Opening a Brokerage Account

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rahmana92
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Opening a Brokerage Account

Post by rahmana92 »

Hi all,

I have gotten a lot of help in the past from these forums so I hope you all can provide some clarity on opening a Brokerage Account.

Some background: I max out my Roth IRA and 401(k) every year. After saving up and buying a house, I have too much money now just sitting in savings and want to start investing outside of retirement accounts. My understanding is that the next step is to open a Brokerage Account but I am overwhelmed. I've read several articles that talk about how to invest tax efficiently as possible but it seems very complicated to me.

- For my retirement accounts, I just put all my money into target date funds with low expense ratios. Is there something like that I can do for my brokerage account? Is there a diversified fund (with stocks, bonds, international, etc.) that is tax efficient?
- I have my Roth IRA at Vanguard. If I open my brokerage there, would everything be on the same page?
- Also, paying taxes on the brokerage account seems really complicated. Right now I just use a free online tax system, would that not suffice once I open a brokerage account? My understanding is that I have to pay taxes on any dividends I earn every year like income.
- Should I do a large transfer of my Savings into the Brokerage account at once? Or can I mimic what I do for my 401(k) and put a portion in each month?

I just want to keep everything as simple as possible. Going forward, my plan is to put a set amount of money in each month and forget about the account. Is that unrealistic?

Thank you!
livesoft
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Re: Opening a Brokerage Account

Post by livesoft »

rahmana92 wrote: Thu Jun 10, 2021 12:47 pm- For my retirement accounts, I just put all my money into target date funds with low expense ratios. Is there something like that I can do for my brokerage account? Is there a diversified fund (with stocks, bonds, international, etc.) that is tax efficient?
It would not be as tax efficient as a Roth IRA, but it would be very tax efficient if you put index funds of equites in taxable, but kept bond index funds out of taxable at first.

- I have my Roth IRA at Vanguard. If I open my brokerage there, would everything be on the same page?
Yes, but it might be a bigger page than you currently look at.

- Also, paying taxes on the brokerage account seems really complicated. Right now I just use a free online tax system, would that not suffice once I open a brokerage account? My understanding is that I have to pay taxes on any dividends I earn every year like income.
Taxes on a brokerage account (if there are any) are simple. You are simply fearing the unfamiliar, so one you become familiar, then no fear. You could still use a free online tax system or use an inexpensive tax prep software or even use pencil and a pocket calculator.

- Should I do a large transfer of my Savings into the Brokerage account at once? Or can I mimic what I do for my 401(k) and put a portion in each month?
Does not matter. Try it both ways and see what you like best.

I just want to keep everything as simple as possible. Going forward, my plan is to put a set amount of money in each month and forget about the account. Is that unrealistic?
This is not unrealistic. You won't be able to "forget" because you will get a 1099 tax form detailing your income from your taxable account and use it when filing your tax return. Presumably you get a W-2 now and do not "forget" about your taxes.
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dbr
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Re: Opening a Brokerage Account

Post by dbr »

What livesoft wrote above is almost exactly what I would have written as well.
mikejuss
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Re: Opening a Brokerage Account

Post by mikejuss »

You can do this, rahmana92.

Call Vanguard today and ask them to open a brokerage account for you. I don't believe that there is any minimum deposit required. You can purchase index stocks and bonds in the same way that you do in your Roth IRA account.

Congrats on saving for your future. :beer
dbr
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Re: Opening a Brokerage Account

Post by dbr »

After your account is open be sure to page through all the tabs and links to become familiar with how it works.

Things to understand are how to select cost basis treatment for taxes, whether or not to reinvest distributions, where cash moves around in the account, who your beneficiaries are and whether anyone else has access, how to link the account to your bank, where to find documents about the account, and so on.

