Midterm Taxable

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eyemgh
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Midterm Taxable

Post by eyemgh »

I've been a busy beaver, but these are all unrelated threads.

For the mid term, say more than 3 years, but less than 10, think saving for a house down payment, where's the best place to park money that's taxable? On first blush, not much seems to be better than a fully liquid, high yield savings account. Wondering if a muni fund or something else I haven't considered might be better. Thanks!
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cheese_breath
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Re: Midterm Taxable

Post by cheese_breath »

eyemgh wrote: Sat May 01, 2021 4:32 pm I've been a busy beaver, but these are all unrelated threads.

For the mid term, say more than 3 years, but less than 10, think saving for a house down payment, where's the best place to park money that's taxable? On first blush, not much seems to be better than a fully liquid, high yield savings account. Wondering if a muni fund or something else I haven't considered might be better. Thanks!
Have you considered MYGAs (Multi Year Guaranteed Annuities)?

Lots of threads here. Just type MYGA in the search box.
The surest way to know the future is when it becomes the past.
KlangFool
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Re: Midterm Taxable

Post by KlangFool »

OP,

The first question would be do you really need to save for the house's down payment? The answer may be no for some people with a large taxable account. Between the emergency fund, annual savings, and the annual dividend/distribution of the taxable account, the money is more than enough for the house's 20% down payment. Or, a slight increase of emergency fund is more than enough. Then, you do not have to do anything special to prepare for this.

KlangFool
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Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

KlangFool wrote: Sat May 01, 2021 4:45 pm OP,

The first question would be do you really need to save for the house's down payment? The answer may be no for some people with a large taxable account. Between the emergency fund, annual savings, and the annual dividend/distribution of the taxable account, the money is more than enough for the house's 20% down payment. Or, a slight increase of emergency fund is more than enough. Then, you do not have to do anything special to prepare for this.

KlangFool
That's a great question! I was asking for myself and for my son, but we are in two very different situations. I'm in a situation where I can just follow the above.

He however is in a situation where he is diligently saving, but hasn't yet amassed a ton of wealth. He maxes out his 401k and a Roth and has plenty of emergency money. Now he's looking to park excess funds. He'll put the bulk into Total Stock Market, but is interested in the midterm to do more than a savings account. He doesn't yet have anything in a taxable account.
slicendice
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Re: Midterm Taxable

Post by slicendice »

If your son is in a high or ultrahigh cost of living location and it will take more than 4 years of savings to amass the downpayment he will need the stock market to help him get there. A high yield savings account especially at today's negative real rates, will not suffice as the real estate appreciation can easily outgrow his savings rate in certain locales. I learned this the hard way. He could hold ~20-25% in bonds (rebalance via contributions, tax-loss harvesting) to help temper the equity risk. If in the 24% marginal bracket or below those bonds can be long term treasuries only etf like VGLT and/or I-bonds. If above the 24% bracket, use a muni-bond fund. Once he gets to within one year's worth of saving/investing for the downpayment, he can sell his risk assets and put the proceeds in the high yield savinings account or short term treasury fund.

If in a moderate cost of living location, he won't need to take the equity risk for the downpayment, so his savings fund could be something like a 20/80 equity/intermediate/short-term treasuies/I-bonds allocation.
KlangFool
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Re: Midterm Taxable

Post by KlangFool »

eyemgh wrote: Sat May 01, 2021 7:03 pm
KlangFool wrote: Sat May 01, 2021 4:45 pm OP,

The first question would be do you really need to save for the house's down payment? The answer may be no for some people with a large taxable account. Between the emergency fund, annual savings, and the annual dividend/distribution of the taxable account, the money is more than enough for the house's 20% down payment. Or, a slight increase of emergency fund is more than enough. Then, you do not have to do anything special to prepare for this.

KlangFool
That's a great question! I was asking for myself and for my son, but we are in two very different situations. I'm in a situation where I can just follow the above.

