Optimizing a Taxable Account

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Joined: Sun Sep 23, 2018 3:09 pm

Optimizing a Taxable Account

Post by investacat » Sun Sep 23, 2018 3:30 pm

Hi all,

26, single, 24% tax bracket, been investing lots for retirement, which is in a good place. However, most of that money I don't plan to use for a long, long time, and I plan to take ocassional mini retirements (breaks of 3-6 months after long periods of working) along the way. So I'm thinking how to optimize my taxable account. I started it years ago with super basic funds - STAR (VGSTX) and a target retirement 2055 (VFFVX). It's clearly time for some purposeful rebalancing.

1. I already have an emergency fund and pretty decent savings interest (1.80% APY). In your opinion(s), how much is too much to keep as cash vs. investing? (I'm thinking I'd want to use some of the money I'm putting aside in 2-4 years).
2. I've done some research on tax efficient funds and have noticed a few schools of thought...either go for two funds, like a total stock market index fund and a tax efficient bond fund, or use an all-in-one fund with both stocks and tax efficient bonds. Any thoughts on those for this use case?
3. If I were to sell the existing holdings to reinvest in the same account for the new fund(s) would there be any tax or capital gain implications? I'm assuming it's very straightforward?


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Re: Optimizing a Taxable Account

Post by stan1 » Sun Sep 23, 2018 6:00 pm

STAR Fund is made up of actively managed funds that will result in you having to pay tax most years on capital gains distributions. To be honest I would consider selling it as a long term capital gain when you need money to pay for your next sabbatical and invest your new money in something more tax efficient. Make sure dividend reinvestment is turned off.

Target retirement funds contain Total Bond Fund which pays dividends that are taxed as ordinary income. Since you are in a higher federal tax bracket and you say you have well funded retirement accounts your most tax efficient course would be to keep total bond market there.

I'd primarily put Total Stock Market and Total International Stock Market in a taxable account. Modern index funds are unlikely to pay capital gains distributions and pay a lower tax rate on qualified dividends. If you want to slant to small and/or value those funds can also go in a taxable account with minimal risk of capital gains distributions. You could also buy some municipal bond funds which will earn federal tax free income. You don't mention state taxes so perhaps you live in a state without an income tax.

A taxable account can be used as a tier of an emergency fund because they are liquid. You can sell funds or ETFs and have the cash in your bank the same or next day if you do a wire transfer and in less than a week if you use an ACH transfer. I would recommend keeping 3-6 months of expenses in an "emergency fund" if you think you have a secure job. You might want to raise that by the duration of the sabbatical before taking one.

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Re: Optimizing a Taxable Account

Post by livesoft » Sun Sep 23, 2018 6:07 pm

If one separates the stock fund and the bond fund in taxable, then one will have potentially more tax-loss harvesting opportunities in taxable. Certainly, with tax-exempt muni bond funds there have been opportunities recently, but the tax-managed balanced fund would not have that bond fund TLH opportunity. And a separate stock fund is going to also have more opportunities.

Plus don't forget to set the cost basis method to Specific Identification.
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