It may sound complicated but it really isn't and all of these things are things one is going to need to know about sooner or later. It is like getting a new car and making sure you know what all the buttons do and what to think when one of those lights goes off on the dashboard.
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iceport
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Re: Opening a Brokerage Account

Post by iceport »

livesoft wrote: Thu Jun 10, 2021 12:57 pm
rahmana92 wrote: Thu Jun 10, 2021 12:47 pm- For my retirement accounts, I just put all my money into target date funds with low expense ratios. Is there something like that I can do for my brokerage account? Is there a diversified fund (with stocks, bonds, international, etc.) that is tax efficient?
It would not be as tax efficient as a Roth IRA, but it would be very tax efficient if you put index funds of equites in taxable, but kept bond index funds out of taxable at first.
I too agree with livesoft, but just wanted to chime in that what he rightly suggests here in the interest of tax-efficiency is a change in how you have been investing. Instead of using an all-in-one fund, with a taxable account it's usually best (most tax-efficient) to split up the holdings so that equities alone are held in the taxable account. You can easily duplicate the underlying asset allocation of your all-in-one fund, but you'll be assembling it a la carte, and looking across all your different accounts. Not that it's difficult at all, once you get used to it, but it's a bigger effort than learning the new (and easy) tax return entries.

Oh — one more thing. Choosing a fund for a taxable account requires some thought. Why? Well, if you ever have losses you have the option to harvest the losses. On the other hand, if you end up with a mountain of unrealized capital gains that would trigger a tax bill if you sold, you might become effectively "locked in" to keeping that fund for longer than you'd like. That's why it's best to pick funds for a taxable account that you know will be a core building block of your portfolio no matter what stage of life you're in. Total market index funds fit that bill. They're usually the most tax-efficient, also.
Last edited by iceport on Thu Jun 10, 2021 2:16 pm, edited 1 time in total.
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mikejuss
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Re: Opening a Brokerage Account

Post by mikejuss »

iceport wrote: Thu Jun 10, 2021 2:04 pm
livesoft wrote: Thu Jun 10, 2021 12:57 pm
rahmana92 wrote: Thu Jun 10, 2021 12:47 pm- For my retirement accounts, I just put all my money into target date funds with low expense ratios. Is there something like that I can do for my brokerage account? Is there a diversified fund (with stocks, bonds, international, etc.) that is tax efficient?
It would not be as tax efficient as a Roth IRA, but it would be very tax efficient if you put index funds of equites in taxable, but kept bond index funds out of taxable at first.
I too agree with livesoft, but just wanted to chime in that what he rightly suggests here in the interest of tax-efficiency is a change in how you have been investing. Instead of using an all-in-one fund, with a taxable account it's usually best (most tax-efficient) to split up the holdings so that equities alone are held in the taxable account. You can easily duplicate the underlying asset allocation of your all-in-one fund, but you'll be assembling it a la carte, and looking across all your different accounts. Not that it's difficult at all, once you get used to it, but it's a bigger effort than learning the new (and easy) tax return entries.
If the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to an overall preferred asset allocation, the purchases will need to be calculated anew each month. For me, that's too much work.
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iceport
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Re: Opening a Brokerage Account

Post by iceport »

mikejuss wrote: Thu Jun 10, 2021 2:15 pm If the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to a preferred asset allocation, the purchases need to be calculated anew each month. For me, that's too much work.
I don't see it that way at all. It's a little up-front work, but then it can be every bit as automated as contributing to an all-in-one fund. It's not required to purchase only those funds furthest away from their target allocations. Eventually that's the way I did it, but for many years at first I just made completely automated contributions according to my asset allocation, and re-balanced once a year as required. Except for the great recession, there was no extreme drift away from the AA.

If you were making no contributions, would it be necessary to re-balance every two weeks? Re-balancing bands typically provide plenty of leeway for real-world portfolio management.
Last edited by iceport on Thu Jun 10, 2021 2:29 pm, edited 1 time in total.
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mikejuss
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Re: Opening a Brokerage Account

Post by mikejuss »

iceport wrote: Thu Jun 10, 2021 2:25 pm
mikejuss wrote: Thu Jun 10, 2021 2:15 pm If the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to a preferred asset allocation, the purchases need to be calculated anew each month. For me, that's too much work.
I don't see it that way at all. It's a little up-front work, but then it can be every bit as automated as contributing to an all-in-one fund. It's not required to purchase only those funds furthest away from their target allocations. Eventually that's the way I did it, but for many years at first I just contributed according to my asset allocation, and re-balanced once a year as required. Except for the great recession, there was no extreme drift away from the AA.