He however is in a situation where he is diligently saving, but hasn't yet amassed a ton of wealth. He maxes out his 401k and a Roth and has plenty of emergency money. Now he's looking to park excess funds. He'll put the bulk into Total Stock Market, but is interested in the midterm to do more than a savings account. He doesn't yet have anything in a taxable account.
eyemgh,

I disagreed. It should be true for your son too. If he do it the same way, either he is buying a house that he cannot afford or he is doing it wrong.

You should run through the numbers:

A) Emergency fund size before buying the house.

B) Emergency fund size after buying the house.

C) Annual savings before buying the house

D) Annual savings after buying the house

E) The price of the house.

F) 20% down payment for the house.

The basic idea is

1) The annual savings before buying the house need to be big enough so that he could buy and keep the house after buying.

2) The emergency fund after buying the house need to be big enough to keep the house if there is an emergency.

If you add up all the numbers, you would find that if someone cannot pay for the 20% down payments via those 3 sources: emergency fund, annual savings, and taxable account with 100% stock. They cannot afford the house.

Please calculate the numbers.

KlangFool
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KlangFool
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Re: Midterm Taxable

Post by KlangFool »

slicendice wrote: Sat May 01, 2021 8:15 pm
If your son is in a high or ultrahigh cost of living location and it will take more than 4 years of savings to amass the downpayment he will need the stock market to help him get there.
slicendice,

I disagreed.

A) If the person is paid well enough to live in that area, it would not take 4 years.

B) If the person is not paid well enough to live in that area, there is no reason to buy a house in that area. It is not a place to be around long-term.

KlangFool
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slicendice
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Re: Midterm Taxable

Post by slicendice »

KlangFool wrote: Sat May 01, 2021 8:58 pm
slicendice wrote: Sat May 01, 2021 8:15 pm
If your son is in a high or ultrahigh cost of living location and it will take more than 4 years of savings to amass the downpayment he will need the stock market to help him get there.
slicendice,

I disagreed.

A) If the person is paid well enough to live in that area, it would not take 4 years.

B) If the person is not paid well enough to live in that area, there is no reason to buy a house in that area. It is not a place to be around long-term.

KlangFool
I don't think we disagree to a large extent. Until you have enough just invest in the market. At some point you probably will have enough whether that is in 3, 5 or 10 years, and then you can make the lifestyle choice to buy.or not. If you make real estate (owning) affordability the main criterion for whether to stay in a location you could be sacrificing your career prospects. VHCOL locations even if you can't afford to buy the real estate usually offer superior career opportunities which can shorten the time to financial independence. In many VHCOL locations renting + investing is more financially prudent than renting, saving and deferring taxable investing until you have enough money to tie up in an albatross of a house. I think my point is with all of the uncertainties in life especially when you are young, it makes more sense simply focusing on investing in the market which gives one more options over time.
KlangFool
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Re: Midterm Taxable

Post by KlangFool »

slicendice wrote: Sat May 01, 2021 9:59 pm
If you make real estate (owning) affordability the main criterion for whether to stay in a location you could be sacrificing your career prospects. VHCOL locations even if you can't afford to buy the real estate usually offer superior career opportunities which can shorten the time to financial independence. In many VHCOL locations renting + investing is more financially prudent than renting, saving and deferring taxable investing until you have enough money to tie up in an albatross of a house. I think my point is with all of the uncertainties in life especially when you are young, it makes more sense simply focusing on investing in the market which gives one more options over time.
slicendice,

I don't think we disagreed. My point is until the career prospect is REALIZED aka the person is actually making good enough money to stay in that area, do not commit by buying a house. Rent instead.

