Where to Move Money From Taxable Account For Potential Use in ~5 Years

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Cruz
Posts: 177
Joined: Sun Mar 30, 2014 7:16 pm

Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Cruz » Tue Sep 17, 2019 9:34 pm

Age: 29
Debt: None
Tax Filing Status: Single
Tax rate: 22%, could be lower depending on how much I contribute to 401k and lower taxable income
Emergency Fund: 6mo in Capital One MM @ 2.00%
State: MA

Current portfolio:

Roth IRA (with Vanguard):
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX) – (20% of total portfolio)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (23% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (5% of total portfolio)

Taxable (with Vanguard):
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (37% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (10% of total portfolio)

401k (with Fidelity):
Vanguard Target Retirement 2055 (VFFVX) - (3% of total portfolio)

Stock
Apple (AAPL) - (3% of total portfolio)

My asset allocation is currently 80/20

I am thinking that a downpayment for a house may be in the foreseeable future (~5 years hopefully). I currently have a taxable account where I've been saving for such an expense, but now that time horizon is relatively close where should I be holding that money? I was thinking of moving it to something with less volatility, either moving it into my Capital One account (2% interest rate) or keeping the taxable account but using Prime Money Market (2.10% interest rate I think). And of course there are tax considerations to think about with moving money in the taxable account...

venkman
Posts: 1162
Joined: Tue Mar 14, 2017 10:33 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by venkman » Tue Sep 17, 2019 11:00 pm

Cruz wrote:
Tue Sep 17, 2019 9:34 pm
I am thinking that a downpayment for a house may be in the foreseeable future (~5 years hopefully). I currently have a taxable account where I've been saving for such an expense, but now that time horizon is relatively close where should I be holding that money? I was thinking of moving it to something with less volatility, either moving it into my Capital One account (2% interest rate) or keeping the taxable account but using Prime Money Market (2.10% interest rate I think). And of course there are tax considerations to think about with moving money in the taxable account...
The tax considerations will eventually come into play anyway. The only reason to factor them in would be if you expect to be in a different capital gains bracket at some point before needing the money. Or if the extra income in a given year would be problematic (e.g. ACA subsidy cliff).

A lot depends on your timeline, which is somewhat vague, and your ability/willingness to be flexible with that timeline. If your situation were along the lines of "I just signed a 5-year lease on an apartment. When it's up, I am definitely buying a house," that's the sort of thing where you want to move everything to relatively short-term fixed income right away, to protect against volatility. If, however, you're willing to wait a few extra years to ride out a potential market downturn, you can afford to keep some money in stocks. In that case, I'd recommend a conservative balanced fund, like Vanguard Wellesley (VWINX) or Target Retirement Income (VTINX). Both of those have a history of relatively modest drawdowns and quick recovery times. If you let the dividends go to cash rather than reinvest, the account will gradually get more conservative as you go along.

mhalley
Posts: 8234
Joined: Tue Nov 20, 2007 6:02 am

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by mhalley » Wed Sep 18, 2019 10:51 am

I would disagree on owning mixed stock/bond funds in taxable as we are at high valuations and you would give up the ability to tax loss harvest. A small portion might be ok in stocks, but as venkman said you will have to deal with capital gains at some point. You aren’t getting paid much more with the longer duration cds, so your plan for the mm or high yield checking is good.
Doughroller has an article on short term investing with some ideas here
https://www.doughroller.net/investing/t ... vestments/

Topic Author
Cruz
Posts: 177
Joined: Sun Mar 30, 2014 7:16 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Cruz » Wed Sep 18, 2019 9:40 pm

venkman wrote:
Tue Sep 17, 2019 11:00 pm
Cruz wrote:
Tue Sep 17, 2019 9:34 pm
I am thinking that a downpayment for a house may be in the foreseeable future (~5 years hopefully). I currently have a taxable account where I've been saving for such an expense, but now that time horizon is relatively close where should I be holding that money? I was thinking of moving it to something with less volatility, either moving it into my Capital One account (2% interest rate) or keeping the taxable account but using Prime Money Market (2.10% interest rate I think). And of course there are tax considerations to think about with moving money in the taxable account...
The tax considerations will eventually come into play anyway. The only reason to factor them in would be if you expect to be in a different capital gains bracket at some point before needing the money. Or if the extra income in a given year would be problematic (e.g. ACA subsidy cliff).

A lot depends on your timeline, which is somewhat vague, and your ability/willingness to be flexible with that timeline. If your situation were along the lines of "I just signed a 5-year lease on an apartment. When it's up, I am definitely buying a house," that's the sort of thing where you want to move everything to relatively short-term fixed income right away, to protect against volatility. If, however, you're willing to wait a few extra years to ride out a potential market downturn, you can afford to keep some money in stocks. In that case, I'd recommend a conservative balanced fund, like Vanguard Wellesley (VWINX) or Target Retirement Income (VTINX). Both of those have a history of relatively modest drawdowns and quick recovery times. If you let the dividends go to cash rather than reinvest, the account will gradually get more conservative as you go along.
I may be able to be in the 0% tax bracket in 2019, otherwise I will squarely be in the 15% capital gains bracket for years to come.

