Seeking advice on taxable account for CA high earner

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Topic Author
greco12
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Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 2:37 pm

Hi --

I have questions about the investments/allocations of mine and my wife's taxable account with Vanguard. The account serves a potential dual role -- the funds in there are primarily for retirement, but potentially may also partially be used for a down payment for a new primary residence in 5-6 years from now. We may or may not use part of the taxable account's funds for a down payment; we could sell our existing home and use the equity there for the down payment, although I think right now our preference is to not sell our current home and convert it into a second rental property (we have one already).

We both have 401k accounts with our employers, as well as Roth IRAs (using backdoor conversions). Our 401ks are both invested in the Vanguard Institutional 2050 Target Retirement Fund (approximately ~$200K in total), and our Roths are both invested in Vanguard Total Stock Market Admiral Shares (~$24K in total). Below is a bit more information about our situation and taxable account. Any insight on our investments there, in light of the potential dual role of the taxable account, would be greatly appreciated. Thank you.

Emergency funds: Three months covered

Debt:
Two mortgages:
- Primary residence: $1.183 million outstanding, 29.6 years left, 3.375% fixed, home value ~$1.6 million
- Rental property: $507K outstanding, 29.7 years left , 3.75% fixed, home value ~$850K-$900K
No other debt (we use credit cards but pay off balances in full every month).

Tax Filing Status: Married Filing Jointly, one dependent (newly born daughter!)

Tax Rate: 37% Federal, 11.3% State

State of Residence: CA

Age: I'm 37, my wife is 30

Current Taxable Portfolio
Vanguard CA MM Fund VCTXX (~$100K)
Vanguard Large Cap Index Fund Admiral VLCAX (~$95.5K)
Vanguard Total Stock Market Admiral VTSAX (~$51.8K)
Vanguard Limited-Term Tax Exempt Investor VMLTX (~$48.4K)
Vanguard CA Intermediate-Term Tax Exempt Investor VCAIX (~$40.8K)
Vanguard CA Long-Term Tax Exempt Investor VCITX (~$33.8K)
TechCo individual stock (from vested RSU) (~$13.8K)

We can contribute approximately $100K annually to our taxable account.

EHEngineer
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Re: Seeking advice on taxable account for CA high earner

Post by EHEngineer » Mon Jan 13, 2020 3:09 pm

you have 2.9M in assets, 58% of which is borrowed and 86% of which is invested in real estate. you're planning to maybe wipe out the rest of your securities to buy more real estate in the middle-term. This much RE is unusual for bogleheads, but maybe you know real estate very well in your area and this is a good bet. I can't criticize in any quantitave way, but that's too much concentrated RE for me. just my 2c.

given that you already own your primary residence and the next home purchase is discretionary, I'd just leave your investments as they are. That's assuming you are happy with them and they follow your investment policy statement.

Maybe consider dumping some of those municipal bond funds and pay down your mortgages.

For my own edification I'd be interested to know the income ratio from your current rental. What monthly rent does the $900k house generate?
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

Jack FFR1846
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Re: Seeking advice on taxable account for CA high earner

Post by Jack FFR1846 » Mon Jan 13, 2020 3:17 pm

You haven't been through a real estate downturn. It isn't fun. I've seen it twice in my area in the time I've owned houses.
Bogle: Smart Beta is stupid

Topic Author
greco12
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Re: Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 3:20 pm

EHEngineer wrote:
Mon Jan 13, 2020 3:09 pm
you have 2.9M in assets, 58% of which is borrowed and 86% of which is invested in real estate. you're planning to maybe wipe out the rest of your securities to buy more real estate in the middle-term. This much RE is unusual for bogleheads, but maybe you know real estate very well in your area and this is a good bet. I can't criticize in any quantitave way, but that's too much concentrated RE for me. just my 2c.

given that you already own your primary residence and the next home purchase is discretionary, I'd just leave your investments as they are. That's assuming you are happy with them and they follow your investment policy statement.

Maybe consider dumping some of those municipal bond funds and pay down your mortgages.

