Newbie Investor Taxable Account Questions

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mountainsoft
Posts: 10
Joined: Mon Jan 25, 2016 12:39 pm

Newbie Investor Taxable Account Questions

Post by mountainsoft » Mon Sep 24, 2018 9:58 am

My wife and I are planning to retire in five years. I'm already maxing out my IRA contributions but have a little extra money I am thinking of investing in a taxable account. I've been reading books and everything I can find online but they all seem to talk about capital gains related to frequent buying and selling. I just want to set up a simple account with a single fund like Vanguards VTMFX Tax Managed Balanced Fund. Then I would put something like $10K in it and just let it sit there for five years. No buying or selling, at least on my part. Sounds simple but I can't find a simple answer as to what kind of capital gains or other taxes I would be looking at (We're married filing jointly grossing about 65K per year).

I would also like to know what I would be looking at if I am able to add more to the taxable account over the next five years, either with regular monthly contributions, or random contributions when we have extra money.

What happens when we start making withdrawals from the taxable account once we are retired?

Do I have to keep track of all the buying and selling for taxes, or does Vanguard do this for me?

bloom2708
Posts: 4791
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Newbie Investor Taxable Account Questions

Post by bloom2708 » Mon Sep 24, 2018 10:25 am

Tax-Managed Balanced fund is a good choice. If it matches your desired mix of stocks/bonds.

There are no gains or losses in taxable until you sell.

When you buy, you get X shares at Y cost. That is a lot (spec ID). If you sell some shares from that lot in 10 years and the cost is Y + $10, you pay tax on the gain.

This fund will pay dividends. If you re-invest dividends (a setting on your account), each dividend/interest payment creates a new lot. The dividend itself is a taxable event. You will get a 1099-DIV at year end and have to pay a little bit of tax. Another option is to not re-invest dividends. This sends them to your settlement account. Kind of like the checking account portion of the account.

Consider your portfolio as one entity and set your mix of stocks/bonds on the entire portfolio.

After 10 years, you will have the original purchase and then little lots/purchases for the dividends (if you re-invest).

Vanguard will track everything and give you 1099s based on your activity for each year. Don't file until you are sure Vanguard has released all tax documents. They can be a bit slow releasing documents.
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billfromct
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Joined: Tue Dec 03, 2013 9:05 am

Re: Newbie Investor Taxable Account Questions

Post by billfromct » Mon Sep 24, 2018 10:58 am

Since your gross income is about $65k, minus the $24k standard deduction, your taxable income would be about $41k, which would put you in the 12% Federal tax bracket, married filing jointly.

In the 12% tax bracket, Federal long term capital gains & qualified dividends would be taxed at 0%. Short term capital gains & interest would be taxed at your ordinary income tax rate, 12%. If your taxable income goes over $77k, your marginal tax rate would go up to 22%. In the 22% tax bracket, long term capital gains & qualified dividends would be taxed at 15%.

When you say you "max out your IRA contributions", is that in a tax deductible traditional IRA or a Roth IRA. When someone is in the 12% tax bracket, a Roth IRA is probably the better alternative. Distributions out of a Roth IRA are tax free if taken after age 59.5 while a traditional tax deductible IRA distributions are taxed as ordinary income when taken out after age 59.5.

If you sell the shares in a taxable account, Vanguard will send you a statement listing the tax implications. Vanguard will also send an annual statement for dividend, interest, short/long term capital gains distributions even if you don't sell any shares. Normally, these distributions are very small, maybe 1%-2% (just my guess).

bill

mountainsoft
Posts: 10
Joined: Mon Jan 25, 2016 12:39 pm

Re: Newbie Investor Taxable Account Questions

Post by mountainsoft » Mon Sep 24, 2018 11:59 am

which would put you in the 12% Federal tax bracket
Correct.
is that in a tax deductible traditional IRA or a Roth IRA. When someone is in the 12% tax bracket, a Roth IRA is probably the better alternative. Distributions out of a Roth IRA are tax free if taken after age 59.5 while a traditional tax deductible IRA distributions are taxed as ordinary income when taken out after age 59.5.
I have a traditional IRA that I am contributing $6500 per year to. I considered converting to a Roth but several conversion calculators showed there wasn't enough benefit to justify converting.

I considered starting a Roth for my wife, but she would only be able to contribute till she stops working in five years. She could withdraw the contributions at any time, but wouldn't be able to withdraw the earnings for ten years when she turns 59.5.

I want something we can continue contributing to even after we retire (such as reinvesting RMD's later in life), and something we can withdraw from any time without penalties. Right now we're using an online savings account that pays 1.8% interest, but I figured a taxable investment account would probably provide better returns.

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