KlangFool
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Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

@klangfool and @slicendice,

I only used the house example as a for instance. He's not planning on buying where he lives. In fact, I strongly dissuaded him. The math doesn't make sense. He's paid well at this stage of his career, but houses are just too expensive where he's working right now. It was more of a "where do you park taxable money that pays more than high yield savings, but has less risk than VTSAX?" question. I just used the house as an example of something someone might be saving for. I think I red herring'd you. :shock:
slicendice
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Re: Midterm Taxable

Post by slicendice »

OK understood. I think it is hard to do better than I-bonds in taxable for a safe investment that has the bonus of unexpected inflation protection as well as tax deferred (State tax-free) interest accrual for up to 30 years. The only caveats with them are the initial 1 year lockup, a loss of 3 month's interest if redeemed prior to 5 years maturity, and you can only buy $10K per SS# directly per year. So it really comes down to how much he has available to save in taxable every year. if it is say $30K per year one could do worse than an 66:34 equity:I-bond mix.
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Re: Midterm Taxable

Post by KlangFool »

eyemgh wrote: Sat May 01, 2021 11:45 pm @klangfool and @slicendice,

I only used the house example as a for instance. He's not planning on buying where he lives. In fact, I strongly dissuaded him. The math doesn't make sense. He's paid well at this stage of his career, but houses are just too expensive where he's working right now. It was more of a "where do you park taxable money that pays more than high yield savings, but has less risk than VTSAX?" question. I just used the house as an example of something someone might be saving for. I think I red herring'd you. :shock:
Money is fungible. I only have cash and 100% stock in my taxable account. The bond is in my tax-advantaged accounts. That is tax efficient.

If I want to sell bond, I can sell stock in my taxable account. Then, exchange bond with stock in my tax-advantaged accounts.

There is no reason to keep bond in the taxable account and pay more taxes.

KlangFool
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KlangFool
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Re: Midterm Taxable

Post by KlangFool »

OP,

Keep an emergency fund of

A) 3 to 6 months
B) 6 to 12 months
C) 12 to 24 months

depending on your comfort level.

Keep an overall portfolio AA of 70/30 to 30/70.

Use 2 funds:

A) Target Retirement Fund or Vanguard Life Strategy Fund (fund of Funds) in your tax-advantaged accounts

B) 100% stock in your taxable account. Total World Index.

Save and contribute. Keep it fully automatic. One portfolio plus emergency fund to handle all short, mid, long, and whatever requirement.

One portfolio to rule it all!

KlangFool
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Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

KlangFool wrote: Sun May 02, 2021 8:28 am OP,

Keep an emergency fund of

A) 3 to 6 months
B) 6 to 12 months
C) 12 to 24 months

depending on your comfort level.

Keep an overall portfolio AA of 70/30 to 30/70.

Use 2 funds:

A) Target Retirement Fund or Vanguard Life Strategy Fund (fund of Funds) in your tax-advantaged accounts

B) 100% stock in your taxable account. Total World Index.

Save and contribute. Keep it fully automatic. One portfolio plus emergency fund to handle all short, mid, long, and whatever requirement.

One portfolio to rule it all!

KlangFool
It’s essentially what I’ve always done, although I haven’t had a lot outside of qualified plans because both my wife and I can contribute. We do now though. The Total World is an interesting approach. I’ll dig in more. Thanks!
slicendice
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Re: Midterm Taxable

Post by slicendice »

KlangFool wrote: Sun May 02, 2021 7:32 am
Money is fungible. I only have cash and 100% stock in my taxable account. The bond is in my tax-advantaged accounts. That is tax efficient.

If I want to sell bond, I can sell stock in my taxable account. Then, exchange bond with stock in my tax-advantaged accounts.

There is no reason to keep bond in the taxable account and pay more taxes.

