Investment Quesiton

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Topic Author
roccodean
Posts: 18
Joined: Thu Mar 26, 2020 7:19 am

Investment Quesiton

Post by roccodean » Thu Mar 26, 2020 7:34 am

Hello all,
Some backgroung, my wife and I max out our 401k and IRA's (back door roth yearly). We are in the second highest (or highest depending on year) federal tax brackets and we do have state income tax.
I am comfortable with the level that I have in my savings and am now ready to let the rest of my money work.
I am looking to dollar cost average about 100k into a taxable account and then monthly savings thereafter.
Time horizon 10-15 years.
I want a set it and forget it approach and will be dollar cost averaging the 100k (and then monthly thereafter) and was contemplating a vanguard lifestrategy fund or target date fund.
Questions:
1) I have read about "tax efficient" funds on this forum. What is that referring to and how can I implement this into my taxable account?
2) My wife is able to put money in a 457b (in addition to maxing out 401k)-this is a tax advantage deferred comp which is great, but I don't like the idea of not being able to touch it until age 59.5 (as I said we already have maxed out our 401k and IRAs with these rules). Should I utilize this instead of putting monthly savings into a taxable account?

Thanks

Call_Me_Op
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Re: Investment Quesiton

Post by Call_Me_Op » Thu Mar 26, 2020 7:48 am

roccodean wrote:
Thu Mar 26, 2020 7:34 am
1) I have read about "tax efficient" funds on this forum. What is that referring to and how can I implement this into my taxable account?
This refers to investments that minimize ongoing taxes, mainly stock large-cap index funds, stock ETFs, and municipal bonds (or bond funds), or fixed-income that generates little yield. You can buy "tax-managed funds", which invest in the above and also make an effort to ensure that any dividends are mostly qualified, and also engage is tax-loss harvesting.
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livesoft
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Re: Investment Quesiton

Post by livesoft » Thu Mar 26, 2020 7:59 am

You didn't write it, but it reads like perhaps each of your accounts might have an allocation to equities and fixed income right now. Perhaps all your existing accounts are investing in Target Retirement or Balanced funds. This is nice, but is not necessary to achieve an overall asset allocation to one's total_of_all_accounts_one_portfolio asset allocation. Once one realizes that, then one has better thinking about tax efficiency, asset location, and paying lower taxes on investments in a taxable account.

So step up your knowledge before investing in a taxable account. You may come to the conclusion that using one single fund of a Total US Stock Market Index fund is fine for your taxable account and better than a LifeStrategy or Target Retirement fund. Such a fund could be set-it-and-forget-it at first.
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Topic Author
roccodean
Posts: 18
Joined: Thu Mar 26, 2020 7:19 am

Re: Investment Quesiton

Post by roccodean » Thu Mar 26, 2020 8:18 am

Livesoft,
Correct, all my wife and I retirement accounts are in target date funds (2035 at vanguard, fidelity).

Topic Author
roccodean
Posts: 18
Joined: Thu Mar 26, 2020 7:19 am

Re: Investment Quesiton

Post by roccodean » Thu Mar 26, 2020 8:33 am

Call_Me_Op wrote:
Thu Mar 26, 2020 7:48 am
roccodean wrote:
Thu Mar 26, 2020 7:34 am
1) I have read about "tax efficient" funds on this forum. What is that referring to and how can I implement this into my taxable account?
This refers to investments that minimize ongoing taxes, mainly stock large-cap index funds, stock ETFs, and municipal bonds (or bond funds), or fixed-income that generates little yield. You can buy "tax-managed funds", which invest in the above and also make an effort to ensure that any dividends are mostly qualified, and also engage is tax-loss harvesting.
Thank you.
So, as opposed to vanguard life strategy funds, would you build these into your cash portfolio. Is there a vanguard fund available that includes these?

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ruralavalon
Posts: 17735
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Re: Investment Quesiton

Post by ruralavalon » Thu Mar 26, 2020 1:35 pm

roccodean wrote:
Thu Mar 26, 2020 7:34 am
Hello all,
Some backgroung, my wife and I max out our 401k and IRA's (back door roth yearly). We are in the second highest (or highest depending on year) federal tax brackets and we do have state income tax.
I am comfortable with the level that I have in my savings and am now ready to let the rest of my money work.
I am looking to dollar cost average about 100k into a taxable account and then monthly savings thereafter.
Time horizon 10-15 years.
I want a set it and forget it approach and will be dollar cost averaging the 100k (and then monthly thereafter) and was contemplating a vanguard lifestrategy fund or target date fund.
Questions:
1) I have read about "tax efficient" funds on this forum. What is that referring to and how can I implement this into my taxable account?
Ordinarily a stock index fund is very tax-efficient. Examples of very tax-efficient stock index funds would include large-cap or total market funds like Vanguard Total Stock Market Index Fund(VTSAX) and Vanguard Total International Stock Index Fund (VTIAX). There are also tax managed stock funds available, as well as tax-exempt bond funds. There is also Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX).

