Investing in Taxable Account. Good or bad?

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Topic Author
Franzkoo
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Joined: Fri Nov 08, 2019 10:47 am

Investing in Taxable Account. Good or bad?

Post by Franzkoo » Fri Nov 08, 2019 10:59 am

I’m 25 years old, I started investing in a regular brokerage account with Vanguard 3 years ago. My balance has grown to around 100k. (I just buy VFIAX)

I work as a web designer doing freelance. The reason I opted for a taxable account vs a 401k is the flexibility I have with my money. I can also invest any amount I want.

Anyways, do you guys have any suggestions? What would you do if you were in my shoes? Should I stop investing in my taxable account?

Thank you :)

Silk McCue
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Re: Investing in Taxable Account. Good or bad?

Post by Silk McCue » Fri Nov 08, 2019 2:24 pm

Welcome to Bogleheads!

Congrats on your savings!

Unfortunately you have left a good amount of tax efficient retirement savings on the table in the past. Using a Traditional IRA or Roth IRA in place of the some of the Taxable savings would have been better for you. It's not too late for 2019 and you will be in 2020 soon enough as well.

As a freelancer you could setup a business structure that would allow you to setup a Solo401k or Simple IRA and stash a bunch more money away in a tax efficient manner as well.

This links discusses the Solo401k.

https://www.irafinancialgroup.com/solo- ... -it-works/

Here is a link to a Wiki page for Simple IRA's

https://www.bogleheads.org/wiki/SIMPLE_IRA

Using the search bar on these terms will bring up past threads for you to review as well.

Cheers

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FiveK
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Re: Investing in Taxable Account. Good or bad?

Post by FiveK » Fri Nov 08, 2019 2:32 pm

In addition to Silk's fine advice on your self-employment specifics, see Prioritizing investmentsand Investment Order for some generic suggestions.

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Wiggums
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Re: Investing in Taxable Account. Good or bad?

Post by Wiggums » Fri Nov 08, 2019 2:33 pm

Welcome to the forum. You’re doing a great job saving.

I agree with the previous response that you don’t want to ignore taxes. You should take advantage of pretax options that are available to you. Your retirement savings does not need to be readily available for non retirement needs. That’s why you should have an emergency fund and perhaps another bucket for other short term needs.

Have you read the document on investment priorities?

https://www.bogleheads.org/wiki/Priorit ... nvestments

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TomatoTomahto
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Re: Investing in Taxable Account. Good or bad?

Post by TomatoTomahto » Fri Nov 08, 2019 4:33 pm

Regard the $100k already saved as an Emergency Fund. Congrats.

I’d start using the 401k and putting the tax savings into taxable.
Okay, I get it; I won't be political or controversial. The Earth is flat.

nix4me
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Re: Investing in Taxable Account. Good or bad?

Post by nix4me » Fri Nov 08, 2019 4:37 pm

Equal amounts is good. Max 401K, Roth IRA and the rest in taxable but don't ignore taxable. Its good to have money. And Capital gains rate is usualy less than ordinary income rate.

Katietsu
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Re: Investing in Taxable Account. Good or bad?

Post by Katietsu » Fri Nov 08, 2019 4:41 pm

At minimum, you should use a Roth IRA. You have the same flexibility as to what you can invest in and you can withdraw the money of you absolutely need to. There is really no downside.

Now, is Roth IRA the definitive best choice instead of a traditional IRA or solo 401k along with an emergency fund? That is a more complicated question and requires knowing more about your annual income, savings goals etc.

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1789
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Re: Investing in Taxable Account. Good or bad?

Post by 1789 » Fri Nov 08, 2019 5:47 pm

Congrats on starting early. I agree with others. Max out traditional 401k (if you have access to) , Roth ira and HSA. Then the rest can be in taxable.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

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Toons
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Re: Investing in Taxable Account. Good or bad?

Post by Toons » Fri Nov 08, 2019 5:59 pm

Tax Free ,Tax Deferred Compounding
Take full advantage as long as you can
An essential tenet of wealth creation.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

mhalley
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Re: Investing in Taxable Account. Good or bad?

Post by mhalley » Fri Nov 08, 2019 6:04 pm

WCI runs some figures here:
https://www.whitecoatinvestor.com/whats-a-401k-worth/
let’s just consider the value of having untaxed reinvested dividends. Let’s say our investment grows at 8% a year; let’s say 2% of that is a dividend taxed at 18.8%. So in the taxable account, that means the investment grows at 7.624%, while in the 401K it grows at 8%. After 30 years, a $30,000 investment in the taxable account is worth $277,710.53, or about $24K less than the $301,879.71 it would be worth in the 401K. Now, this additional gain would be taxed when withdrawn from the 401K, of course, as we saw above at about 12.5%, so we’ll subtract out ~$3000. Even so, avoiding that tax as the money grows results in an additional 7.6% return for the 401K investor.
These numbers are for a dr in a high tax bracket, so the savings might not be as much for you.
Certainly it gives you some flexibility having the money in the taxable account, but now that you have that flexibility in place, I would concur with others that it is time to start maxing out a 401k and roth.