If you were making no contributions, would it be necessary to re-balance every two weeks? Re-balancing bands typically provide plenty of leeway for real-world portfolio management.
Here's a really basic example: if your asset allocation is 60/40, and every month you're buying $400 of bonds in your 401(k), you must purchase $600 of stocks in your brokerage account. But what if, one month, you're unable to do so--or, say, for three months? Or you have a windfall of $10,000 that you want to contribute to your brokerage account. Do you purchase only stocks or a mixture of stocks and bonds? I know that all of this can be figured out on a case-by-case basis; I just don't want to spend the time doing so.
livesoft
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Re: Opening a Brokerage Account

Post by livesoft »

mikejuss wrote: Thu Jun 10, 2021 2:15 pmIf the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to an overall preferred asset allocation, the purchases will need to be calculated anew each month. For me, that's too much work.
I disagree. BT; DT. One can automate brokerage purchases trivially The preferred asset allocation would not and in fact does not change very much and thus would not be need to be calculated anew each month. If you think that is true, then show your work with real math.

Here is an example: Say someone has $100,000 in a 401(k) and in Roth with Vanguard LifeStrategy Moderate Growth and is putting $2,000 a month into that fund and $1,000 a month in to Vanguard Total US Stock Market index fund. At the end of 12 months, what is their asset allocation. You can assume any rate of return you want, but how about 3 scenarios: -10% growth, 0% growth, and +10% growth. Thanks!
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iceport
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Re: Opening a Brokerage Account

Post by iceport »

mikejuss wrote: Thu Jun 10, 2021 2:29 pm Here's a really basic example: if your asset allocation is 60/40, and every month you're buying $400 of bonds in your 401(k), you must purchase $600 of stocks in your brokerage account. But what if, one month, you're unable to do so--or, say, for three months?
My guess is that the taxable account contribution will be a small fraction of the total. It's basically spill-over from maxed-out tax-advantaged space. So there will probably need to be tax-advantaged equity holdings and contributions in tax-advantaged space, also.

As far as making variable savings contributions, I don't have experience with that. My pay was very uniform over the course of the year. So I knew my contribution rate, and it didn't change often.
Last edited by iceport on Thu Jun 10, 2021 2:38 pm, edited 1 time in total.
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mikejuss
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Re: Opening a Brokerage Account

Post by mikejuss »

livesoft wrote: Thu Jun 10, 2021 2:32 pm
mikejuss wrote: Thu Jun 10, 2021 2:15 pmIf the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to an overall preferred asset allocation, the purchases will need to be calculated anew each month. For me, that's too much work.
I disagree. BT; DT. One can automate brokerage purchases trivially The preferred asset allocation would not and in fact does not change very much and thus would not be need to be calculated anew each month. If you think that is true, then show your work with real math.

Here is an example: Say someone has $100,000 in a 401(k) and in Roth with Vanguard LifeStrategy Moderate Growth and is putting $2,000 a month into that fund and $1,000 a month in to Vanguard Total US Stock Market index fund. At the end of 12 months, what is their asset allocation. You can assume any rate of return you want, but how about 3 scenarios: -10% growth, 0% growth, and +10% growth. Thanks!
What if you can't add anything to the brokerage account for 6 months?
dbr
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Re: Opening a Brokerage Account

Post by dbr »

mikejuss wrote: Thu Jun 10, 2021 2:29 pm
iceport wrote: Thu Jun 10, 2021 2:25 pm
mikejuss wrote: Thu Jun 10, 2021 2:15 pm If the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to a preferred asset allocation, the purchases need to be calculated anew each month. For me, that's too much work.
I don't see it that way at all. It's a little up-front work, but then it can be every bit as automated as contributing to an all-in-one fund. It's not required to purchase only those funds furthest away from their target allocations. Eventually that's the way I did it, but for many years at first I just contributed according to my asset allocation, and re-balanced once a year as required. Except for the great recession, there was no extreme drift away from the AA.

If you were making no contributions, would it be necessary to re-balance every two weeks? Re-balancing bands typically provide plenty of leeway for real-world portfolio management.
Here's a really basic example: if your asset allocation is 60/40, and every month you're buying $400 of bonds in your 401(k), you must purchase $600 of stocks in your brokerage account. But what if, one month, you're unable to do so--or, say, for three months?
You could probably do the arithmetic on how long it would take for a $100,000 60/40 portfolio to drift to 55/45. Just as a first estimate ignoring the increasing value of the portfolio 5% of $100,000 is $5000. If someone has less, such as perhaps $10,000, I would not even assign an asset allocation and just buy nothing but stocks everywhere, assuming an emergency fund exists.
livesoft
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Re: Opening a Brokerage Account

Post by livesoft »

mikejuss wrote: Thu Jun 10, 2021 2:36 pmWhat if you can't add anything to the brokerage account for 6 months?
C'mon, try it yourself. You could let the "growth" be 0% in the first 6 months and 10% in the next 6 months and it would still match the +10% scenario I mentioned. You could contribute $2000 a month in the last 6 months and nothing in the first 6 months. Or $12,000 once a year or whatever you feel like modeling.