When investing in a taxable account, the idea is to minimize the taxes you pay because of non-qualified dividends or distributed capital gains.

Wiki article "Tax-efficient Fund Placement" .

roccodean wrote:
Thu Mar 26, 2020 7:34 am
2) My wife is able to put money in a 457b (in addition to maxing out 401k)-this is a tax advantage deferred comp which is great, but I don't like the idea of not being able to touch it until age 59.5 (as I said we already have maxed out our 401k and IRAs with these rules). Should I utilize this instead of putting monthly savings into a taxable account?
roccodean wrote:
Thu Mar 26, 2020 8:18 am
Livesoft,
Correct, all my wife and I retirement accounts are in target date funds (2035 at vanguard, fidelity).
Is this 457 with a government employer?

Wiki article, " 457(b)". "Government 457(b) plans are subject to income tax upon withdrawal but are not subject to the 10% early withdrawal penalty. Funds can be withdrawn at retirement, upon severance from the employer, upon death, upon disability, and under stringent hardship withdrawal rules."

If a governmental 457 then I suggest contributions to the 457 as a priority ahead of contributions to a taxable account. You could use a target date fund in the 457 as well as in your other tax-advantaged accounts.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

mega317
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Re: Investment Quesiton

Post by mega317 » Thu Mar 26, 2020 2:23 pm

roccodean wrote:
Thu Mar 26, 2020 7:34 am
Time horizon 10-15 years.
What happens in 10-15 years?
ruralavalon wrote:
Thu Mar 26, 2020 1:35 pm
If a governmental 457 then I suggest contributions to the 457 as a priority ahead of contributions to a taxable account. You could use a target date fund in the 457 as well as in your other tax-advantaged accounts.
+1
https://www.bogleheads.org/forum/viewtopic.php?t=6212

Topic Author
roccodean
Posts: 18
Joined: Thu Mar 26, 2020 7:19 am

Re: Investment Quesiton

Post by roccodean » Fri Mar 27, 2020 11:12 am

ruralavalon wrote:
Thu Mar 26, 2020 1:35 pm
roccodean wrote:
Thu Mar 26, 2020 7:34 am
Hello all,
Some backgroung, my wife and I max out our 401k and IRA's (back door roth yearly). We are in the second highest (or highest depending on year) federal tax brackets and we do have state income tax.
I am comfortable with the level that I have in my savings and am now ready to let the rest of my money work.
I am looking to dollar cost average about 100k into a taxable account and then monthly savings thereafter.
Time horizon 10-15 years.
I want a set it and forget it approach and will be dollar cost averaging the 100k (and then monthly thereafter) and was contemplating a vanguard lifestrategy fund or target date fund.
Questions:
1) I have read about "tax efficient" funds on this forum. What is that referring to and how can I implement this into my taxable account?
Ordinarily a stock index fund is very tax-efficient. Examples of very tax-efficient stock index funds would include large-cap or total market funds like Vanguard Total Stock Market Index Fund(VTSAX) and Vanguard Total International Stock Index Fund (VTIAX). There are also tax managed stock funds available, as well as tax-exempt bond funds. There is also Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX).

When investing in a taxable account, the idea is to minimize the taxes you pay because of non-qualified dividends or distributed capital gains.

Wiki article "Tax-efficient Fund Placement" .

roccodean wrote:
Thu Mar 26, 2020 7:34 am
2) My wife is able to put money in a 457b (in addition to maxing out 401k)-this is a tax advantage deferred comp which is great, but I don't like the idea of not being able to touch it until age 59.5 (as I said we already have maxed out our 401k and IRAs with these rules). Should I utilize this instead of putting monthly savings into a taxable account?
roccodean wrote:
Thu Mar 26, 2020 8:18 am
Livesoft,
Correct, all my wife and I retirement accounts are in target date funds (2035 at vanguard, fidelity).
Is this 457 with a government employer?

Wiki article, " 457(b)". "Government 457(b) plans are subject to income tax upon withdrawal but are not subject to the 10% early withdrawal penalty. Funds can be withdrawn at retirement, upon severance from the employer, upon death, upon disability, and under stringent hardship withdrawal rules."

If a governmental 457 then I suggest contributions to the 457 as a priority ahead of contributions to a taxable account. You could use a target date fund in the 457 as well as in your other tax-advantaged accounts.
Thank you for your input.
You mentioned some specific vanguard funds that are tax efficient and those funds are withing the lifestrategy and the target date vanguard funds. So, are the vanguard life strategy and target date funds tax efficient. I would prefer those as opposed to having to rebalance often.
As I understand it, the 457b is essentially exactly like 401k in terms of taxes (tax deffered up front, pay taxes when withdrawl).

