Taxable for Young Investor

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eyemgh
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Taxable for Young Investor

Post by eyemgh » Fri May 01, 2020 10:39 pm

My son, age 24, is in a fortunate situation. He has a good job that allows him to max his 401k, max a Roth, buy the options that were extended to him and have investible money left over. I've done my best to educate him on assessing investment vehicles, the costs associated with investing, the myth of beating the market on a predictable basis, asset allocation, etc. As a result, he puts all of his long term money into a Vanguard Target fund.

I've suggested that he look at shorter horizon, yet still long term goal. For example, trying to amass enough money to retire early before he can take his 401k and Roth money without penalty a bridge investment if you will, or as John Goodman put it in The Gambler...F-you money. My problem is, I wasn't smart enough to do that. I simply spent what I didn't put in my long term accounts.

I don't have a clue on the best strategies or investment vehicles for taxable accounts. What advice would you give a young man in that situation?

BTW, he has short term emergency funds covered already and isn't living so frugally that he doesn't travel and eat out some. He's not materialistic. The two previously mentioned experiences are really the things he enjoys spending his money on the most.

Thanks!

retired@50
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Re: Taxable for Young Investor

Post by retired@50 » Fri May 01, 2020 11:38 pm

eyemgh wrote:
Fri May 01, 2020 10:39 pm

I don't have a clue on the best strategies or investment vehicles for taxable accounts. What advice would you give a young man in that situation?

Thanks!
Taxable holding ideas.
1. Emergency fund, easily accessed, hopefully high yield, savings account or something along those lines. Best yield nowadays might be around 1.5% interest. Check out money market funds, no-penalty CDs, online savings accounts (Marcus, Ally, Capital One).

2. Tax-efficient stock index funds. Assuming the money can be left alone to grow over the long term. Using something like Vanguard S&P 500 fund (VFIAX) or Vanguard Total Market Stock Index (VTSAX) or possibly Vanguard Total International Stock Market Index (VTIAX).

3. If income (and/or tax bracket) gets high enough, AND if tax-deferred space (401k) runs out of room for bond holdings, one could consider a municipal bond fund to be held in a taxable account, but it's typically best to hold bonds inside a 401k.

Finally, see wiki page on the topic of tax efficient fund placement. https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
This is one person's opinion. Nothing more.

Topic Author
eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Sat May 02, 2020 12:02 am

Thanks!

He's got 1 covered. Your suggestions in 2 are what my gut was telling me. Off to read the Wiki.

Chrono Triggered
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Re: Taxable for Young Investor

Post by Chrono Triggered » Sat May 02, 2020 8:39 am

I'm a younger investor myself and from the posts I have read from older investors with taxable holdings is that you want holdings that you are prepared to hold for life. A good number of people have holdings they purchased earlier that they wish they could sell but the capital gains would be too great so they're stuck. So choose a taxable investment wisely; total market US and total market INTL funds are an excellent choice, along with the S&P 500. Small cap value seems fairly tax efficient as well (IJS). Take a look at this spreadsheet and play around with some numbers yourself.
viewtopic.php?t=242137

Somebody made for their own for 2018 as well: viewtopic.php?f=10&t=242137&start=100#p4788420

stan1
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Re: Taxable for Young Investor

Post by stan1 » Sat May 02, 2020 8:57 am

To start Total Stock Market in a taxable account. When he has over $100K in it he should come back and ask again.

There's a chance he will want to sell this investment to purchase a home or pay for graduate school. If either of those is highly likely within the next five years I'd have more of it in a CD.

Tenesmus83
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Re: Taxable for Young Investor

Post by Tenesmus83 » Sat May 02, 2020 9:23 am

I'm in a similar situation myself. After maxing out my retirement accounts, and have an emergency fund, what percentage of my monthly savings should I invest in a taxable account. 100% too risky? Is 50% reasonable? No idea what other people are doing.

retired@50
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Re: Taxable for Young Investor

Post by retired@50 » Sat May 02, 2020 9:33 am

Tenesmus83 wrote:
Sat May 02, 2020 9:23 am
I'm in a similar situation myself. After maxing out my retirement accounts, and have an emergency fund, what percentage of my monthly savings should I invest in a taxable account. 100% too risky? Is 50% reasonable? No idea what other people are doing.
What other people are doing isn't as important as what you want to do...