My point is DON'T GUESS! Please do the math for any scenario you want to think of.
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Re: Opening a Brokerage Account

Post by mikejuss »

dbr wrote: Thu Jun 10, 2021 2:37 pm
mikejuss wrote: Thu Jun 10, 2021 2:29 pm
iceport wrote: Thu Jun 10, 2021 2:25 pm
mikejuss wrote: Thu Jun 10, 2021 2:15 pm If the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to a preferred asset allocation, the purchases need to be calculated anew each month. For me, that's too much work.
I don't see it that way at all. It's a little up-front work, but then it can be every bit as automated as contributing to an all-in-one fund. It's not required to purchase only those funds furthest away from their target allocations. Eventually that's the way I did it, but for many years at first I just contributed according to my asset allocation, and re-balanced once a year as required. Except for the great recession, there was no extreme drift away from the AA.

If you were making no contributions, would it be necessary to re-balance every two weeks? Re-balancing bands typically provide plenty of leeway for real-world portfolio management.
Here's a really basic example: if your asset allocation is 60/40, and every month you're buying $400 of bonds in your 401(k), you must purchase $600 of stocks in your brokerage account. But what if, one month, you're unable to do so--or, say, for three months?
You could probably do the arithmetic on how long it would take for a $100,000 60/40 portfolio to drift to 55/45. Just as a first estimate ignoring the increasing value of the portfolio 5% of $100,000 is $5000. If someone has less, such as perhaps $10,000, I would not even assign an asset allocation and just buy nothing but stocks everywhere, assuming an emergency fund exists.
That depends, of course, on the total amount of portfolio contributions each year, and for high earners who also save a lot, the drift will happen sooner than for others.
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iceport
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Re: Opening a Brokerage Account

Post by iceport »

"Discipline matters more than allocation.” ─William Bernstein
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Wiggums
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Re: Opening a Brokerage Account

Post by Wiggums »

rahmana92 wrote: Thu Jun 10, 2021 12:47 pm Hi all,

I have gotten a lot of help in the past from these forums so I hope you all can provide some clarity on opening a Brokerage Account.

Some background: I max out my Roth IRA and 401(k) every year. After saving up and buying a house, I have too much money now just sitting in savings and want to start investing outside of retirement accounts. My understanding is that the next step is to open a Brokerage Account but I am overwhelmed. I've read several articles that talk about how to invest tax efficiently as possible but it seems very complicated to me.

- For my retirement accounts, I just put all my money into target date funds with low expense ratios. Is there something like that I can do for my brokerage account? Is there a diversified fund (with stocks, bonds, international, etc.) that is tax efficient?
- I have my Roth IRA at Vanguard. If I open my brokerage there, would everything be on the same page?
- Also, paying taxes on the brokerage account seems really complicated. Right now I just use a free online tax system, would that not suffice once I open a brokerage account? My understanding is that I have to pay taxes on any dividends I earn every year like income.
- Should I do a large transfer of my Savings into the Brokerage account at once? Or can I mimic what I do for my 401(k) and put a portion in each month?

I just want to keep everything as simple as possible. Going forward, my plan is to put a set amount of money in each month and forget about the account. Is that unrealistic?

Thank you!
I schedule the money transfers from my checking account and mutual fund purchase. I had this setup for over 20 years. I get email confirmations showing the activity. Unless you are moving large sums of money, a target fund would be ok to get started. Not having bonds in taxable would be better long term from a tax perspective. There are many ways to schedule the purchases. You can you schedule a money transfer and two purchases, or schedule a transfer & buy and a second transfer & buy.

The most important thing is to open the brokerage account, link your bank account and make the first purchase. then setup the monthly transfer/buy schedule.
mikejuss
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Re: Opening a Brokerage Account

Post by mikejuss »

livesoft wrote: Thu Jun 10, 2021 2:40 pm
mikejuss wrote: Thu Jun 10, 2021 2:36 pmWhat if you can't add anything to the brokerage account for 6 months?
C'mon, try it yourself. You could let the "growth" be 0% in the first 6 months and 10% in the next 6 months and it would still match the +10% scenario I mentioned. You could contribute $2000 a month in the last 6 months and nothing in the first 6 months. Or $12,000 once a year or whatever you feel like modeling.