Topic Author
Franzkoo
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Re: Investing in Taxable Account. Good or bad?

Post by Franzkoo » Fri Nov 08, 2019 6:28 pm

I want to thank you all for taking the time to read my post and for giving me some advice.

I see the majority, (or everyone really hehe) are recommending that I start investing in an individual 401k and/or Roth.

I will need to do a bit more research into these types of accounts and I’ll also have to speak with my accountant to see how this would impact my taxes.

There do seem to be quite a few “rules” with investing in these accounts which in all honesty I'm not a fan of. I like to invest any amount of money, whenever I’d like. But I do understand that I’d be losing a few percentage points due to taxes if I continue with my taxable.

A_Bond
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Re: Investing in Taxable Account. Good or bad?

Post by A_Bond » Fri Nov 08, 2019 6:43 pm

Think of the rules as being to your advantage. Take the ROTH IRA account for example. The ability to able to invest $6,000.00 per year and then watch it grow TAX-FREE until your retirement is a beautiful thing. That alone is worth much more than just a few percentage points. Plus, those few percentage points that are lost compound fast, just like gains do.

Silk McCue
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Re: Investing in Taxable Account. Good or bad?

Post by Silk McCue » Fri Nov 08, 2019 6:43 pm

Franzkoo wrote:
Fri Nov 08, 2019 6:28 pm
I want to thank you all for taking the time to read my post and for giving me some advice.

I see the majority, (or everyone really hehe) are recommending that I start investing in an individual 401k and/or Roth.

I will need to do a bit more research into these types of accounts and I’ll also have to speak with my accountant to see how this would impact my taxes.

There do seem to be quite a few “rules” with investing in these accounts which in all honesty I'm not a fan of. I like to invest any amount of money, whenever I’d like. But I do understand that I’d be losing a few percentage points due to taxes if I continue with my taxable.
Once you get an elementary level education you will discover why you should be investing in them along with Taxable. We aren’t talking about a few percentage points . Your accountant will know. If he doesn’t, fire him and hire someone else.

And to answer one question, it will decrease your taxes, and by no small amount, over the life of your investing as well as immediately.

Cheers

retired@50
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Re: Investing in Taxable Account. Good or bad?

Post by retired@50 » Fri Nov 08, 2019 7:06 pm

Silk McCue wrote:
Fri Nov 08, 2019 6:43 pm
Franzkoo wrote:
Fri Nov 08, 2019 6:28 pm
I want to thank you all for taking the time to read my post and for giving me some advice.

I see the majority, (or everyone really hehe) are recommending that I start investing in an individual 401k and/or Roth.

I will need to do a bit more research into these types of accounts and I’ll also have to speak with my accountant to see how this would impact my taxes.

There do seem to be quite a few “rules” with investing in these accounts which in all honesty I'm not a fan of. I like to invest any amount of money, whenever I’d like. But I do understand that I’d be losing a few percentage points due to taxes if I continue with my taxable.
Once you get an elementary level education you will discover why you should be investing in them along with Taxable. We aren’t talking about a few percentage points . Your accountant will know. If he doesn’t, fire him and hire someone else.

Cheers
Franzkoo,
I agree with the idea of using the various tax-advantaged accounts you have available to you. I like to think about the 3 basic account types, tax-deferred (IRA, 401k), taxable, & Roth IRA as 3 different piggy banks with different pros and cons involved in each. I have used all three account types during my life, depending on what made the most sense at the time. I held a lot of different jobs, so things changed over the years. I often think about the IRA, 401k, or Roth IRA as if you're entering into an agreement with the IRS about how and when your retirement savings can be saved, spent, and taxed. Generally speaking these rules and regulations tend to favor the saver instead of the government. Get familiar with these advantages and use them during your working years.
Regards,

Topic Author
Franzkoo
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Joined: Fri Nov 08, 2019 10:47 am

Re: Investing in Taxable Account. Good or bad?

Post by Franzkoo » Fri Nov 08, 2019 10:03 pm

Not being able to withdraw my money (without penalty) until I’m 59 does not seem like an advantage worth an additional 7.6% return.

I could be wrong about this because I am young right now, but I just don’t know how my life is going to be in the future. Having the majority of my investments into accounts that I can’t withdraw from until I’m in the back half of my life doesn’t seem like a good idea.

Does anyone else share this way of thinking or is it just me? 😅

KlangFool
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Re: Investing in Taxable Account. Good or bad?

