VTINX for cautious mom with only taxable?

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lostinjersey
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Joined: Thu Nov 18, 2010 3:29 pm

VTINX for cautious mom with only taxable?

Post by lostinjersey » Sun Dec 03, 2017 9:47 pm

Hello Bogleheads. I’ve been on this site for years and have learned a tremendous amount about investing from you all. However, I’ve never had any need for taxable accounts. My mom has asked me for help with her investments and they are only in taxable so I want to make sure I have a full grasp before I give her any advice.

My mom is 67,widowed, 25% federal tax bracket, no debt. SS and other rental income meet her ongoing expenses. She is a very inexperienced and cautious investor and we’ve discussed using the Vanguard Target Retirement Income Fund (VTINX) to invest ~$200K that she has currently in cash. This is a long term investment against future medical expenses or the like.

My question is, how is VTINX income taxed? Can she reinvest to reduce her taxable income, or does she pay tax each year on the div/int no matter what? And is any appreciation taxed at LTCG rates, assuming she holds it for 12+ months? Or is there a better way to be tax-efficient and simple, knowing she prefers a very conservative allocation?
Last edited by lostinjersey on Sun Dec 03, 2017 11:06 pm, edited 2 times in total.

MotoTrojan
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Re: VTINX for cautious mom with only taxable?

Post by MotoTrojan » Sun Dec 03, 2017 9:57 pm

lostinjersey wrote:
Sun Dec 03, 2017 9:47 pm
Hello Bogleheads. I’ve been on this site for years and have learned a tremendous amount about investing from you all. However, I’ve never had any need for taxable accounts. My mom has asked me for help with her investments and they are only in taxable so I want to make sure I have a full grasp before I give her any advice.

My mom is 67,widowed, 25% federal tax bracket, no debt. SS and other rental income meet her ongoing expenses. She is a very inexperienced and cautious investor and we’ve discussed using the Vanguard Target Retirement Income Fund (VTINX) to invest ~$200K that she has currently in cash. This is a long term investment against future medical expenses or the like.

My question is, how is VTINX income taxed? Can she reinvest to reduce her taxable income, or does she pay tax each year on the div/int no matter what? And is any appreciation taxes at TCG rates, assuming she holds it for 12+ months? Or is there a better way to be tax-efficient and simple, knowing she prefers a very conservative allocation?
Dividends are taxed regardless of what you do with them. Yes, if held for a year and then sold, it will be taxed as a long-term gain, but no change for dividends. I would probably plan to have dividends sent to your settlement fund, so you can withdraw enough to cover taxes, and then reinvest the rest as desired.

I believe that fund is a 30/70 with good diversification via International, so I agree this makes sense given what you have said about her. I believe there is also a tax-managed balanced fund, but not sure if it has International diversification, and a bit more equity than you were interested in perhaps.

rkhusky
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Re: VTINX for cautious mom with only taxable?

Post by rkhusky » Mon Dec 04, 2017 9:27 am

Currently, the SEC yield for Vanguard TR Income is 1.78%. After paying 25% taxes, the result is 1.34%. The current SEC yield for Vanguard Intermediate Tax Exempt is 1.89%, for which no fed tax is due.

You could create a portfolio with Total Stock, Total Int'l and Inter. Tax Exempt. This would be a bit more work to maintain and the TR Income bonds are much more diverse with US and Int'l Gov't and Corporate bonds and US Gov't inflation protected (TIPS) bonds, as opposed to the state gov't bonds in Inter. Tax Exempt. Both portfolios would be fine.

Tax Managed Balanced has mid and large US Stocks and tax exempt bonds in a 50/50 ratio.

A couple other Vanguard options on the risk/return spectrum are Life Strategy Income, which is 20/80, and Life Strategy Conservative Growth, which is 40/60. The Life Strategy funds do not contain the short term TIPS that are in TR Income, whose current SEC yield is -0.05%.

dbr
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Re: VTINX for cautious mom with only taxable?

Post by dbr » Mon Dec 04, 2017 10:33 am

VTINX is likely a good choice. All issues tax depend on the details. There is not enough information to tell what problems or opportunities she has in that area.

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Tyler Aspect
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Re: VTINX for cautious mom with only taxable?

Post by Tyler Aspect » Mon Dec 04, 2017 3:29 pm

If you are worried about tax inefficiency of TIPS within VTINX for taxable account then you can split the money between:

50% Vanguard LifeStrategy Moderate Growth
50% Vanguard Intermediate Bond Index Admiral

This allocation remains at 30% stock / 70% bond.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

dbr
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Re: VTINX for cautious mom with only taxable?

Post by dbr » Mon Dec 04, 2017 5:42 pm

Tyler Aspect wrote:
Mon Dec 04, 2017 3:29 pm
If you are worried about tax inefficiency of TIPS within VTINX for taxable account then you can split the money between:

50% Vanguard LifeStrategy Moderate Growth
50% Vanguard Intermediate Bond Index Admiral

This allocation remains at 30% stock / 70% bond.
TIPS have no special tax inefficiency and like all Treasuries are state tax exempt of which only half of IB is Treasuries.

lostinjersey
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Re: VTINX for cautious mom with only taxable?

Post by lostinjersey » Wed Dec 06, 2017 9:06 pm

Thanks everyone. I think we will just stick with VTINX for the time being. It’s simple and the tax drag isn’t going to be that big of a deal.

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