What to do with pre-bogleheads taxable investment account

[sedonabogle]

Looking for advice on what to do (if anything) with my taxable investing account. Before I found bogleheads, I was only contributing 6% to my 401k (to get the maximum employer match) but would max out HSA. With my spare money I put in $1000 a month to my brokerage account. Did some occasional trading and eventually moved to a 3-fund portfolio, and now I max out 401k and HSA and don't contribute to the taxable account anymore (since I have other living expenses and mortgage now).

Current mortgage - $160k and 11 years remaining (would like to pay off in 6 years) @ 2.88%
Savings - $75k @ 1% currently
No other debts
Taxable investment account - 3-fund at $70k

6 months ago, my plan was to pay $20k/yr extra to principal on the mortgage out of savings. Convert remaining savings to CDs for a year. Now that CD rates are abysmal I'm wondering if I should pay $50k toward mortgage now. Seems like I'm losing money in the long run if I sit on cash (that I don't want to invest any more than I currently do with maxing 401k). That still leaves a big enough cushion in savings for emergency.

Would you pay off more or less mortgage now given the rates?

Is there anything I can do better with my taxable investment account? It's performing well but I'm not sure how to view that account anymore that I changed to the bogleheads philosophy. I haven't withdrawn from it so in a way it's like a retirement account. Could I convert some to an IRA or just keep it as an emergency fund and let it build over time (maybe to retirement)?

Thanks for any advice.

[retired@50]

Have you considered opening a Roth IRA?
Assuming you're eligible to open a Roth IRA, you could use some of the money in the taxable account to fund the Roth IRA each year.

See link: https://www.bogleheads.org/wiki/Roth_IRA

Regards,

[sedonabogle]

Have you considered opening a Roth IRA?
Assuming you're eligible to open a Roth IRA, you could use some of the money in the taxable account to fund the Roth IRA each year.

See link: https://www.bogleheads.org/wiki/Roth_IRA

Regards,

I did open one up last year. I'll look more into that option.

[Silverado]

I didn’t see specifically what the taxable account contains. If you have any high ER funds, for sure turn off reinvesting and funnel and distributions to lower cost.

I had a couple moderate ER funds left after getting smarter about fees. One I was able sell during the 2018 drop late in the year. The last remaining fund would need a real drop before I’d be willing to pay the taxes. So it sits there, growing like crazy some years and throwing out mountains of taxable gains most years. Not the worst problem to have, but a little annoying all the same.

I consider my entire portfolio to be a retirement account, regardless where it is. You sounded a little like you didn’t think a taxable account can be a retirement account. I expect to be around 50/50 at retirement, half in tax deferred accounts and half in taxable. With just a little Roth for good measure, though I will work to get it larger.

[sedonabogle]

I didn’t see specifically what the taxable account contains. If you have any high ER funds, for sure turn off reinvesting and funnel and distributions to lower cost.

I had a couple moderate ER funds left after getting smarter about fees. One I was able sell during the 2018 drop late in the year. The last remaining fund would need a real drop before I’d be willing to pay the taxes. So it sits there, growing like crazy some years and throwing out mountains of taxable gains most years. Not the worst problem to have, but a little annoying all the same.

I consider my entire portfolio to be a retirement account, regardless where it is. You sounded a little like you didn’t think a taxable account can be a retirement account. I expect to be around 50/50 at retirement, half in tax deferred accounts and half in taxable. With just a little Roth for good measure, though I will work to get it larger.

FOSFX 19% (0.9% ER)
FSKAX 59% (0.015% ER)
FTBFX 22% (0.45% ER)

I turned off reinvestments a couple years back.

Yeah I suppose starting out I didn't view or think about retirement much so considered it for just investments. It does make sense that some of it will be used for retirement.

[Duckie]

FOSFX 19% (0.9% ER)
FSKAX 59% (0.015% ER)
FTBFX 22% (0.45% ER)

There are some cost and placement issues:

• FSKAX (0.015%) is a good US stock fund and excellent in taxable.
• FOSFX (0.90%) should be replaced with FTIHX (0.06%) if you keep international in taxable.
• FTBFX (0.45%) should be replaced with FXNAX (0.025%) if you keep bonds in taxable but you're better off putting all your bonds in tax-sheltered accounts.

Sell FOSFX and FTBFX when fiscally prudent.

[grabiner]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

[houseofnine]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

Wouldn’t this depend on OP’s tax bracket when he sold? If he is MFJ when he sells and his taxable income is <$80K, wouldn’t he pay 0% on his LTCG?

[beckwith]

Looking for advice on what to do (if anything) with my taxable investing account. Before I found bogleheads, I was only contributing 6% to my 401k (to get the maximum employer match) but would max out HSA. With my spare money I put in $1000 a month to my brokerage account. Did some occasional trading and eventually moved to a 3-fund portfolio, and now I max out 401k and HSA and don't contribute to the taxable account anymore (since I have other living expenses and mortgage now).
axing 401k). That still leaves a big enough cushion in savings for emergency.

