when to sell equities when using taxable and no EF

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masrepus
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when to sell equities when using taxable and no EF

Post by masrepus »

I was wondering how others decide when to sell in their taxable when they do not have an EF. The simple answer is when you need money you sell. But is it that simple? And do you truly only have a taxable you spend from or do you build up some cash for bucketing purposes?

I have a mid 6 fixture taxable all in VTI (Total Market) or VOO (SP500). For my cash, I keep maybe a couple months worth to cover expenses at Ally HYS. But with kids and school some months it gets really tight which I don't like - not because I don't have money, but because I am playing games. I fight the urge to sell anything in the taxable to provide more cushion. I play games to delay the expenses or wait till quarterly when I can cash in some RSUs and get a cash infusion.

Is the thinking it doesn't matter to sell in taxable and then buy more when the RSUs come in? If I don't have a need for the proceeds from the RSUs I buy VTI or VOO in the taxable. The cost basis is higher and you have fewer shares when buying with the RSU money. But it's all fungible in this flow so it doesn't matter.

Also is it the right view that with a taxable, you have some shares that have gains, and some loss, but at they end of the day they are shares all the same. Sell some at gain or loss, whatever is advantageous to you, and get the money when you need it.

Or should I look to keep a little more cash to even out the ups and downs a little better? Typically that's why you have an EF to keep you from doing drastic things to your portfolio, but in this case it is more how can I better use the taxable or convince myself of using it more efficiently.
mikejuss
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Re: when to sell equities when using taxable and no EF

Post by mikejuss »

You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
tashnewbie
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Re: when to sell equities when using taxable and no EF

Post by tashnewbie »

masrepus wrote: Wed Oct 13, 2021 12:36 pm Or should I look to keep a little more cash to even out the ups and downs a little better?
Seems like the easier solution.

Hold a little more cash in your HYSA to smooth your cashflow and reduce the "tightening" that occurs regularly.
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Re: when to sell equities when using taxable and no EF

Post by Mike Scott »

masrepus wrote: Wed Oct 13, 2021 12:36 pm The simple answer is when you need money you sell. But is it that simple? And do you truly only have a taxable you spend from or do you build up some cash for bucketing purposes?
You are making this harder than it needs to be. Either keep enough cash to smooth things out or sell something when you need money.
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Re: when to sell equities when using taxable and no EF

Post by mhc »

OP,

there is nothing wrong with what you are currently doing, but you mentioned that you don't like it. Either learn to like it or keep a little more cash on hand.

I prefer to keep a little more cash on hand when I know a large expense is coming up. Maybe you can do a little more forecasting. If you can predict that you may need an extra $X in a few months, then set aside that much and invest the rest.
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Re: when to sell equities when using taxable and no EF

Post by mikejuss »

mhc wrote: Wed Oct 13, 2021 2:21 pm OP,

there is nothing wrong with what you are currently doing, but you mentioned that you don't like it. Either learn to like it or keep a little more cash on hand.

I prefer to keep a little more cash on hand when I know a large expense is coming up. Maybe you can do a little more forecasting. If you can predict that you may need an extra $X in a few months, then set aside that much and invest the rest.
Actually, if the OP pulls money from his retirement account during a down market, there is indeed something wrong with what he's doing. It's risky. He should hold more cash.
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Re: when to sell equities when using taxable and no EF

Post by sailaway »

mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
That seems like an oddly rigid rule. We certainly don't sell often, but have no problem selling when needed.

For the OP, the reason we don't sell often is because we keep a couple of months' buffer. If you are cashing in RSUs quarterly, you aren't even holding a particularly large cash buffer, just enough to get you to the next RSU on average, and you can sell if there is anything extraordinary.
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mhc
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Re: when to sell equities when using taxable and no EF

Post by mhc »

mikejuss wrote: Wed Oct 13, 2021 2:30 pm
mhc wrote: Wed Oct 13, 2021 2:21 pm OP,

there is nothing wrong with what you are currently doing, but you mentioned that you don't like it. Either learn to like it or keep a little more cash on hand.

I prefer to keep a little more cash on hand when I know a large expense is coming up. Maybe you can do a little more forecasting. If you can predict that you may need an extra $X in a few months, then set aside that much and invest the rest.
Actually, if the OP pulls money from his retirement account during a down market, there is indeed something wrong with what he's doing. It's risky. He should hold more cash.
The OP has a mid 6 figure taxable account. That is the context of his post. He also has RSUs vesting periodically. If the mid 6 figure taxable account, salary, and RSUs are not enough to cover what comes up, he has serious problems. I think drawing from his retirement account during a down market would be the least of his problems.

Holding cash is risky. Have you seen inflation lately?
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Re: when to sell equities when using taxable and no EF

Post by mikejuss »

mhc wrote: Wed Oct 13, 2021 2:36 pm
mikejuss wrote: Wed Oct 13, 2021 2:30 pm
mhc wrote: Wed Oct 13, 2021 2:21 pm OP,

there is nothing wrong with what you are currently doing, but you mentioned that you don't like it. Either learn to like it or keep a little more cash on hand.

I prefer to keep a little more cash on hand when I know a large expense is coming up. Maybe you can do a little more forecasting. If you can predict that you may need an extra $X in a few months, then set aside that much and invest the rest.
Actually, if the OP pulls money from his retirement account during a down market, there is indeed something wrong with what he's doing. It's risky. He should hold more cash.
The OP has a mid 6 figure taxable account. That is the context of his post. He also has RSUs vesting periodically. If the mid 6 figure taxable account, salary, and RSUs are not enough to cover what comes up, he has serious problems. I think drawing from his retirement account during a down market would be the least of his problems.

Holding cash is risky. Have you seen inflation lately?
I agree that RSUs provide a solid cushion. But depleting a taxable account during a down market--should that circumstance occur--could severely affect one's ability to retire on time, as one will not enjoy as much pop when the market recovers. This topic is endlessly debatable; as with so many other things in life, the key is balance.
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mhc
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Re: when to sell equities when using taxable and no EF

Post by mhc »

mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
This advice is wrong. It may apply to some people but certainly not all.

What about tax loss harvesting?

If I have a $2 million dollar taxable account and $5+ million in investments, why would I need an emergency fund?

Taxable investments in index funds are rather liquid. Credit cards can certainly bridge gaps in time between spending and liquidating investments.
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Re: when to sell equities when using taxable and no EF

Post by mikejuss »

mhc wrote: Wed Oct 13, 2021 2:42 pm
mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
This advice is wrong. It may apply to some people but certainly not all.

What about tax loss harvesting?

If I have a $2 million dollar taxable account and $5+ million in investments, why would I need an emergency fund?

Taxable investments in index funds are rather liquid. Credit cards can certainly bridge gaps in time between spending and liquidating investments.
You're confusing things. If you have enough money to retire (i.e., "a $2 million dollar taxable account and $5+ million in investments"), then selling is not a problem, provided your asset allocation is reflective of your status as a retiree. If you're still in the accumulation phase, selling is generally not advisable (though I understand that it is sometimes necessary).

Tax-loss harvesting is a different matter, more like exchanging one fund for another. You're not really selling anything, just trying to lower your tax bill via a switcheroo.
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Re: when to sell equities when using taxable and no EF

Post by mhc »

mikejuss wrote: Wed Oct 13, 2021 2:48 pm
mhc wrote: Wed Oct 13, 2021 2:42 pm
mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
This advice is wrong. It may apply to some people but certainly not all.

