[Split into taxable / non-tax advantage accounts]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
CxInvest
Posts: 6
Joined: Thu Jan 10, 2019 2:33 pm

[Split into taxable / non-tax advantage accounts]

Post by CxInvest » Thu Jan 10, 2019 2:45 pm

[Moved into a new thread from: Fidelity, Schwab, or Vanguard --admin LadyGeek]

Hello all. I'm about to open an IRA and an individual brokerage account.

So I'll keep it brief. I just wanted to pick these brains of those few on the thread here that are talking splitting accounts for tax / non tax advantage accounts. I did all the homework I'm going to do and I landed on Fidelity overall for my needs. That being said, my interest has been piqued with this thread about splitting the two accounts for tax purposes.

I guess what I'm really wanting to know is how big of a difference we are talking here in numbers? I'd rather send them all to one spot for simplicity / self management sake - but since this SHOULD be more or less permanent if all works ok I realize savings on tax structure could definitely add up over 20-30 years (i'm 33).

Yes trying to avoid crunching the numbers and doing all the math myself... Not sure I understand it well enough to figure it out anyway without spending necessarily large amounts of time.

Can ya guys help me out here?

Thank you and great thread!

~ Cx

User avatar
ruralavalon
Posts: 14713
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Fidelity, Schwab, or Vanguard

Post by ruralavalon » Thu Jan 10, 2019 5:44 pm

Welcome to the forum :) .

CxInvest wrote:
Thu Jan 10, 2019 2:45 pm
Hello all. I'm about to open an IRA and an individual brokerage account.

So I'll keep it brief. I just wanted to pick these brains of those few on the thread here that are talking splitting accounts for tax / non tax advantage accounts. I did all the homework I'm going to do and I landed on Fidelity overall for my needs. That being said, my interest has been piqued with this thread about splitting the two accounts for tax purposes.

I guess what I'm really wanting to know is how big of a difference we are talking here in numbers? I'd rather send them all to one spot for simplicity / self management sake - but since this SHOULD be more or less permanent if all works ok I realize savings on tax structure could definitely add up over 20-30 years (i'm 33).

Yes trying to avoid crunching the numbers and doing all the math myself... Not sure I understand it well enough to figure it out anyway without spending necessarily large amounts of time.

Can ya guys help me out here?

Thank you and great thread!

~ Cx
To answer your question ("how big a difference") it's hard to avoid looking at the numbers at least a little bit. More information might be useful.

What is your tax bracket, both federal and state?

You are age 33. Do you expect to be in a substantially high tax bracket for most of your working life?

About what portion of your total annual contributions do you expect will be going into your taxable brokerage account?

What State do you pay any state income tax to?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
CxInvest
Posts: 6
Joined: Thu Jan 10, 2019 2:33 pm

Re: Fidelity, Schwab, or Vanguard

Post by CxInvest » Thu Jan 10, 2019 6:36 pm

ruralavalon wrote:
Thu Jan 10, 2019 5:44 pm
Welcome to the forum :) .

CxInvest wrote:
Thu Jan 10, 2019 2:45 pm
Hello all. I'm about to open an IRA and an individual brokerage account.

So I'll keep it brief. I just wanted to pick these brains of those few on the thread here that are talking splitting accounts for tax / non tax advantage accounts. I did all the homework I'm going to do and I landed on Fidelity overall for my needs. That being said, my interest has been piqued with this thread about splitting the two accounts for tax purposes.

I guess what I'm really wanting to know is how big of a difference we are talking here in numbers? I'd rather send them all to one spot for simplicity / self management sake - but since this SHOULD be more or less permanent if all works ok I realize savings on tax structure could definitely add up over 20-30 years (i'm 33).

Yes trying to avoid crunching the numbers and doing all the math myself... Not sure I understand it well enough to figure it out anyway without spending necessarily large amounts of time.

Can ya guys help me out here?

Thank you and great thread!

~ Cx
To answer your question ("how big a difference") it's hard to avoid looking at the numbers at least a little bit. More information might be useful.

What is your tax bracket, both federal and state?

