Time for Taxable?

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user85613
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Time for Taxable?

Post by user85613 » Tue Apr 24, 2018 12:40 pm

MFJ - 22% federal - 0% state

Currently have $145K across retirement accounts all in VFIFX - Vanguard Target Retirement 2050. Maxing out all tax-differed accounts. Both ROTH IRAs have been maxed for 2018. Not eligible for HSA.

Debts:

Mortgage $350K @ 4% (no PMI)
Car #1 - $21K @ 1.74%
Car #2 - $25K @ 0%

Cash on-hand: $90K sitting in 2% APY savings account
Monthly positive cash-flow of around $1K after $7.5K in expenses.

Considerations:

1. I have $43K earmarked to drop the mortgage balance to below 80% in two years so I can get rid of escrow for taxes and insurance. (Mortgage servicer requires loan to be two years old before considering escrow deletion.) I'm considering making extra principal payments now to get there before the two year.
2. Two kids under 5 and no 529 accounts yet. Maybe not worth it at my tax rate?
3. For emergency funds I consider: #1 Credit cards, #2 cash, #3 ROTH IRAs, #4 hope to never get here.

Am I ready to start a taxable account? Currently at a 90/10 ratio and would like to get closer to 80/20. I'm thinking about buying a chunk of VTI and moving some of my VFIFX into bonds. Should I buy all at once in the taxable or ease myself in?

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triceratop
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Re: Time for Taxable?

Post by triceratop » Tue Apr 24, 2018 12:43 pm

Whatever else you do, I hope you realize that VFIFX holds 40% of stocks in international and VTI holds 0%. Are you aware that your current plan results in you tilting away from international stocks?

I would use "VT" -- Vanguard Total World Stock.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

livesoft
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Re: Time for Taxable?

Post by livesoft » Tue Apr 24, 2018 12:47 pm

Based on your emergency fund notes, I would be investing the $90K, but maybe after paying off the car loan that has interest.

OTOH, many people would not take the risk that I have always taken.
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user85613
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Re: Time for Taxable?

Post by user85613 » Tue Apr 24, 2018 1:09 pm

triceratop wrote:
Tue Apr 24, 2018 12:43 pm
Whatever else you do, I hope you realize that VFIFX holds 40% of stocks in international and VTI holds 0%. Are you aware that your current plan results in you tilting away from international stocks?

I would use "VT" -- Vanguard Total World Stock.
Great point. I was just thinking about the US and international ratios last night.

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FiveK
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Re: Time for Taxable?

Post by FiveK » Tue Apr 24, 2018 5:40 pm

user85613 wrote:
Tue Apr 24, 2018 12:40 pm
Mortgage $350K @ 4% (no PMI)
Car #1 - $21K @ 1.74%
Car #2 - $25K @ 0%
Cash on-hand: $90K sitting in 2% APY savings account

1. I have $43K earmarked to drop the mortgage balance to below 80% in two years so I can get rid of escrow for taxes and insurance. (Mortgage servicer requires loan to be two years old before considering escrow deletion.) I'm considering making extra principal payments now to get there before the two year.
2. Two kids under 5 and no 529 accounts yet. Maybe not worth it at my tax rate?
3. For emergency funds I consider: #1 Credit cards, #2 cash, #3 ROTH IRAs, #4 hope to never get here.

Am I ready to start a taxable account? Currently at a 90/10 ratio and would like to get closer to 80/20. I'm thinking about buying a chunk of VTI and moving some of my VFIFX into bonds. Should I buy all at once in the taxable or ease myself in?
1. If you will be comfortable with the lower cash balance, paying some 4% principal with 2% savings in two years, to get rid of escrow, is defensible - only the most aggressive would likely demur.

Whether to do so ASAP would get more discussion. E.g., see Paying down loans versus investing - Bogleheads.

2. The "oxygen mask" philosophy in Investment Order seems apt. See that link for more on the specific 529 question, and more on the general "pay loan vs. invest" question.

History says, when one has a lump sum to invest, it more often is better to invest all at once vs. a little at a time. But that's "more often" not "always". Good luck!

user85613
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Re: Time for Taxable?