My point is DON'T GUESS! Please do the math for any scenario you want to think of.
I take your point; you're clearly more passionate about this matter than I.

Two questions I've never been able to settle in a satisfactory manner (which has lead to my skepticism about prioritizing tax efficiency): are indexed bonds a significant tax drag when they're spread out across 401(k), Roth IRA, and brokerage accounts? And assuming one's 401(k) is the best place in which to hold bonds, what is the second-best place--a Roth IRA or a brokerage account?
exodusNH
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Re: Opening a Brokerage Account

Post by exodusNH »

mikejuss wrote: Thu Jun 10, 2021 2:29 pm
iceport wrote: Thu Jun 10, 2021 2:25 pm
mikejuss wrote: Thu Jun 10, 2021 2:15 pm If the OP is regularly contributing to his or her 401(k) and/or Roth IRA, worrying about tax efficiency may be more trouble than it's worth. It means that you can't automate your brokerage purchases; in order to stick to a preferred asset allocation, the purchases need to be calculated anew each month. For me, that's too much work.
I don't see it that way at all. It's a little up-front work, but then it can be every bit as automated as contributing to an all-in-one fund. It's not required to purchase only those funds furthest away from their target allocations. Eventually that's the way I did it, but for many years at first I just contributed according to my asset allocation, and re-balanced once a year as required. Except for the great recession, there was no extreme drift away from the AA.

If you were making no contributions, would it be necessary to re-balance every two weeks? Re-balancing bands typically provide plenty of leeway for real-world portfolio management.
Here's a really basic example: if your asset allocation is 60/40, and every month you're buying $400 of bonds in your 401(k), you must purchase $600 of stocks in your brokerage account. But what if, one month, you're unable to do so--or, say, for three months? Or you have a windfall of $10,000 that you want to contribute to your brokerage account. Do you purchase only stocks or a mixture of stocks and bonds? I know that all of this can be figured out on a case-by-case basis; I just don't want to spend the time doing so.
But eventually, you get to the point where the numbers are trivial compared to the balance of your account. My annual 401K contributions amount to about 2.5% of the balance. It gets nearly as out-of-whack from dividends as it does new contributions. My AA drifting from 80/20 to 81/19 isn't going to make much difference and will be rebalanced eventually.

You're better off automating investing so that you actually do it than worrying too much about AA drift, unless your balances are small. If your balances are small, you probably want to be nearly all equities anyway.
exodusNH
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Re: Opening a Brokerage Account

Post by exodusNH »

mikejuss wrote: Thu Jun 10, 2021 3:26 pm
livesoft wrote: Thu Jun 10, 2021 2:40 pm
mikejuss wrote: Thu Jun 10, 2021 2:36 pmWhat if you can't add anything to the brokerage account for 6 months?
C'mon, try it yourself. You could let the "growth" be 0% in the first 6 months and 10% in the next 6 months and it would still match the +10% scenario I mentioned. You could contribute $2000 a month in the last 6 months and nothing in the first 6 months. Or $12,000 once a year or whatever you feel like modeling.

My point is DON'T GUESS! Please do the math for any scenario you want to think of.
I take your point; you're clearly more passionate about this matter than I.

Two questions I've never been able to settle in a satisfactory manner (which has lead to my skepticism about prioritizing tax efficiency): are indexed bonds a significant tax drag when they're spread out across 401(k), Roth IRA, and brokerage accounts? And assuming one's 401(k) is the best place in which to hold bonds, what is the second-best place--a Roth IRA or a brokerage account?
Brokerage. Don't burn Roth space with slow-growing assets.
livesoft
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Re: Opening a Brokerage Account

Post by livesoft »

mikejuss wrote: Thu Jun 10, 2021 3:26 pmTwo questions I've never been able to settle in a satisfactory manner (which has lead to my skepticism about prioritizing tax efficiency): are indexed bonds a significant tax drag when they're spread out across 401(k), Roth IRA, and brokerage accounts? And assuming one's 401(k) is the best place in which to hold bonds, what is the second-best place--a Roth IRA or a brokerage account?
Nowadays bond funds with their low yields and potential for further losses are not much of a problem in a taxable account. But that can change.

