Taxable account, early retirement, and profits

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Topic Author
SeaToTheBay
Posts: 210
Joined: Thu Jun 08, 2017 6:11 pm

Taxable account, early retirement, and profits

Post by SeaToTheBay »

Quick intro:
-Wife and I are mid-30s with a 2-year-old, no plans to have another (but he's great)
-Goal to retire mid-40s
-High income in HCOL = high marginal tax bracket
-$2.5M NW ($2.0M portfolio + $500K in home)

50% / $1M of our portfolio is in 401k/HSA (all index funds) and wife's company stock (taxable).
Other 50% / $1M is split about 60/40% between Taxable and Roth/Rollover IRAs

My strategy has been to put funds and more conservative individual stocks (many paying dividends) into the Roth/Rollover, and using Taxable accounts for higher risk/reward funds and stocks (I know, not very Boglehead-ish). My main question is if I'm approaching this correctly.

Over the past 10 months I have developed a leveraged ETF trading strategy (again, not very Boglehead-ish but that's beside the point of my question) which has done very well. It profits from the LETF's volatility and uses limit orders in an effort to reduce emotional decision making, with positions typically open for a few days or weeks. While I obviously don't know if this success will continue, at this point I am mostly playing with house money and not increasing the amount I'm allocating to this strategy, so the risk is limited since I've pocketed and reallocated the gains I've made.

The problem with my strategy is it generates a lot of short-term gains, and we are at a very high marginal tax rate due to income and state taxes. It's painful to have success but then watch nearly half of the gains go to the IRS. However, at the same time I'm not thrilled about risking precious tax-advantaged $ intended for retirement, and with our goal of retiring mid-40s I'd like to grow our taxable accounts since that's what will really get us to our goal.

Any thoughts on how to divide this high risk/reward, high-ST gain portion of our portfolio between taxable and tax-advantaged? Maybe take a hybrid approach and do 75/25% taxable/tax-advantaged?
jarjarM
Posts: 981
Joined: Mon Jul 16, 2018 1:21 pm

Re: Taxable account, early retirement, and profits

Post by jarjarM »

SeaToTheBay wrote: Tue Apr 06, 2021 6:17 pm
I'm doing something somewhat similar. I have 20% in my taxable "trading" account, similar to your high risk/high reward, ST gain account. We're also in the 50+% fed + state marginal tax bracket. My view is that the "trading" portfolio is risky so if there's losses, I want to use it for TLH harvesting. If you feel like you can be fairly confident on substantial gain on the high risk portfolio then go ahead move it to tax advantaged account but otherwise I would suggest to stay in taxable. We haven't facing any adversity in the market over the last 10 months, wait until there's very substantial volatility like March 2020 or 2008 or 2000 before you can be confident of your trading strategy (remember backtesting don't always work since you'll be fighting the last war). Good luck :beer
Topic Author
SeaToTheBay
Posts: 210
Joined: Thu Jun 08, 2017 6:11 pm

Re: Taxable account, early retirement, and profits

Post by SeaToTheBay »

jarjarM wrote: Tue Apr 06, 2021 8:47 pm
SeaToTheBay wrote: Tue Apr 06, 2021 6:17 pm
I'm doing something somewhat similar. I have 20% in my taxable "trading" account, similar to your high risk/high reward, ST gain account. We're also in the 50+% fed + state marginal tax bracket. My view is that the "trading" portfolio is risky so if there's losses, I want to use it for TLH harvesting. If you feel like you can be fairly confident on substantial gain on the high risk portfolio then go ahead move it to tax advantaged account but otherwise I would suggest to stay in taxable. We haven't facing any adversity in the market over the last 10 months, wait until there's very substantial volatility like March 2020 or 2008 or 2000 before you can be confident of your trading strategy (remember backtesting don't always work since you'll be fighting the last war). Good luck :beer
Thanks. I had the same thought on tax loss harvesting. I think maybe slowly moving more of it into tax-advantaged over time might be a good plan, and continuing to sock away any profits so that hopefully in time the original capital will be diverted into other more conservative investments.
jarjarM
Posts: 981
Joined: Mon Jul 16, 2018 1:21 pm

Re: Taxable account, early retirement, and profits

Post by jarjarM »

SeaToTheBay wrote: Wed Apr 07, 2021 4:35 pm Thanks. I had the same thought on tax loss harvesting. I think maybe slowly moving more of it into tax-advantaged over time might be a good plan, and continuing to sock away any profits so that hopefully in time the original capital will be diverted into other more conservative investments.
Keep in mind that $$$ in non-Roth tax advantaged account will be subject to RMD later in life so tax will still be relevant. I use some LETFs in my tax advantaged account but mainly to get my equities exposure up to my target level. Think adding UPRO to VTSAX/PSLDX type scenarios.
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