What about tax loss harvesting?

If I have a $2 million dollar taxable account and $5+ million in investments, why would I need an emergency fund?

Taxable investments in index funds are rather liquid. Credit cards can certainly bridge gaps in time between spending and liquidating investments.
You're confusing things. If you have enough money to retire (i.e., "a $2 million dollar taxable account and $5+ million in investments"), then selling is not a problem, provided your asset allocation is reflective of your status as a retiree. If you're still in the accumulation phase, selling is generally not advisable (though I understand that it is sometimes necessary).

Tax-loss harvesting is a different matter, more like exchanging one fund for another. You're not really selling anything, just trying to lower your tax bill.
I'm not confusing things. $5+ million may or may not be enough to retire. You stated an absolute. I am just illustrating that your absolute is really not an absolute.

TLH is absolutely involves selling. Call it what you like, but it is a valid example that shows your absolute does not hold water.
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Re: when to sell equities when using taxable and no EF

Post by mikejuss »

mhc wrote: Wed Oct 13, 2021 2:53 pm
mikejuss wrote: Wed Oct 13, 2021 2:48 pm
mhc wrote: Wed Oct 13, 2021 2:42 pm
mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
This advice is wrong. It may apply to some people but certainly not all.

What about tax loss harvesting?

If I have a $2 million dollar taxable account and $5+ million in investments, why would I need an emergency fund?

Taxable investments in index funds are rather liquid. Credit cards can certainly bridge gaps in time between spending and liquidating investments.
You're confusing things. If you have enough money to retire (i.e., "a $2 million dollar taxable account and $5+ million in investments"), then selling is not a problem, provided your asset allocation is reflective of your status as a retiree. If you're still in the accumulation phase, selling is generally not advisable (though I understand that it is sometimes necessary).

Tax-loss harvesting is a different matter, more like exchanging one fund for another. You're not really selling anything, just trying to lower your tax bill.
I'm not confusing things. $5+ million may or may not be enough to retire. You stated an absolute. I am just illustrating that your absolute is really not an absolute.

TLH is absolutely involves selling. Call it what you like, but it is a valid example that shows your absolute does not hold water.
Instead of an absolute, let's call it a guideline that, in a pinch, may be ignored.

Tax-loss harvesting involves selling one investment in order to purchase another (and to get a tax benefit). The OP--unless I've misunderstood him--is talking about selling an investment in order to pay for goods and services, thus depleting his total investment amount. I don't advise him to do that.
Last edited by mikejuss on Wed Oct 13, 2021 3:03 pm, edited 1 time in total.
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Re: when to sell equities when using taxable and no EF

Post by bloom2708 »

I keep cash at the local bank and my taxable at Vanguard is not 100% stocks.

We keep spillover cash in the settlement/money market at Vanguard. Sure it doesn't make much interest, but the amount isn't going to make or break retirement.

2 kids in college and 1 a few years away. Lots of perhaps unexpected things come up. Nice to have buffer.
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Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

masrepus wrote: Wed Oct 13, 2021 12:36 pm I was wondering how others decide when to sell in their taxable when they do not have an EF. The simple answer is when you need money you sell. But is it that simple? And do you truly only have a taxable you spend from or do you build up some cash for bucketing purposes?

Or should I look to keep a little more cash to even out the ups and downs a little better? Typically that's why you have an EF to keep you from doing drastic things to your portfolio, but in this case it is more how can I better use the taxable or convince myself of using it more efficiently.
One approach is to sell whatever the WR you plan to use in retirement, today. So if your AA is 500K and 4% WR, you can sell 1.7K/mo. If this doesn't seem enough, you need more cash on hand.

Personally I like to max out at 95/5 and keep 5% in cash. On a 500K portfolio, that'd be 25K - a lot of liquidity while not hurting the performance of equities that much.
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masrepus
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Re: when to sell equities when using taxable and no EF

Post by masrepus »

Probably should have included more details in the original post, but here also: I am probably 10-5 years off before retiring so still accumulating. Allocation is 90/10 across retirement and taxable. Though that 10% fixed includes my two months of cash. Salary covers most of the bills, but I also fully contribute to pre-tax 401k and post-tax Megabackdoor Roth so the paychecks go to near 0.00 until I hit the 58k. I use one to two quarters of RSUs to fund the backdoor Roth. Then I start getting the regular paycheck income.

With kids and school stuff the short-term cash needs ratchet up a few 1000 here and there - I need to do a better job forecasting, but school stuff, cars, ac repairs, seem to hit me often. I keep just enough cash to cover the bills and then I like to invest everything else. That is what bugs me, is I want to be fully invested with little cash drag. But I haven't fully embraced the taxable as my EF yet. I wait till the next quarterly RSUs to make up any shortfall, but that is because I won't sell in the taxable. I am working through how that would work and how others view it.
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

masrepus wrote: Wed Oct 13, 2021 3:26 pm Probably should have included more details in the original post, but here also: I am probably 10-5 years off before retiring so still accumulating. Allocation is 90/10 across retirement and taxable. Though that 10% fixed includes my two months of cash. Salary covers most of the bills, but I also fully contribute to pre-tax 401k and post-tax Megabackdoor Roth so the paychecks go to near 0.00 until I hit the 58k. I use one to two quarters of RSUs to fund the backdoor Roth. Then I start getting the regular paycheck income.

With kids and school stuff the short-term cash needs ratchet up a few 1000 here and there - I need to do a better job forecasting, but school stuff, cars, ac repairs, seem to hit me often. I keep just enough cash to cover the bills and then I like to invest everything else. That is what bugs me, is I want to be fully invested with little cash drag. But I haven't fully embraced the taxable as my EF yet. I wait till the next quarterly RSUs to make up any shortfall, but that is because I won't sell in the taxable. I am working through how that would work and how others view it.
If you're 90/10 overall, why can't you go 100/0 in retirement and push fixed income into taxable? 10% in fixed income provides a lot of liquidity, just a matter of how you construct the instruments (LTT, STT, cash etc etc).
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Re: when to sell equities when using taxable and no EF

Post by grabiner »

My taxable account has been all stock for years. I sell from it only when I need the money, which has happened five times: car purchases in 2006 and 2017, home down payment in 2013, and car loan payoff in 2002 and mortgage payoff in 2020 (both times, a stock market decline allowed me to sell stock for no capital gain).

Since I also hold bonds (in my employer plan), I have the option of making an effective sale of bonds: I sell my taxable stock, and move an equal amount from stock to bonds in my employer plan. This is what I did in 2020. In 2013, buying a home was a major change in my financial situation, so I also changed my asset allocation and then rebalanced to the new allocation. The car payments were small enough that they didn't significantly affect my allocation.
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masrepus
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Re: when to sell equities when using taxable and no EF

Post by masrepus »

Marseille07 wrote: Wed Oct 13, 2021 3:34 pm
masrepus wrote: Wed Oct 13, 2021 3:26 pm Probably should have included more details in the original post, but here also: I am probably 10-5 years off before retiring so still accumulating. Allocation is 90/10 across retirement and taxable. Though that 10% fixed includes my two months of cash. Salary covers most of the bills, but I also fully contribute to pre-tax 401k and post-tax Megabackdoor Roth so the paychecks go to near 0.00 until I hit the 58k. I use one to two quarters of RSUs to fund the backdoor Roth. Then I start getting the regular paycheck income.

