Taxable Account - a Swiss Army Knife for Savers

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SantaClaraSurfer
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Taxable Account - a Swiss Army Knife for Savers

Post by SantaClaraSurfer » Thu May 21, 2020 3:59 pm

We've only recently begun to build up our taxable brokerage account, and, even in the midst of a financial crisis, I've come to see to see this tool as an underappreciated, at least to me, Swiss Army Knife of wealth building and financial well being.

Let me explain.

We are a mid-career household with two college age children. We bank at a credit union, where a good chunk of our Emergency Fund resides, we contribute regularly to our 401(k)s (which are on Boglehead Target Date autopilot), and we then conduct the rest of our savings and investing (outside of our Treasury Direct purchases) via Schwab.

Having a brokerage account was new to us as we had previously lived our lives in a "pre-Boglehead" world where anything beyond our 401(k)'s revolved around whittling down student loans and consumer debt.

Speaking for myself, I came into taxable savings and investing with a fundamental misperception about what a Schwab account would mean for us. To sum it up simply, I saw our taxable account as a "place where we would buy equities while aiming at maximizing return."

I was so wrong.

Instead, I now see the taxable accounts as the fulcrum point for mid-career couples like us to build and manage wealth, maintain flexibility, create targeted savings for multiple goals, and to help us make better financial decisions and ultimately plan and execute our long term financial future. Each of the smaller uses of the taxable account adds up to a sum that is very much greater than its parts. Here's some examples:
  • We now save for Vacations, Home Improvements, and other life goals well in advance. That money lives in Money Funds in taxable. As those funds grow, we can expand where we put them and how we put them to use.
  • We track a separate account for our college age children where we've created multi-tiered funds to support them (ex. Future year's tuition, Emergency Fund for College Years, Long-Term Emergency Fund/Gift planning.)
  • We take windfalls that go above our Investing/Savings goal for the year (tax returns, one time gifts/bonuses, rebates) and drive them into longer term interest earning vehicles and investments that support our overall goals.
  • We research and experiment with Equity and Bond investments to hone our asset allocation and investment strategy. (The research and tracking functions at Schwab are fantastic.) This has allowed us to try on for size two social good funds we would not have considered otherwise. It's also caused us to want to keep things simpler after being burned by complexity.
  • We can park/save an appropriate (ie. small) portion of company stock grants within our taxable creating additional opportunities for one-time expenditures or gifting/donating.
The upshot of this is that in addition to investing in equities and our bond allocation, we've used the Schwab account to shift the spend portion of our expenses much further back in our savings pipeline, giving us access to much more liquidity to adapt to changing situations. Unlike our Treasury Direct bonds or our 401(k), everything in our taxable can move or be repurposed very quickly as needs arise. These are explicitly not Emergency Funds, so as we build the account their value becomes an increasingly powerful lever that we can use to further and expand our goals. In fact, that flexibility has its own inherent value. For example, having the option of purchasing things outright, if we choose, changes negotiations for durables, repairs or a vehicle.

That being said, these funds do have an "emergency/well-being" component. Take the current pandemic and market downturn. Since our brokerage account funds are roughly 50/50, we were able to rebalance into equities all the way through the downturn without significantly impacting our college funds or long term emergency funds. As we're not taking a typical vacation for the foreseeable future, we have been able to slow the contributions to that fund and amp up our reserves while we rebalance. Shifting the contributions makes sense, and, so far, it's worked.

In sum, for myself, I care less about "maxing" the return in taxable equity investments now than I ever thought that I would. Instead, I see this account as a lever that will grow increasingly powerful as we save and invest more. There's more things we can do, and more productive financial conversations we can have, when we are working out of the context of a growing and diversified taxable account.

It's not where I thought we would end up when we started with Schwab, but I'll take it as it is a much better outcome holistically. In fact, I wish there were more discussions of ways to leverage brokerage accounts here on these forums since they are much more powerful than the typical discussion of where to hold Bond funds or taxation. They truly are Swiss Army Knives for those interested in maxing their utility. Thank you for reading.

