taxable account questions

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taxable account questions

Post by brian2013 »

I have some money to "play" with, after maxing out IRAs and 529s. I'd like to open a taxable account with about $10K and put it in Vanguard total stock market index. I understand I need to keep the funds in there at least a year to avoid short-term cap gains taxes. Assume these are funds I don't "need" at any specific time, or at all.

My general question is this: what is the best way to contribute to, and withdraw from, a taxable account: one lump sum up front, or incremental monthly contributions?

More specifically:

1) Do I have to wait a year each time I make a contribution before withdrawing earnings? For example if I contribute $5K in January, then in March I contribute another $5k, do i have to wait until the following March before I can withdraw the earnings?

2) if the answer to 1) is yes, I do have to wait a full year from each contribution before withdrawing earnings, then it seems like withdrawing funds could get complicated if I make regular, monthly contributions: how do you know how much you can withdraw before triggering short term cap gains taxes?
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Re: taxable account questions

Post by runninginvestor »

Most people in taxable use a SpecID (specific identification) cost basis, where you select which tax lot (investment contribution) you'd like to sell. This allows you to specify exactly what shares you'd like to sell so in your example if it was February the following year, if you specified January lots to sell, it'd be LTCG and March would be STCG
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Re: taxable account questions

Post by stan1 »

What you are describing is related to cost basis (how much you paid for the investment). Use specific lot identification as your cost basis method. Then you can select which lots you want to sell based on realized capital gains (or losses) when the time comes. Since 2012 the IRS has required all brokerages to report realized capital gains on 1099s. Brokerage user interfaces keep track of cost basis for you as you buy and sell. Will tell you the purchase date, purchase price per share, and purchase amount. Most will also tell you if the gain is long term or short term. Some people still like to keep these records themselves, too.

I would invest the money when you have it available. Generally I think of "investing" for the long term and "saving" for the short term. If there is a high likelihood I'll need the money in a year I consider that to be saving not investing, and would put it in a CD or money market savings account.
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Re: taxable account questions

Post by kaneohe »

If you are interested in withdrawing "earnings" consider not re-investing the distributions........then you can withdraw them as soon as you get them. They will be taxed at dividends/CGs depending on their nature but not as STCG since they were never invested.
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Re: taxable account questions

Post by KingRiggs »

Remember, too, that there is no "capital gains tax", either long- or short-term, if there are no capital gains.

So if you buy $5k of funds every January, but then you need money for a purchase in March, you may find that one of your batches (tax lots, more properly) has stayed flat or decreased in value. You can sell this with no gain, and hence owe no tax...
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Re: taxable account questions

Post by nix4me »

It’s better to use spec Id and sell lots at a loss when you need money (if you have losses). Read up on tax loss harvesting. As far as when and how often and how much - as much as possible, as often as possible.
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