KlangFool
State income taxes play a large role in determining whether that is a tax efficient strategy. For example in my state, long term capital gains, qualified dividends, and interest income are all treated as ordinary income. At the 24% federal and 9.3% state bracket, qualified dividends are taxed at 15 (or 18.6%) + 9.3% = 24.3-27.9% and Interest on treasury obligations at 24%. If treasury bonds were paying 5+% there might be an argument, but that hasn't been true for years now. The additional benefit of a bond allocation in taxable is that you can pay for intermittent non-emergency big ticket purchases cars, boats, new roof, new paint on the house without paying large amounts of capital gains taxes at the 24.3-27.9% rates or causing a jump in tax brackets. Essentially having some treasury bonds in taxable allows you to never need to sell stocks during your working years unless it is to realize a loss for tax purposes or buy real estate. I-bonds are even better because you can defer the taxation event until you actually need the money.

As for cash, I think it is a modest behavioral mistake to hold more than $10K in cash for more than a couple of years.
KlangFool
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Re: Midterm Taxable

Post by KlangFool »

slicendice wrote: Sun May 02, 2021 2:22 pm
As for cash, I think it is a modest behavioral mistake to hold more than $10K in cash for more than a couple of years.
slicendice,

I was unemployed for more than 1 year a few times.

KlangFool
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Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

slicendice wrote: Sun May 02, 2021 2:22 pm
KlangFool wrote: Sun May 02, 2021 7:32 am
Money is fungible. I only have cash and 100% stock in my taxable account. The bond is in my tax-advantaged accounts. That is tax efficient.

If I want to sell bond, I can sell stock in my taxable account. Then, exchange bond with stock in my tax-advantaged accounts.

There is no reason to keep bond in the taxable account and pay more taxes.

KlangFool
State income taxes play a large role in determining whether that is a tax efficient strategy. For example in my state, long term capital gains, qualified dividends, and interest income are all treated as ordinary income. At the 24% federal and 9.3% state bracket, qualified dividends are taxed at 15 (or 18.6%) + 9.3% = 24.3-27.9% and Interest on treasury obligations at 24%. If treasury bonds were paying 5+% there might be an argument, but that hasn't been true for years now. The additional benefit of a bond allocation in taxable is that you can pay for intermittent non-emergency big ticket purchases cars, boats, new roof, new paint on the house without paying large amounts of capital gains taxes at the 24.3-27.9% rates or causing a jump in tax brackets. Essentially having some treasury bonds in taxable allows you to never need to sell stocks during your working years unless it is to realize a loss for tax purposes or buy real estate. I-bonds are even better because you can defer the taxation event until you actually need the money.

As for cash, I think it is a modest behavioral mistake to hold more than $10K in cash for more than a couple of years.
What about minis? My son lives in CA (the tax structure I have no clue about) and Vanguard has Intermediate and Long term CA Municipal Bond Funds.

I think he's going to do something like 70/30 using VTSAX for equities based on the hassle of filling out extra tax forms if he does Total World, and is deciding on what to do with the 30.

Thanks!
BrokerageZelda
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Re: Midterm Taxable

Post by BrokerageZelda »

slicendice wrote: Sun May 02, 2021 2:22 pm State income taxes play a large role in determining whether that is a tax efficient strategy. For example in my state, long term capital gains, qualified dividends, and interest income are all treated as ordinary income. At the 24% federal and 9.3% state bracket, qualified dividends are taxed at 15 (or 18.6%) + 9.3% = 24.3-27.9% and Interest on treasury obligations at 24%. If treasury bonds were paying 5+% there might be an argument, but that hasn't been true for years now. The additional benefit of a bond allocation in taxable is that you can pay for intermittent non-emergency big ticket purchases cars, boats, new roof, new paint on the house without paying large amounts of capital gains taxes at the 24.3-27.9% rates or causing a jump in tax brackets. Essentially having some treasury bonds in taxable allows you to never need to sell stocks during your working years unless it is to realize a loss for tax purposes or buy real estate. I-bonds are even better because you can defer the taxation event until you actually need the money.
I would also note that Treasury securities (including I Bonds) are entirely exempt from state and local income taxes, which can be an additional advantage depending on your state of residence.
Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