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Harry Livermore
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Harry Livermore » Fri May 22, 2020 6:42 am

I have an Etrade account (taxable) that has roughly 3% of our net worth/ 5% of our liquid investments, in various ETFs and individual stocks, and a small amount of cash in the sweep account. In addition, I hold a nice chunk of VTSAX and a tiny amount of STAR in a taxable account at VG that maybe amounts to another 3% of liquid.
The money in Etrade is an outgrowth of my early investing career, when I would research and choose individual stocks and grow my holdings through company-direct DRIPs. Over the last few years I have consolidated these holdings at the brokerage for simplicity, and have the dividends paid into the sweep account.
I've long thought that we would use this money for the "in between" years: post high-earnings working years, but pre-RMD and pension payouts/SS. At that point we'd be debt free, with two rental property income streams (perhaps still generating paper losses) Cashing in individual stocks and ETFs then would be the least costly in terms of taxes, and allow us to delay SS and also allow IRAs and Roths to continue to grow.
It's also possible that during these years, we could do some more Roth conversions that would be more painful today, when we are paying top rates.
I'm not sure I'd use the term "Swiss Army Knife", but I believe that having some tax diversity is useful.
Cheers

ETA: added the idea of Roth conversions
Last edited by Harry Livermore on Fri May 22, 2020 9:56 am, edited 1 time in total.

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tipswatcher
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by tipswatcher » Fri May 22, 2020 7:14 am

I do think having sizable investments in a taxable account is a wise choice. If you overload your non-Roth retirement accounts you will face a big-time tax bite at age 72, when RMDs kick in along with the dreaded Medicare IRMAA add-on fees.

Anyone who has a 401k plan that matches contributions should at least invest enough there to get the max. We did a lot more, saving about 20% in our work income in 401k plans. Now we face the RMD time-bomb. (It's a nice problem to have, I admit). About 3/5ths of our total assets are in traditional IRAs and 401ks. And yes, we are doing Roth conversions but that is good only up to a point, and then the taxes and IRMAA fees are too high.

I happen to have a ladder of TIPS in a taxable Treasury Direct account, which runs contrary to the usual advice. But now, at age 66, I am letting those TIPS mature each year (creating a negligible taxable event) and using that money to tide us over until the RMDs begin. On the flip side I continue to buy I Bonds to keep inflation-protection in my portfolio. I Bonds are sort of like an IRA hybrid, tax-deferred, but no RMDs and no taxes until you redeem them.
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by MnD » Fri May 22, 2020 7:22 am

1986-1990 we built up a $70K taxable account 100% equity and never added to it again.
IRA limits were very low, my 401-K limit was low and DW did not have a 401-K option. By 1990 we had enough options to direct what we wanted to save to retirement accounts. We never considered it a retirement account and spent from it for emergencies and big ticket items from time to time.
Sometimes it would go up enough in a year to buy a new car for cash. It has varied from around $60K to $150K and we've spent multiple hundreds of thousands of dollars from it. Currently $135K. We retired exactly when planned (age 56) with more in retirement accounts than we planned. The taxable account pulled forward a lot of enjoyment from what investing can add to life in the decades prior to retirement. It's not all about the future which may or may not come to pass as anticipated. :beer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by livesoft » Fri May 22, 2020 7:23 am

We have contributed the maximums allowed to all 401(k), 403(b), traditional IRAs, Roth IRAs, and HSAs throughout our lifetimes.

I think this idea of RMDs being a tax poor-teedo applies only to those who were not wise enough to retire earlier and start using that money for Roth conversion or living the soft life.

A taxable account is a great thing, too, but not at the expense of tax-advantaged investments.

And for the OP, here is a way to "leverage" a taxable account:
https://www.bogleheads.org/wiki/Placing ... ed_account
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acegolfer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by acegolfer » Fri May 22, 2020 7:34 am

SantaClaraSurfer wrote:
Thu May 21, 2020 3:59 pm
In fact, I wish there were more discussions of ways to leverage brokerage accounts here on these forums since they are much more powerful than the typical discussion of where to hold Bond funds or taxation. They truly are Swiss Army Knives for those interested in maxing their utility. Thank you for reading.
There are many discussions about using taxable accounts to park emergency fund. It's not recommended to everyone but it works for certain ppl.