With kids and school stuff the short-term cash needs ratchet up a few 1000 here and there - I need to do a better job forecasting, but school stuff, cars, ac repairs, seem to hit me often. I keep just enough cash to cover the bills and then I like to invest everything else. That is what bugs me, is I want to be fully invested with little cash drag. But I haven't fully embraced the taxable as my EF yet. I wait till the next quarterly RSUs to make up any shortfall, but that is because I won't sell in the taxable. I am working through how that would work and how others view it.
If you're 90/10 overall, why can't you go 100/0 in retirement and push fixed income into taxable? 10% in fixed income provides a lot of liquidity, just a matter of how you construct the instruments (LTT, STT, cash etc etc).
Retirement is still a good 10-15 years off. Are you suggesting trying to move the 10% (or good chunk of it) from 401k to taxable over this duration? And use that as a way to get past my dilemma?

I haven't fully though through the idea, but I wonder if it would help another question I had. In a previous thread I had questioned the need for my 10% bonds in my 401k - if I never rebalanced. The bonds just sitting in the 401k and I couldn't really touch. You can do the sell equities in taxable and then exchange bonds for equities to even it back out - but I don't do any rebalancing. I just have this 10% chunk of bonds in there. But if those were in the taxable I could see the upside you mention about liquidity.
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Re: when to sell equities when using taxable and no EF

Post by regularguy455 »

Have you considered a HELOC? It’s a super cheap solution to temporary liquidity issues. Ive been happy using it to float low balances instead of selling assets and realizing a capital gain. Some folks might be tempted to over extend but if you’re disciplined it’s worth a look.
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

masrepus wrote: Wed Oct 13, 2021 9:44 pm Retirement is still a good 10-15 years off. Are you suggesting trying to move the 10% (or good chunk of it) from 401k to taxable over this duration? And use that as a way to get past my dilemma?

I haven't fully though through the idea, but I wonder if it would help another question I had. In a previous thread I had questioned the need for my 10% bonds in my 401k - if I never rebalanced. The bonds just sitting in the 401k and I couldn't really touch. You can do the sell equities in taxable and then exchange bonds for equities to even it back out - but I don't do any rebalancing. I just have this 10% chunk of bonds in there. But if those were in the taxable I could see the upside you mention about liquidity.
Well, I don't know what 90/10's "10%" entails, but you should be able to go 100/0 in 401K by swapping your investment funds, then buy the same notional amount of bonds in taxable (via using ETFs like BND).

This way, you have more liquidity by selling bonds in taxable to generate cash if you need.
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Re: when to sell equities when using taxable and no EF

Post by tomsense76 »

Marseille07 wrote: Wed Oct 13, 2021 9:58 pm
masrepus wrote: Wed Oct 13, 2021 9:44 pm Retirement is still a good 10-15 years off. Are you suggesting trying to move the 10% (or good chunk of it) from 401k to taxable over this duration? And use that as a way to get past my dilemma?

I haven't fully though through the idea, but I wonder if it would help another question I had. In a previous thread I had questioned the need for my 10% bonds in my 401k - if I never rebalanced. The bonds just sitting in the 401k and I couldn't really touch. You can do the sell equities in taxable and then exchange bonds for equities to even it back out - but I don't do any rebalancing. I just have this 10% chunk of bonds in there. But if those were in the taxable I could see the upside you mention about liquidity.
Well, I don't know what 90/10's "10%" entails, but you should be able to go 100/0 in 401K by swapping your investment funds, then buy the same notional amount of bonds in taxable (via using ETFs like BND).

This way, you have more liquidity by selling bonds in taxable to generate cash if you need.
Or consider munis. If you are making enough money to front-load your retirement accounts in 6months (that's what I understand you to be doing though please feel free to correct me), then you are in a high enough bracket for munis to make sense.

grabiner is the expert in this stuff. So he may have better suggestions. Just to start though would look at Vanguard Limited-Term Tax-Exempt. This on the short end of maturities. If you want shorter, there is Vanguard Short-Term Tax-Exempt. Selling out of there won't generate too much in capital gains (sometimes there will be losses). On average it is mostly a wash. The income is tax-free nationally, but you may face state income taxes.
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Re: when to sell equities when using taxable and no EF

Post by tomsense76 »

masrepus wrote: Wed Oct 13, 2021 3:26 pm Probably should have included more details in the original post, but here also: I am probably 10-5 years off before retiring so still accumulating. Allocation is 90/10 across retirement and taxable. Though that 10% fixed includes my two months of cash. Salary covers most of the bills, but I also fully contribute to pre-tax 401k and post-tax Megabackdoor Roth so the paychecks go to near 0.00 until I hit the 58k. I use one to two quarters of RSUs to fund the backdoor Roth. Then I start getting the regular paycheck income.

With kids and school stuff the short-term cash needs ratchet up a few 1000 here and there - I need to do a better job forecasting, but school stuff, cars, ac repairs, seem to hit me often. I keep just enough cash to cover the bills and then I like to invest everything else. That is what bugs me, is I want to be fully invested with little cash drag. But I haven't fully embraced the taxable as my EF yet. I wait till the next quarterly RSUs to make up any shortfall, but that is because I won't sell in the taxable. I am working through how that would work and how others view it.
Just to clarify you are front-loading the retirement accounts, correct? If so, am doing the same thing as you.

As you say, this isn't so much an emergency fund issue, but a forecasting/cashflow issue. Ultimately this comes down to getting a better handle on what your expenses are. Maybe go back through the credit card bills to get a sense of how much you are spending per month? Checking on what maintenance items in the house might be due for replacement? If you have used cars that are having issues, the market for those has been hot of late. So one could sell them and upgrade to new cars on warranty for less than normal (though do your own research here). It may also involve a family planning meeting (at least on the adult side of the table) to help get everyone on-board with planning these expenses better. Not to say anyone isn't being conscientious, just it may take a concerted effort from multiple people for things to work properly.

If you are giving up ~6months of salary to cover costs, would make sure you at least have enough to make it to the next RSU (maybe plus a month for buffer). If your RSUs are offered quarterly (guessing the last one is in December), there isn't that much cash drag on this money practically speaking as you are then maxing out your retirement accounts immediately after (effectively moving money from taxable to tax preferential accounts). Also you are benefitting from the fact that the tax-preferential money is going into the market as early as it possibly can as opposed to being added throughout the year.

This isn't to say you couldn't sell from taxable to cover expenses. That could be reasonable. However if you are doing this every year multiple times, it is introducing a fair bit of tax drag to your portfolio (not to mention complexity and more work at tax time). It would be much better if you could plan so as to avoid this headache.
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Re: when to sell equities when using taxable and no EF

Post by grabiner »

tomsense76 wrote: Wed Oct 13, 2021 10:06 pm
Marseille07 wrote: Wed Oct 13, 2021 9:58 pm Or consider munis. If you are making enough money to front-load your retirement accounts in 6months (that's what I understand you to be doing though please feel free to correct me), then you are in a high enough bracket for munis to make sense.

grabiner is the expert in this stuff. So he may have better suggestions. Just to start though would look at Vanguard Limited-Term Tax-Exempt. This on the short end of maturities. If you want shorter, there is Vanguard Short-Term Tax-Exempt. Selling out of there won't generate too much in capital gains (sometimes there will be losses). On average it is mostly a wash. The income is tax-free nationally, but you may face state income taxes.
I am not really an expert here, although I do often make muni recommendations. Whether to hold bonds in taxable or tax-deferred depends on your tax situation, and also on the relative quality of the stock and fixed-income options in your 401(k). But as long as you have a large taxable account, you don't need bonds in taxable for liquidity; see Placing cash needs in a tax-advantaged account on the wiki.