You are age 33. Do you expect to be in a substantially high tax bracket for most of your working life?

About what portion of your total annual contributions do you expect will be going into your taxable brokerage account?

What State do you pay any state income tax to?
Hey Rurulavalon - thanks for the response! I'll try to answer your questions as accurately as possible.

My current Federal is tax bracket is 12% as of now but for the long haul likely 22% and possibly 24%. State is 7% (S.C.)

I think the above should answer your second question.

I'm not exactly sure yet on percentages for total annual contributions, but I'll be maxing the ROTH first and putting essentially everything else that doesn't go to normal bills (i have no debt) or other investments (e.g. real estate related ventures). I know that doesn't give you a % allocation but I really don't have that # just yet. It will just be anything extra not being diversified into other assets / investments.

Just South Carolina for now. Possibly South and North Carolina later on.

Thanks again.

radiowave
Posts: 2102
Joined: Thu Apr 30, 2015 5:01 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by radiowave » Thu Jan 10, 2019 6:49 pm

CxInvest welcome to the forum.

If I read you post correctly, you are asking whether to open just an IRA (I'm assuming a traditional IRA) vs. added a second taxable brokerage account. So I'll answer from that perspective. You have the option to make a personal $5,500 annual contribution to either a traditional IRA (tIRA) OR a Roth IRA (rIRA). The typical feedback here on the forum is to contribute to any 401k, 401a up to the top of the match from your company. The IRAs are separate and you can do either or both (max 5,500). Anything left after than typically goes into a liquid emergency fund, online bank, CDs, etc. then anything left over after than purchase of stock funds in the taxable account. If you have the IRA already set up at Fidelity, I'd go with that until you are ready to contribute into funds on the taxable side. With Fidelity, or most all other brokerages, you can directly link a bank account and transfer funds electronically.

If you were asking whether to have 2 brokerages, e.g. Fidelity and Vanguard, let us know and we can respond to that question as well.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

Topic Author
CxInvest
Posts: 6
Joined: Thu Jan 10, 2019 2:33 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by CxInvest » Thu Jan 10, 2019 7:26 pm

Hey radiowave thanks for chiming in and the warm welcome.

I'm just looking more of a number crunch assessment from those experienced with brokerages such as Fidelity / Schwab vs. a Vanguard. Vanguard seems to have a history / reputation for being more tax friendly which is the only reason I was really considering them for the taxable account as opposed to running both my ROTH and individual brokerage accounts at Fidelity alone (which is where I've already decided my ROTH is headed).

I like simplicity in a complex world. If I can run it all from Fidelity that's fantastic - but money is money and sometimes it adds up. Maybe 5 years of the taxation difference at Vanguard isn't much, but 20-30 years could be (not that I couldn't adjust at some point).

As an aside since you mentioned 401K - yes I'm only interested in matching there for the free money. I'd rather have better investment options that I can manage long term as opposed to the very limited array offered in most 401K's.

Thanks!

User avatar
ruralavalon
Posts: 14713
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Fidelity, Schwab, or Vanguard

Post by ruralavalon » Fri Jan 11, 2019 8:17 am

I also like the simplicity and convenience of having all investing accounts at one fund firm. We use Vanguard for all of our investing accounts, just a personal preference.


CxInvest wrote:
Thu Jan 10, 2019 6:36 pm
ruralavalon wrote:
Thu Jan 10, 2019 5:44 pm
Welcome to the forum :) .

CxInvest wrote:
Thu Jan 10, 2019 2:45 pm
Hello all. I'm about to open an IRA and an individual brokerage account.

So I'll keep it brief. I just wanted to pick these brains of those few on the thread here that are talking splitting accounts for tax / non tax advantage accounts. I did all the homework I'm going to do and I landed on Fidelity overall for my needs. That being said, my interest has been piqued with this thread about splitting the two accounts for tax purposes.

I guess what I'm really wanting to know is how big of a difference we are talking here in numbers? I'd rather send them all to one spot for simplicity / self management sake - but since this SHOULD be more or less permanent if all works ok I realize savings on tax structure could definitely add up over 20-30 years (i'm 33).