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SantaClaraSurfer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by SantaClaraSurfer » Fri May 22, 2020 1:32 pm

livesoft wrote:
Fri May 22, 2020 7:23 am
A taxable account is a great thing, too, but not at the expense of tax-advantaged investments.

And for the OP, here is a way to "leverage" a taxable account:
https://www.bogleheads.org/wiki/Placing ... ed_account
I agree with your tax-advantaged advice, and we both max our 401(k)s and purchase I-bonds.

Personally, however, I would not use that technique for an Emergency Fund.

First, I prefer to leave our 401(k)s as close to set and forget mode as possible (My wife is 100% TDF, I rebalance 1x per year), I think that is the best long term approach for retirement funds, and, second, we try to keep the bulk of Emergency Funds as cash equivalent (Money Market/Money Fund).

By leverage I'm referring mostly to the flexibility that comes as savings pools aggregate within the non-equities portion of a taxable account.

There are needs/opportunities that you might not have saved for explicitly but are advantageous: attending a weekend seminar, consulting a lawyer, helping a young 'independent' adult with a car repair, and it's much easier to pull the trigger on a novel expense when you have ready funds that you can rebalance. In effect the money can serve multiple purposes, as needed.

Put another way, if given the choice between $300,000 invested in a vacation cabin or a brokerage account, one might see the choice as simply based on the potential returns, ie. real estate versus equities/bonds.

However, I now see that the advantage of the liquidity as being worth much, much more than even the returns in practice. I'd go for the taxable account and rent an Air Bn'b.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by livesoft » Fri May 22, 2020 1:45 pm

SantaClaraSurfer wrote:
Fri May 22, 2020 1:32 pm
However, I now see that the advantage of the liquidity as being worth much, much more than even the returns in practice. I'd go for the taxable account and rent an Air Bn'b.
And you wouldn't even attempt to pay off a home mortgage any earlier than necessary. :)
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Triple digit golfer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Triple digit golfer » Fri May 22, 2020 1:58 pm

Our taxable account allows me to sleep at night. I like knowing there's a big pile of accessible funds. I have considered paying down more on the mortgage, but I won't because I value the liquidity and I am confident that our 80/20 portfolio will outperform the mortgage rate.

Prior to investing, I just assumed that anything not in a 401k goes toward the mortgage or just sits in a savings account.

Now, we keep only a couple months of expenses in a savings account. Everything else gets invested tax efficiently. The taxable account outside of the savings is 100% S&P 500 index. In our tax deferred accounts we hold bond index funds and equity index funds. In my Roth IRA we hold equity index funds.

If cash is needed for something like a new car, I will plan ahead and stop adding to taxable equities in advance, or simply sell taxable equities to pay for it. If equities were above desired AA, I'm done. If they were below, I will exchange bonds to equities in tax deferred accounts. In other words, always sell what is high, and maintain desired AA.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Portfolio7 » Fri May 22, 2020 3:08 pm

This is good advice. It's possible to ride the ragged edge on liquidity (I should know, I've been doing it for near on 15 years), but I woudn't advise it.

We had a $70K living/emergency/whatever fund in our early 30's, whose purpose was to get us through the first 5 years or so of our kid's lives, until DW started working again. But life changes, and DW went to grad school, and our oldest was special needs with special medical costs, and the $70K was gone in 5 or 6 years. Not that we made bad decisions; I'd argue that the npv (or the emotional present value in a few cases) was very strong on virtually all of our spending - but to some extent we took our eye off the ball.

We're still doing well; but sometimes you only recognize your luck when looking in the rear view mirror.
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SantaClaraSurfer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by SantaClaraSurfer » Fri May 22, 2020 7:45 pm

I want to thank everyone who replied, I read and appreciate every response.

I am new to this and still have a shock when something doesn't turn out like I expected. This one was pleasant.

I've been very happy with Schwab. It's really helped my wife and I leave our 401(k)s be, while we use our brokerage account frequently, mostly for direct work with our savings goals and college age student funds.