For my own edification I'd be interested to know the income ratio from your current rental. What monthly rent does the $900k house generate?
Never thought about the RE aspect of our "allocation" -- thanks for pointing that out. We are going to be purchasing a larger primary residency in 5-6 when our kids are older (move from a 2 bedroom condo in SF, to a larger home in the burbs with better school system). Our thinking was, if we can afford to keep the current 2-br condo, why not keep it so that we can benefit from the appreciation in value (and have the expenses covered by rental income)? But I see your point about over-concentrating in real estate.

We generate $4100/month on our current rental. Believe it or not, that barely covers all the expenses though (mortgage, property taxes, HOA). The rental income essentially is paying our ability to benefit from the appreciation in value of the property (and if we keep it, we'll eventually benefit from the extra income once the mortgage is paid off).

As for the muni bonds, my thinking there was -- it's a taxable account and we get taxed at an insanely high rate, and given that we may end up using some of the funds in the mid-term, we should keep some bonds in the account (hence, muni bonds)..

Topic Author
greco12
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Re: Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 3:21 pm

Jack FFR1846 wrote:
Mon Jan 13, 2020 3:17 pm
You haven't been through a real estate downturn. It isn't fun. I've seen it twice in my area in the time I've owned houses.
I take it from your response, that you would sell the existing house to purchase our new residence in 5-6 years (rather than try to keep it and add another rental.)

mr.masku
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Re: Seeking advice on taxable account for CA high earner

Post by mr.masku » Mon Jan 13, 2020 3:25 pm

VCADX would be worth a look in this situation for the Taxable Account.
Duration is about 5 years, and Tax Equivalent Yield would be in the 2.7-2.8% neighborhood.

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Wiggums
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Re: Seeking advice on taxable account for CA high earner

Post by Wiggums » Mon Jan 13, 2020 3:31 pm

a house /condo over 1.5 million is harder to sell in most markets because of the number of people that can afford it. Does that type of property really make an ideal rental given the big mortgage balance?

I agree that you have a lot of real estate vs other investments. At some point the stock market needs to slow down. I don’t know if that hurts or encourages rentals of this type.

I’m not sure what your income is, but that sure appears to be a lot of debt. Does your family have any concerns about job loss, serious illness or death.
Last edited by Wiggums on Mon Jan 13, 2020 3:39 pm, edited 2 times in total.

EHEngineer
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Re: Seeking advice on taxable account for CA high earner

Post by EHEngineer » Mon Jan 13, 2020 3:37 pm

greco12 wrote:
Mon Jan 13, 2020 3:20 pm

We generate $4100/month on our current rental. Believe it or not, that barely covers all the expenses though (mortgage, property taxes, HOA).
I do believe it. $4100/900000 = 0.46% per month. Not good cashflow. That's common with high value properties. A good rental brings 1% per month. So yeah, it's an appreciation play, which brings me back to my prior assessment: too much concentrated RE for my taste. YMMV.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

Topic Author
greco12
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Re: Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 3:42 pm

mr.masku wrote:
Mon Jan 13, 2020 3:25 pm
VCADX would be worth a look in this situation for the Taxable Account.
Duration is about 5 years, and Tax Equivalent Yield would be in the 2.7-2.8% neighborhood.
We're currently invested in the "investor" shares class of VCADX -- the idea was we would convert to VCADX (admiral shares) in the near future with future contributions. We also added the CA Long-Term Fund and Limited-Term Fund to tweak the duration even further, closer to 4 years (and to have the ability to further tweak the average duration with future contributions among the 3 tax exempt funds).

Topic Author
greco12
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Re: Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 3:45 pm

EHEngineer wrote:
Mon Jan 13, 2020 3:37 pm
greco12 wrote:
Mon Jan 13, 2020 3:20 pm

We generate $4100/month on our current rental. Believe it or not, that barely covers all the expenses though (mortgage, property taxes, HOA).
I do believe it. $4100/900000 = 0.46% per month. Not good cashflow. That's common with high value properties. A good rental brings 1% per month. So yeah, it's an appreciation play, which brings me back to my prior assessment: too much concentrated RE for my taste. YMMV.
So, from your perspective, would it make more sense to sell the existing home and use the equity for the new purchase? Get rid of the existing rental as well? Our incomes are pretty secure (knock on wood) so I'm not concerned about servicing the debt (or keep the existing rental occupied), so wondering what you would suggest.