Yes trying to avoid crunching the numbers and doing all the math myself... Not sure I understand it well enough to figure it out anyway without spending necessarily large amounts of time.

Can ya guys help me out here?

Thank you and great thread!

~ Cx
To answer your question ("how big a difference") it's hard to avoid looking at the numbers at least a little bit. More information might be useful.

What is your tax bracket, both federal and state?

You are age 33. Do you expect to be in a substantially high tax bracket for most of your working life?

About what portion of your total annual contributions do you expect will be going into your taxable brokerage account?

What State do you pay any state income tax to?
Hey Rurulavalon - thanks for the response! I'll try to answer your questions as accurately as possible.

My current Federal is tax bracket is 12% as of now but for the long haul likely 22% and possibly 24%. State is 7% (S.C.)

I think the above should answer your second question.

I'm not exactly sure yet on percentages for total annual contributions, but I'll be maxing the ROTH first and putting essentially everything else that doesn't go to normal bills (i have no debt) or other investments (e.g. real estate related ventures). I know that doesn't give you a % allocation but I really don't have that # just yet. It will just be anything extra not being diversified into other assets / investments.

Just South Carolina for now. Possibly South and North Carolina later on.

Thanks again.
It's good to see that you will be making maximum annual contributions to a Roth IRA.

Do you have a work-based account (like a 401k, 403b, 457, SIMPLE IRA, TSP, etc.)? If so funding that account should probably be the priority ahead of funding a taxable brokerage account. Please see the wiki article "Prioritizing Investments".

It makes a difference how much might be in the potential taxable account. Without some information on probable account size, you can't calculate or or even estimate the dollar impact of the choice of location for the account.

In the 12% tax bracket it may make little difference.

Use the Google search box on this site (upper right, this page) to find the thread "2017 relative tax efficiency". This includes a spread sheet which can give you the relative tax efficiency of traditional mutual funds and ETFs of various companies including Vanguard, Fidelity and Schwab.

You can try various tax rates in the spreadsheet, this changes the result.

At Vanguard the tax efficiency of their traditional mutual funds and their ETFs will be identical.
Last edited by ruralavalon on Fri Jan 11, 2019 8:31 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
Peter Foley
Posts: 4775
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: [Split into taxable / non-tax advantage accounts]

Post by Peter Foley » Fri Jan 11, 2019 8:30 am

I think it is advisable to the the same brokerage for all acccounts. At some point you may want to do transfers between accounts and a single brokerage with a summary page of all your accounts can make that easier.

I use Schwab. They have had on line access and trading for many years. They have low minimums and a user friendly web site. They also have local offices in major cities if that is an issue.

As mentioned earlier, include your employer based tax deferred account in your planning (401k, 403b). Use your brokerage accounts to compliment the low cost index offerrings that might be offered in a 401k.

Lots of smart, experienced people post here so don't be afraid to ask questions. Welcome!

Topic Author
CxInvest
Posts: 6
Joined: Thu Jan 10, 2019 2:33 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by CxInvest » Tue Jan 29, 2019 10:03 am

Do you guys have any knowledge base of variability in performance of the different larger index funds (e.g. S&P / Total Market / Emerging) ?

Obviously there will be differences because they won't all be built the same. I was just curious if any had majorly outperformed the other similar fund builds over time (since Vanguard / Fidelity / Schwab / etc. have some of their own specific index funds).

Or maybe there is somewhere you could point me to look at the numbers?

I think basically for now I'm working with about $85k I have to put to work. I intend to max the Roth I'll be opening 2x (before and after taxes), keep $3-$5k for emergency savings, and then the rest will be put to work in a brokerage account split between bonds / stocks / index fund investments (very little in bonds - but then I'll have to do some homework to figure out how I want / should split the large remaining sum between single equities and index funds).

Thanks again.

P.S. Any other relevant wisdom you want to toss my way I'd love to hear it. Just want to learn and be smart. :happy

EDIT: I already mentioned it before but as an aside I will always be taking the match on 401K. Free money. Contributing to it beyond that I'm not a big fan of what's offered in such basic, low option availability. It is possible in the future I use it as another type of "index fund" type of investment mechanism.