This thread has helped me realize what was already becoming apparent: that the experience of financial well-being in your 40s, 50s and 60s can really be shaped by a healthy taxable. And, contrary to my earlier misconception, that financial well-being is driven more by savings and steady stewardship than by using the brokerage account as a vehicle to make "exciting" equity investments.

Our social security/pension/401(k)/Treasury Direct etc. are the foundation of our true retirement nest egg. Our taxable will be where we build the funds (including sensible Boglehead investments) to enjoy the road we take to get there, and navigate the transition.

Btw, about the only thing I'm not grokking here is tax aversion. I'm never sure if Bogleheads are tax averse in general (ie. opposed to paying tax in general) or simply looking for tax optimization. Our financial planner, who helped set us on this course, put taxes of the kind that are unavoidable (as opposed to based on poor execution) squarely in the "good kind of problem to have" category. Having gone from struggling with debt and making too little income, I've seen my taxation grow by leaps and bounds, and from that perspective, I've welcomed it every step of the way since it means I'm making much more income!! Plus the 401(k) deduction for maxing out is a huge savings that makes my contributions pack more of a punch than when my tax rate was much, much lower and I really had to think about the opportunity cost of contributing or taking the income. It's almost like I can spot the market a 35%+ drop in advance now. I don't take that for granted.

Thanks!!

Triple digit golfer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Triple digit golfer » Fri May 22, 2020 7:56 pm

Minimizing taxes should not be the goal. Maximizing after-tax return should be.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by New Providence » Fri May 22, 2020 8:03 pm

I have used my Taxable Account to make big bets......and the end result is that the house always wins. :oops:

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by FiveK » Fri May 22, 2020 8:07 pm

SantaClaraSurfer wrote:
Fri May 22, 2020 7:45 pm
I'm never sure if Bogleheads are tax averse in general (ie. opposed to paying tax in general) or simply looking for tax optimization.
For the vast majority, likely the latter.
...I've seen my taxation grow by leaps and bounds, and from that perspective, I've welcomed it every step of the way since it means I'm making much more income!!
There is much truth to that. At the same time, ol' Learned Hand's comments, Famous Tax Quotes #4 & #5 - No Patriotic Duty to Increase Taxes, would probably be endorsed by most Bogleheads.

E.g., the choice of Traditional versus Roth probably won't make or break anyone, but one has to make some choice so it's probably worth the thousands of dollars per the limited hours it takes to do some back-of-the-envelope calculations guiding the choice.

See also Prioritizing investments and Investment Order for those suggestions.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by absolute zero » Fri May 22, 2020 8:47 pm

Id be interested if there was some reliable data on the growth of 401k plans that allow after-tax contributions. In my opinion, the “mega backdoor Roth” pretty much steals any ounce of “thunder” that taxable accounts have. By stuffing 20-30k per year into your Roth instead of your taxable account, you can very quickly gain huge amounts of liquidity. Hard to see any advantage of taxable accounts at that point.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by lazynovice » Fri May 22, 2020 11:14 pm

They must be nice to have. None of our three employers over the last 30 years have had the option.

absolute zero wrote:
Fri May 22, 2020 8:47 pm
Id be interested if there was some reliable data on the growth of 401k plans that allow after-tax contributions. In my opinion, the “mega backdoor Roth” pretty much steals any ounce of “thunder” that taxable accounts have. By stuffing 20-30k per year into your Roth instead of your taxable account, you can very quickly gain huge amounts of liquidity. Hard to see any advantage of taxable accounts at that point.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by aristotelian » Fri May 22, 2020 11:34 pm

I like the first conception ("place to buy equities"). No need to make it any more complicated than that.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Paul K » Fri May 22, 2020 11:35 pm

I think OP is discovering that having money makes life easier. I fully agree.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by absolute zero » Sat May 23, 2020 9:42 am

lazynovice wrote:
Fri May 22, 2020 11:14 pm
They must be nice to have. None of our three employers over the last 30 years have had the option.

absolute zero wrote:
Fri May 22, 2020 8:47 pm
Id be interested if there was some reliable data on the growth of 401k plans that allow after-tax contributions. In my opinion, the “mega backdoor Roth” pretty much steals any ounce of “thunder” that taxable accounts have. By stuffing 20-30k per year into your Roth instead of your taxable account, you can very quickly gain huge amounts of liquidity. Hard to see any advantage of taxable accounts at that point.
To clarify, no one had access to the “mega backdoor Roth” maneuver 20-30 years ago. The IRS did not truly enable it as a process until 2015.