Post by KlangFool » Fri Nov 08, 2019 10:35 pm

Franzkoo wrote:
Fri Nov 08, 2019 10:03 pm
Not being able to withdraw my money (without penalty) until I’m 59 does not seem like an advantage worth an additional 7.6% return.

I could be wrong about this because I am young right now, but I just don’t know how my life is going to be in the future. Having the majority of my investments into accounts that I can’t withdraw from until I’m in the back half of my life doesn’t seem like a good idea.

Does anyone else share this way of thinking or is it just me? 😅
Franzkoo,

<<Not being able to withdraw my money (without penalty) until I’m 59 does not seem like an advantage worth an additional 7.6% return.
>>

That is not true.

<<Does anyone else share this way of thinking or is it just me? >>

This is a common myth. Please check out this URL.

https://www.madfientist.com/how-to-acce ... nds-early/

They are tax-advantaged accounts. They are not retirement accounts.

KlangFool

DameTime
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Re: Investing in Taxable Account. Good or bad?

Post by DameTime » Fri Nov 08, 2019 11:29 pm

Just take a deep breath and try to understand what all these very smart and well intentioned posters are unanimously telling you. You are leaving a significant amount of money in the table in both the present and the future but only investing in a taxable account. I encourage you to keep an open mind and do your diligence with the options mentioned above.

After all, isn’t this the feedback you were trying to solicit?

inbox788
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Re: Investing in Taxable Account. Good or bad?

Post by inbox788 » Sat Nov 09, 2019 5:36 am

Taxable: good
HSA and Roth: better
401k matching: best
Franzkoo wrote:
Fri Nov 08, 2019 6:28 pm
I will need to do a bit more research into these types of accounts and I’ll also have to speak with my accountant to see how this would impact my taxes.

There do seem to be quite a few “rules” with investing in these accounts which in all honesty I'm not a fan of. I like to invest any amount of money, whenever I’d like. But I do understand that I’d be losing a few percentage points due to taxes if I continue with my taxable.
You've got to invest the time to learn. It takes some effort to figure out the rules, but it's worth it. If you want to pay more in taxes, by all means, thank you!
Franzkoo wrote:
Fri Nov 08, 2019 10:03 pm
Not being able to withdraw my money (without penalty) until I’m 59 does not seem like an advantage worth an additional 7.6% return.

I could be wrong about this because I am young right now, but I just don’t know how my life is going to be in the future. Having the majority of my investments into accounts that I can’t withdraw from until I’m in the back half of my life doesn’t seem like a good idea.

Does anyone else share this way of thinking or is it just me? 😅
I think it's just you. Annualized 7.6% over decades will be a fortune and if that's the total, I think you're missing something significant. FWIW, some folks here obsess over 0.7% or even 0.07.
Regular Contributions can be withdrawn at any time with no tax and no penalty.
https://www.bogleheads.org/wiki/Roth_IRA

https://www.bankrate.com/calculators/re ... lator.aspx

Compound
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Re: Investing in Taxable Account. Good or bad?

Post by Compound » Sat Nov 09, 2019 5:59 am

Franzkoo wrote:
Fri Nov 08, 2019 10:03 pm
Not being able to withdraw my money (without penalty) until I’m 59 does not seem like an advantage worth an additional 7.6% return.

I could be wrong about this because I am young right now, but I just don’t know how my life is going to be in the future. Having the majority of my investments into accounts that I can’t withdraw from until I’m in the back half of my life doesn’t seem like a good idea.

Does anyone else share this way of thinking or is it just me? 😅
Not that I’d advise doing this unless absolutely necessary, but you can withdrawal Roth IRA contributions penalty free. There are also 401k loans.

You seem to have considerable angst about contributing to these types of accounts. How about starting with a Roth IRA for now and keep investing the rest in taxable? Doing so may make you more comfortable and open you up to more tax deferred opportunities.

1130Super
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Location: Minnesota

Re: Investing in Taxable Account. Good or bad?

Post by 1130Super » Sat Nov 09, 2019 8:52 am

Im in the minority of boggleheadnation by liking the liquidity of taxable accounts, but i still put 10% in my 401k and max out my Roth IRA anything extra goes in my taxable

aristotelian
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Re: Investing in Taxable Account. Good or bad?

Post by aristotelian » Sat Nov 09, 2019 9:01 am

Investing is always good. Taxable account is probably a mistake if you have not already maxed your retirement accounts. By forsaking the 401k, you are giving up a massive tax advantage equivalent to your marginal tax rate. Even if you are in a low tax bracket, you should max Roth contributions before taxable. Generally speaking, max 401k + Roth IRA is a powerful combination.

If you are worried about your funds being inaccessible until age 59.5, there are many methods you can use, especially Roth Conversion Ladder:
https://www.madfientist.com/how-to-acce ... nds-early/

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