Topic Author
Cruz
Posts: 177
Joined: Sun Mar 30, 2014 7:16 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Cruz » Thu Sep 19, 2019 8:43 pm

With interest rates leveling out and potentially decreasing, would buying IBonds, which lock in a minimum rate make sense? With current interest rates, it seems something like a Money Market account would work, but I worry those rates will drop soon.

venkman
Posts: 1162
Joined: Tue Mar 14, 2017 10:33 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by venkman » Thu Sep 19, 2019 8:58 pm

Cruz wrote:
Thu Sep 19, 2019 8:43 pm
With interest rates leveling out and potentially decreasing, would buying IBonds, which lock in a minimum rate make sense? With current interest rates, it seems something like a Money Market account would work, but I worry those rates will drop soon.
The problem with I bonds is that you can only buy $10k per person per calendar year. And there's a 3-month interest penalty if you redeem them before 5 years.

If you buy before November, you could get $10k worth at a 0.5% real yield, which is pretty good right now. But it's likely that the real yield will drop significantly at the next reset, so it's probably not a viable strategy for your entire down payment fund.

retiredflyboy
Posts: 225
Joined: Sun Dec 02, 2018 10:02 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by retiredflyboy » Thu Sep 19, 2019 10:37 pm

I like Prime Money Market or a high yield savings account just as you mentioned. Lazy option to leave in Vanguard with Prime would work well. I like your thinking to move this money to a stable net asset value option. As you probably know, Prime would not have FDIC which would not concern me but want to mention.
Facts are stubborn things. Everything works until it doesn’t.

Topic Author
Cruz
Posts: 177
Joined: Sun Mar 30, 2014 7:16 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Cruz » Mon Sep 23, 2019 10:28 pm

So it seems like the best two options to deposit the money from selling my taxable shares are either VMMXX in taxable or my CapOne savings account, both are around 2% interest right now.

The money will be used for a downpayment for a house, I know neither where or how much yet so that clouds the situation a bit. I have small losses in VTIAX and good gains in VTSAX. Some gains are short-term (<$1000) but most are long-term and I have dividends set to reinvest (need to change that)...

But my theoretical plan is to:
Sell VTIAX first (small loss)
Sell what I need to of VTSAX (big gain)
Deposit it into either VMMXX in taxable or my CapOne savings account

I think I can get under the $39,375 income level this year so my long-term cap gains tax would be 0% which would be great to take out a big chunk. Also I would have the loss from selling VTIAX too.

Does my plan make sense? Not sure how I will figure out how much I will need for a downpayment as I am not sure where I will settle, though it seemingly looks like New England/greater Boston area or the PNW. Any thoughts??

Ambition89
Posts: 11
Joined: Thu Mar 23, 2017 1:03 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Ambition89 » Mon Sep 23, 2019 10:40 pm

Wouldn’t it make sense to DCA in reverse and sell a certain amount each week?

Topic Author
Cruz
Posts: 177
Joined: Sun Mar 30, 2014 7:16 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Cruz » Tue Sep 24, 2019 8:36 pm

Ambition89 wrote:
Mon Sep 23, 2019 10:40 pm
Wouldn’t it make sense to DCA in reverse and sell a certain amount each week?
I suppose so, never heard of that approach...

Ambition89
Posts: 11
Joined: Thu Mar 23, 2017 1:03 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Ambition89 » Tue Sep 24, 2019 9:23 pm

I recently started doing that for my first house purchase in the next three years. I'm not trying to market time but is the risk of a market decline too much to slowly move it out of the market?

DonIce
Posts: 1102
Joined: Thu Feb 21, 2019 6:44 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by DonIce » Tue Sep 24, 2019 9:34 pm

At 29 I was also saving for my first down payment. I kept the money in 100% stocks and just figured I'd buy the house at a fortuitous time, since I didn't have a particularly fixed timeline. I sold 100% of my taxable portfolio and used it all for a house down payment in 2017. I didn't sell the stocks until I started actively putting in offers on houses.

Topic Author
Cruz
Posts: 177
Joined: Sun Mar 30, 2014 7:16 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by Cruz » Sat Oct 12, 2019 10:42 pm

DonIce wrote:
Tue Sep 24, 2019 9:34 pm
At 29 I was also saving for my first down payment. I kept the money in 100% stocks and just figured I'd buy the house at a fortuitous time, since I didn't have a particularly fixed timeline. I sold 100% of my taxable portfolio and used it all for a house down payment in 2017. I didn't sell the stocks until I started actively putting in offers on houses.
I figure given that since I might be able to slip into the 0% bracket for capital gains tax this year that it would make sense to take advantage of those savings, given I will probably need the money in (hopefully) less than 5 years. What I save in taxes theoretically could be equal to or greater than what I may make in interest in the next 5 years.

The big question for me is how much I should sell. Average downpayment rates these days seem to be 5, 10, 20%, though I don't know where I will end up settling down I guess I can still come up with an approximate budget and estimate a downpayment rate from there.

User avatar
1789
Posts: 1288
Joined: Fri Aug 16, 2019 3:31 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by 1789 » Sun Oct 13, 2019 12:44 am

Prime money market VMMXX would be a good place to keep money with 5 years of time horizon.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

User avatar
anon_investor
Posts: 1900
Joined: Mon Jun 03, 2019 1:43 pm

Re: Where to Move Money From Taxable Account For Potential Use in ~5 Years

Post by anon_investor » Sun Oct 13, 2019 6:35 am

Why not Vanguard's Federal Money Market Fund (VMFXX) same as Vanguard's sweep account? Slightly lower rate than Vanguard's Prime Money Market Fund (VMMXX), but since approximately 78% of interest would be exempt from state income tax for the OP (MA), the after tax return would be higher than VMMXX or many high yield savings accounts.

Post Reply