But yes, I agree, for high savers they are very nice to have.

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SantaClaraSurfer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by SantaClaraSurfer » Sun May 24, 2020 9:40 am

Paul K wrote:
Fri May 22, 2020 11:35 pm
I think OP is discovering that having money makes life easier. I fully agree.
Yes, that's a good part of it!

In practical terms, we live on the budget from when we made 40% of the income we do know.

But now, after we max our retirement accounts, we save or invest the rest at Schwab and then allocate some of those funds back out to ourselves and to the kids.

My discovery, as it relates to brokerage accounts, is that I'm liking the savings/parking/spending component of our Schwab account as much or more than I do the ETF investing component.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by bertilak » Sun May 24, 2020 9:50 am

As a retiree, my preferences of where I want my money to BE is as follows:

BEST: Roth IRA
BETTER: Taxable account
(not so) GOOD: Traditional IRA

Everything in a ROTH is mine, tax free.
I only pay taxes on gains in a taxable account.
I pay max tax on everything taken out of a traditional IRA.
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by anon_investor » Sun May 24, 2020 9:56 am

Paul K wrote:
Fri May 22, 2020 11:35 pm
I think OP is discovering that having money makes life easier. I fully agree.
+1.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by assyadh » Sun May 24, 2020 5:10 pm

bertilak wrote:
Sun May 24, 2020 9:50 am
Everything in a ROTH is mine, tax free.
Don't underestimate the power of changing laws. Especially when considering decades. The account is still a government sponsored one, endorsed by a section in the tax code, which you have 0 control over.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by FrankTheViking » Sun May 24, 2020 5:57 pm

Don't forget margin loans. We don't keep an emergency fund, if for some reason we need to come up with a cold hard cash sum that can't be put on a credit card (read: can't be paid off with cash flow in a month) we can always take out a loan at 3.5% interest. Love me some taxable! :sharebeer
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by decapod10 » Sun May 24, 2020 8:16 pm

I think if I'm reading you correctly OP, it seems like one large aspect of what you are talking about is planning for "lumpy expenses" I think Willthrill called them once. Large but irregular expenses. There are many expenses that seem like "emergencies" but we could probably plan for: we need a new car, we need a new roof, we need money to go on a big vacation, etc. Converting those "one-off" expenses into monthly expenses and saving that money somewhere helps us be prepared when we need to make large purchases.

I honestly haven't found taxable brokerage accounts that useful for those "earmarked funds" as I call them on my tracking spreadsheet, though I'm glad that you have found them useful for yourself. Pretty much everything goes into one online savings account, or sometimes individual treasury bills, and then tracked via a spreadsheet. For us, I don't think that stocks would be appropriate, but there could be a larger role for bonds in there somewhere. However I've been more comfortable just keeping the money in an online savings account and calling it a day.

For college/education we use 529 accounts, for retirement we use 401k and IRA (we don't have any excess retirement funds outside of those accounts, though if we did then a taxable brokerage account would be the next step), and everything else is in an online savings account.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by JBTX » Sun May 24, 2020 8:26 pm

With insanely low long term bond yields, at the moment options like ibonds, eebonds if held 20 years or even paying off 3%+ mortgages are seemingly more attractive in certain circumstances vs having low yield intermediate or long term bonds in tax deferred accounts. Our ability to pursue those options will be somewhat limited since most of our investments are in tax advantaged retirement accounts.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by as9 » Sun May 24, 2020 8:55 pm

assyadh wrote:
Sun May 24, 2020 5:10 pm
bertilak wrote:
Sun May 24, 2020 9:50 am
Everything in a ROTH is mine, tax free.
Don't underestimate the power of changing laws. Especially when considering decades. The account is still a government sponsored one, endorsed by a section in the tax code, which you have 0 control over.
Surely if the law changed it would be for all contributions after X date. Otherwise it would be like cutting SS by 30% and applying it to people claiming now.

