Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

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KT785
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Joined: Fri Jul 11, 2014 2:21 pm

Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by KT785 » Thu Nov 09, 2017 5:12 pm

I’m trying to decide where to open a small taxable account—anticipated annual deposits of around $2,000 in the near term. For the past several years, I have deposited funds recouped through credit card cash-back programs (withdrawn quarterly) and periodic educational bonuses through my employer into my or my wife’s Roth IRAs held at Vanguard with the intent of eventually maxing them out. We’re now maxing both Roth IRAs via cash flow so I planned on investing those excess funds in a taxable account; we’re not yet maxing out our 401ks but given the source and nature of these extra funds, directing them into the 401ks would be a challenge.

For context:
-We're 30 (me) and 29 (wife)
-25% tax bracket - MFJ
-We save 22%+ of our gross income between our 401Ks (Vanguard 2050 Trust Plus) and Roth IRAs (Vanguard 2050 Investor Shares)
-We both work for the same stable mega-corp with a fully funded pension plan
-3-6 month emergency fund in place
-Ample term life insurance on both of us as we plan to start a family relatively soon
-Given current savings, increasing deferral rate, and pension plan, we aim to retire at 56/55 respectively

Debt:
-$195,000 left on mortgage at 3.125% (30 year fixed); house is worth around $240,000
-$19,000 auto loan at 0.9%
-Student loans total approximately $10,000 at around 4%

My planned asset allocation for the taxable account would be 90-100% equities split 60/40 U.S. and International—10% could/would be placed in a muni-bond fund. If I had my wish, I’d simply open a joint taxable account at Vanguard and purchase the requisite TSM and TISM funds, however the $3,000 minimum of each fund is far too high given my initial investment would only be a few hundred dollars.

I’ve alternatively considered executing the same plan at Schwab given the $1 minimums of the corresponding funds. My concern in doing so is the tax efficiency differences between the analogous Vanguard and Schwab funds. I would however get a $100 bonus for opening the Schwab checking account :moneybag

Another option would be to leverage one of the robo-advisors, Wealthfront in particular, as I wouldn’t incur any fees given the low balance (under $10,000) and I’d possibly get greater tax efficiency (and tax loss harvesting) as compared to Schwab.

I could leverage Vanguard ETFs but the fact that I cannot purchase fractional shares would limit my ability to invest all the funds at the requisite intervals and in the allocation I desire.

I’d likely view any of these alternatives as merely a stop-gap measure until I had sufficient assets to use the actual Vanguard funds—tax implications in doing so do give me pause however.

Given my situation, does anyone have an opinion on how to proceed (or alternatives I’ve not examined)?

Thanks!
Last edited by KT785 on Thu Nov 09, 2017 5:58 pm, edited 1 time in total.

retiredjg
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Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by retiredjg » Thu Nov 09, 2017 5:24 pm

Where are your IRAs held?

KT785
Posts: 78
Joined: Fri Jul 11, 2014 2:21 pm

Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by KT785 » Thu Nov 09, 2017 6:00 pm

retiredjg wrote:
Thu Nov 09, 2017 5:24 pm
Where are your IRAs held?
Both of the Roth IRAs are held at Vanguard; I updated my initial post to clarify this.

mega317
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Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by mega317 » Fri Nov 10, 2017 12:22 am

I would probably max my 401k and/or pay off debt before taxable stock investing. Can you explain again why, if you have $2,000 to invest per year, you can't contribute another $2,000 to the 401k? (Actually $2667 if pretax.)

That said, if you're doing it I would choose Vanguard. Good funds with low expenses, you already have accounts there, and you've expressed it as your long-term preference.

At these small numbers it doesn't matter if you have to hold some cash because of the fractional share issue with ETFs, or if your desired allocation is out of whack for a while, or if you just hold cash for 18 months until you can meet the minimum for a mutual fund. I mean if you hold cash for 18 months and miss out on a rocking 20% stock increase in that time, your opportunity cost is like 200 bucks. I would consider that a worst-case scenario.

Muni funds are probably not beneficial in your bracket since they yield less than taxable bonds of comparable risk.

retiredjg
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Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by retiredjg » Fri Nov 10, 2017 7:37 am

If you direct a little more of your cash flow to the 401k and put that $2k into Roth IRA, it should work out.