User avatar
ruralavalon
Posts: 14713
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: [Split into taxable / non-tax advantage accounts]

Post by ruralavalon » Tue Jan 29, 2019 11:09 am

Incomplete draft posted in error, now deleted.
Last edited by ruralavalon on Tue Jan 29, 2019 11:35 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

02nz
Posts: 1390
Joined: Wed Feb 21, 2018 3:17 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by 02nz » Tue Jan 29, 2019 11:18 am

radiowave wrote:
Thu Jan 10, 2019 6:49 pm
You have the option to make a personal $5,500 annual contribution to either a traditional IRA (tIRA) OR a Roth IRA (rIRA).
You can still contribute $5500 for 2018 (until the tax filing deadline), and the limit goes up to $6000 for 2019.

02nz
Posts: 1390
Joined: Wed Feb 21, 2018 3:17 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by 02nz » Tue Jan 29, 2019 11:27 am

ruralavalon wrote:
Tue Jan 29, 2019 11:09 am
I was just curious if any had majorly outperformed the other similar fund builds over time (since Vanguard / Fidelity / Schwab / etc. have some of their own specific index funds).
Looking at past performance is not a great way of predicting the future. S&P 500 and Total Stock Market are closely correlated as the former makes up about 80% of the latter. Emerging markets is a different animal and is generally more volatile. I would recommend using a Total International fund (which will include EM) for the int'l allocation.
CxInvest wrote:
Tue Jan 29, 2019 10:03 am
EDIT: I already mentioned it before but as an aside I will always be taking the match on 401K. Free money. Contributing to it beyond that I'm not a big fan of what's offered in such basic, low option availability.
In the 12% tax bracket, you should prioritize Roth IRA contributions, but when you move into a higher bracket, you should defer taxes as much as possible with traditional 401k contributions. You don't need a ton of choices in a 401k, really just a few low-cost choices. Without seeing the list of choices and expense ratios we can't make a recommendation one way or another.

User avatar
ruralavalon
Posts: 14713
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: [Split into taxable / non-tax advantage accounts]

Post by ruralavalon » Tue Jan 29, 2019 11:31 am

CxInvest wrote:
Tue Jan 29, 2019 10:03 am
Do you guys have any knowledge base of variability in performance of the different larger index funds (e.g. S&P / Total Market / Emerging) ?


Obviously there will be differences because they won't all be built the same. I was just curious if any had majorly outperformed the other similar fund builds over time (since Vanguard / Fidelity / Schwab / etc. have some of their own specific index funds).

Or maybe there is somewhere you could point me to look at the numbers?
You can compare performance of similar funds from Vanguard, Fidelity and Schwab using www.portfolivisualizer.com and on Morningstar.

You will not find significant differences.


CxInvest wrote:I think basically for now I'm working with about $85k I have to put to work. I intend to max the Roth I'll be opening 2x (before and after taxes), keep $3-$5k for emergency savings, and then the rest will be put to work in a brokerage account split between bonds / stocks / index fund investments (very little in bonds - but then I'll have to do some homework to figure out how I want / should split the large remaining sum between single equities and index funds).

Thanks again.

P.S. Any other relevant wisdom you want to toss my way I'd love to hear it. Just want to learn and be smart. :happy

EDIT: I already mentioned it before but as an aside I will always be taking the match on 401K. Free money. Contributing to it beyond that I'm not a big fan of what's offered in such basic, low option availability. It is possible in the future I use it as another type of "index fund" type of investment mechanism.
I suggest broadly diversified stock index funds instead of individual stocks, to reduce risk.

At age 33 I usually suggest around 20% in bonds or other fixed income. This is expected to reduce portfolio volatility (risk).

I don't understand what you said "I intend to max the Roth I'll be opening 2x (before and after taxes)". Please explain.

What is your tax filing status? If married, does your spouse have an IRA yet?

What funds are offered in your 401k? Please give fund names, tickers and expense ratios. (This is important in prioritizing investments.)

