Taxable Account Selection

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Topic Author
lvm919
Posts: 32
Joined: Fri Jul 24, 2020 7:42 pm

Taxable Account Selection

Post by lvm919 »

Hello,

I've been lurking for a while and have learned a lot from reading this board, so thank you all.

During the past year I've had the extremely good fortune of staying employed and even increasing my income. I am currently maxing out my tax advantaged accounts (401k, Roth IRA, HSA) and am going to start putting money not needed for emergency funds or short term needs in a taxable account. The question I have is what should I put there?

The new money is all going to either VTI or VXUS per my IPS, but I have some growth funds (Vanguard Small Cap Growth VBK and Vanguard MidCap Growth VOT) in my IRA's that seem like they would be more tax efficient. My marginal tax rate will be 24% Federal, 7% state/local.

I am trying to decide whether it makes more sense to sell the growth funds in the IRA and buy in taxable, and use the proceeds within the IRA to buy the new shares of VTI/VXUS in tax advantaged space, or whether it isn't really going to make much of a difference and I should just buy new shares of VTI/VXUS in taxable.

FWIW, my IPS says that I shouldn't sell any security once I have it unless there is a extremely compelling reason to do so to make it easier to stay the course. While I probably won't be buying new shares of VBK/VOT, I don't want to sell my current positions and switch everything to a simpler portfolio for this reason.
You will have to give back your multiples.
sycamore
Posts: 6359
Joined: Tue May 08, 2018 12:06 pm

Re: Taxable Account Selection

Post by sycamore »

lvm919 wrote: Tue May 18, 2021 12:41 pm I've been lurking for a while and have learned a lot from reading this board, so thank you all.
Welcome!

Regarding taxable account investing, some important things to know are:
1) Tax-efficient fund placement
2) Tax loss harvesting
3) Wash sale

Suggest you read those wiki articles to learn all the fine points but here's a quick summary:

- In regard to 1) using either growth stocks funds or "total" funds fit the bill, so your fund choices are fine.

- In regards to 2) and 3), eventually you'll have a position in your taxable account that has a loss and you may want to tax loss harvest it for the tax benefits: any realized loss amount above realized gains can offset up to $3000 in regular income. That's a good thing. The bad thing is you get to learn about "wash sale". Without going into all the weeds, the main problem scenario is you sell VTI for a loss in taxable and within 30 days (before or after) you buy VTI "replacement" shares in your IRA. In that scenario, you can never claim the capital loss because the transferred loss amount went into the IRA shares and you can't claim losses on IRA positions -- the Wash sale wiki article has more details. To avoid wash sale issues, some BHers will use a different security in taxable than in IRAs, e.g., Vanguard Large Cap Index fund instead of Total Market.
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retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Taxable Account Selection

Post by retiredjg »

Broad stock index funds are best used in taxable. The two most recommended art Total Stock Index and Total International Index. Those are the funds I would use.

Welcome to the forum. :happy
Topic Author
lvm919
Posts: 32
Joined: Fri Jul 24, 2020 7:42 pm

Re: Taxable Account Selection

Post by lvm919 »

Thank you for your advice. I decided to go with the growth funds as if they end up tanking, I think it will be easier for me (psychologically) to TLH and just exchange for VTI, thereby simplifying my portfolio a little bit.
You will have to give back your multiples.
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iceport
Posts: 6054
Joined: Sat Apr 07, 2007 4:29 pm

Re: Taxable Account Selection

Post by iceport »

lvm919 wrote: Wed May 19, 2021 11:11 am Thank you for your advice. I decided to go with the growth funds as if they end up tanking, I think it will be easier for me (psychologically) to TLH and just exchange for VTI, thereby simplifying my portfolio a little bit.
Just a word of caution: Funds held for a while taxable accounts eventually end up building unrealized capital gains — sometimes mountains of them. At that point, the tax cost of liquidating any unwanted holdings could be prohibitive.

For that reason, it's usually recommended that you only select funds for taxable accounts that you know you will want to hold "forever," no matter what stage of life you're in.

retiredjg's recommendations meet that requirement perfectly!
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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