If you want a house, save for it. If you want a new car, save for it. Using an online savings account for your particular needs (and wants) is sound strategy, as you may not want to risk your house or car money in the market.

If you seek to retire before 65, then you can save for that too, but just realize that if you put money to work in a taxable account using stock index funds, you don't want to be in a position where you'll need that money soon. Put it in with the idea that this money in VTSAX is for retirement, even though it's not in a retirement account.

As far as percentages, that's all up to you.

Regards,
This is one person's opinion. Nothing more.

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Sun May 03, 2020 11:00 am

Thank you all!

He's got the emergency funds covered. I'll suggest he decide how much he wants for a retirement bridge ane put that into VTSAX with the remainder in VMMXX. I already forwarded the tax-efficient fund wiki to him. Once he hits an amount where it starts making sense to manage tax efficiency he'll have a much better baseline of knowledge.

Mode32
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Re: Taxable for Young Investor

Post by Mode32 » Sun May 03, 2020 4:52 pm

stan1 wrote:
Sat May 02, 2020 8:57 am
To start Total Stock Market in a taxable account. When he has over $100K in it he should come back and ask again.

There's a chance he will want to sell this investment to purchase a home or pay for graduate school. If either of those is highly likely within the next five years I'd have more of it in a CD.
Can you please clarify why he should come back and ask again once he’s hit $100k in taxable? Would you recommend making changes to taxable acct and why?

Thanks

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anon_investor
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Re: Taxable for Young Investor

Post by anon_investor » Sun May 03, 2020 5:29 pm

eyemgh wrote:
Sun May 03, 2020 11:00 am
Thank you all!

He's got the emergency funds covered. I'll suggest he decide how much he wants for a retirement bridge ane put that into VTSAX with the remainder in VMMXX. I already forwarded the tax-efficient fund wiki to him. Once he hits an amount where it starts making sense to manage tax efficiency he'll have a much better baseline of knowledge.
I would suggest a high yield savings account over VMMXX as he will get better interest right now (1.5% vs 0.60%). I agree with the rest into VTSAX.

stan1
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Re: Taxable for Young Investor

Post by stan1 » Sun May 03, 2020 5:49 pm

Mode32 wrote:
Sun May 03, 2020 4:52 pm
stan1 wrote:
Sat May 02, 2020 8:57 am
To start Total Stock Market in a taxable account. When he has over $100K in it he should come back and ask again.

There's a chance he will want to sell this investment to purchase a home or pay for graduate school. If either of those is highly likely within the next five years I'd have more of it in a CD.
Can you please clarify why he should come back and ask again once he’s hit $100k in taxable? Would you recommend making changes to taxable acct and why?

Thanks
Well first when a 24 year old has $100K in a taxable account he should be able to ask his own questions not rely on his parents to do it for him, but other than that yes after he had $100K in a taxable account I probably would also start investing in Total International Stock Market in the taxable account.

megabad
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Re: Taxable for Young Investor

Post by megabad » Sun May 03, 2020 6:52 pm

eyemgh wrote:
Fri May 01, 2020 10:39 pm
My son, age 24, is in a fortunate situation. He has a good job that allows him to max his 401k
When you say “max” do you mean $57k? If not, then I would look into after tax 401k contributions before taxable. If so, it is an understatement that he is “in a fortunate situation”.

dru808
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Re: Taxable for Young Investor

Post by dru808 » Sun May 03, 2020 7:47 pm

Man, I’m impressed with your son’s financial responsibility. 24 years old maxing tax advantaged with extra to go to taxable? :sharebeer
60% US equity | 25% International equity | 15% US Treasury bonds

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Mon May 04, 2020 1:08 am

I was able to impress upon him at a relatively early age the importance of saving and compounding. He started a Roth first year in college. With little to no investing foundation he trusted my target fund recommendation after a brief discussion on asset allocation and fees. Certainly after he gets to the point that he has $100k taxable, his foundation will be sufficient to bypass dear old dad. I'm only asking here because I missed the taxable boat due to ignorance and having been much more consumeristic that he is. My hope is that each successive generation can build on our strengths and learn from our mistakes. ;)

As for "maxing" his 401k, he's employed. You can only hit the $50k+ mark in a solo 401k. I'm not sure if his pre-match 401k + Roth total $19,500 or if his 401k alone does. If it's the former, that's the lowest hanging fruit and we already covered that.