My rule of thumb is that, if you hold bonds in your taxable account, munis will have a higher after-tax yield than taxable bonds of comparable risk if your marginal tax rate is over 25%. Therefore, I recommend munis in a 32% bracket, 24% bracket if you are subject to Net Investment Income Tax, or 22% or 24% bracket if you use a Vanguard muni fund for your high-tax state.

The Vanguard muni funds most similar to Total Bond Market Index (the Bogleheads default taxable bond holding) are Intermediate-Term Tax-Exempt and Tax-Exempt Bond Index. I usually recommend the shorter-term funds only if you have short-term needs (money to be spent within three years should not be in longer-term bonds), or if you are balancing out a long-term fund (50% in the Vanguard long-term fund for your state and 50% in Limited-Term Tax-Exempt gives you an overall intermediate-term duration, with half the bonds outside your state for diversification but more than half the income exempt from state tax).
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masrepus
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Re: when to sell equities when using taxable and no EF

Post by masrepus »

tomsense76 wrote: Wed Oct 13, 2021 10:23 pm
masrepus wrote: Wed Oct 13, 2021 3:26 pm Probably should have included more details in the original post, but here also: I am probably 10-5 years off before retiring so still accumulating. Allocation is 90/10 across retirement and taxable. Though that 10% fixed includes my two months of cash. Salary covers most of the bills, but I also fully contribute to pre-tax 401k and post-tax Megabackdoor Roth so the paychecks go to near 0.00 until I hit the 58k. I use one to two quarters of RSUs to fund the backdoor Roth. Then I start getting the regular paycheck income.

With kids and school stuff the short-term cash needs ratchet up a few 1000 here and there - I need to do a better job forecasting, but school stuff, cars, ac repairs, seem to hit me often. I keep just enough cash to cover the bills and then I like to invest everything else. That is what bugs me, is I want to be fully invested with little cash drag. But I haven't fully embraced the taxable as my EF yet. I wait till the next quarterly RSUs to make up any shortfall, but that is because I won't sell in the taxable. I am working through how that would work and how others view it.
Just to clarify you are front-loading the retirement accounts, correct? If so, am doing the same thing as you.
Yes, front-loading. RSUs and bonus in December, keep a chunk in cash to cover expenses while front-loading the after-tax and backdoor Roths.
tomsense76 wrote: Wed Oct 13, 2021 10:23 pm As you say, this isn't so much an emergency fund issue, but a forecasting/cashflow issue. Ultimately this comes down to getting a better handle on what your expenses are. Maybe go back through the credit card bills to get a sense of how much you are spending per month? Checking on what maintenance items in the house might be due for replacement? If you have used cars that are having issues, the market for those has been hot of late. So one could sell them and upgrade to new cars on warranty for less than normal (though do your own research here). It may also involve a family planning meeting (at least on the adult side of the table) to help get everyone on-board with planning these expenses better. Not to say anyone isn't being conscientious, just it may take a concerted effort from multiple people for things to work properly.
Forecasting is good for the known expenses, but the random stuff causes the issue because I keep so little cash and put everything back into the taxable. Hence this thread. The other advantage of the taxable is that "seems" more off-limits. Amazingly we can find a way to spend what is in the savings account, but the taxable is left alone.
tomsense76 wrote: Wed Oct 13, 2021 10:23 pm If you are giving up ~6months of salary to cover costs, would make sure you at least have enough to make it to the next RSU (maybe plus a month for buffer). If your RSUs are offered quarterly (guessing the last one is in December), there isn't that much cash drag on this money practically speaking as you are then maxing out your retirement accounts immediately after (effectively moving money from taxable to tax preferential accounts). Also you are benefitting from the fact that the tax-preferential money is going into the market as early as it possibly can as opposed to being added throughout the year.
This isn't to say you couldn't sell from taxable to cover expenses. That could be reasonable. However if you are doing this every year multiple times, it is introducing a fair bit of tax drag to your portfolio (not to mention complexity and more work at tax time). It would be much better if you could plan so as to avoid this headache.
A bigger cushion of cash is the easiest option and likely what I should do. But with the large taxable, that is where I was trying to get better about actually using it if it made sense and could be done in an efficient manner. Your last comment is also what lead to the thread and why I don't use the taxable - bunch of small transactions, creating work and possibly drag. I am really overthinking this. It's not like these are large amounts that are moving the needle, so I should keep a little more cash to smooth things out. Leave the taxable until there is a large expense and use it as needed.
MrJedi
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Re: when to sell equities when using taxable and no EF

Post by MrJedi »

Sell in taxable when you need money. At the same time you can rebalance fixed income to equities in a IRA/401k/etc. to maintain a proper AA.
Topic Author
masrepus
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Re: when to sell equities when using taxable and no EF

Post by masrepus »

grabiner wrote: Thu Oct 14, 2021 12:42 am
tomsense76 wrote: Wed Oct 13, 2021 10:06 pm
Marseille07 wrote: Wed Oct 13, 2021 9:58 pm Or consider munis. If you are making enough money to front-load your retirement accounts in 6months (that's what I understand you to be doing though please feel free to correct me), then you are in a high enough bracket for munis to make sense.

grabiner is the expert in this stuff. So he may have better suggestions. Just to start though would look at Vanguard Limited-Term Tax-Exempt. This on the short end of maturities. If you want shorter, there is Vanguard Short-Term Tax-Exempt. Selling out of there won't generate too much in capital gains (sometimes there will be losses). On average it is mostly a wash. The income is tax-free nationally, but you may face state income taxes.
I am not really an expert here, although I do often make muni recommendations. Whether to hold bonds in taxable or tax-deferred depends on your tax situation, and also on the relative quality of the stock and fixed-income options in your 401(k). But as long as you have a large taxable account, you don't need bonds in taxable for liquidity; see Placing cash needs in a tax-advantaged account on the wiki.
You have mentioned that wiki to me before. What always gets me, is I never rebalance in the 401k. I have all my bonds in there, in a VG institutional total bond at .012 ER, so it is pretty good. The bonds are about 2 years of expenses. But I never rebalance, I just keep a chunk in there. I am not so strict on the ration 90/10 - but I keep a couple years in there, which it doesn't bother me if it is 1 year or 3 years. I focus mainly on 100% sp500 for the after-tax mega backdoor Roth and then balance out the pre-tax to international and bond. But maybe I should get better with the ratio, if I do sell a large chunk in the taxable and swap it in the 401k.
grabiner wrote: Thu Oct 14, 2021 12:42 am My rule of thumb is that, if you hold bonds in your taxable account, munis will have a higher after-tax yield than taxable bonds of comparable risk if your marginal tax rate is over 25%. Therefore, I recommend munis in a 32% bracket, 24% bracket if you are subject to Net Investment Income Tax, or 22% or 24% bracket if you use a Vanguard muni fund for your high-tax state.