Quaestner
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Quaestner » Sun May 24, 2020 10:04 pm

Probably 40% of our portfolio is in taxable. It does offer many benefits, as you are learning! That said, don’t pay unnecessary taxes. For example, use a 529 for college savings, tax loss harvest, and donate appreciated shares to charities via donor advised fund in some years do you can itemize.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by pascalwager » Sun May 24, 2020 10:18 pm

A retiree, I've had taxable accounts for a long time: local bank checking/savings, US Treasury, Charles Schwab, and Vanguard. Bank and Treasury were the oldest and allowed me to lump-sum into a DFA stock portfolio at Schwab in 1995. Then, after contributing to the max at work (deferred comp) and ROTH, I opened up a MMF at Vanguard. Now, 38% of my portfolio is in taxable: DFA stocks at Schwab; stocks, bonds and MMF at Vanguard. (Remainder, 62%, is in Rollover IRA, ROTH, and variable annuity.)

The Schwab account has been unused since 1995 (not even rebalanced since 2011), but the Vanguard account has continuously changed through the years. I've used it mainly to help buy a house, three new cars, pay taxes, and receive RMDs. I keep a pretty good buffer in my bank accounts for smaller expenses.

I came to investing through the back door and knew nothing about stocks until I already had saved $400k in T-Bills. So I already had large taxable accounts long before I became informed about retirement accounts.

Note: When I purchased the DFA stock funds at Schwab, I also purchased a variable annuity (tax-deferred) with DFA stock funds through an insurance company--not a wise investment--but it was recommended by an advisor.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by gblack » Sun May 24, 2020 10:23 pm

I agree with a lot of what's been said in these posts.

I count taxable, Roth, and bank accounts as real money. Whereas 401K and SEP IRA balances are a bit misleading. Depending on ones financial situation in the future, you can end up losing a good chunk of that money to taxes, penalties, and/or be required to take an RMD.

IMO, probably the sloppiest math thing we all do with retirement and net worth calculation is treat all these dollars as the same when they are not.

Plus, I really value the option of doing nothing unless I want or need to. Taxable allows that with very little complication.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by assyadh » Sun May 24, 2020 11:05 pm

as9 wrote:
Sun May 24, 2020 8:55 pm
assyadh wrote:
Sun May 24, 2020 5:10 pm
bertilak wrote:
Sun May 24, 2020 9:50 am
Everything in a ROTH is mine, tax free.
Don't underestimate the power of changing laws. Especially when considering decades. The account is still a government sponsored one, endorsed by a section in the tax code, which you have 0 control over.
Surely if the law changed it would be for all contributions after X date. Otherwise it would be like cutting SS by 30% and applying it to people claiming now.
I raise you with the GILTI tax which was retroactive for instance.

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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Mountain Doc » Mon May 25, 2020 9:30 pm

bertilak wrote:
Sun May 24, 2020 9:50 am
As a retiree, my preferences of where I want my money to BE is as follows:

BEST: Roth IRA
BETTER: Taxable account
(not so) GOOD: Traditional IRA

Everything in a ROTH is mine, tax free.
I only pay taxes on gains in a taxable account.
I pay max tax on everything taken out of a traditional IRA.
These preferences are rational at the time of withdrawals. But just to be clear, that does not mean an accumulator should prioritize taxable contributions over traditional IRAs. The majority of accumulators are better off in the long run prioritizing traditional IRA/401k contributions before making taxable investments (the notable exception being someone who expects to be in a higher tax bracket during retirement than during their working years).

aristotelian
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by aristotelian » Mon May 25, 2020 11:33 pm

bertilak wrote:
Sun May 24, 2020 9:50 am
As a retiree, my preferences of where I want my money to BE is as follows:

BEST: Roth IRA
BETTER: Taxable account
(not so) GOOD: Traditional IRA

Everything in a ROTH is mine, tax free.
I only pay taxes on gains in a taxable account.
I pay max tax on everything taken out of a traditional IRA.
This is true but I would rather have, say, $500K in Traditional IRA than $400K in Roth or $375K Taxable.

