What’s the point of a taxable account?

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Workable Goblin
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Re: What’s the point of a taxable account?

Post by Workable Goblin » Mon Oct 14, 2019 1:25 am

DonIce wrote:
Mon Oct 14, 2019 1:10 am
Not everyone has access to 401k's. Unfortunately, the US tax system offers special treatment to individuals that work for some employers but not others. For those that happen to work at an employer that doesn't offer one, you can only contribute $6k per year to an IRA, which is very little. All the rest has to go to taxable.
And in some cases you can’t even contribute to IRAs, if your income doesn’t qualify as earned income. I’m in that situation this year because I was a postdoc and so all of my income was either investment income or “scholarship/grant”. So I could only contribute to taxable accounts (needless to say I didn’t have a 401(k) or anything of the sort)

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jb1
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Re: What’s the point of a taxable account?

Post by jb1 » Mon Oct 14, 2019 6:31 am

mcraepat9 wrote:
Mon Oct 14, 2019 12:41 am
jb1 wrote:
Sun Oct 13, 2019 6:57 pm

Thank you for the educated response. I will say my biggest weakness, is understanding taxes.

Thank you everyone else for the responses.

Some more background. My Roth is 90/10 stocks to bonds (target retirement 2060).

My taxable is approximately 70% VTSAX, 10% VTIAX, 20% stocks I am interested such as Visa, Apple, Square, Paypal.

My long term goal, as much as it is frowned upon, is to buy a duplex by the end of next year. I currently have a house now that I live in and rent out.

Emergency fund for me is 19k right now in a high yield account.

Ideally, I could use the taxable money in 10 years to pay off any mortgage debt etc. I am not that concerned with retirement as I know my discipline especially at my age is second to none, just trying to figure out what my intentions are with my taxable account!
What do you mean by “as I know my discipline especially at my age is second to none”? What does that have to do with being concerned about retirement?

You are giving up a significant tax advantage by not using your tax-deferred workplace plan. It is hard to fathom how this decision will cause you to end up with more money by the time you retire. You are flushing money down the toilet by bypassing your 401k (even unmatched) to invest in taxable.
When I stared the taxable, my intentions was it can be something to use when I am 40.

My biggest fear is this. I am single, no kids, no siblings. I would like to have access to money I worked hard for, rather than having an excess of it when I am 60.

My other job only offered a simple IRA which I contributed up to match with. I just started this job with the 401k I can start to contribute to that.

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CyclingDuo
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Re: What’s the point of a taxable account?

Post by CyclingDuo » Mon Oct 14, 2019 8:43 am

DonIce wrote:
Mon Oct 14, 2019 1:10 am
Not everyone has access to 401k's. Unfortunately, the US tax system offers special treatment to individuals that work for some employers but not others. For those that happen to work at an employer that doesn't offer one, you can only contribute $6k per year to an IRA, which is very little. All the rest has to go to taxable.
Not true. There are other tax deferred investment plans available for those such as you mention.

Vanguard and Fidelity offer investing in index funds via retirement variable annuity plans for those who may not have access to a employer sponsored retirement plan and want to save more than maxing out a tIRA or Roth IRA.

Although they are funded with after tax contributions, they grow tax deferred and you pay taxes on the gains as ordinary income in retirement. One can begin withdrawals at age 59 1/2, but there are no RMD's once the owner reaches age 70 1/2. The two lowest cost plans available are...

Vanguard Variable Annuity ($5,000 minimum initial investment)
Fidelity Personal Retirement Annuity ($10,000 minimum initial investment)
"Everywhere is within walking distance if you have the time." ~ Steven Wright

KlangFool
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Re: What’s the point of a taxable account?

Post by KlangFool » Mon Oct 14, 2019 8:55 am

jb1 wrote:
Mon Oct 14, 2019 6:31 am
mcraepat9 wrote:
Mon Oct 14, 2019 12:41 am
jb1 wrote:
Sun Oct 13, 2019 6:57 pm

Thank you for the educated response. I will say my biggest weakness, is understanding taxes.