The Vanguard muni funds most similar to Total Bond Market Index (the Bogleheads default taxable bond holding) are Intermediate-Term Tax-Exempt and Tax-Exempt Bond Index. I usually recommend the shorter-term funds only if you have short-term needs (money to be spent within three years should not be in longer-term bonds), or if you are balancing out a long-term fund (50% in the Vanguard long-term fund for your state and 50% in Limited-Term Tax-Exempt gives you an overall intermediate-term duration, with half the bonds outside your state for diversification but more than half the income exempt from state tax).
Yes, I am in the 32% bracket. I have a small amount, 5000.00, of Vanguard Tax-Exempt Bond ETF (VTEB) in my taxable. I bought that just to see how it worked, trying to understand the SEC and TTM yields, and compare to the total bonds in the 401k. For short-term of just to get more cash stashed away a good option is to start the I-bonds. It has a better yield than the VTEB at least for the next year or two and that would make be less resistant to have more cash. Though even here the 10K or 20K isn't much to move the needle.
tomsense76
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Re: when to sell equities when using taxable and no EF

Post by tomsense76 »

masrepus wrote: Thu Oct 14, 2021 10:20 am Forecasting is good for the known expenses, but the random stuff causes the issue because I keep so little cash and put everything back into the taxable. Hence this thread. The other advantage of the taxable is that "seems" more off-limits. Amazingly we can find a way to spend what is in the savings account, but the taxable is left alone.

A bigger cushion of cash is the easiest option and likely what I should do. But with the large taxable, that is where I was trying to get better about actually using it if it made sense and could be done in an efficient manner. Your last comment is also what lead to the thread and why I don't use the taxable - bunch of small transactions, creating work and possibly drag. I am really overthinking this. It's not like these are large amounts that are moving the needle, so I should keep a little more cash to smooth things out. Leave the taxable until there is a large expense and use it as needed.
Yeah that's fair. Sometimes things do come up.

One thing to consider that has helped me at least, is to start treating this cash cushion as part of your fixed income (if you are not already). This could allow you to move more fixed income to stock in other accounts when the cash cushion is high and reverse the process as the cash cushion is depleted.

Related to the point above, have found it useful to look at how much cash I'm holding relative to the rest of my portfolio. Idk where you are in terms of amount saved, income, expenses, and cash on hand, but as you save more and your investments grow this number becomes smaller.

While I like you am trying to invest as much cash as I can and not leave it hanging around, have to admit the amount of cash that is hanging around is becoming an increasingly insignificant amount relative to the portfolio. It sounds like you may be coming to this conclusion as well. Tracking the percentage though does help make this concrete.
Last edited by tomsense76 on Thu Oct 14, 2021 9:45 pm, edited 1 time in total.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
zie
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Re: when to sell equities when using taxable and no EF

Post by zie »

Like others have said, this is a cashflow issue. I'm now Financially Independent, still working, with 6 figures in taxable(which is roughly 5x my annual expenses) and no special emergency fund. This is how I manage my cashflow needs:

Expenses always go on credit cards(for cash back rewards) unless I can't for some reason, so 90+% of my expenses are on CC.

Paychecks get deposited into a taxable brokerage account, labelled "savings". Day 1 of the month, I transfer all of my known expenses for that month into a CMA account labelled "outgoing" (since I know what my CC bills are already and any other bills, I'm always accurate unless I need the rare ATM cash withdrawal). Over that month, as the bills come due, they come out of my "outgoing" account. The last day of the month "outgoing" will be a zero balance.

So I keep around 1 month of expenses in cash(depending on when bills come due). Since 90+% of my spend is on CC, I have 30 days to come up with the cash. Since I have roughly a 50% savings rate, I generally always have the cash available the first of the month, I just end up buying less equities. Whatever is left over on the 1st of the month after the transfer to "outgoing" just buys more ETF's according to my AA in my "savings" account. I keep no other cash.

If my incoming cash can't cover because of some large expense, then my plan is: I generally have 30 days to figure out how to pay for it. I can borrow a few dollars on margin(being careful to stay < 25% of my equities value -- i.e. no more than $25k borrowed per $100k invested). If I had a house I could potentially do a HELOC, or I can sell from taxable, using LTCG rates. It just depends on the various rates available to me that day, the amount of $$'s I have to cover, time it will take to get back cashflow positive, etc.

So I login to my accounts the first of the month and do the transfer, schedule the upcoming bills for the month and buy some ETF's. Then I get on with my day, generally taking 5-10 minutes.

This may or may not work for you, but hopefully it gives you another perspective on your cash flow issues.
Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

zie wrote: Thu Oct 14, 2021 9:33 pm Like others have said, this is a cashflow issue. I'm now Financially Independent, still working, with 6 figures in taxable(which is roughly 5x my annual expenses) and no special emergency fund. This is how I manage my cashflow needs:

Expenses always go on credit cards(for cash back rewards) unless I can't for some reason, so 90+% of my expenses are on CC.

Paychecks get deposited into a taxable brokerage account, labelled "savings". Day 1 of the month, I transfer all of my known expenses for that month into a CMA account labelled "outgoing" (since I know what my CC bills are already and any other bills, I'm always accurate unless I need the rare ATM cash withdrawal). Over that month, as the bills come due, they come out of my "outgoing" account. The last day of the month "outgoing" will be a zero balance.

So I keep around 1 month of expenses in cash(depending on when bills come due). Since 90+% of my spend is on CC, I have 30 days to come up with the cash. Since I have roughly a 50% savings rate, I generally always have the cash available the first of the month, I just end up buying less equities. Whatever is left over on the 1st of the month after the transfer to "outgoing" just buys more ETF's according to my AA in my "savings" account. I keep no other cash.

If my incoming cash can't cover because of some large expense, then my plan is: I generally have 30 days to figure out how to pay for it. I can borrow a few dollars on margin(being careful to stay < 25% of my equities value -- i.e. no more than $25k borrowed per $100k invested). If I had a house I could potentially do a HELOC, or I can sell from taxable, using LTCG rates. It just depends on the various rates available to me that day, the amount of $$'s I have to cover, time it will take to get back cashflow positive, etc.

So I login to my accounts the first of the month and do the transfer, schedule the upcoming bills for the month and buy some ETF's. Then I get on with my day, generally taking 5-10 minutes.

This may or may not work for you, but hopefully it gives you another perspective on your cash flow issues.
It is a cashflow issue, but a solvable one because the OP's portfolio is mid-6 figs running 90/10. Suppose it is 500K, they have 50K of fixed income!

Quite simply, their fixed income is misplaced. Bonds have no business being in 401K where they can't spend down. This is why I was suggesting to simply swap the investments, i.e. go 100/0 in 401K and hold cash / bonds in taxable / HYSA.
tomsense76
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Re: when to sell equities when using taxable and no EF

Post by tomsense76 »

masrepus wrote: Thu Oct 14, 2021 1:18 pm
grabiner wrote: Thu Oct 14, 2021 12:42 am My rule of thumb is that, if you hold bonds in your taxable account, munis will have a higher after-tax yield than taxable bonds of comparable risk if your marginal tax rate is over 25%. Therefore, I recommend munis in a 32% bracket, 24% bracket if you are subject to Net Investment Income Tax, or 22% or 24% bracket if you use a Vanguard muni fund for your high-tax state.