BrokerageZelda wrote: Mon May 03, 2021 3:15 pm
slicendice wrote: Sun May 02, 2021 2:22 pm State income taxes play a large role in determining whether that is a tax efficient strategy. For example in my state, long term capital gains, qualified dividends, and interest income are all treated as ordinary income. At the 24% federal and 9.3% state bracket, qualified dividends are taxed at 15 (or 18.6%) + 9.3% = 24.3-27.9% and Interest on treasury obligations at 24%. If treasury bonds were paying 5+% there might be an argument, but that hasn't been true for years now. The additional benefit of a bond allocation in taxable is that you can pay for intermittent non-emergency big ticket purchases cars, boats, new roof, new paint on the house without paying large amounts of capital gains taxes at the 24.3-27.9% rates or causing a jump in tax brackets. Essentially having some treasury bonds in taxable allows you to never need to sell stocks during your working years unless it is to realize a loss for tax purposes or buy real estate. I-bonds are even better because you can defer the taxation event until you actually need the money.
I would also note that Treasury securities (including I Bonds) are entirely exempt from state and local income taxes, which can be an additional advantage depending on your state of residence.
That is also a possibility, one that slicendice favors. I'm not familiar with the logistics of purchase though. Can they be purchased through Vanguard? I understand there are potentially liquidity issues. Thanks!
orklc
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Re: Midterm Taxable

Post by orklc »

I'm probably doing it wrong. We've bought a house twice, but in neither case did we have any reasonable advance notion of how far away we were from being able to afford a house. As a result, what eventually became the down payment was just invested in VTSAX (well, the first case was before I know about VTSAX, but same idea). The two states were "maybe someday, houses are so expensive" and "oh, huh, our balance is high enough that this could really work" with almost no transition in between. Without knowing what our investment duration really was, I didn't really see a reason to prefer lower-risk lower-yield alternatives.
slicendice
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Re: Midterm Taxable

Post by slicendice »

eyemgh wrote: Mon May 03, 2021 3:40 pm
BrokerageZelda wrote: Mon May 03, 2021 3:15 pm
slicendice wrote: Sun May 02, 2021 2:22 pm State income taxes play a large role in determining whether that is a tax efficient strategy. For example in my state, long term capital gains, qualified dividends, and interest income are all treated as ordinary income. At the 24% federal and 9.3% state bracket, qualified dividends are taxed at 15 (or 18.6%) + 9.3% = 24.3-27.9% and Interest on treasury obligations at 24%. If treasury bonds were paying 5+% there might be an argument, but that hasn't been true for years now. The additional benefit of a bond allocation in taxable is that you can pay for intermittent non-emergency big ticket purchases cars, boats, new roof, new paint on the house without paying large amounts of capital gains taxes at the 24.3-27.9% rates or causing a jump in tax brackets. Essentially having some treasury bonds in taxable allows you to never need to sell stocks during your working years unless it is to realize a loss for tax purposes or buy real estate. I-bonds are even better because you can defer the taxation event until you actually need the money.
I would also note that Treasury securities (including I Bonds) are entirely exempt from state and local income taxes, which can be an additional advantage depending on your state of residence.
That is also a possibility, one that slicendice favors. I'm not familiar with the logistics of purchase though. Can they be purchased through Vanguard? I understand there are potentially liquidity issues. Thanks!
I bonds are purchased directly from the US treasury via the Treasury Direct website which is not flashy but pretty straightforward to use just setup an account link a bank account and transfer money. Other than the first year lockup period there are no liquidity issues with I-bonds, since they are non-marketable securities redeemed directly by the US treasury. Their main limitation is implementation in that you are only allowed to buy $10K per year so it can take a few years to convert for example an emergency fund held in cash to I-bonds. In terms of your previous comment the Vanguard CA municipal bond funds are fine also an option. I have noticed that many on this board that are in tax-brackets above 30% (who most benefit from these funds) will also allocate to treasuries in addition I guess to diversify to completely the credit and liquidity risks in the muni funds. Depending on your son's tax bracket he could prioritize buying $10K in I bonds every year, and split the remainder between either an intermediate-term or long term treasury etf like VGIT or VGLT and the CA long-term muni fund. If he is under 30% in his federal marginal tax bracket he could probably just stick to treasury funds and do fine.

