. The F in ETF is "fund".

It turns out some index ETFs are less tax efficient than some index mutual funds and vice versa. And it can depend on your tax bracket.

See also:
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

The differences in taxes can be so insignificant that the price one pays for an ETF share on any given day at any give hour could overshadow any tax differences. And that goes for commissions, but if you have to pay a commission, then there is probably a better way to do what you are doing.
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JBTX
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Re: ETF vs Index mutual fund for taxable account

Post by JBTX » Fri Sep 01, 2017 6:34 pm

reaper070 wrote:
Fri Sep 01, 2017 6:17 pm
Hello Bogleheads,

I am 26 years old and currently working at a company that does not offer a 401k Plan. I have been maxing out my Roth IRA for past 2 years at Fidelity using the following allocation.

60% US total stock market (FSTMX)
30% Total international stock market (IXUS)
10 % Total Bond market index (AGG)

Since, I do not have a 401k Plan offered at work, I was planning on opening a Taxable account to supplement my Roth IRA.
For the taxable account, I am planning to fill it with U.S Total stock market index, since it is the most tax efficient. My question is should I go for an index fund or an ETF ? Which one is more tax efficient among the two ?

Thanks!
Not a lot of difference. What investment company is your taxable account going to be in? Is it a brokerage account? If your brokerage account is at fidelity, and you want to buy vanguard funds, I suspect the etf is going to have less upfront fees than buying a vanguard mutual fund at fidelity.

TheAncientOne
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Re: ETF vs Index mutual fund for taxable account

Post by TheAncientOne » Fri Sep 01, 2017 6:47 pm

If you already have a Fidelity account, just open up a taxable account with them and pick a single index fund for now. The key thing is to keep money going in during good times and bad. The difference between S&P 500 or TSM is trivial compared to committing to regular contributions to said account. When you get to a larger amount there, you can do an international index fund too if you wish, although again, the difference by doing this will pale compared to sticking with investing in good times and bad.

reaper070
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Re: ETF vs Index mutual fund for taxable account

Post by reaper070 » Fri Sep 01, 2017 6:58 pm

Thanks for the responses. I am thinking of opening a taxable account with Vanguard (Diversifying between brokerages, I know this sounds weird !!). I will go with the index mutual fund ,investor class to start with and then upgrade to Admiral class. Mutual fund seems more convenient to me, because I cannot buy fractional shares of ETFs.

samorris74
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Re: ETF vs Index mutual fund for taxable account

Post by samorris74 » Fri Sep 01, 2017 8:10 pm

Good plan. I assume you have the 3k needed to get started in VTSMX. Another pro and con of the ETF vs. Mutual Fund. ETF all you need is enough $ to buy one share whereas the mutual fund has the 3k minimum. That said, if you have the 3k then dollar cost averaging from that point on is awesome. Good luck.

lostdog
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Re: ETF vs Index mutual fund for taxable account

Post by lostdog » Sat Sep 02, 2017 8:41 am

You mention upgrading from investor shares to admiral shares. Just so you know there will be no action needed from you. Once you get over 10k Vanguard will upgrade the fund for you.

jcerickson
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Location: Tampa, FL

Re: ETF vs Index mutual fund for taxable account

Post by jcerickson » Sat Sep 02, 2017 2:43 pm

reaper070 wrote:
Fri Sep 01, 2017 6:17 pm
Since, I do not have a 401k Plan offered at work, I was planning on opening a Taxable account to supplement my Roth IRA.
If you have a High Deductible Health insurance plan (HDHP) through work, you can also open an HSA and contribute the individual maximum of $3,400/year pre-tax. If not, you can set up your own HSA and get a tax benefit when you file your return.

Many HSA's have an investment option, also. We use United Healthcare insurance at work, which allows me to invest amounts over the required $2,000 cash balance in a Vanguard fund.

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grabiner
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Re: ETF vs Index mutual fund for taxable account

Post by grabiner » Sat Sep 02, 2017 3:08 pm

jcerickson wrote:
Sat Sep 02, 2017 2:43 pm
reaper070 wrote:
Fri Sep 01, 2017 6:17 pm
Since, I do not have a 401k Plan offered at work, I was planning on opening a Taxable account to supplement my Roth IRA.
If you have a High Deductible Health insurance plan (HDHP) through work, you can also open an HSA and contribute the individual maximum of $3,400/year pre-tax. If not, you can set up your own HSA and get a tax benefit when you file your return.
This is not correct. You cannot contribute to an HSA unless you have an HDHP for your insurance. If you have an HDHP at work, it may be connected to a particular HSA; the employer may make contributions to the HSA for you, allow you to make them by payroll deduction (saving you Social Security and Medicare taxes), or have an arrangement with the HSA to waive fees. If your employer doesn't do this, but you have an HDHP for insurance (either through work or on the private market), you can contribute to an HSA on your own.
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jcerickson
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Location: Tampa, FL

Re: ETF vs Index mutual fund for taxable account

Post by jcerickson » Sat Sep 02, 2017 3:24 pm

grabiner wrote:
Sat Sep 02, 2017 3:08 pm
jcerickson wrote:
Sat Sep 02, 2017 2:43 pm
reaper070 wrote:
Fri Sep 01, 2017 6:17 pm
Since, I do not have a 401k Plan offered at work, I was planning on opening a Taxable account to supplement my Roth IRA.
If you have a High Deductible Health insurance plan (HDHP) through work, you can also open an HSA and contribute the individual maximum of $3,400/year pre-tax. If not, you can set up your own HSA and get a tax benefit when you file your return.
This is not correct. You cannot contribute to an HSA unless you have an HDHP for your insurance. If you have an HDHP at work, it may be connected to a particular HSA; the employer may make contributions to the HSA for you, allow you to make them by payroll deduction (saving you Social Security and Medicare taxes), or have an arrangement with the HSA to waive fees. If your employer doesn't do this, but you have an HDHP for insurance (either through work or on the private market), you can contribute to an HSA on your own.
Mea culpa, grabiner... In my haste, I didn't fully explain the HDHP requirement. :beer

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oldcomputerguy
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Re: ETF vs Index mutual fund for taxable account

Post by oldcomputerguy » Sat Sep 02, 2017 4:19 pm

reaper070 wrote:
Fri Sep 01, 2017 6:58 pm
Thanks for the responses. I am thinking of opening a taxable account with Vanguard (Diversifying between brokerages, I know this sounds weird !!).
Not weird at all. Many people do this. My traditional IRA (and both our Roths) are at Fidelity because that was where my 401k was, but we also have a taxable account at Vanguard.
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