pascalwager
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by pascalwager » Tue May 26, 2020 2:23 am

bertilak wrote:
Sun May 24, 2020 9:50 am
As a retiree, my preferences of where I want my money to BE is as follows:

BEST: Roth IRA
BETTER: Taxable account
(not so) GOOD: Traditional IRA

Everything in a ROTH is mine, tax free.
I only pay taxes on gains in a taxable account.
I pay max tax on everything taken out of a traditional IRA.
I might have been better off in retirement by avoiding the workplace IRA, but it did provide a regimen for auto-buying stocks over a long period. I might have wavered if I were buying stocks in taxable accounts. I'm sure I would have saved just as much, but it might have ended up in T-Bills or a MMF.

lostdog
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by lostdog » Wed May 27, 2020 12:07 pm

bertilak wrote:
Sun May 24, 2020 9:50 am
As a retiree, my preferences of where I want my money to BE is as follows:

BEST: Roth IRA
BETTER: Taxable account
(not so) GOOD: Traditional IRA

Everything in a ROTH is mine, tax free.
I only pay taxes on gains in a taxable account.
I pay max tax on everything taken out of a traditional IRA.
A taxable account is really nice too when you're in the 12% tax bracket.
Global Market Cap Equity || Taxable: VTSAX+VTIAX || IRA: VTWAX

CurlyDave
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by CurlyDave » Wed May 27, 2020 3:06 pm

pascalwager wrote:
Tue May 26, 2020 2:23 am
bertilak wrote:
Sun May 24, 2020 9:50 am
As a retiree, my preferences of where I want my money to BE is as follows:

BEST: Roth IRA
BETTER: Taxable account
(not so) GOOD: Traditional IRA

Everything in a ROTH is mine, tax free.
I only pay taxes on gains in a taxable account.
I pay max tax on everything taken out of a traditional IRA.
I might have been better off in retirement by avoiding the workplace IRA, but it did provide a regimen for auto-buying stocks over a long period. I might have wavered if I were buying stocks in taxable accounts. I'm sure I would have saved just as much, but it might have ended up in T-Bills or a MMF.
I don't think you you would have been better off. The money in your IRA got there without ever being taxed in the first place, so you could put more aside at the same pain level as a smaller amount in a taxable account.

teaman
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by teaman » Wed May 27, 2020 3:38 pm

For folks who have Mega Backdoor Roth (MBR) option available, it makes sense to prioritize this one over a taxable account, correct?

Couple of issues I can think of with MBR are:

1. It would result in a tax nightmare if your employer's 401k plan does not pass the IRS' annual ADP/ACP test in which case your contributions would be returned to you (likely late into the tax season). I don't know how earnings on those after-tax contributions are handled if the plan fails the tests

2. I know that you'd have to wait for 5 years from the year you've started contributing to be able to withdraw your contributions penalty-free. However, I'm not sure if this is still valid if one has had a Roth IRA account for > 5 years, prior to making after-tax contributions + in-service distributions to a Roth IRA, i.e; can I withdraw those MBR contributions penalty-free before 5 years if I've had a Roth IRA for >5 years?
Last edited by teaman on Wed May 27, 2020 4:38 pm, edited 1 time in total.

Now Boarding
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by Now Boarding » Wed May 27, 2020 3:44 pm

I was in some ways forced to start investing with a taxable account--I began my career as a teacher overseas and didn't have access to US-based retirement vehicles. This turned out to be a blessing, though, because I threw everything I made into my taxable and let it ride. I teach and live at a boarding school in New England now and most of my investing is done with a Roth IRA and 403(b).

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yangtui
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by yangtui » Wed May 27, 2020 3:52 pm

Even better than a taxable account is having majority ownership of a large corporation. When you need cash to buy interesting things you can sell shares of your company. You can also borrow against it at 1% like Mark Zuckerberg when he needed cash to buy his house. As others have already said, the overall lesson here is that it is better to have money than to not have money.

primetime5
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by primetime5 » Wed May 27, 2020 10:15 pm

Very well said. My taxable account is by far my favorite. I have used it to purchase some great private equity deals that have done well. And cap gains taxes are very reasonable imo. Mostly, like you said, the flexibility is the big draw. I'm hoping to hit FIRE in a few years and that doesn't work out unless you have a sizable taxable account. I hope to have that plus a large solo 401k balance that will just grow untouched for the next 20 years.