In terms of equity funds it can be beneficial without in my opinion that much complexity in taxable to hold the US and International as separate positions. For example 50% VTI + 50% VXUS this can open up some tax-loss harvesting opportunities down the road.
Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

orklc wrote: Mon May 03, 2021 4:22 pm I'm probably doing it wrong. We've bought a house twice, but in neither case did we have any reasonable advance notion of how far away we were from being able to afford a house. As a result, what eventually became the down payment was just invested in VTSAX (well, the first case was before I know about VTSAX, but same idea). The two states were "maybe someday, houses are so expensive" and "oh, huh, our balance is high enough that this could really work" with almost no transition in between. Without knowing what our investment duration really was, I didn't really see a reason to prefer lower-risk lower-yield alternatives.
That's because you weren't actively planning and through serendipity the investment grew to where it was a possibility. It was in a higher risk vehicle where the risk didn't manifest.

That said, he may go that way anyway. He's 25 and mainly looking to build something to bridge to qualified retirement withdraw should he retire before then, build funds for a year of travel, etc.
Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

slicendice wrote: Mon May 03, 2021 4:56 pm
eyemgh wrote: Mon May 03, 2021 3:40 pm
BrokerageZelda wrote: Mon May 03, 2021 3:15 pm
slicendice wrote: Sun May 02, 2021 2:22 pm State income taxes play a large role in determining whether that is a tax efficient strategy. For example in my state, long term capital gains, qualified dividends, and interest income are all treated as ordinary income. At the 24% federal and 9.3% state bracket, qualified dividends are taxed at 15 (or 18.6%) + 9.3% = 24.3-27.9% and Interest on treasury obligations at 24%. If treasury bonds were paying 5+% there might be an argument, but that hasn't been true for years now. The additional benefit of a bond allocation in taxable is that you can pay for intermittent non-emergency big ticket purchases cars, boats, new roof, new paint on the house without paying large amounts of capital gains taxes at the 24.3-27.9% rates or causing a jump in tax brackets. Essentially having some treasury bonds in taxable allows you to never need to sell stocks during your working years unless it is to realize a loss for tax purposes or buy real estate. I-bonds are even better because you can defer the taxation event until you actually need the money.
I would also note that Treasury securities (including I Bonds) are entirely exempt from state and local income taxes, which can be an additional advantage depending on your state of residence.
That is also a possibility, one that slicendice favors. I'm not familiar with the logistics of purchase though. Can they be purchased through Vanguard? I understand there are potentially liquidity issues. Thanks!
I bonds are purchased directly from the US treasury via the Treasury Direct website which is not flashy but pretty straightforward to use just setup an account link a bank account and transfer money. Other than the first year lockup period there are no liquidity issues with I-bonds, since they are non-marketable securities redeemed directly by the US treasury. Their main limitation is implementation in that you are only allowed to buy $10K per year so it can take a few years to convert for example an emergency fund held in cash to I-bonds. In terms of your previous comment the Vanguard CA municipal bond funds are fine also an option. I have noticed that many on this board that are in tax-brackets above 30% (who most benefit from these funds) will also allocate to treasuries in addition I guess to diversify to completely the credit and liquidity risks in the muni funds. Depending on your son's tax bracket he could prioritize buying $10K in I bonds every year, and split the remainder between either an intermediate-term or long term treasury etf like VGIT or VGLT and the CA long-term muni fund. If he is under 30% in his federal marginal tax bracket he could probably just stick to treasury funds and do fine.