Post by user85613 » Tue Apr 24, 2018 10:37 pm

How does one handle additional purchases if you wanted to buy additional shares twice a month? I can't set a dollar amount for the ETF and the mutual fund equivalent has double the ER.

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FiveK
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Re: Time for Taxable?

Post by FiveK » Tue Apr 24, 2018 10:58 pm

user85613 wrote:
Tue Apr 24, 2018 10:37 pm
...the mutual fund equivalent has double the ER.
Vanguard's Total Stock Market investor-class shares have an ER almost four times that of the ETF: 0.15 for VTSMX vs. 0.04 for VTI.

But on an absolute basis, if one has just under the amount needed for admiral-class (VTSAX, also a 0.04 ER), the extra cost is
(0.15% - 0.04%) * $9999 = $11/yr.

Not too onerous, eh? In other words, if you want to invest a fixed amount every two weeks, the mutual fund should work well.

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triceratop
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Re: Time for Taxable?

Post by triceratop » Tue Apr 24, 2018 11:48 pm

FiveK wrote:
Tue Apr 24, 2018 10:58 pm
user85613 wrote:
Tue Apr 24, 2018 10:37 pm
...the mutual fund equivalent has double the ER.
Vanguard's Total Stock Market investor-class shares have an ER almost four times that of the ETF: 0.15 for VTSMX vs. 0.04 for VTI.

But on an absolute basis, if one has just under the amount needed for admiral-class (VTSAX, also a 0.04 ER), the extra cost is
(0.15% - 0.04%) * $9999 = $11/yr.

Not too onerous, eh? In other words, if you want to invest a fixed amount every two weeks, the mutual fund should work well.
I think OP is referring to Vanguard Total World, where the ER is slightly more onerous and also there’s no promise of an admiral shares fund in the future.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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FiveK
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Re: Time for Taxable?

Post by FiveK » Tue Apr 24, 2018 11:58 pm

triceratop wrote:
Tue Apr 24, 2018 11:48 pm
I think OP is referring to Vanguard Total World, where the ER is slightly more onerous and also there’s no promise of an admiral shares fund in the future.
In that case,
Image
the difference is 0.09% (assuming OP can't come up with the $5 million for VTWIX).

Even with a $100K balance, that's $90/yr.

One can decide whether that is a cost worth paying for the ease of regular contributions, or whether one chooses to spend a little time to save the $90.

user85613
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Re: Time for Taxable?

Post by user85613 » Tue May 01, 2018 5:18 pm

So I went ahead and bought some VT.

Now I am looking at a 457(b) that I have access to that I may use to spend down the cash on hand.

Fees are 0.65% and $18.50 annually with these funds available:

Vanguard Total Stock Market Index - VTSMX - 0.14% ER - (100% US Stock)
Vanguard Wellington - VWELX - 0.25% ER (66/34)
Vanguard Wellesley - VWINX - 0.22% ER (58/42)
Vanguard Long-Term Investment-Grade - VWESX - 0.22% ER (100% Bonds)
Vanguard Short-Term Bond Index - VBISX - 0.15% ER (100% Bonds)

MotoTrojan
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Re: Time for Taxable?

Post by MotoTrojan » Tue May 01, 2018 5:21 pm

Nothing terrible about VT, but it is much easier to tax-loss harvest with VTI and VXUS separate. Maybe if the market drops, you can consider selling and buying the individual ETFs/MFs. Then you can also custom tweak your AA more (the target fund holds more International than I'd like, so I personally would've gone 100% VTI in taxable until it was more aligned with my 25% International AA).

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triceratop
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Re: Time for Taxable?

Post by triceratop » Tue May 01, 2018 5:28 pm

user85613 wrote:
Tue May 01, 2018 5:18 pm
So I went ahead and bought some VT.

Now I am looking at a 457(b) that I have access to that I may use to spend down the cash on hand.