I’m working through transitioning a taxable account to a 3 or 4 fund portfolio. It’s an inherited account and was under active management with ~30 individual stock holdings and a handful of high ER mutual funds. There was one fund that would not transfer to my Schwab taxable, so, despite significant unrealized gains on it (yes, a good problem to have!), I sold it and am accepting the tax burden. The fees alone, if I held it for another 2-3 years at that bank, would equal the taxes I’ll pay in LTCG. On the flip side, one mutual fund that did transfer has an ER of 0.77 and tracks fairly well as an international index. I don’t love it, but I’m also not in a terrible rush to transition it to SWISX because it too has significant unrealized gains. Maybe next year or if we see a significant market correction at any point soon. I guess it really depends on how soon you want to achieve that Bogleheads style 3-fund portfolio, and if you can stomach the high ER’s. I’ve decided to “rip the band aid”, so to speak, with the one mutual fund.

Nice job maxing out 401k and HSA, definitely agree with other folks’ suggesting looking into also maxing Roth IRA contributions. The “Backdoor Roth IRA” is a process that allows contributions to a Roth IRA even if you are over the AGI contribution limit.

[nix4me]

Taxable accounts are not bad. In fact, they are quite good. Very flexible, no income limits, no RMDs, VERY favorable ltcg tax rates, and your money is not locked away until you are 59 1/2.

We use VTI in our taxable account.

[sedonabogle]

FOSFX 19% (0.9% ER)
FSKAX 59% (0.015% ER)
FTBFX 22% (0.45% ER)

There are some cost and placement issues:

• FSKAX (0.015%) is a good US stock fund and excellent in taxable.
• FOSFX (0.90%) should be replaced with FTIHX (0.06%) if you keep international in taxable.
• FTBFX (0.45%) should be replaced with FXNAX (0.025%) if you keep bonds in taxable but you're better off putting all your bonds in tax-sheltered accounts.

Sell FOSFX and FTBFX when fiscally prudent.

Appreciate the advice, thanks

[sedonabogle]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

I never thought about it that way before. Thanks

[sedonabogle]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

Wouldn’t this depend on OP’s tax bracket when he sold? If he is MFJ when he sells and his taxable income is <$80K, wouldn’t he pay 0% on his LTCG?

I'd be in the 15% bracket.

[MathIsMyWayr]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

OP already maxes out 401k and HSA.

[sedonabogle]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

OP already maxes out 401k and HSA.

True, but not IRA. Is it advisable to max out Roth IRA each year with funds from the taxable account that I intend to keep for retirement anyway?

[MathIsMyWayr]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

OP already maxes out 401k and HSA.

True, but not IRA. Is it advisable to max out Roth IRA each year with funds from the taxable account that I intend to keep for retirement anyway?

According to the general opinion,

• deductible IRA and Roth IRA are almost always beneficial.
  non-deductible IRA is beneficial if a Roth conversion may be done "soon" without incurring large taxes.

[grabiner]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

Wouldn’t this depend on OP’s tax bracket when he sold? If he is MFJ when he sells and his taxable income is <$80K, wouldn’t he pay 0% on his LTCG?

This is theoretically possible, if they wait to sell until after retirement (to get out of the 15% marginal tax rate) and before taking Social Security (the phase-in of Social Security taxation is likely to make the marginal tax rate 10.2%, or 12.75% if the 12% tax bracket goes up to 15%) to sell the taxable account, and don't go over the limit for tax-free capital gains in any one year. Even then, it might not be a net gain, because of the need to pay tax on dividends every year while waiting to get there.

[houseofnine]

Even if you have a good stock fund in your taxable account, it is worth selling the fund, paying the capital-gains tax, and buying the same or similar fund in a 401(k) or IRA. The reason is that the fund will lose a larger percentage of its value to taxes as long as it stays in the taxable account, because of dividend taxes and a larger capital gain when you finally sell. Once you put the fund in a 401(k) or IRA, it will lose the same percentage of its returns (zero in a Roth account, or your withdrawal tax rate in your traditional account) no matter how long you hold it.

Wouldn’t this depend on OP’s tax bracket when he sold? If he is MFJ when he sells and his taxable income is <$80K, wouldn’t he pay 0% on his LTCG?

This is theoretically possible, if they wait to sell until after retirement (to get out of the 15% marginal tax rate) and before taking Social Security (the phase-in of Social Security taxation is likely to make the marginal tax rate 10.2%, or 12.75% if the 12% tax bracket goes up to 15%) to sell the taxable account, and don't go over the limit for tax-free capital gains in any one year. Even then, it might not be a net gain, because of the need to pay tax on dividends every year while waiting to get there.

Thanks for the explanation. Very helpful!