When to start taxable?

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Arinbjorn
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When to start taxable?

Post by Arinbjorn » Wed Jul 11, 2018 7:23 am

Hello Boglehead friends - I would like to pose the question, when should I consider a taxable investing account at Vanguard?

I realize that optimally, I should be maxing my work 401k and Roth IRA first. I max my Roth IRA and contribute 10% to my 401k, to get full 5% employer match. I utilize the Vanguard 3 fund portfolio in my Roth, and Vanguard target date in my 401k.

I do have an emergency fund at Ally's high interest savings.

I also pay some extra principal at my 4.0% mortgage each month, just for some satisfaction. I got the mortgage in 2009, when I was 19 years old - now I'm 30.

Would it make sense to start a taxable account with equities only for tax efficiency, to help bolster my emergency fund and provide some liquid distant future assets?

I've partially convinced myself that it would be like another tier to my emergency fund, but also feel like I would be disregarding the advice to max all tax benefited account types first.

I see many folks here talking about their taxable accounts - have you all been maxing tax advantaged accounts first, or did you start a taxable account before then? What was your logic, if so?

Bacchus01
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Re: When to start taxable?

Post by Bacchus01 » Wed Jul 11, 2018 7:32 am

You don’t say how much you have in residual income not what tax bracket, but my order of funding is:

- 401k to max match
- HSA
- Roth IRA
- 401k to $18.5k
- 529s
- NQ deferred comp to get to 24% marginal bracket
- after tax

magicrat
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Re: When to start taxable?

Post by magicrat » Wed Jul 11, 2018 7:35 am

Max your tax advantaged space first unless there is some clear reason not to (e.g., horrible 401k options).

BeautifulDisaster
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Re: When to start taxable?

Post by BeautifulDisaster » Wed Jul 11, 2018 8:12 am

0.Establish an emergency fund to your satisfaction
1.Contribute to your 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5)
6. Fund a mega backdoor Roth if applicable.
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account and/or fund a 529 with any extra.

See full info here: https://forum.mrmoneymustache.com/inves ... msg1333153

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David Jay
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Re: When to start taxable?

Post by David Jay » Wed Jul 11, 2018 8:12 am

magicrat wrote:
Wed Jul 11, 2018 7:35 am
Max your tax advantaged space first unless there is some clear reason not to (e.g., horrible 401k options).
+1

All tax advantaged space that you do not use this year is lost permanently. No way to get it back.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

KlangFool
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Re: When to start taxable?

Post by KlangFool » Wed Jul 11, 2018 8:17 am

Arinbjorn wrote:
Wed Jul 11, 2018 7:23 am

I realize that optimally, I should be maxing my work 401k and Roth IRA first. I max my Roth IRA and contribute 10% to my 401k, to get full 5% employer match. I utilize the Vanguard 3 fund portfolio in my Roth, and Vanguard target date in my 401k.

I also pay some extra principal at my 4.0% mortgage each month, just for some satisfaction. I got the mortgage in 2009, when I was 19 years old - now I'm 30.
Arinbjorn,

Is your satisfaction worth paying 10+% to 20+% tax in order to save 4% interest? Max up your 401K up to 18.5K before considering paying extra principal to the 4.0% mortgage.

KlangFool

Rupert
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Re: When to start taxable?

Post by Rupert » Wed Jul 11, 2018 8:23 am

I'll be the contrarian here. Whether it makes sense to max your 401k before investing in a taxable account depends, in large part, on whether you need to max that account in order to reach your retirement goals and on what your other goals are. For example, if you have a pension, in addition to a 401k and Social Security, you may not necessarily need to max the 401k to reach your retirement goals and, if you have other goals such as buying a different house in the future, starting a family, or saving for your kids' education, it may make perfect sense to save for those goals as opposed to stuffing unneeded funds in the 401k. There's no one right answer here. Note, I agree with KlangFool that paying down the mortgage is not necessarily a great financial move, but if it makes you happy, it's not a bad decision. Again, no one right answer here. Overall, you're doing great.

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iceport
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Re: When to start taxable?