(Please see the post "Asking Portfolio Questions" for information needed and format.)

Please see the wiki article "Prioritizing Investments". In general its usually better to make maximum annual contributions to the 401k and maximum annual contributions to the IRA before contributions to a taxable account.

Please see the wiki article "Tax-efficient Fund Placement". Bond funds are not very tax-efficient. In general bond funds should be held in a tax-advantaged account, preferably a tax deferred account. In a taxable account use very tax-efficient large-cap or total market type stock index funds. Examples of very tax-efficient stock index funds include:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%; and
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
CxInvest
Posts: 6
Joined: Thu Jan 10, 2019 2:33 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by CxInvest » Tue Jan 29, 2019 4:28 pm

@ 02nz:

Thanks. Again though I'm not a huge fan of the oversimplified investment options available for 401K. Since I'm going to run single stocks at a certain % of my overall portfolio, it makes the most sense to do that in tax friendly or deferred accounts. 401K's (at least not in my experience) don't really offer these types of options - just mutual fund or money market type mediums. Also with the Roth / single brokerage accounts, I can pull $$$ back out if necessary for reasons other than the few allowed early for the 401. I'm currently switching jobs though so I'll have to see what options they DO have (will be through Fidelity) before I can let you know what's available.

@ruralavalon:

Let me see what I can get answered here and thanks again for your continued help.

- "I intend to max the Roth I'll be opening 2x (before and after taxes)" ~ Sorry bad English. I just meant this will be my first time opening one and I'm going to be sure to open for the current $5,500 possible before April 14th, and then $6,000 right after that to get it put to work. Shame really schools teach little to nothing about this stuff early on. I've missed 10 years + or - in IRA maxouts. U.S. education is a joke - but I digress from this point.

- Tax filing status is Single

- 401K as I stated in response to 02nz I'll see when I switch to my new job (but yeah Fidelity). Really only looking to match here unless I just have a surplus of extra equity to allocate. Much rather put it into other investments (real estate, etc.)

I think that covers most of it. As an aside you said "I suggest broadly diversified stock index funds instead of individual stocks, to reduce risk." That's fine to an extent but the time to take risks is now while im young. I won't pretend I can stock pick like Buffet or some of the other greats, but I'm also not going to sit here expecting 12% returns on my index fund investments over the next 25 years like the S&P has run historically. Nothing wrong with taking some shots or investing in exceptional companies over the long haul. Besides - my intention isn't to just buy and hold until I retire. I'll be DCA'ing in and out %'s as the major markets move up and down over the coming years.

Hope that helps!

02nz
Posts: 1390
Joined: Wed Feb 21, 2018 3:17 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by 02nz » Tue Jan 29, 2019 5:23 pm

CxInvest wrote:
Tue Jan 29, 2019 4:28 pm
Again though I'm not a huge fan of the oversimplified investment options available for 401K.
I think you're conflating simplicity with lack of sophistication/diversification. If you really think you're a sophisticated investor, go ahead and play the market. Just know the downside risks, and keep in mind that people with far more knowledge, experience, and resources have tried and don't manage to beat the market.

Topic Author
CxInvest
Posts: 6
Joined: Thu Jan 10, 2019 2:33 pm

Re: [Split into taxable / non-tax advantage accounts]

Post by CxInvest » Wed Jan 30, 2019 12:58 am

02nz wrote:
Tue Jan 29, 2019 5:23 pm
CxInvest wrote:
Tue Jan 29, 2019 4:28 pm
Again though I'm not a huge fan of the oversimplified investment options available for 401K.
I think you're conflating simplicity with lack of sophistication/diversification. If you really think you're a sophisticated investor, go ahead and play the market. Just know the downside risks, and keep in mind that people with far more knowledge, experience, and resources have tried and don't manage to beat the market.
Yes sophistication / diversification is what I meant - poor word choice.

I hear you on the risks but the era of easy money is over imo. 5-6% expected annual returns not including inflation? Ouch.

Gotta take some shots when you are younger. Can still adjust and recover later on. Again I'm splitting the allocations between them.

Post Reply