Fees are 0.65% and $18.50 annually with these funds available:

Vanguard Total Stock Market Index - VTSMX - 0.14% ER - (100% US Stock)
Vanguard Wellington - VWELX - 0.25% ER (66/34)
Vanguard Wellesley - VWINX - 0.22% ER (58/42)
Vanguard Long-Term Investment-Grade - VWESX - 0.22% ER (100% Bonds)
Vanguard Short-Term Bond Index - VBISX - 0.15% ER (100% Bonds)
I don't understand what you mean here. In your OP you said all of your investments were in Vanguard Target Retirement 2050. But this 457(b) does not include that fund. Is there money currently in that 457(b) (if so, can you roll it over -- those fees are high!) or are you talking about future contributions?

If you're forced into contributing to these funds for future savings then that would have changed my advice I gave -- since you would want to split Total World Stock into Total (US) Stock and Total International Stock.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

youngpleb
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Re: Time for Taxable?

Post by youngpleb » Tue May 01, 2018 7:10 pm

Have you looked into whether you are eligible to do a mega backdoor Roth IRA? That would beat any taxable investing options.
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avoidingdumbmistakes
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Re: Time for Taxable?

Post by avoidingdumbmistakes » Tue May 01, 2018 7:20 pm

If would do a 529 regardless of personal tax benefits. The growth is tax free as long as it's used for college expenses. Your kids are young. You can take a big dent out of college costs with modest annual investments. I have 4 kids. I didn't do 529s for my older 2 who graduate next year and I'm kicking myself for not doing it. My younger 2 are in great shape and it's a big relief after bootstrapping the first 2.

user85613
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Re: Time for Taxable?

Post by user85613 » Tue May 01, 2018 10:17 pm

triceratop wrote:
Tue May 01, 2018 5:28 pm

I don't understand what you mean here. In your OP you said all of your investments were in Vanguard Target Retirement 2050. But this 457(b) does not include that fund. Is there money currently in that 457(b) (if so, can you roll it over -- those fees are high!) or are you talking about future contributions?

If you're forced into contributing to these funds for future savings then that would have changed my advice I gave -- since you would want to split Total World Stock into Total (US) Stock and Total International Stock.
The 457(b) has just now become an option. Previously it had outrageous fees and only annuities available.

user85613
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Re: Time for Taxable?

Post by user85613 » Tue May 01, 2018 10:29 pm

To elaborate on current monthly contributions:

2018 his and her ROTH IRA - already maxed out
His SIMPLE IRA - $1040/month
Her 403(b) - $1,600/month

All of the above in Vanguard Target 2050.

I'm debating whether to start contributing to the 457(b) as well. I could max it for at least a few years at the expense of monthly cash flow due to the excessive cash on hand. Maybe that is going overboard with tax deferred?

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FiveK
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Re: Time for Taxable?

Post by FiveK » Tue May 01, 2018 10:44 pm

user85613 wrote:
Tue May 01, 2018 10:29 pm
Maybe that is going overboard with tax deferred?
Unless you like paying more tax, it's probably not worth worrying about going overboard with tax-advantaged (i.e., either traditional or Roth).

It's difficult, but not impossible, to have "too much" in traditional accounts. That occurs when withdrawals from your traditional accounts end up being taxed at a marginal rate higher than you saved when contributing.

Have you done a back-of-the-envelope to estimate your withdrawal marginal rate and compare that with this year's tax saving rate for traditional contributions?

user85613
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Re: Time for Taxable?

Post by user85613 » Tue May 22, 2018 11:12 pm

So I was looking at a dated plan description for the 457(b).

Fees are actually 1.2% and $15 annually. :oops:
Lowest cost funds are Vanguard Total Stock Market or Vanguard 500 at .14% each.

If I did start contributing it would only be for 5 to 7 years.

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FiveK
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Re: Time for Taxable?

Post by FiveK » Tue May 22, 2018 11:48 pm

user85613 wrote:
Tue May 22, 2018 11:12 pm
So I was looking at a dated plan description for the 457(b).

Fees are actually 1.2% and $15 annually. :oops:
Lowest cost funds are Vanguard Total Stock Market or Vanguard 500 at .14% each.

If I did start contributing it would only be for 5 to 7 years.
If that's a governmental 457b (in other words, one that allows you to roll over the balance after you leave the employer (see https://www.irs.gov/pub/irs-tege/rollover_chart.pdf) - then it's probably worth paying those fees. See Expensive or mediocre choices.

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