The Vanguard muni funds most similar to Total Bond Market Index (the Bogleheads default taxable bond holding) are Intermediate-Term Tax-Exempt and Tax-Exempt Bond Index. I usually recommend the shorter-term funds only if you have short-term needs (money to be spent within three years should not be in longer-term bonds), or if you are balancing out a long-term fund (50% in the Vanguard long-term fund for your state and 50% in Limited-Term Tax-Exempt gives you an overall intermediate-term duration, with half the bonds outside your state for diversification but more than half the income exempt from state tax).
Yes, I am in the 32% bracket. I have a small amount, 5000.00, of Vanguard Tax-Exempt Bond ETF (VTEB) in my taxable. I bought that just to see how it worked, trying to understand the SEC and TTM yields, and compare to the total bonds in the 401k. For short-term of just to get more cash stashed away a good option is to start the I-bonds. It has a better yield than the VTEB at least for the next year or two and that would make be less resistant to have more cash. Though even here the 10K or 20K isn't much to move the needle.
One thought here on munis, some funds declare dividends daily vs. monthly. This has an effect on taxation. From the wiki:
If you sell shares of a mutual fund at a loss, and those shares have been held for 6 months or less, then there are special rules that may alter the loss you claim. First, if those shares produced any tax-exempt interest, then the loss is reduced, dollar for dollar, by that interest. Second, if those shares were held while the fund distributed (long term) capital gains, then the loss is treated as a long term loss up to the dollar amount of the distribution those shares produced.[1][2] Vanguard, and likely most other brokerages, will not make the correct adjustment on your IRS Form 1099-B, so you will have to correct it yourself by filing Form 8949 and changing the type of capital loss.[3]
Note that most Vanguard Tax Exempt funds (and others like them) are not subject to the preceding 6 month rule because of the way they accrue and pay out interest (dividends). The 6 month rule for tax exempt interest comes from 26 U.S. Code § 852(b)(4)(B), but there is an exception in 852(b)(4)(E) for funds that declare dividends daily and pay them monthly or more frequently.[4] [5]
However, ETFs and the Tax-Exempt Bond Index Fund (which is the mutual fund class of an ETF) are subject to the six-month rule, because they declare dividends monthly, not daily. To see whether a fund is exempt from the six-month rule, check its prospectus for the statement, "dividends are declared daily and paid monthly"; if it says "dividends are declared monthly" (or quarterly), the six-month rule applies.
For this reason, many of us just go with Vanguard's Tax-Exempt Mutual Funds instead of the ETF (or the Mutual Fund tracking that same index).

Full disclosure, am not currently holding Tax-Exempt funds, but when I have that has been what I have done (and will do so again in the future).
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
zie
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Re: when to sell equities when using taxable and no EF

Post by zie »

Marseille07 wrote: Thu Oct 14, 2021 9:40 pm
It is a cashflow issue, but a solvable one because the OP's portfolio is mid-6 figs running 90/10. Suppose it is 500K, they have 50K of fixed income!

Quite simply, their fixed income is misplaced. Bonds have no business being in 401K where they can't spend down. This is why I was suggesting to simply swap the investments, i.e. go 100/0 in 401K and hold cash / bonds in taxable / HYSA.
I agree this is another way to handle the cashflow issue, provided one wanted to sell their fixed income. One can spend down the fixed income in the 401k if so inclined by swapping can't you? (i.e. sell fixed income and buy equities in 401k and then sell same equities in Taxable). It's potentially annoying, so your approach is the lazier way to do it, but one doesn't have to hold fixed income in taxable to make it work.

Granted in this low return fixed income environment, there is probably no point in working that hard, but some people just like the busy work.
Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

zie wrote: Thu Oct 14, 2021 10:10 pm I agree this is another way to handle the cashflow issue, provided one wanted to sell their fixed income. One can spend down the fixed income in the 401k if so inclined by swapping can't you? (i.e. sell fixed income and buy equities in 401k and then sell same equities in Taxable). It's potentially annoying, so your approach is the lazier way to do it, but one doesn't have to hold fixed income in taxable to make it work.

Granted in this low return fixed income environment, there is probably no point in working that hard, but some people just like the busy work.
I mean...given cash is running short and a choice of selling a) equities or b) fixed income, selling fixed income is an obvious choice. It makes 0 sense to sell equities and keep fixed income around in my opinion.

You're correct that they can sell the fixed income in 401K little by little instead of going 100/0 at once.
Topic Author
masrepus
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Re: when to sell equities when using taxable and no EF

Post by masrepus »

Marseille07 wrote: Thu Oct 14, 2021 10:14 pm
zie wrote: Thu Oct 14, 2021 10:10 pm I agree this is another way to handle the cashflow issue, provided one wanted to sell their fixed income. One can spend down the fixed income in the 401k if so inclined by swapping can't you? (i.e. sell fixed income and buy equities in 401k and then sell same equities in Taxable). It's potentially annoying, so your approach is the lazier way to do it, but one doesn't have to hold fixed income in taxable to make it work.

Granted in this low return fixed income environment, there is probably no point in working that hard, but some people just like the busy work.
I mean...given cash is running short and a choice of selling a) equities or b) fixed income, selling fixed income is an obvious choice. It makes 0 sense to sell equities and keep fixed income around in my opinion.

You're correct that they can sell the fixed income in 401K little by little instead of going 100/0 at once.
How do you spend down the fixed income in the 401k and increased fixed income in the taxable? Do you just quit buying equities in the taxable? In my case 90/10, with the 10 all bonds in the 401k. The only free cash is quarterly RSUs which I currently put to equities in the taxable. Is the idea to simply leave it as cash or buy munis/bonds in taxable and in the 401k exchange the bonds for equities in the same amount? If so, that starts to make sense. I wouldn't go to 100/0 in the 401k, but just enough to get my cash flow problem fixed.

That might also fix my annoyance at having so many bonds in the 401k doing nothing. This might also satisfy my itch to get some i-bonds over the next couple years. Small enough amounts, but it provides a second level EF.
Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

masrepus wrote: Fri Oct 15, 2021 2:20 pm How do you spend down the fixed income in the 401k and increased fixed income in the taxable? Do you just quit buying equities in the taxable? In my case 90/10, with the 10 all bonds in the 401k. The only free cash is quarterly RSUs which I currently put to equities in the taxable. Is the idea to simply leave it as cash or buy munis/bonds in taxable and in the 401k exchange the bonds for equities in the same amount? If so, that starts to make sense. I wouldn't go to 100/0 in the 401k, but just enough to get my cash flow problem fixed.

That might also fix my annoyance at having so many bonds in the 401k doing nothing. This might also satisfy my itch to get some i-bonds over the next couple years. Small enough amounts, but it provides a second level EF.
You just sell bonds & buy equities in 401K, then buy bonds in taxable. The idea is to push bonds out of 401K, ideally $0.
zie
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Re: when to sell equities when using taxable and no EF

Post by zie »

masrepus wrote: Fri Oct 15, 2021 2:20 pm
Marseille07 wrote: Thu Oct 14, 2021 10:14 pm
zie wrote: Thu Oct 14, 2021 10:10 pm I agree this is another way to handle the cashflow issue, provided one wanted to sell their fixed income. One can spend down the fixed income in the 401k if so inclined by swapping can't you? (i.e. sell fixed income and buy equities in 401k and then sell same equities in Taxable). It's potentially annoying, so your approach is the lazier way to do it, but one doesn't have to hold fixed income in taxable to make it work.

Granted in this low return fixed income environment, there is probably no point in working that hard, but some people just like the busy work.
I mean...given cash is running short and a choice of selling a) equities or b) fixed income, selling fixed income is an obvious choice. It makes 0 sense to sell equities and keep fixed income around in my opinion.

You're correct that they can sell the fixed income in 401K little by little instead of going 100/0 at once.
How do you spend down the fixed income in the 401k and increased fixed income in the taxable? Do you just quit buying equities in the taxable? In my case 90/10, with the 10 all bonds in the 401k. The only free cash is quarterly RSUs which I currently put to equities in the taxable. Is the idea to simply leave it as cash or buy munis/bonds in taxable and in the 401k exchange the bonds for equities in the same amount? If so, that starts to make sense. I wouldn't go to 100/0 in the 401k, but just enough to get my cash flow problem fixed.