A financial planner told me the other day that since bond index fund yields were lower than stock index fund yields that they were just as tax efficient and maybe more tax efficient. The planner neglected to mention that the bond fund dividends were not qualified dividends like a decent stock fund and for folks like me qualified dividends have a tax rate of 0%.

OTOH, the fund that loses the most money in a taxable account is the most tax efficient!
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Re: Opening a Brokerage Account

Post by mikejuss »

exodusNH wrote: Thu Jun 10, 2021 4:08 pm
mikejuss wrote: Thu Jun 10, 2021 3:26 pm
livesoft wrote: Thu Jun 10, 2021 2:40 pm
mikejuss wrote: Thu Jun 10, 2021 2:36 pmWhat if you can't add anything to the brokerage account for 6 months?
C'mon, try it yourself. You could let the "growth" be 0% in the first 6 months and 10% in the next 6 months and it would still match the +10% scenario I mentioned. You could contribute $2000 a month in the last 6 months and nothing in the first 6 months. Or $12,000 once a year or whatever you feel like modeling.

My point is DON'T GUESS! Please do the math for any scenario you want to think of.
I take your point; you're clearly more passionate about this matter than I.

Two questions I've never been able to settle in a satisfactory manner (which has lead to my skepticism about prioritizing tax efficiency): are indexed bonds a significant tax drag when they're spread out across 401(k), Roth IRA, and brokerage accounts? And assuming one's 401(k) is the best place in which to hold bonds, what is the second-best place--a Roth IRA or a brokerage account?
Brokerage. Don't burn Roth space with slow-growing assets.
I've heard this argued from both sides--and the Bogleheads Wiki disagrees with you.
exodusNH
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Re: Opening a Brokerage Account

Post by exodusNH »

mikejuss wrote: Thu Jun 10, 2021 4:14 pm
exodusNH wrote: Thu Jun 10, 2021 4:08 pm
mikejuss wrote: Thu Jun 10, 2021 3:26 pm
livesoft wrote: Thu Jun 10, 2021 2:40 pm
mikejuss wrote: Thu Jun 10, 2021 2:36 pmWhat if you can't add anything to the brokerage account for 6 months?
C'mon, try it yourself. You could let the "growth" be 0% in the first 6 months and 10% in the next 6 months and it would still match the +10% scenario I mentioned. You could contribute $2000 a month in the last 6 months and nothing in the first 6 months. Or $12,000 once a year or whatever you feel like modeling.

My point is DON'T GUESS! Please do the math for any scenario you want to think of.
I take your point; you're clearly more passionate about this matter than I.

Two questions I've never been able to settle in a satisfactory manner (which has lead to my skepticism about prioritizing tax efficiency): are indexed bonds a significant tax drag when they're spread out across 401(k), Roth IRA, and brokerage accounts? And assuming one's 401(k) is the best place in which to hold bonds, what is the second-best place--a Roth IRA or a brokerage account?
Brokerage. Don't burn Roth space with slow-growing assets.
I've heard this argued from both sides--and the Bogleheads Wiki disagrees with you.
Given good bond fund choices in your 401K, that's preferable. But if you don't, using Roth is OK can be preferable to holding them in taxable. But if you had no problem holding savings in an account paying 2% (ah, the good not-so-old-days!), you shouldn't have any issue holding bonds right now. And if you don't have huge balances, the actual amount of taxes are going to be small.

But if you like the bonds you have in your 401K, just keep them there. Don't focus on the AA of individual accounts. Look at all of your accounts as one big bucket.
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rahmana92
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Joined: Sun Sep 13, 2015 9:20 pm

Re: Opening a Brokerage Account

Post by rahmana92 »

Hi all,

Thank you so much for the detailed and thoughtful replies. After reviewing them all, I think I have a better idea of how all this works. A few follow-ups:

More background:
I've been maxing out both Roth and 401(k) for 6 years now. The amount I would put into the brokerage account is still substantial in comparison (around 100k, I thought I would be spending much more on a house) so I want to make sure I get the allocations right when spread across all my accounts. Reading through some of the comments above, it seems like the ideal thing would be to put most of my stocks in brokerage since it's more tax efficient and most of my bonds in 401(k) since it's tax inefficient. However, keeping my 401(k) and Roth in target date retirement accounts is very important to me. I like contributing automatically to one source and forgetting about it. It makes me less likely to do something stupid!