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Wiggums
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Re: Seeking advice on taxable account for CA high earner

Post by Wiggums » Mon Jan 13, 2020 3:48 pm

EHEngineer wrote:
Mon Jan 13, 2020 3:37 pm
greco12 wrote:
Mon Jan 13, 2020 3:20 pm

We generate $4100/month on our current rental. Believe it or not, that barely covers all the expenses though (mortgage, property taxes, HOA).
I do believe it. $4100/900000 = 0.46% per month. Not good cashflow. That's common with high value properties. A good rental brings 1% per month. So yeah, it's an appreciation play, which brings me back to my prior assessment: too much concentrated RE for my taste. YMMV.
In the DC market, we get $3,900 / month for $750,000 house.

EHEngineer
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Re: Seeking advice on taxable account for CA high earner

Post by EHEngineer » Mon Jan 13, 2020 3:54 pm

greco12 wrote:
Mon Jan 13, 2020 3:45 pm
EHEngineer wrote:
Mon Jan 13, 2020 3:37 pm
greco12 wrote:
Mon Jan 13, 2020 3:20 pm

We generate $4100/month on our current rental. Believe it or not, that barely covers all the expenses though (mortgage, property taxes, HOA).
I do believe it. $4100/900000 = 0.46% per month. Not good cashflow. That's common with high value properties. A good rental brings 1% per month. So yeah, it's an appreciation play, which brings me back to my prior assessment: too much concentrated RE for my taste. YMMV.
So, from your perspective, would it make more sense to sell the existing home and use the equity for the new purchase? Get rid of the existing rental as well? Our incomes are pretty secure (knock on wood) so I'm not concerned about servicing the debt (or keep the existing rental occupied), so wondering what you would suggest.
I am uncomfortable giving advice on this because my opinion is not based on any real data, just my own gut feelings. Some people use all their cash to start their own businesses, and I am equally unqualified to critique that. You have to decide what the right balance of RE (or business) and/or public securities is for you.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

Topic Author
greco12
Posts: 15
Joined: Mon Nov 19, 2018 12:39 pm

Re: Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 3:57 pm

EHEngineer wrote:
Mon Jan 13, 2020 3:54 pm
greco12 wrote:
Mon Jan 13, 2020 3:45 pm
EHEngineer wrote:
Mon Jan 13, 2020 3:37 pm
greco12 wrote:
Mon Jan 13, 2020 3:20 pm

We generate $4100/month on our current rental. Believe it or not, that barely covers all the expenses though (mortgage, property taxes, HOA).
I do believe it. $4100/900000 = 0.46% per month. Not good cashflow. That's common with high value properties. A good rental brings 1% per month. So yeah, it's an appreciation play, which brings me back to my prior assessment: too much concentrated RE for my taste. YMMV.
So, from your perspective, would it make more sense to sell the existing home and use the equity for the new purchase? Get rid of the existing rental as well? Our incomes are pretty secure (knock on wood) so I'm not concerned about servicing the debt (or keep the existing rental occupied), so wondering what you would suggest.
I am uncomfortable giving advice on this because my opinion is not based on any real data, just my own gut feelings. Some people use all their cash to start their own businesses, and I am equally unqualified to critique that. You have to decide what the right balance of RE (or business) and/or public securities is for you.
Understood, totally get it. Appreciate you flagging the issue anyway and giving me food for thought.

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grabiner
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Re: Seeking advice on taxable account for CA high earner

Post by grabiner » Mon Jan 13, 2020 8:48 pm

Given your very high tax bracket, you are better off holding munis in your taxable account and stocks in tax-deferred. My usual recommendation is a 50/50 split between Limited-Term Tax-Exempt and CA Long-Term Tax-Exempt, so that half your bonds are in CA but more than half your bond income is exempt from CA tax. Don't sell your existing stock funds for a capital gain; if you are charitably inclined, you can use those funds for charitable donations.
Wiki David Grabiner