That might also fix my annoyance at having so many bonds in the 401k doing nothing. This might also satisfy my itch to get some i-bonds over the next couple years. Small enough amounts, but it provides a second level EF.

I disagree with Marseille07 here, as you can keep your bonds in your 401k and still spend it. I'm not saying you should, I'm just saying you can.

see: https://www.bogleheads.org/wiki/Placing ... ed_account

Also Grabiner mentioned this exact wiki page upthread.
Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

zie wrote: Fri Oct 15, 2021 5:57 pm
masrepus wrote: Fri Oct 15, 2021 2:20 pm
Marseille07 wrote: Thu Oct 14, 2021 10:14 pm
zie wrote: Thu Oct 14, 2021 10:10 pm I agree this is another way to handle the cashflow issue, provided one wanted to sell their fixed income. One can spend down the fixed income in the 401k if so inclined by swapping can't you? (i.e. sell fixed income and buy equities in 401k and then sell same equities in Taxable). It's potentially annoying, so your approach is the lazier way to do it, but one doesn't have to hold fixed income in taxable to make it work.

Granted in this low return fixed income environment, there is probably no point in working that hard, but some people just like the busy work.
I mean...given cash is running short and a choice of selling a) equities or b) fixed income, selling fixed income is an obvious choice. It makes 0 sense to sell equities and keep fixed income around in my opinion.

You're correct that they can sell the fixed income in 401K little by little instead of going 100/0 at once.
How do you spend down the fixed income in the 401k and increased fixed income in the taxable? Do you just quit buying equities in the taxable? In my case 90/10, with the 10 all bonds in the 401k. The only free cash is quarterly RSUs which I currently put to equities in the taxable. Is the idea to simply leave it as cash or buy munis/bonds in taxable and in the 401k exchange the bonds for equities in the same amount? If so, that starts to make sense. I wouldn't go to 100/0 in the 401k, but just enough to get my cash flow problem fixed.

That might also fix my annoyance at having so many bonds in the 401k doing nothing. This might also satisfy my itch to get some i-bonds over the next couple years. Small enough amounts, but it provides a second level EF.

I disagree with Marseille07 here, as you can keep your bonds in your 401k and still spend it. I'm not saying you should, I'm just saying you can.

see: https://www.bogleheads.org/wiki/Placing ... ed_account

Also Grabiner mentioned this exact wiki page upthread.
Buddy, we're actually on the same page. The wiki page is exactly what I said the OP can do.
JD2775
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Re: when to sell equities when using taxable and no EF

Post by JD2775 »

mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
Ummm that's news to me. I am planning on selling some (VTSAX) for a house downpayment in about a year. Nothing massive but probably mid 5 figures of LTCG lots. I'm about 15 years from retirement.
Last edited by JD2775 on Fri Oct 15, 2021 6:45 pm, edited 2 times in total.
JD2775
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Re: when to sell equities when using taxable and no EF

Post by JD2775 »

mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
Delete. double post
zie
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Re: when to sell equities when using taxable and no EF

Post by zie »

Marseille07 wrote: Fri Oct 15, 2021 6:00 pm
zie wrote: Fri Oct 15, 2021 5:57 pm
masrepus wrote: Fri Oct 15, 2021 2:20 pm
Marseille07 wrote: Thu Oct 14, 2021 10:14 pm
zie wrote: Thu Oct 14, 2021 10:10 pm I agree this is another way to handle the cashflow issue, provided one wanted to sell their fixed income. One can spend down the fixed income in the 401k if so inclined by swapping can't you? (i.e. sell fixed income and buy equities in 401k and then sell same equities in Taxable). It's potentially annoying, so your approach is the lazier way to do it, but one doesn't have to hold fixed income in taxable to make it work.

Granted in this low return fixed income environment, there is probably no point in working that hard, but some people just like the busy work.
I mean...given cash is running short and a choice of selling a) equities or b) fixed income, selling fixed income is an obvious choice. It makes 0 sense to sell equities and keep fixed income around in my opinion.

You're correct that they can sell the fixed income in 401K little by little instead of going 100/0 at once.
How do you spend down the fixed income in the 401k and increased fixed income in the taxable? Do you just quit buying equities in the taxable? In my case 90/10, with the 10 all bonds in the 401k. The only free cash is quarterly RSUs which I currently put to equities in the taxable. Is the idea to simply leave it as cash or buy munis/bonds in taxable and in the 401k exchange the bonds for equities in the same amount? If so, that starts to make sense. I wouldn't go to 100/0 in the 401k, but just enough to get my cash flow problem fixed.

That might also fix my annoyance at having so many bonds in the 401k doing nothing. This might also satisfy my itch to get some i-bonds over the next couple years. Small enough amounts, but it provides a second level EF.

I disagree with Marseille07 here, as you can keep your bonds in your 401k and still spend it. I'm not saying you should, I'm just saying you can.

see: https://www.bogleheads.org/wiki/Placing ... ed_account

Also Grabiner mentioned this exact wiki page upthread.
Buddy, we're actually on the same page. The wiki page is exactly what I said the OP can do.
AH. I was under the impression you were trying to permanently move the Fixed Income(FI) into taxable. I apologize for my misunderstanding. The page doesn't seem to cover the next step, when you have $5k again and want to buy back into FI again(i.e. replenish the Emergency Fund(EF)). If the $5k is in taxable, you buy 5k of equities in taxable and sell $5k equities in 401k and buy FI with it. If the $5k is in the 401k, you just buy FI directly.
Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

zie wrote: Fri Oct 15, 2021 11:01 pm AH. I was under the impression you were trying to permanently move the Fixed Income(FI) into taxable. I apologize for my misunderstanding. The page doesn't seem to cover the next step, when you have $5k again and want to buy back into FI again(i.e. replenish the Emergency Fund(EF)). If the $5k is in taxable, you buy 5k of equities in taxable and sell $5k equities in 401k and buy FI with it. If the $5k is in the 401k, you just buy FI directly.
Well, my preference is to simply go 100/0 in 401K and hold fixed income in taxable. But I understand the approach you're describing, and I don't have an attitude of my way or the highway :beer
zie
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Re: when to sell equities when using taxable and no EF

Post by zie »

JD2775 wrote: Fri Oct 15, 2021 6:42 pm
mikejuss wrote: Wed Oct 13, 2021 12:43 pm You should never sell in taxable before retirement; you should always maintain an appropriate level of liquidity in an emergency fund.
Ummm that's news to me. I am planning on selling some (VTSAX) for a house downpayment in about a year. Nothing massive but probably mid 5 figures of LTCG lots. I'm about 15 years from retirement.
I think the mindset is don't ever sell unless you need to. Part of the whole buy and hold for life mindset. Which is good general advice, but I think not an iron-clad rule. I hold no emergency fund(EF), my entire portfolio is my emergency fund, but if your taxable & ROTH contributions are not large enough to handle your liquidity/EF needs even during a 50% crash, it's probably wise to keep some liquidity and/or emergency fund around.