Post by iceport » Wed Jul 11, 2018 8:28 am

Arinbjorn wrote:
Wed Jul 11, 2018 7:23 am
Would it make sense to start a taxable account with equities only for tax efficiency, to help bolster my emergency fund and provide some liquid distant future assets?
A taxable account for tax efficiency? No, absolutely not. The more tax efficient alternatives (traditional defined contribution plans/IRAs and Roth defined contribution plans/IRAs) are called tax-advantaged for a reason. They save you taxes.

For future liquidity and tax uncertainty considerations, there is a case to be made for tax-diversification that could well include taxable investing. However, it still probably makes the most sense at this point (before you are saving enough to outgrow all tax-advantaged space) to use Roth account options instead. Does your employer offer Roth 401k contributions?

As far as bolstering your emergency fund, the most straightforward way to do that is to add additional funds to the account(s) where you currently hold it.
"Discipline matters more than allocation.” ─William Bernstein

KlangFool
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Re: When to start taxable?

Post by KlangFool » Wed Jul 11, 2018 8:35 am

Rupert wrote:
Wed Jul 11, 2018 8:23 am
I'll be the contrarian here. Whether it makes sense to max your 401k before investing in a taxable account depends, in large part, on whether you need to max that account in order to reach your retirement goals and on what your other goals are. For example, if you have a pension, in addition to a 401k and Social Security, you may not necessarily need to max the 401k to reach your retirement goals and, if you have other goals such as buying a different house in the future, starting a family, or saving for your kids' education, it may make perfect sense to save for those goals as opposed to stuffing unneeded funds in the 401k. There's no one right answer here. Note, I agree with KlangFool that paying down the mortgage is not necessarily a great financial move, but if it makes you happy, it's not a bad decision. Again, no one right answer here. Overall, you're doing great.
Rupert,

401K is not a retirement account. You could withdraw money from that account without paying penalty before the retirement age. So, I disagree that contribution to 401K has anything to do with whether the retirement is fully funded. It is a tax management tool.

The following URL showed that clearly.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

Jordan4FI
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Re: When to start taxable?

Post by Jordan4FI » Wed Jul 11, 2018 8:38 am

If you plan to retire early, you need to start one and really pump it up with what left over $ you can.

AlohaJoe
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Re: When to start taxable?

Post by AlohaJoe » Wed Jul 11, 2018 8:40 am

Arinbjorn wrote:
Wed Jul 11, 2018 7:23 am
I've partially convinced myself that it would be like another tier to my emergency fund
Your Roth IRA is your next tier of emergency fund.
I see many folks here talking about their taxable accounts - have you all been maxing tax advantaged accounts first, or did you start a taxable account before then? What was your logic, if so?
Many Bogleheads make a lot of money. When you make well into six figures it is easy to max everything and have taxable accounts as well.

Arinbjorn
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Re: When to start taxable?

Post by Arinbjorn » Wed Jul 11, 2018 8:47 am

Good points all around everyone, thank you.

Klangfool's point on the mortgage is one of the most direct ways to put it I have seen here - that's pretty presuasive.

Not eligible for HSA. I do contribute a small amount to a 529, no kids yet, but we are trying for one.

I have no debt other than my mortgage. I have some TSP funds invested from my military days as well.

So it seems to me, just from the responses already, it is indeed best to follow an order of operations where maxing out all tax advantaged space first is best.

Forgive the curiosity and heresay.

A, perhaps, stupid question... The 401k cap is 18.5k, and employer match doesn't count towards this cap as I understand it? I also have two jobs at different hospitals, one has a 401k and the other a 403b. Is it... is it possible to contribute 18.5k to the 401k, and contribute to the 403b as well? Or do 401ks and 403bs count together in totality for the 18.5k limit?

KlangFool
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Re: When to start taxable?

Post by KlangFool » Wed Jul 11, 2018 8:49 am

Arinbjorn wrote:
Wed Jul 11, 2018 7:23 am

I see many folks here talking about their taxable accounts - have you all been maxing tax advantaged accounts first, or did you start a taxable account before then? What was your logic, if so?
Arinbjorn,

I had max up all my tax-advantaged accounts and I do not believe 529 is the right choice for me. So, the taxable account was the logical choice.