In terms of equity funds it can be beneficial without in my opinion that much complexity in taxable to hold the US and International as separate positions. For example 50% VTI + 50% VXUS this can open up some tax-loss harvesting opportunities down the road.
Thanks!

Since they are Vanguard ETFs, is there a big advantage of the ETF vs the equivalent mutual fund?
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climber2020
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Re: Midterm Taxable

Post by climber2020 »

eyemgh wrote: Sat May 01, 2021 4:32 pm For the mid term, say more than 3 years, but less than 10, think saving for a house down payment, where's the best place to park money that's taxable?
If you have a decent amount of bonds and those bonds are in your tax deferred accounts, you could continue investing in stocks in your taxable account according to your asset allocation.

When it comes time to buy the house, you could sell some stocks if they've been going up. You'll pay some capital gains taxes, but you'll still come out ahead compared to having held cash for all that time. If the market has just crashed, you could either not buy a house or sell some stocks in your taxable account and simultaneously exchange the same dollar amount of bonds for stocks in your tax deferred account; so you're indirectly selling bonds.
Topic Author
eyemgh
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Re: Midterm Taxable

Post by eyemgh »

climber2020 wrote: Mon May 03, 2021 5:06 pm
eyemgh wrote: Sat May 01, 2021 4:32 pm For the mid term, say more than 3 years, but less than 10, think saving for a house down payment, where's the best place to park money that's taxable?
If you have a decent amount of bonds and those bonds are in your tax deferred accounts, you could continue investing in stocks in your taxable account according to your asset allocation.

When it comes time to buy the house, you could sell some stocks if they've been going up. You'll pay some capital gains taxes, but you'll still come out ahead compared to having held cash for all that time. If the market has just crashed, you could either not buy a house or sell some stocks in your taxable account and simultaneously exchange the same dollar amount of bonds for stocks in your tax deferred account; so you're indirectly selling bonds.
Great idea! Like me though, he holds all his deferred money in a target fund so it rebalances automatically and bonds can't be selectively sold. I guess if he held the separately and rebalanced the net effect would be the same though.
orklc
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Re: Midterm Taxable

Post by orklc »

eyemgh wrote: Mon May 03, 2021 4:58 pm
orklc wrote: Mon May 03, 2021 4:22 pm I'm probably doing it wrong. We've bought a house twice, but in neither case did we have any reasonable advance notion of how far away we were from being able to afford a house. As a result, what eventually became the down payment was just invested in VTSAX (well, the first case was before I know about VTSAX, but same idea). The two states were "maybe someday, houses are so expensive" and "oh, huh, our balance is high enough that this could really work" with almost no transition in between. Without knowing what our investment duration really was, I didn't really see a reason to prefer lower-risk lower-yield alternatives.
That's because you weren't actively planning and through serendipity the investment grew to where it was a possibility. It was in a higher risk vehicle where the risk didn't manifest.

That said, he may go that way anyway. He's 25 and mainly looking to build something to bridge to qualified retirement withdraw should he retire before then, build funds for a year of travel, etc.
Yes, lack of a goal or deadline and an acceptable alternative (no house) if the risk materialized increased ability to take that risk. The first time around was only partway through the post-dot-com recovery, so that risk did materialize, but still produced a house once serendipity between assets, income, and house prices crossed. Or, as I said up front, I was doing it wrong by selling stocks still at a loss. In retrospect I'm glad we did.
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eyemgh
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Re: Midterm Taxable

Post by eyemgh »

orklc wrote: Mon May 03, 2021 6:00 pm
eyemgh wrote: Mon May 03, 2021 4:58 pm
orklc wrote: Mon May 03, 2021 4:22 pm I'm probably doing it wrong. We've bought a house twice, but in neither case did we have any reasonable advance notion of how far away we were from being able to afford a house. As a result, what eventually became the down payment was just invested in VTSAX (well, the first case was before I know about VTSAX, but same idea). The two states were "maybe someday, houses are so expensive" and "oh, huh, our balance is high enough that this could really work" with almost no transition in between. Without knowing what our investment duration really was, I didn't really see a reason to prefer lower-risk lower-yield alternatives.
That's because you weren't actively planning and through serendipity the investment grew to where it was a possibility. It was in a higher risk vehicle where the risk didn't manifest.