Topic Author
roccodean
Posts: 18
Joined: Thu Mar 26, 2020 7:19 am

Re: Investment Quesiton

Post by roccodean » Fri Mar 27, 2020 11:22 am

mega317 wrote:
Thu Mar 26, 2020 2:23 pm
roccodean wrote:
Thu Mar 26, 2020 7:34 am
Time horizon 10-15 years.
What happens in 10-15 years?
ruralavalon wrote:
Thu Mar 26, 2020 1:35 pm
If a governmental 457 then I suggest contributions to the 457 as a priority ahead of contributions to a taxable account. You could use a target date fund in the 457 as well as in your other tax-advantaged accounts.
+1
In 10-15 years I would like to have funds available and be in low risk funds as I will be nearing retirement and child will be in college. I do contribute to 529, but it is hard to say how much will be needed given rising costs, so I want cash on hand.

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ruralavalon
Posts: 17735
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Location: Illinois

Re: Investment Quesiton

Post by ruralavalon » Fri Mar 27, 2020 11:46 am

roccodean wrote:
Thu Mar 26, 2020 7:34 am
We are in the second highest (or highest depending on year) federal tax brackets and we do have state income tax.
roccodean wrote:
Fri Mar 27, 2020 11:12 am
You mentioned some specific vanguard funds that are tax efficient and those funds are withing the lifestrategy and the target date vanguard funds. So, are the vanguard life strategy and target date funds tax efficient. I would prefer those as opposed to having to rebalance often.
Both LifeStrategy funds and target date funds contain bond allocations. "In a taxable account, the bond dividends will get taxed at ordinary income rates" so LifeStrategy funds and target date funds are not very tax efficient especially since you are in a very high tax bracket. Please see the wiki article "Tax-efficient Fund Placement" .

For a tax-efficient balanced fund which will not require rebalancing you could use Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX). "The fund provides exposure to the mid- and large-capitalization segments of the U.S. stock market with about 50% of assets, while the balance of assets are invested in federally tax-exempt municipal bonds. The stock component’s unique index-oriented approach attempts to track its benchmark, while minimizing taxable dividend income."

roccodean wrote:
Fri Mar 27, 2020 11:12 am
As I understand it, the 457b is essentially exactly like 401k in terms of taxes (tax deffered up front, pay taxes when withdrawl).
That is basically correct. Wiki article, " 457(b)".

Is your employer a government or government agency? Or is your employer a charity or non-profit? It makes a difference when it comes to a 457 plan.

If a governmental 457 then I suggest contributions to the 457 as a priority ahead of contributions to a taxable account. You could use a target date fund in the 457 as well as in your other tax-advantaged accounts.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
roccodean
Posts: 18
Joined: Thu Mar 26, 2020 7:19 am

Re: Investment Quesiton

Post by roccodean » Fri Mar 27, 2020 12:45 pm

ruralavalon wrote:
Fri Mar 27, 2020 11:46 am
roccodean wrote:
Thu Mar 26, 2020 7:34 am
We are in the second highest (or highest depending on year) federal tax brackets and we do have state income tax.
roccodean wrote:
Fri Mar 27, 2020 11:12 am
You mentioned some specific vanguard funds that are tax efficient and those funds are withing the lifestrategy and the target date vanguard funds. So, are the vanguard life strategy and target date funds tax efficient. I would prefer those as opposed to having to rebalance often.
Both LifeStrategy funds and target date funds contain bond allocations. "In a taxable account, the bond dividends will get taxed at ordinary income rates" so LifeStrategy funds and target date funds are not very tax efficient especially since you are in a very high tax bracket. Please see the wiki article "Tax-efficient Fund Placement" .

For a tax-efficient balanced fund which will not require rebalancing you could use Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX). "The fund provides exposure to the mid- and large-capitalization segments of the U.S. stock market with about 50% of assets, while the balance of assets are invested in federally tax-exempt municipal bonds. The stock component’s unique index-oriented approach attempts to track its benchmark, while minimizing taxable dividend income."

roccodean wrote:
Fri Mar 27, 2020 11:12 am
As I understand it, the 457b is essentially exactly like 401k in terms of taxes (tax deffered up front, pay taxes when withdrawl).
That is basically correct. Wiki article, " 457(b)".

Is your employer a government or government agency? Or is your employer a charity or non-profit? It makes a difference when it comes to a 457 plan.

If a governmental 457 then I suggest contributions to the 457 as a priority ahead of contributions to a taxable account. You could use a target date fund in the 457 as well as in your other tax-advantaged accounts.
Non government.

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