KlangFool

KlangFool
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Re: When to start taxable?

Post by KlangFool » Wed Jul 11, 2018 8:54 am

Arinbjorn wrote:
Wed Jul 11, 2018 8:47 am

I do contribute a small amount to a 529, no kids yet, but we are trying for one.
Arinbjorn,

1) That is a bad idea. The amount is too small to matter in term of helping your kids. But, it will hurt your kids' chance to get financial aid. 401K and Roth IRA are not counted towards financial aid. 529 does.

2) It is after-tax money. Why do you choose to pay 10+% to 20+% tax when you can contribute 401K?

529 is a bad choice for most people. It is a good deal for folks with very high income.

KlangFool

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MNGopher
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Re: When to start taxable?

Post by MNGopher » Wed Jul 11, 2018 9:15 am

I started a taxable account before I maxed out my tax deferred 403B, for two reasons.

1. Until a few years ago I had only bad choices (variable annuities with er's over 2%) as options from my employer. I held my nose and did a little over the match.
2. My plan is to retire at 57 with a modest pension, so I wanted some "fun/travel" type money to use in the early years of retirement between 57 and 59.5 before I start withdrawing from the 403B.

I have also maxed a Roth for many years, and have now maxed my tax deferred to 24K when better options became available from employer plan and I turned 50.

LiterallyIronic
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Re: When to start taxable?

Post by LiterallyIronic » Wed Jul 11, 2018 9:45 am

KlangFool wrote:
Wed Jul 11, 2018 8:17 am
Arinbjorn wrote:
Wed Jul 11, 2018 7:23 am

I realize that optimally, I should be maxing my work 401k and Roth IRA first. I max my Roth IRA and contribute 10% to my 401k, to get full 5% employer match. I utilize the Vanguard 3 fund portfolio in my Roth, and Vanguard target date in my 401k.

I also pay some extra principal at my 4.0% mortgage each month, just for some satisfaction. I got the mortgage in 2009, when I was 19 years old - now I'm 30.
Arinbjorn,

Is your satisfaction worth paying 10+% to 20+% tax in order to save 4% interest? Max up your 401K up to 18.5K before considering paying extra principal to the 4.0% mortgage.

KlangFool
I'm not OP, but for me, it's absolutely worth it. Not everything is about chasing yield. I fret about the fact that I owe $144,000 on my mortgage; I don't fret about optimizing my taxes. Maybe I'll feel differently when the outstanding mortgage gets down to $99,999, but for now at least mortgage pre-payment beats 401k maximization.

Horsefly
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Re: When to start taxable?

Post by Horsefly » Wed Jul 11, 2018 10:38 am

I contributed to my taxable nearly my entire working career, after maxing out my 401K. At one point I was sending a $1000 check per month to Fidelity for my taxable. My reasoning was that if I was going to retire early, I wanted to leave my tax-advantaged stuff alone until I was past age 59.5.

We've now been retired for 5 years (retired at 55), and we clearly won't touch the tax-deferred stuff, possibly until RMDs. The padding is also affording us the opportunity to do lots of Roth conversions. I can't claim that I thought of Roth conversions when I was doing the taxable investments; I'm not that smart. :happy

02nz
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Re: When to start taxable?

Post by 02nz » Wed Jul 11, 2018 11:16 am

Arinbjorn wrote:
Wed Jul 11, 2018 7:23 am
I got the mortgage in 2009, when I was 19 years old - now I'm 30.
You may also want to look into why you're aging faster than the rest of the human population. :happy

In all seriousness - agree with others here that you should max the 401k before putting money into taxable, and before extra payments toward the mortgage. The only exception would be if the 401k only had very bad (high-cost) options; that's not the case here since you're using a Vanguard Target Retirement fund in the 401k.

ExitStageLeft
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Re: When to start taxable?