That said, he may go that way anyway. He's 25 and mainly looking to build something to bridge to qualified retirement withdraw should he retire before then, build funds for a year of travel, etc.
Yes, lack of a goal or deadline and an acceptable alternative (no house) if the risk materialized increased ability to take that risk. The first time around was only partway through the post-dot-com recovery, so that risk did materialize, but still produced a house once serendipity between assets, income, and house prices crossed. Or, as I said up front, I was doing it wrong by selling stocks still at a loss. In retrospect I'm glad we did.
Especially if you're in a booming real estate market!

The way I look at any asset, stock, house whatever, if you're selling it to buy something else, is that it's worth what it's worth at the time regardless of what it was worth previously. :D
slicendice
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Re: Midterm Taxable

Post by slicendice »

If he's only 25 he should take as much equity risk as he can bare, no more than 20% in bonds (excluding counting the emergency fund) and the bonds should be long term treasuries VGLT or the mutual fund equivalent share class (either one I don't think it matters).
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eyemgh
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Re: Midterm Taxable

Post by eyemgh »

slicendice wrote: Mon May 03, 2021 7:11 pm If he's only 25 he should take as much equity risk as he can bare, no more than 20% in bonds (excluding counting the emergency fund) and the bonds should be long term treasuries VGLT or the mutual fund equivalent share class (either one I don't think it matters).
In general I agree with this philosophy, maybe even all in on equities. The only hedge is what if he wants a new car, house, etc.? Is exposing those needed funds a good idea? That said...he has no plans for any of that, hence the catch 22.
slicendice
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Re: Midterm Taxable

Post by slicendice »

If he can realistically save the downpayment for the house in less then 3 years (assuming 5% year over year appreciation on houses, and a much larger emergency fund) cash is fine. If the house is something that yeah someday he would like to buy a house but no present firm plans then I would put it all in the market. Also, I have found that having plenty in the emergency fund (at least a year of expenses) makes me a better equity investor, able to handle the market declines with more equanimity, aggressively buying into them than if I only had 3-6 months expenses in safe assets with a job that could go poof in the next downturn. In terms of cars etc... I have always been lucky to get sub 1.5% financing, and paid off the loan in a year. if I could not get that I would do some combination of borrow from the bank of the emergency fund and/or sell some equities/LTT.
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eyemgh
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Re: Midterm Taxable

Post by eyemgh »

slicendice wrote: Mon May 03, 2021 9:58 pm If he can realistically save the downpayment for the house in less then 3 years (assuming 5% year over year appreciation on houses, and a much larger emergency fund) cash is fine. If the house is something that yeah someday he would like to buy a house but no present firm plans then I would put it all in the market. Also, I have found that having plenty in the emergency fund (at least a year of expenses) makes me a better equity investor, able to handle the market declines with more equanimity, aggressively buying into them than if I only had 3-6 months expenses in safe assets with a job that could go poof in the next downturn. In terms of cars etc... I have always been lucky to get sub 1.5% financing, and paid off the loan in a year. if I could not get that I would do some combination of borrow from the bank of the emergency fund and/or sell some equities/LTT.
He got a good rate on his car...$0 down, 0%, zero payment...from the bank of Mom and Dad. :D He certainly makes enough to buy something other than his Honda, but wisely hasn't.

I certainly agree on the cash. It gives comfort to weather the storm. I've been through 2000, 2008 and 2020. The cash helps me sleep the older I get. Never needed more than a few months for piece of mind back in the day.
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