- If I was to keep my 401(k) and Roth as is, would I invest in something like a Vanguard S&P 500 Index Fund or Vanguard Total Market Index Fund for the Brokerage Account? I was thinking that could fall in line what I need in regards to contributing to one source since they are diversified stocks. Or would it be better to invest in a Target Date Fund here as well even if the bonds are inefficient to make sure the allocations across all the accounts is even?
- Should I buy Admiral Shares? Should I buy an EFT index fund instead (are they more tax efficient)?
- Should I reinvest distributions - I was going to select yes so that the money isn't just sitting there and is getting reinvested.

The good news is that my bank account is already linked to Vanguard due to my Roth so hopefully opening a Brokerage will be easier with them.

Thank you!
dbr
Posts: 35878
Joined: Sun Mar 04, 2007 9:50 am

Re: Opening a Brokerage Account

Post by dbr »

rahmana92 wrote: Fri Jun 11, 2021 8:56 am However, keeping my 401(k) and Roth in target date retirement accounts is very important to me. I like contributing automatically to one source and forgetting about it. It makes me less likely to do something stupid!

It is certainly possible to mix holdings of blended funds and individual investments in stocks and bonds across these different accounts, but it is usually simpler and more straightforward to not use TD funds anymore when there are large assets in taxable. Note that the benefit of TD fund being automatically rebalanced and adjusted to a glide path is no longer so helpful.

- If I was to keep my 401(k) and Roth as is, would I invest in something like a Vanguard S&P 500 Index Fund or Vanguard Total Market Index Fund for the Brokerage Account? I was thinking that could fall in line what I need in regards to contributing to one source since they are diversified stocks. Or would it be better to invest in a Target Date Fund here as well even if the bonds are inefficient to make sure the allocations across all the accounts is even?
- Should I buy Admiral Shares? Should I buy an EFT index fund instead (are they more tax efficient)?
- Should I reinvest distributions - I was going to select yes so that the money isn't just sitting there and is getting reinvested.

You can hold only stocks in taxable and then select the TD fund that results in the correct overall allocation. TD funds should be chosen by asset allocation in the first place and not by matching the label on the fund to your year of retirement. If you broker at Vanguard the total market mutual fund Admiral shares are a good choice. People that broker somewhere else probably prefer a TSM ETF to avoid transaction costs. There is no reason to prefer S&P 500 to total market except in the occasional 401k where no TSM is available.

A long term holder of a single fund in taxable might as well reinvest the distributions. An alternative is to direct the money somewhere else to rebalance or some other use. Retirees who are withdrawing money from their accounts might often direct the distributions directly into a checking account. Be sure when you reinvest that you realize new investment increases your cost basis (not your expenses but you cost basis for calculating capital gains when you sell something). You should elect Specific ID to keep all the tax lots organized.

The good news is that my bank account is already linked to Vanguard due to my Roth so hopefully opening a Brokerage will be easier with them.

Thank you!
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iceport
Posts: 4816
Joined: Sat Apr 07, 2007 4:29 pm

Re: Opening a Brokerage Account

Post by iceport »

rahmana92 wrote: Fri Jun 11, 2021 8:56 am More background:
I've been maxing out both Roth and 401(k) for 6 years now. The amount I would put into the brokerage account is still substantial in comparison (around 100k, I thought I would be spending much more on a house) so I want to make sure I get the allocations right when spread across all my accounts. Reading through some of the comments above, it seems like the ideal thing would be to put most of my stocks in brokerage since it's more tax efficient and most of my bonds in 401(k) since it's tax inefficient.
dbr wrote: Fri Jun 11, 2021 9:14 am
rahmana92 wrote: Fri Jun 11, 2021 8:56 am However, keeping my 401(k) and Roth in target date retirement accounts is very important to me. I like contributing automatically to one source and forgetting about it. It makes me less likely to do something stupid!

It is certainly possible to mix holdings of blended funds and individual investments in stocks and bonds across these different accounts, but it is usually simpler and more straightforward to not use TD funds anymore when there are large assets in taxable. Note that the benefit of TD fund being automatically rebalanced and adjusted to a glide path is no longer so helpful.
I'd just like to expand on dbr's excellent comments.

Your careful consideration of opening a taxable account to hold the substantial spill-over from your tax-advantaged savings is appropriate, and I highly recommend that do it.