Thank you everyone else for the responses.

Some more background. My Roth is 90/10 stocks to bonds (target retirement 2060).

My taxable is approximately 70% VTSAX, 10% VTIAX, 20% stocks I am interested such as Visa, Apple, Square, Paypal.

My long term goal, as much as it is frowned upon, is to buy a duplex by the end of next year. I currently have a house now that I live in and rent out.

Emergency fund for me is 19k right now in a high yield account.

Ideally, I could use the taxable money in 10 years to pay off any mortgage debt etc. I am not that concerned with retirement as I know my discipline especially at my age is second to none, just trying to figure out what my intentions are with my taxable account!
What do you mean by “as I know my discipline especially at my age is second to none”? What does that have to do with being concerned about retirement?

You are giving up a significant tax advantage by not using your tax-deferred workplace plan. It is hard to fathom how this decision will cause you to end up with more money by the time you retire. You are flushing money down the toilet by bypassing your 401k (even unmatched) to invest in taxable.
When I stared the taxable, my intentions was it can be something to use when I am 40.

My biggest fear is this. I am single, no kids, no siblings. I would like to have access to money I worked hard for, rather than having an excess of it when I am 60.

My other job only offered a simple IRA which I contributed up to match with. I just started this job with the 401k I can start to contribute to that.
jb1,

I hope that you had learned from this thread that they are tax-advantaged accounts. They are not retirement accounts. You have access to the money in those accounts before your retirement age.

KlangFool

sschoe2
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Re: What’s the point of a taxable account?

Post by sschoe2 » Mon Oct 14, 2019 9:00 am

Some people have really crappy/predatory 401k's that siphon >2% of the AUM each year and have crappy funds (or none at all). If you are in the middle tax brackets and a low income tax state it may be preferable to do a taxable and eat the 15% long term capital gains rate tax. Also money in taxable has no restrictions on when you can use it.

Domadosolo
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Re: What’s the point of a taxable account?

Post by Domadosolo » Mon Oct 14, 2019 9:40 am

KlangFool wrote:
Sun Oct 13, 2019 6:21 pm
<<Klang, are you 100% in stocks?>>

I am 60/40. My Roth IRA is 100% Wellington fund. It is a 65/35 fund. I do not need to care about how the market is doing. I put the money into my Roth IRA's Wellington Fund and adjust my holding in other accounts to keep my AA at 60/40.

KlangFool
@KlangFool,
educate me ... with a 60/40 AA why don’t you need to care about how the market is doing?

Silence Dogood
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Re: What’s the point of a taxable account?

Post by Silence Dogood » Mon Oct 14, 2019 9:50 am

jb1 wrote:
Mon Oct 14, 2019 6:31 am
When I stared the taxable, my intentions was it can be something to use when I am 40.

My biggest fear is this. I am single, no kids, no siblings. I would like to have access to money I worked hard for, rather than having an excess of it when I am 60.
You don't have to wait until 60 (or 59.5) to access the money in your tax advantaged accounts.

For example:

This year, I maxed out my Roth IRA on January 2nd ($6,000). I will likely max out my Traditional 401(k) by the end of the year ($19,000).

If I were to retire at 40, I could withdraw the $6,000 I contributed to my Roth IRA this year (2019), tax and penalty free. I could also withdraw amounts that I've already contributed/converted in previous years.

At the same time, I could start converting amounts from my Traditional (pre-tax) account to my Roth (after-tax) account. Then, after 5 years, I could withdraw the amounts I converted, tax and penalty free.

I would have to pay taxes on the conversion, of course, but since the conversion will be done when I have no other income (since I'd be retired) it would likely be at a fairly low tax rate.

Regardless, I think that's it's getting ahead of ourselves to assume we will be able to retire by 40. I'd rather make sure that I'll be okay by 60, first.
Last edited by Silence Dogood on Mon Oct 14, 2019 9:52 am, edited 1 time in total.

KlangFool
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Re: What’s the point of a taxable account?