It's pretty wild that short CDs, longer CDs, T bills, notes, and long bonds, are all being outperformed by a savings account! We had to go over that after he read the Wiki on the three tiers of emergency funds and wanted to learn about vehicles traditionally used for each of those buckets.

I totally spaced the VMMXX yield drop with the rate cut. He already has his emergency money in a high yield savings account. He can just augment that with shorter term funds.

Thanks again! :sharebeer

megabad
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Re: Taxable for Young Investor

Post by megabad » Mon May 04, 2020 1:40 am

eyemgh wrote:
Mon May 04, 2020 1:08 am

As for "maxing" his 401k, he's employed. You can only hit the $50k+ mark in a solo 401k.
This is not true. After tax contributions are allowable by law in any 401k, it is up to the plan to make that decision. As a high income 24 year old, the odds that his plan allows after tax contributions is very high. This should be the first place he investigates in my opinion. If he is just under the HCE limit, this is even more important.

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anon_investor
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Re: Taxable for Young Investor

Post by anon_investor » Mon May 04, 2020 7:47 am

megabad wrote:
Mon May 04, 2020 1:40 am
eyemgh wrote:
Mon May 04, 2020 1:08 am

As for "maxing" his 401k, he's employed. You can only hit the $50k+ mark in a solo 401k.
This is not true. After tax contributions are allowable by law in any 401k, it is up to the plan to make that decision. As a high income 24 year old, the odds that his plan allows after tax contributions is very high. This should be the first place he investigates in my opinion. If he is just under the HCE limit, this is even more important.
+1 have him look into this option (mega backdoor roth). For example my mega corp 401k allows me to make after-tax (this is different than roth) contributions in excess of the $19.5k individual contribution limit and make instant in plan roth conversions (which no additional taxes are owed on since the funds are after tax).

For 2020 $57k is the maximum 401k contribution limit for the combination of individual contributions, company match contributions and after tax contributions. If after tax contributions are allowed by the 401k plan, the key though is whether in plab roth conversions are allowed or in service rollover to a roth ira. Otherwise after tax 401k contributions may be less advantageous than a taxable account.

Another note, if you son is considered a HCE (Highly Compensated Employee) by the IRS, I think the threshold is in the $130k range for 2020, even if his 401k plan allows for after tax contributions his ability to make such contributions may be limited or even disallowed (but this all depends on the plan). For example I am designated a HCE but I can still make after tax contributions, but they are capped at a certain % of my salary which prevents me from reaching the $57k overall contribution limit.

https://www.bogleheads.org/wiki/After-tax_401(k)

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Mon May 04, 2020 10:35 am

Ahhh, post-tax. He's on the cusp of being a HCE, but not quite yet.

I don't think that fits with his current lifestyle or future plans. He leads a fairly non-consumeristic existence. His extravagances are travel and food experiences. If he hits $19.5k + match in a 401k + max Roth until he's means tested out of a traditional Roth. He should have plenty in his longest term accounts.

I think that would conflict with the secondary goal of having money accessible prior to 59.5 unless there's a way to access 401k funds prior.

Again, my MO, now 57 years old, had always been max the pre-tax 401k (along with my wife doing the same), plan on working until at least 59.5 and blow the rest. :? We started a new business 5 years ago, so that really precluded looking at other "tricks" or "hacks" because all of our surplus cash plus was going into the new office. As a result, I don't have the tools to advise him to the fullest. He's learning, but has a lot of foundational groundwork still in front of him.

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dratkinson
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Re: Taxable for Young Investor

Post by dratkinson » Mon May 04, 2020 11:48 am

Taxable account.

In his assumed higher tax bracket(s), and in a taxable account, the recommended long-term investments are:
--total stock market index fund,
--national or single-state municipal bond funds.


Disclosure. Since dividends are the major component of bond fund total return, I shoot for higher risk/reward bonds to get more dividends/reward. And TLH any risk that appears.

Since bonds can lose 5-15% during a crash, I fill my multi-duty bonds (home down payment, extended emergency fund tier, retirement bonds,...) to ~120% (=1/(1-0.15)) of the anticipated need, and stopped worrying.



Roth IRA.

I'm surprised he's investing in a Roth IRA. "Good job" to whoever recommended it to him.

With many years to retirement, the benefit of tax-sheltered growth+distributions will easily outweigh the additional tax paid now.