Or perhaps you are thinking of this as fun money, to save until you can go on a cruise or something. In that case, I'd save the first $1k and buy one of the later target funds at Vanguard which are 90/10 with 40% of the stock in international...just what you want.

Schwab does offer lower minimums and they now have a nice series of index target funds. I'm not sure a small account like that wouldn't just be a hassle to hold in a separate custodian but I guess it could be OK. I would not worry about the difference in tax efficiency for that small amount of money. I don't think the difference is that great anyway. I could be wrong.

Same with the robo. Might be fun though. Since you have target funds in all your other accounts, tax loss harvesting should not cause any wash sale issues. Know that some people have tired of the robo TLH'ing when tax time comes and they have several pages of 1099 info.

Probably no wrong answer in the custodians you are considering.

I'd either funnel it into the Roth IRA or pay off student loans.

KT785
Posts: 78
Joined: Fri Jul 11, 2014 2:21 pm

Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by KT785 » Fri Nov 10, 2017 4:13 pm

Thanks for the advice provided thus far!

While re-directing the funds into my or my wife's 401k isn't impossible, given the source of some of the funds (majority consists of credit card cash back redemptions) and that the educational bonuses are paid in such a way that they aren't able to be deferred like our regular payroll, doing so becomes a bit more cumbersome. Admittedly, I could hold onto the redemptions/bonuses and just adjust my payroll deferral on an ad hoc basis as needed; I will take this into greater consideration.

retiredjg is correct that I somewhat view the account as "fun money". Less in the sense that my wife and I would spend it now on travel/toys, but more as a third/fourth tier emergency fund--we already have a sufficient e-fund at Ally and I'm aware that I can withdraw contributions from our Roth IRAs, but my initial thinking was that the taxable account would be a secondary retirement account (helpful in tax diversification in early retirement) but if absolutely needed, could be tapped in emergency. The classification as "fun money" also is part of why I'd consider testing out one of the robo-advisors . . . merely out of curiosity to see how they perform, all the while presuming I'd eventually move the funds to Vanguard anyway.

Leveraging the same TR 2050 fund that we use in our tax advantaged accounts hadn't really crossed my mind given the consistent advice on Bogleheads to avoid TR funds in a taxable account. Given that we'd only use the TR fund until we had about $7,500 in the account and I can liquidate the shares and purchase the TSM and TISM 60/40, the tax consequences of doing so might be limited. Thoughts?

I'd not anticipated using the funds to pay down our current debts as the interest rates on those loans are quite low as outlined in my first post.

Any other advice is greatly appreciated!

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BL
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Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by BL » Fri Nov 10, 2017 4:51 pm

I would get it into the 401k (after you have it in hand, if you are concerned about not having it) or pay down the student loans (4% is not terrible, but much more than you could get in fixed interest.) It will feel so good to be done with the loans, and it would open up that much more cash flow.

In taxable, $1000 for Target fund or Star fund (60/40) would work until you get 3k for total stock market. You don't need to have enough for international to start with. ETFs would solve that problem another way.

Actually, with that amount of income, you should be able to fill your 401k with 18k each (you would save 25% + state tax on the savings so the govt is paying you to do this). There should be some way to budget the savings.

KT785
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Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by KT785 » Fri Nov 10, 2017 5:13 pm

Thanks, BL

We are actively increasing our 401k deferrals each year and max both of our Roth IRAs; while we could conceivably max our 401ks as well, we're planning on starting a family next year and are ratcheting up our liquid savings in anticipation and because of our company's pension plan, maxing out all tax advantaged accounts may be a bit too much . . . . we're relatively big savers, and increasingly so, but at some point one has to evaluate whether increasing deferrals can be excessive in light of current assets, savings rates, and alternative income sources (pension, SS, etc.).

sport
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Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by sport » Fri Nov 10, 2017 5:38 pm

If you ultimately want to have the account at Vanguard, I would accumulate the money in a bank savings account until you have 1K. Then, you can invest in a TR fund at Vanguard.

stlutz
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Re: Where to open small taxable brokerage account? (Vanguard vs. Schwab vs. Robo / MF vs. ETF)

Post by stlutz » Fri Nov 10, 2017 9:00 pm

ETFs are more portable than mutual funds if you want to change brokers in the future. In a taxable account I prefer ETFs.

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