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rob
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by rob » Wed May 27, 2020 10:27 pm

assyadh wrote:
Sun May 24, 2020 11:05 pm
as9 wrote:
Sun May 24, 2020 8:55 pm
assyadh wrote:
Sun May 24, 2020 5:10 pm
bertilak wrote:
Sun May 24, 2020 9:50 am
Everything in a ROTH is mine, tax free.
Don't underestimate the power of changing laws. Especially when considering decades. The account is still a government sponsored one, endorsed by a section in the tax code, which you have 0 control over.
Surely if the law changed it would be for all contributions after X date. Otherwise it would be like cutting SS by 30% and applying it to people claiming now.
I raise you with the GILTI tax which was retroactive for instance.
Lots of other ways to nullify this - means testing free withdrawals, increased sales tax, inclusion in SS calcs etc. Never assume taxes play the same rules - it's a fluid thing over time.

(edit) I have a lot of $ in traditional IRA's that were once the "best" option once 401K was max'ed along with rollover IRA's that cannot be rolled into my current employers plan. With the back-door roth that now exists - it looks like a stupid idea.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

assyadh
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by assyadh » Wed May 27, 2020 10:49 pm

rob wrote:
Wed May 27, 2020 10:27 pm
assyadh wrote:
Sun May 24, 2020 11:05 pm
as9 wrote:
Sun May 24, 2020 8:55 pm
assyadh wrote:
Sun May 24, 2020 5:10 pm
bertilak wrote:
Sun May 24, 2020 9:50 am
Everything in a ROTH is mine, tax free.
Don't underestimate the power of changing laws. Especially when considering decades. The account is still a government sponsored one, endorsed by a section in the tax code, which you have 0 control over.
Surely if the law changed it would be for all contributions after X date. Otherwise it would be like cutting SS by 30% and applying it to people claiming now.
I raise you with the GILTI tax which was retroactive for instance.
Lots of other ways to nullify this - means testing free withdrawals, increased sales tax, inclusion in SS calcs etc. Never assume taxes play the same rules - it's a fluid thing over time.

(edit) I have a lot of $ in traditional IRA's that were once the "best" option once 401K was max'ed along with rollover IRA's that cannot be rolled into my current employers plan. With the back-door roth that now exists - it looks like a stupid idea.
The SECURE act killed stretch IRAs. That's another example of things out of the control of the regular investor.
But I still agree with bertilak in the sense that he is right to use whatever tool is the best at the time. Just planning it will not change over the course of decades is really ambitious. 2020 is the year when you can pull 100k penalty free from a 401k after all .

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tipswatcher
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Re: Taxable Account - a Swiss Army Knife for Savers

Post by tipswatcher » Thu May 28, 2020 7:58 am

Don't underestimate the power of changing laws. Especially when considering decades. The account is still a government sponsored one, endorsed by a section in the tax code, which you have 0 control over.
I think it's a fair assumption that the top U.S. income tax bracket will be higher in future years, and it will be much harder to hold your marginal tax rate to 22%. It's an assumption, but U.S. revenue is going to need to rise, beyond the growth that comes with a 2% increase in GDP.

I have also heard speculation (Ric Edelman of Financial Engines, for one) that the U.S. could suddenly change tax laws to tax Roth distributions, even after people paid hefty taxes for Roth conversions. Edelman is therefore not a fan of Roth conversions, and discourages them. (I'm just a listener, not a customer or a fan.)

But my thinking is that higher marginal tax rates and higher top tax rates are much more likely than a step to make Roth distributions taxable. So I'm a fan of Roth conversions. If any change is coming, I could see the U.S. putting a tax on inherited Roth IRAs, which would make a lot of people angry, but eventually, "this debt will destroy us."
TIPS: Perfect investment for imperfect times?

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