However, taxable investing is in many ways a different animal than tax-advantaged investing. It goes beyond near-term tax-efficiency concerns to long-term concerns. For example, say you were to put a TD fund in taxable to match your other holdings elsewhere, knowing that a) the bond allocation is perhaps a minor allocation at this point, and b) bond yields are currently low. So far, so good. But then the market boom continues. Then the TD fund AA glides to a more bond-heavy version. And by then interest rates and bond yields have may have risen. In other words, the TD fund starts to kill you in taxes.

However, now you're looking at a holding with a veritable mountain of unrealized capital gains. And you can't pare it down without incurring an unwanted tax bill.

This is not some far-fetched scenario, but a very likely one, IMHO. And it's for that reason that I feel it's so important to conceptualize every taxable fund you select as a fund you will definitely want to own — and own in a taxable account! — "forever." It's not always easy to undo fund selection errors in a taxable account. (Ironically, holding a dedicated bond-only fund in taxable is often not too expensive to undo, because bond funds don't typically generate a "mountain" of unrealized capital gains, especially in a rising interest rate environment.)

Next, your focus on preventing your own behavioral mistakes is admirable, and shows a great deal of wisdom. TD funds are a great way to keep yourself safe from your own worst instincts.

However, as dbr alludes to, it might be best to acknowledge your days of blissful ignorance of how your asset allocation is being maintained are going to be over, for all practical purposes, once you start a taxable account and/or start mixing TD funds with more elemental index fund building blocks. And once you see that you will have to monitor and re-balance your AA over time for yourself, you'll see how much more complicated monitoring your AA will be when holding "balanced" or TD funds in combination with index funds tracking individual markets.

You can still automate your contributions, no problem there. But you'll have to monitor AA drift.

It's a big step up in behavioral risk and sophistication to start managing your own AA, but it's not really difficult to do. And with a taxable account in play, it's usually the best way to proceed.

It can also be rewarding. :!: :)
"Discipline matters more than allocation.” ─William Bernstein
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Opening a Brokerage Account

Post by livesoft »

iceport wrote: Fri Jun 11, 2021 3:50 pm ...
You can still automate your contributions, no problem there. But you'll have to monitor AA drift.
I am not a purest in this regard and do not believe that any investor has to be.

We have a few accounts that have a single target date index fund in them and one account with a single target risk fund: Vanguard LifeStrategy Moderate Growth. These are actually very useful as they function as stand-alone benchmark accounts with the performance figures automatically appearing as part of a normal glance at the entire portfolio. If the entire portfolio is not outperforming these benchmark funds, then what is the point of participating on Bogleheads.org and commenting about RBDs and arcane tax laws?

For the rest of the portfolio, we do have broad market index funds and a few funds for tilting. From lengthy experience it turns out that "AA drift" is practically a non-issue because we are not anal retentive about precision. AA precision is a false god anyways. One can easily set up a portfolio with a mix of Target funds and either some equity funds alone in taxable or some bond funds in addition to Target funds in tax-advantaged or whatever. Brokerages have tools to show one the asset allocation of all these puppies together whenever one wants to look to monitor portfolio drift.

But I would not put a balanced nor Target fund in my taxable account.

It took me more effort to type this comment than it took me to rebalance my portfolio a few times during all of 2020.
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iceport
Posts: 4816
Joined: Sat Apr 07, 2007 4:29 pm

Re: Opening a Brokerage Account

Post by iceport »

livesoft wrote: Fri Jun 11, 2021 4:02 pm One can easily set up a portfolio with a mix of Target funds and either some equity funds alone in taxable or some bond funds in addition to Target funds in tax-advantaged or whatever. Brokerages have tools to show one the asset allocation of all these puppies together whenever one wants to look to monitor portfolio drift.
Yup, it's all true. And yet, the OP is interested in simplicity. Maintaining a mix of balanced and dedicated equity and fixed income funds is more complicated. Nothing to fear, but more of a PITA that it has to be. (Kinda like creating a wash sale for the fun of it... he says in an attempt at good-natured humor.) :wink: 8-)
"Discipline matters more than allocation.” ─William Bernstein
placeholder
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Re: Opening a Brokerage Account

Post by placeholder »

I'll point out that you do not want to ignore any account due to the possibility of fraud so set whatever account alerts are allowed and check the account manually at least once per month.
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