Backdoor Roth IRA. When he makes too much to directly contribute to a Roth IRA, he'll want to learn the Backdoor Roth IRA concept: https://www.bogleheads.org/wiki/Back_door_Roth_IRA

Note, the Backdoor Roth IRA (he contributes directly) and Mega Backdoor Roth IRA (he contributes through his employer's retirement plan) are different concepts, have different rules, and are executed differently.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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Re: Taxable for Young Investor

Post by KT785 » Mon May 04, 2020 12:11 pm

I didn't see any mention of HSA contributions . . . . if available, I'd max those out too before investing in taxable or making after-tax 401k contributions.

KT785

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Mon May 04, 2020 12:24 pm

dratkinson wrote:
Mon May 04, 2020 11:48 am

I'm surprised he's investing in a Roth IRA. "Good job" to whoever recommended it to him.

With many years to retirement, the benefit of tax-sheltered growth+distributions will easily outweigh the additional tax paid now.
That was me. :wink: He started as a student. It was a rare opportunity to shield 100% going in and drawing out against taxes since his income was so low that money wasn't taxed per se.

absolute zero
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Re: Taxable for Young Investor

Post by absolute zero » Mon May 04, 2020 12:25 pm

eyemgh wrote:
Mon May 04, 2020 10:35 am
I think that would conflict with the secondary goal of having money accessible prior to 59.5 unless there's a way to access 401k funds prior.

Again, my MO, now 57 years old, had always been max the pre-tax 401k (along with my wife doing the same), plan on working until at least 59.5 and blow the rest. :?
Yes there are multiple methods to access 401k and IRA funds prior to 59.5. Just do a search and you can read all about them.

If a person has a 401k that allows a certain technique (often dubbed mega backdoor Roth strategy on this site) they can stuff tens of thousands of dollars into their Roth IRA each year.There are very few situations where it makes any sense to forego Roth IRA space and instead contribute to a taxable brokerage account. But it all depends on the rules of the 401k.

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Mon May 04, 2020 12:33 pm

KT785 wrote:
Mon May 04, 2020 12:11 pm
I didn't see any mention of HSA contributions . . . . if available, I'd max those out too before investing in taxable or making after-tax 401k contributions.

KT785
Thanks! He brought up HSA. The issue is that he gets good low deductible insurance through his job. An HSA plan is an option. The real calculus behind HSA though assumes that you pay less premium in exchange for self insuring the first dollars used. The problem is, he doesn't pay his premium. He'd essentially be getting far worse insurance for the privilege of access to an HSA. He is healthy though and doesn't expect to utilize much. He's mulling that option knowing the pluses and minuses.

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Mon May 04, 2020 9:20 pm

absolute zero wrote:
Mon May 04, 2020 12:25 pm

Yes there are multiple methods to access 401k and IRA funds prior to 59.5. Just do a search and you can read all about them.

If a person has a 401k that allows a certain technique (often dubbed mega backdoor Roth strategy on this site) they can stuff tens of thousands of dollars into their Roth IRA each year.There are very few situations where it makes any sense to forego Roth IRA space and instead contribute to a taxable brokerage account. But it all depends on the rules of the 401k.
I've read about this in the past but since it wasn't germane to me, I blew it off. Having read more, I want to make sure I have the thumbnail sketch correct. If the company allows after tax 401k contributions, either directly deposit into Roth 401K if that's an option, or roll over if it isn't. Hold it for 5+ years and it withdraws without additional taxes or penalties at any age?

absolute zero
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Re: Taxable for Young Investor

Post by absolute zero » Mon May 04, 2020 11:10 pm

eyemgh wrote:
Mon May 04, 2020 9:20 pm
absolute zero wrote:
Mon May 04, 2020 12:25 pm

Yes there are multiple methods to access 401k and IRA funds prior to 59.5. Just do a search and you can read all about them.

If a person has a 401k that allows a certain technique (often dubbed mega backdoor Roth strategy on this site) they can stuff tens of thousands of dollars into their Roth IRA each year.There are very few situations where it makes any sense to forego Roth IRA space and instead contribute to a taxable brokerage account. But it all depends on the rules of the 401k.
I've read about this in the past but since it wasn't germane to me, I blew it off. Having read more, I want to make sure I have the thumbnail sketch correct. If the company allows after tax 401k contributions, either directly deposit into Roth 401K if that's an option, or roll over if it isn't. Hold it for 5+ years and it withdraws without additional taxes or penalties at any age?
I’m pretty sure you are correct regarding penalty-free withdrawal treatment of funds rolled over from a 401k to a Roth IRA, but I’m going to refrain from confirming your understanding (will leave it to someone else on this site). I researched the different pre-59.5 withdrawal strategies years ago and I’m a bit rusty and don’t want to lead you astray.