Post by ExitStageLeft » Thu Jul 12, 2018 4:34 pm

Arinbjorn wrote:
Wed Jul 11, 2018 8:47 am
A, perhaps, stupid question... The 401k cap is 18.5k, and employer match doesn't count towards this cap as I understand it? I also have two jobs at different hospitals, one has a 401k and the other a 403b. Is it... is it possible to contribute 18.5k to the 401k, and contribute to the 403b as well? Or do 401ks and 403bs count together in totality for the 18.5k limit?
The $18,500 cap is for your elective contributions in all combined 401k or 403b accounts. If you are able to save in a 457b account, that has a separate $18,500 cap. Employer match doesn't count towards the $18,500.

Once you reach the $18,500 limit you may be able to do a mega backdoor Roth contribution if your 401k plan allows after-tax contributions and in-service withdrawals.

mbasherp
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Re: When to start taxable?

Post by mbasherp » Thu Jul 12, 2018 9:50 pm

OP, I think I can relate to where you’re at. Taxable always felt like the step that I looked forward to, like a notch in the belt. No good reason why, but that’s how I felt.

In my case, DW and I do fine for ourselves but don’t make a lot by Boglehead standards. However, between the two of us the only tax advantaged space available is 1 401k and 2 Roth IRAs. We are able to fill those. So once we paid off our student loans and really got our e-fund to a comfortable level, it just became the thing to do.

I should add that we don’t pay extra toward our mortgage, but my goal amount for taxable each month equals a double mortgage payment and I mentally consider it a mortgage payoff investment account. I may pay off the mortgage early if/when the taxable balance is > 3x the outstanding mortgage balance.

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Tamarind
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Re: When to start taxable?

Post by Tamarind » Fri Jul 13, 2018 6:45 am

Horsefly wrote:
Wed Jul 11, 2018 10:38 am
I contributed to my taxable nearly my entire working career, after maxing out my 401K. At one point I was sending a $1000 check per month to Fidelity for my taxable. My reasoning was that if I was going to retire early, I wanted to leave my tax-advantaged stuff alone until I was past age 59.5.
This is a great strategy, and should clearly illustrate for OP that taxable comes when you are making enough to max out tax-deferred choices AND invest more afterwards.

Hope I can follow in your footsteps soon, Horsefly. This is my and DW's first year able to max out two 401ks and two Roth IRAs. Not quite ready for taxable yet but hopefully in a couple of years.

MnD
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Re: When to start taxable?

Post by MnD » Fri Jul 13, 2018 8:44 am

if you have a variety of investment accounts and can get past the mental accounting of needing a big seperate "lockbox" of cash earning on a real basis nothing or less somewhere for decades, you can have a taxable account right now. Here's what we did 32 years ago (from another thread) and it's paid off grandly.

Where do you keep your emergency fund?
MnD wrote:
Thu Jul 12, 2018 6:47 pm
32 years now in a taxable brokerage account 100% stock funded from 1987-1990 till it was around $70K and never added a dime after that. Regarding your concern about locking locking up large amounts of money at low returns that's what we seeked to avoid. Our unsafe emergency fund has generated a few hundreds of thousands over the decades. Of course we've handled plenty of minor emergencies with credit card float - 60 days if the billing cycle lines up with the minor emergency. Never used it as such - but a inherited IRA of equity and bonds would work in an emergency if we needed it. Taxable sure but in an emergency being able to write yourself an themselves an extra paycheck or 10 comes in handy.

And then we have the real retirement accounts with a mix of equity and fixed incomes. When we would hit the taxable account for emergencies, needs, wants or extras it's really easy to sell a corresponding amount of safe funds in retirement accounts and buy stocks. Bottom line you haven't really sold any stocks unless you want to, such as needing to bankroll a new roof or getting a car totaled towards the end of a raging bull market - which does happen.

Once you have enough overall and enough outside retirement accounts to avoid penalties - its all just mental accounting and a drain on returns to have these "lockboxes of cash" scattered around.

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bengal22
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Re: When to start taxable?

Post by bengal22 » Fri Jul 13, 2018 8:55 am

I always made my taxable portion of my portfolio my emergency fund. Why lose money on low interest fixed assets.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

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