Topic Author
greco12
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Re: Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 9:45 pm

grabiner wrote:
Mon Jan 13, 2020 8:48 pm
Given your very high tax bracket, you are better off holding munis in your taxable account and stocks in tax-deferred. My usual recommendation is a 50/50 split between Limited-Term Tax-Exempt and CA Long-Term Tax-Exempt, so that half your bonds are in CA but more than half your bond income is exempt from CA tax. Don't sell your existing stock funds for a capital gain; if you are charitably inclined, you can use those funds for charitable donations.
Thank you Grabiner. Do you see any issue with holding Limited-Term, CA Intermediate-Term and CA Long-Term (right now the bond allocation is about 40% Limited-Term/33% Intermediate / 27% Long-Term)? Do you think I should sell off the CA Intermediate holding, or cease contributing to it? My thinking for investing in all three was that I would have added flexibility to adjust (higher or lower) the average duration with new contributions, but still be heavy on CA tax-exempt income.

Topic Author
greco12
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Re: Seeking advice on taxable account for CA high earner

Post by greco12 » Mon Jan 13, 2020 9:51 pm

grabiner wrote:
Mon Jan 13, 2020 8:48 pm
Given your very high tax bracket, you are better off holding munis in your taxable account and stocks in tax-deferred. My usual recommendation is a 50/50 split between Limited-Term Tax-Exempt and CA Long-Term Tax-Exempt, so that half your bonds are in CA but more than half your bond income is exempt from CA tax. Don't sell your existing stock funds for a capital gain; if you are charitably inclined, you can use those funds for charitable donations.
With reference to your suggestion that I place stocks in tax-deferred, we're already maxed out in our tax-deferred accounts. Are you suggesting I shouldn't include stocks in the taxable account even if I have no more room to invested in stocks in 401k/Roth IRA?

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grabiner
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Re: Seeking advice on taxable account for CA high earner

Post by grabiner » Mon Jan 13, 2020 10:37 pm

greco12 wrote:
Mon Jan 13, 2020 9:45 pm
grabiner wrote:
Mon Jan 13, 2020 8:48 pm
Given your very high tax bracket, you are better off holding munis in your taxable account and stocks in tax-deferred. My usual recommendation is a 50/50 split between Limited-Term Tax-Exempt and CA Long-Term Tax-Exempt, so that half your bonds are in CA but more than half your bond income is exempt from CA tax. Don't sell your existing stock funds for a capital gain; if you are charitably inclined, you can use those funds for charitable donations.
Thank you Grabiner. Do you see any issue with holding Limited-Term, CA Intermediate-Term and CA Long-Term (right now the bond allocation is about 40% Limited-Term/33% Intermediate / 27% Long-Term)? Do you think I should sell off the CA Intermediate holding, or cease contributing to it? My thinking for investing in all three was that I would have added flexibility to adjust (higher or lower) the average duration with new contributions, but still be heavy on CA tax-exempt income.
I don't see anything wrong with this, but it only makes significant sense if you have a good reason for changing durations (for example, reducing duration when you have some shorter-term expenses).
Wiki David Grabiner

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grabiner
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Re: Seeking advice on taxable account for CA high earner

Post by grabiner » Mon Jan 13, 2020 10:41 pm

greco12 wrote:
Mon Jan 13, 2020 9:51 pm
grabiner wrote:
Mon Jan 13, 2020 8:48 pm
Given your very high tax bracket, you are better off holding munis in your taxable account and stocks in tax-deferred. My usual recommendation is a 50/50 split between Limited-Term Tax-Exempt and CA Long-Term Tax-Exempt, so that half your bonds are in CA but more than half your bond income is exempt from CA tax. Don't sell your existing stock funds for a capital gain; if you are charitably inclined, you can use those funds for charitable donations.
With reference to your suggestion that I place stocks in tax-deferred, we're already maxed out in our tax-deferred accounts. Are you suggesting I shouldn't include stocks in the taxable account even if I have no more room to invested in stocks in 401k/Roth IRA?
You should get your asset allocation correct first. You currently have a Target Retirement fund in the 401(k)s, which holds some bonds; it would be better to move the 401(k)s to all stock. Once your 401(k) and Roth IRA are already 100% stock, if this is not enough stock for your desired allocation (reasonable given your age and the relative account sizes), then you should hold a tax-efficient stock fund in the taxable account.
Wiki David Grabiner

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