That being said, after learning a good deal about the different methods to access funds prior to 59.5, I concluded years ago that there are so many ways and there is so much flexibility that it doesn’t make any sense to even *think* about this as an issue in a person’s 20’s or 30’s, even if they are a high saver and are potentially on track for a very early retirement. Honestly. Maximizing tax-advantaged space, whether that’s 401k, HSA, IRA, 403b, etc is a total slam-dunk over taxable investing (assuming low fee funds exist in the tax advantaged accounts).

With a roth conversion ladder, all but the first 5 years of an early retirement can be totally funded with a 401k without penalty. So worst case, an early retiree just has to come up with 5 years of expenses if they are planning to retire early. If that person contributed to a Roth IRA for 25 years, they have $6000*25=$150,000 to use in the first five years of early retirement, penalty free. If married, that’s $300k and for lots of people would totally fill the 5 year gap. For others who still need a bit more during the first 5 years, they can set aside a small amount in a taxable account during their final 2 or 3 years of their career and they will be set.

Many on this site (myself included) have significant portions of our net worth (eg 30 or 40 or 50%) in a taxable account because we maxed out all tax advantaged accounts when younger and didn’t have anywhere else to contribute. Would love to be able to convert my whole taxable account into a Roth IRA with the snap of a finger, if I could.

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dratkinson
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Re: Taxable for Young Investor

Post by dratkinson » Tue May 05, 2020 8:45 am

I only know about HSAs from what I half-remember reading here.


HSA. The reason it's suggested is because it is often mentioned as being a "stealth IRA".
--Tax deductible contribution. (Like a traditional IRA.)
--Tax free annual growth.
--Tax free withdrawals for medical expenses.
--Taxed as ordinary income for non medical expenses. (Like a tIRA withdrawn for retirement living.)

The folks who use it as a stealth IRA, plan to contribute to a HSA, but pay medical expenses from another source, and save their HSA to withdraw for living expenses in retirement.

Search forum, HSA stealth IRA: http://www.google.com/search?q=HSA+stea ... rg%2Fforum

Wiki, HSA: https://www.bogleheads.org/wiki/HSA
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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celia
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Re: Taxable for Young Investor

Post by celia » Tue May 05, 2020 9:39 am

absolute zero wrote:
Mon May 04, 2020 11:10 pm
Maximizing tax-advantaged space, whether that’s 401k, HSA, IRA, 403b, etc is a total slam-dunk over taxable investing (assuming low fee funds exist in the tax advantaged accounts).
Would love to be able to convert my whole taxable account into a Roth IRA with the snap of a finger, if I could.
So which is it? Avoid Roth in favor of tax-deferred or max out Roths first, when you had a chance? You can’t have it both ways. Now it sounds like you regret putting all of it into tax-deferred or that you should have done some Roth conversions along the way.

You would pay the same in taxes whether you contributed to Roth or put the same money into taxable. Now THAT’S what I call a no-brainer.

AND this is a good year to convert if the markets go down significantly.

See my signature below.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

whereskyle
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Re: Taxable for Young Investor

Post by whereskyle » Tue May 05, 2020 9:51 am

eyemgh wrote:
Fri May 01, 2020 10:39 pm
My son, age 24, is in a fortunate situation. He has a good job that allows him to max his 401k, max a Roth, buy the options that were extended to him and have investible money left over. I've done my best to educate him on assessing investment vehicles, the costs associated with investing, the myth of beating the market on a predictable basis, asset allocation, etc. As a result, he puts all of his long term money into a Vanguard Target fund.

I've suggested that he look at shorter horizon, yet still long term goal. For example, trying to amass enough money to retire early before he can take his 401k and Roth money without penalty a bridge investment if you will, or as John Goodman put it in The Gambler...F-you money. My problem is, I wasn't smart enough to do that. I simply spent what I didn't put in my long term accounts.

I don't have a clue on the best strategies or investment vehicles for taxable accounts. What advice would you give a young man in that situation?

BTW, he has short term emergency funds covered already and isn't living so frugally that he doesn't travel and eat out some. He's not materialistic. The two previously mentioned experiences are really the things he enjoys spending his money on the most.