Post by KlangFool » Mon Oct 14, 2019 9:52 am

Domadosolo wrote:
Mon Oct 14, 2019 9:40 am
KlangFool wrote:
Sun Oct 13, 2019 6:21 pm
<<Klang, are you 100% in stocks?>>

I am 60/40. My Roth IRA is 100% Wellington fund. It is a 65/35 fund. I do not need to care about how the market is doing. I put the money into my Roth IRA's Wellington Fund and adjust my holding in other accounts to keep my AA at 60/40.

KlangFool
@KlangFool,
educate me ... with a 60/40 AA why don’t you need to care about how the market is doing?
Domadosolo,

If the stock market is up, I am buying more fixed income. And, vice versa.

A) I always buy low.

B) if the stock market goes up too high, my rebalancing rule forced me to "Sell High".

C) If you "Buy Low" and "Sell High", you always make money.

KlangFool

DonIce
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Re: What’s the point of a taxable account?

Post by DonIce » Mon Oct 14, 2019 11:03 am

CyclingDuo wrote:
Mon Oct 14, 2019 8:43 am
Not true. There are other tax deferred investment plans available for those such as you mention.

Vanguard and Fidelity offer investing in index funds via retirement variable annuity plans for those who may not have access to a employer sponsored retirement plan and want to save more than maxing out a tIRA or Roth IRA.

Although they are funded with after tax contributions, they grow tax deferred and you pay taxes on the gains as ordinary income in retirement. One can begin withdrawals at age 59 1/2, but there are no RMD's once the owner reaches age 70 1/2. The two lowest cost plans available are...

Vanguard Variable Annuity ($5,000 minimum initial investment)
Fidelity Personal Retirement Annuity ($10,000 minimum initial investment)
Thanks for mentioning these, I hadn't heard of them. I'll look into it more. However, at first glance, that sounds like it's the worst of both worlds? You don't get the present tax deduction, and you still have to pay tax on it as income once you begin withdrawing? That seems worse than a normal taxable account, since capital gains and qualified dividends are taxed at lower rates than ordinary income. And then it looks like you have a limited selection of funds inside it and relatively high fees?

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ruralavalon
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Re: What’s the point of a taxable account?

Post by ruralavalon » Mon Oct 14, 2019 11:44 am

jb1 wrote:
Sun Oct 13, 2019 3:00 pm
Hey all,

The more I read the forum, the more I see people bring up questions regarding taxable accounts. At age 29, I will be honest that 75% of my total portfolio is in a taxable account (vtsax), the remaining 25% in a Roth IRA.

Every week deposit into my Roth IRA account, while also buying into my taxable account.

I guess my question is, what’s the point of a taxable? I’m in a fairly low tax bracket, but do most of you have a taxable account?
We do have a joint taxable account.

A taxable account is a vehicle for investing savings, in addition to tax-advantaged accounts like IRAs and work-based accounts like a 401k or 403b or 457 or SIMPLE IRA or TSP.

In general it is usually best to contribute to all available tax-advantaged accounts as a priority ahead of contributions to a taxable account.

jb1 wrote:
Sun Oct 13, 2019 3:47 pm
Thank you all for the responses. I do have a 401k at work however it is not matched, so I do not contribute to it.
If any decent funds are offered in your 401k you should still contribute even without an employer match. The tax deduction and tax deferral are still very valuable.

What is your tax bracket, both federal and state?

What funds are offered in your 401k? Please give fund names, tickers and expense ratios. If the list is very long just give the 2-3 funds with the lowest expense ratios in each of these categories:
1) domestic stocks;
2) international stocks; and
3) bonds.
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CyclingDuo
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Re: What’s the point of a taxable account?

Post by CyclingDuo » Mon Oct 14, 2019 1:02 pm

DonIce wrote:
Mon Oct 14, 2019 11:03 am
CyclingDuo wrote:
Mon Oct 14, 2019 8:43 am
Not true. There are other tax deferred investment plans available for those such as you mention.