Thanks!
Vanguard ETFs and index funds in my opinion are great for taxable accounts. They do not distribute capital gains, but they do pay dividends. I am 31, and I'm also hoping to turn my taxable account into F-you money (although I have quite a ways to go). VUG (Vanguard Growth ETF, ER .04) has a very low dividend yield, which would help your son avoid taxes while still allowing him to own a diversified basket of stocks (although he would obviously be missing out on value stocks). I currently have a taxable account consisting of roughly equal parts VGT (Vanguard Tech ETF, ER .10), VUG, VIG (Vanguard Dividend Growth ETF, ER .06), VDC (Vanguard Consumer Staples ETF, ER .10), VT (Vanguard All-World ETF, ER .08), and VTI (Vanguard Total U.S. Stock ETF, .03). I have a little bit of fun with my taxable account, but I keep things low-cost, broadly diversified, and tax efficient. To keep things very simple for him, I would just recommend VT or VTI for his taxable account or VUG if he is particularly concerned about avoiding taxes on dividends. I hold no bonds in my taxable account, so my F-you money depends on the stock market.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

absolute zero
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Re: Taxable for Young Investor

Post by absolute zero » Tue May 05, 2020 9:59 am

celia wrote:
Tue May 05, 2020 9:39 am
absolute zero wrote:
Mon May 04, 2020 11:10 pm
Maximizing tax-advantaged space, whether that’s 401k, HSA, IRA, 403b, etc is a total slam-dunk over taxable investing (assuming low fee funds exist in the tax advantaged accounts).
Would love to be able to convert my whole taxable account into a Roth IRA with the snap of a finger, if I could.
So which is it? Avoid Roth in favor of tax-deferred or max out Roths first, when you had a chance? You can’t have it both ways. Now it sounds like you regret putting all of it into tax-deferred or that you should have done some Roth conversions along the way.

You would pay the same in taxes whether you contributed to Roth or put the same money into taxable. Now THAT’S what I call a no-brainer.

AND this is a good year to convert if the markets go down significantly.

See my signature below.
I wasn’t advocating for or against tax-deferred. I was advocating for tax-advantaged as opposed to taxable.

The decision between tax-deferred vs Roth is a separate matter.

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Tue May 05, 2020 10:27 am

dratkinson wrote:
Tue May 05, 2020 8:45 am
I only know about HSAs from what I half-remember reading here.


HSA. The reason it's suggested is because it is often mentioned as being a "stealth IRA".
--Tax deductible contribution. (Like a traditional IRA.)
--Tax free annual growth.
--Tax free withdrawals for medical expenses.
--Taxed as ordinary income for non medical expenses. (Like a tIRA withdrawn for retirement living.)

The folks who use it as a stealth IRA, plan to contribute to a HSA, but pay medical expenses from another source, and save their HSA to withdraw for living expenses in retirement.

Search forum, HSA stealth IRA: http://www.google.com/search?q=HSA+stea ... rg%2Fforum

Wiki, HSA: https://www.bogleheads.org/wiki/HSA
These are all true and good, with a big caveat. You can’t have an HSA unless you have an HSA eligible plan. By definition they are worse plans with higher deductibles. I personally have one, but I pay my own premiums as a business owner. My son gets any of several much better policies “free” as an employee.

My favorite HSA benefit is that you can pay Medicare premiums out of it.

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Re: Taxable for Young Investor

Post by snowman » Tue May 05, 2020 10:41 am

My son is in somewhat similar situation. I say somewhat because he is not highly compensated employee - he is in military, which means he gets his housing, food and health insurance/expenses covered, tax-free. His relatively low salary is basically his spending money, and like your son he is not materialistic at all, so he invests most of it. He maxes Roth TSP and Roth IRA, and invests leftover money in taxable. There, he buys VTI and VXUS, just like he does in Roth. There are other choices for taxable account, of course, but it's hard to beat these 2 ETFs.

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celia
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Re: Taxable for Young Investor

Post by celia » Tue May 05, 2020 11:37 am

absolute zero wrote:
Tue May 05, 2020 9:59 am
The decision between tax-deferred vs Roth is a separate matter.
Not to me because they are opposites of each other. Roth is better than taxable, while tax-deferred is worse than taxable.