Vanguard and Fidelity offer investing in index funds via retirement variable annuity plans for those who may not have access to a employer sponsored retirement plan and want to save more than maxing out a tIRA or Roth IRA.

Although they are funded with after tax contributions, they grow tax deferred and you pay taxes on the gains as ordinary income in retirement. One can begin withdrawals at age 59 1/2, but there are no RMD's once the owner reaches age 70 1/2. The two lowest cost plans available are...

Vanguard Variable Annuity ($5,000 minimum initial investment)
Fidelity Personal Retirement Annuity ($10,000 minimum initial investment)
Thanks for mentioning these, I hadn't heard of them. I'll look into it more. However, at first glance, that sounds like it's the worst of both worlds? You don't get the present tax deduction, and you still have to pay tax on it as income once you begin withdrawing? That seems worse than a normal taxable account, since capital gains and qualified dividends are taxed at lower rates than ordinary income. And then it looks like you have a limited selection of funds inside it and relatively high fees?
It is true that both plans have some higher cost funds available with them, but I would also point out that both plans do have the very low cost Three Fund Portfolio available (Vanguard traditional three funder via Total Stock Market, Total International, and Total Bond; and Fidelity with their low cost version of their own Total Stock, Total International, and Total Bond).

The annual administrative wrap fee of .25% (or .1% for accounts over $1M) at Fidelity (and whatever the Vanguard fees are - I think it is .35% or something in the neighborhood of that) does indeed add to the underlying ER fees of the low cost funds. Such as wrap fee is not unlike many 403b or 457b or 401k plans that may have similar annual administrative wrap fees.

Again, they are not a product or solution for everyone, but they are available for those who want to get some or more tax deferred growth for a few decades either because they have no employer sponsored plan available to them, or they have already maxed out all of the space available and want additional space.

My post wasn't intended to tout them, but just point out that there are indeed products available. I would imagine taking the time for someone who does not have an employer sponsored plan to compare choices of investing in taxable investments vs. these products over several decades, and one's tax situation in retirement when taking withdrawals would be worth each individual's study to see if the strategy would or would not be beneficial.
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KlangFool
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Re: What’s the point of a taxable account?

Post by KlangFool » Mon Oct 14, 2019 1:14 pm

CyclingDuo wrote:
Mon Oct 14, 2019 1:02 pm


The annual administrative wrap fee of .25% (or .1% for accounts over $1M) at Fidelity (and whatever the Vanguard fees are - I think it is .35% or something in the neighborhood of that) does indeed add to the underlying ER fees of the low cost funds. Such as wrap fee is not unlike many 403b or 457b or 401k plans that may have similar annual administrative wrap fees.
CyclingDuo,

Before someone go that route, they should check out the actual tax burden of the taxable investing with this spreadsheet.

viewtopic.php?t=242137

They may find out that it is not worth the trouble. This is before someone does some Tax Loss Harvesting and Tax Gain Harvesting.

I have about 500K in my taxable account. I generate about 10K (2%) of dividend/interest/distribution every year. They are about 90+% qualified dividend/long-term capital gain. In the worst case, I pay 15% tax = $1,500. That is about annual tax burden of $1,500 / 500K = 0.3%. For many years, I pay 0% on that 10K of gain.

KlangFool

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goodenyou
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Re: What’s the point of a taxable account?

Post by goodenyou » Mon Oct 14, 2019 2:03 pm

The essence of the answer was answered above. If you maximize ALL tax-privileged accounts (especially keeping in mind your tax bracket) and you have "excess" after you consumed to your desired lifestyle, you will only have two choices left for the remainder. Consume more or save in a taxable account. Life is much more complex when you have dependents, and your priorities may be different than when you only have to be accountable for yourself. People save for the ability to have more choices. Some (here on BH) are especially driven to save to retire and have more time without obligations.

FWIW, 75% of my portfolio is taxable. The reason is that we are fortunate to be high earners and we live way below our means. We don't need to tap into our tax-privileged accounts until RMDs or take Social Security early even if we "retired" tomorrow.
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