It’s all a matter of when you (or your heirs) will pay the tax.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

JamesJonesJrJr
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Re: Taxable for Young Investor

Post by JamesJonesJrJr » Tue May 05, 2020 11:44 am

Surprised nobody's mentioned the most obvious answer, especially for a 24-year old: a robo advisor.

absolute zero
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Re: Taxable for Young Investor

Post by absolute zero » Tue May 05, 2020 1:34 pm

celia wrote:
Tue May 05, 2020 11:37 am
absolute zero wrote:
Tue May 05, 2020 9:59 am
The decision between tax-deferred vs Roth is a separate matter.
Not to me because they are opposites of each other. Roth is better than taxable, while tax-deferred is worse than taxable.

It’s all a matter of when you (or your heirs) will pay the tax.
My post was in response to the OP’s claim that mega backdoor Roth likely didn’t make sense for his son since the money would not be accessible prior to 59.5. Mega backdoor Roth would be tax-free, which (as you mentioned) is always better than taxable. And I pointed out to the OP that young high-income investors should not worry about early access to retirement funds (certainly not in their 20’s or 30’s). There are many early-access options, and so they should always favor tax-advantaged over taxable.

All of my statements specifically referenced young high-income investors. To your point, there are situations where taxable account investing is favorable to tax-advantaged. This would be the case if:

(1) someone has already built up substantial tax-deferred savings and/or pension benefits
AND
(2) that person has tax advantaged space which only allows for pre-tax contributions

While I concede that #2 may be true for a young investor (although increasingly unlikely due to growth in popularity of Roth options within 401k’s), #1 is almost never true until a person has a decade or two of saving/investing underneath his or her belt.

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Re: Taxable for Young Investor

Post by anon_investor » Tue May 05, 2020 1:43 pm

eyemgh wrote:
Mon May 04, 2020 10:35 am
Ahhh, post-tax. He's on the cusp of being a HCE, but not quite yet.

I don't think that fits with his current lifestyle or future plans. He leads a fairly non-consumeristic existence. His extravagances are travel and food experiences. If he hits $19.5k + match in a 401k + max Roth until he's means tested out of a traditional Roth. He should have plenty in his longest term accounts.

I think that would conflict with the secondary goal of having money accessible prior to 59.5 unless there's a way to access 401k funds prior.

Again, my MO, now 57 years old, had always been max the pre-tax 401k (along with my wife doing the same), plan on working until at least 59.5 and blow the rest. :? We started a new business 5 years ago, so that really precluded looking at other "tricks" or "hacks" because all of our surplus cash plus was going into the new office. As a result, I don't have the tools to advise him to the fullest. He's learning, but has a lot of foundational groundwork still in front of him.
Depending on the 401k plan, it may allow for in service rollover of after-tax contributions into a personal roth 401k. If the rolled over funds are held for at least 5 years, then the original rollover amount can be withdraw anytime regardless of age (it gets the same tax free treatment as direct Roth contribution).

He should definitely look into and plan for the back door roth IRA process, for when his income prevents him from making direct roth IRA contributions.

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eyemgh
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Re: Taxable for Young Investor

Post by eyemgh » Tue May 05, 2020 2:45 pm

anon_investor wrote:
Tue May 05, 2020 1:43 pm

Depending on the 401k plan, it may allow for in service rollover of after-tax contributions into a personal roth 401k. If the rolled over funds are held for at least 5 years, then the original rollover amount can be withdraw anytime regardless of age (it gets the same tax free treatment as direct Roth contribution).

He should definitely look into and plan for the back door roth IRA process, for when his income prevents him from making direct roth IRA contributions.
THIS seems like the ultimate cat's meow!

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Re: Taxable for Young Investor

Post by anon_investor » Tue May 05, 2020 3:37 pm

eyemgh wrote:
Tue May 05, 2020 2:45 pm
anon_investor wrote:
Tue May 05, 2020 1:43 pm

Depending on the 401k plan, it may allow for in service rollover of after-tax contributions into a personal roth 401k. If the rolled over funds are held for at least 5 years, then the original rollover amount can be withdraw anytime regardless of age (it gets the same tax free treatment as direct Roth contribution).

He should definitely look into and plan for the back door roth IRA process, for when his income prevents him from making direct roth IRA contributions.
THIS seems like the ultimate cat's meow!
It is all 401k plan dependent, but a really great option if available. My 401k plan allows this, but there is a $5 fee per rollover, so I just leave my after-tax contributions in my 401k since my plan allows for instant roth conversions, so all my after-tax contributions are effectively roth funds in my 401k.

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