JD2775, this is getting off-topic, but you might consider converting some or all of your proposed down payment into some fixed income like short term TIPS or cash, so you are guaranteed to have the $$'s around in a year when you want it for the house.
zie
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Re: when to sell equities when using taxable and no EF

Post by zie »

Marseille07 wrote: Fri Oct 15, 2021 11:03 pm
zie wrote: Fri Oct 15, 2021 11:01 pm AH. I was under the impression you were trying to permanently move the Fixed Income(FI) into taxable. I apologize for my misunderstanding. The page doesn't seem to cover the next step, when you have $5k again and want to buy back into FI again(i.e. replenish the Emergency Fund(EF)). If the $5k is in taxable, you buy 5k of equities in taxable and sell $5k equities in 401k and buy FI with it. If the $5k is in the 401k, you just buy FI directly.
Well, my preference is to simply go 100/0 in 401K and hold fixed income in taxable. But I understand the approach you're describing, and I don't have an attitude of my way or the highway :beer
Unless one has so much $$$'s that the tax drag is severe enough to notice(i.e. well into the 2 comma club in taxable), I don't think it really matters where one holds bonds. Certainly holding FI in a tax-advantaged is technically more efficient, and if one really wants to bother with the annoyance I won't complain, but I don't think there is any big need to bother with it. Over optimization for a few dollars a year doesn't move the needle even over one's entire investing lifetime. Some people need to do stuff with their portfolio though, so busy work like this is certainly better than trying to day trade or something!
Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

zie wrote: Fri Oct 15, 2021 11:17 pm Unless one has so much $$$'s that the tax drag is severe enough to notice(i.e. well into the 2 comma club in taxable), I don't think it really matters where one holds bonds. Certainly holding FI in a tax-advantaged is technically more efficient, and if one really wants to bother with the annoyance I won't complain, but I don't think there is any big need to bother with it. Over optimization for a few dollars a year doesn't move the needle even over one's entire investing lifetime. Some people need to do stuff with their portfolio though, so busy work like this is certainly better than trying to day trade or something!
Right, holding bonds in tax-advantaged may be more efficient but not sure if it matters much.

Meanwhile, the OP is holding 50K worth of fixed income, *and* having a cashflow problem. Hence it appears to make sense to squeeze that fixed income out of tax-advantaged into taxable so they can deal with the problem. The question is to do it all at once (100/0) or gradually over time.
shess
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Re: when to sell equities when using taxable and no EF

Post by shess »

masrepus wrote: Thu Oct 14, 2021 10:20 am Forecasting is good for the known expenses, but the random stuff causes the issue because I keep so little cash and put everything back into the taxable. Hence this thread. The other advantage of the taxable is that "seems" more off-limits. Amazingly we can find a way to spend what is in the savings account, but the taxable is left alone.
So, if you're routinely getting hit with unexpected expenses, at some point you maybe need to wonder if you should just budget for a certain size of unexpected expense. Maybe you just need to aim to keep a bit more in a liquid position to cover these unexpected events which are happening so often that you wonder if there's a better way to handle them?

You could sell taxable holdings to cover it, causing tax drag. You could keep more in fixed-income positions in taxable, causing tax drag. You could keep more in cash causing cash drag. You could use a HELOC, causing drag while you pay down that interest. You could use asset-backed line of credit from your brokerage, also causing drag due to interest payments. I suspect that if you sat down to calculate all of these out, and accounted for all of the gotchas, you'd find that one or the other was "best", but that all of them fall into a particular range. Basically, that's just the cost of trying to be 100% invested, so make sure you factor that cost into your return expectations.

Personally, at some point I just decided I'd rather keep a few more months than I prefered of short-term funds available across the year. It just felt like a prudent way to handle expected unexpected costs, and it's certainly easier to implement than some of the alternatives.
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masrepus
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Re: when to sell equities when using taxable and no EF

Post by masrepus »

Marseille07 wrote: Fri Oct 15, 2021 11:32 pm
zie wrote: Fri Oct 15, 2021 11:17 pm Unless one has so much $$$'s that the tax drag is severe enough to notice(i.e. well into the 2 comma club in taxable), I don't think it really matters where one holds bonds. Certainly holding FI in a tax-advantaged is technically more efficient, and if one really wants to bother with the annoyance I won't complain, but I don't think there is any big need to bother with it. Over optimization for a few dollars a year doesn't move the needle even over one's entire investing lifetime. Some people need to do stuff with their portfolio though, so busy work like this is certainly better than trying to day trade or something!
Right, holding bonds in tax-advantaged may be more efficient but not sure if it matters much.

Meanwhile, the OP is holding 50K worth of fixed income, *and* having a cashflow problem. Hence it appears to make sense to squeeze that fixed income out of tax-advantaged into taxable so they can deal with the problem. The question is to do it all at once (100/0) or gradually over time.
Both of the points above are where I am at. 90/10, all index funds, total market/sp500, total intl, total bonds. I have 150k bonds in the 401k, and then some 0 to 25k cash in savings. The 25k cash gets depleted too quickly causing the cash flow. The bonds just sit there since I prefer more a floor rather than percentage and don't rebalance.

Growing up I was poor as dirt. Now I have been fortunate to make some money and save it, but always thinking how to optimize it. I have been through the dot com and lost a bundle of real and paper money, and the great recession and lower 401k. In both I never changed, just kept plugging away with contributions. What has changed over last few years is the RSUs allowing me to build up the taxable and more fixed costs. But I dont have a good feel on how to use the taxable efficiently.

Building up a larger fixed income to even out the cash flow is the priority. I can sell equities in taxable and balance in the 401k. Or I can build up fixed income in the taxable.

As shess says also, I have worked through the different methods and they are all pretty close, so I cant differentiate based on cost alone. My feel right now is saying fixed income in the taxable, but not much reasoning behind it. I am stuck on pure cash or bonds. I have 5k of VTEB municipal bonds, but those have the 6 month issues on qualified dividends, so I need something else. At Fidelity so I can't buy VG funds. I will look at Fidelity funds. There is still the issue on how to build up the bigger fixed income. The next RSU dump I will use to get most of the way there.

I also like the idea of margin, if I need to float for a couple weeks or a month. I am at Fidelity where the rates are high. I will attempt to get the rate lower. Other option is a heloc, and I might try that as I am about as low as I think I would get with a 15 year 2.0% and no more refis. Credit card is also the first line but you have to pay the bill in full at the next due date.
zie
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Re: when to sell equities when using taxable and no EF

Post by zie »

masrepus wrote: Sat Oct 16, 2021 12:36 pm
I also like the idea of margin, if I need to float for a couple weeks or a month. I am at Fidelity where the rates are high. I will attempt to get the rate lower. Other option is a heloc, and I might try that as I am about as low as I think I would get with a 15 year 2.0% and no more refis. Credit card is also the first line but you have to pay the bill in full at the next due date.
Even at "high" Fidelity rates, if it's for 30 days or less.. I'm guessing the cost is better than paying LTCG on selling taxable equities. Again, it matters the time frame, amount, etc. 8% margin cost for 6 months will add up enough to notice probably, but for 30 days, I doubt anyone would care much.

I forget all the details, but I think if you hold 100k or so @ IBKR, you can get 1.6-ish% margin rates, so that's something worth thinking about if it will be common. However, if you need to do it more than 1 or 2 times a year, you probably should just think about holding a bit more cash.

Around CC , yes but you get 30 days to figure out how to pay it, with any of the many options available to one with assets. Personally I would just pick the cheapest version that particular day.
MrJedi
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Re: when to sell equities when using taxable and no EF

Post by MrJedi »

I guess I don't understand the aversion to selling out of taxable if you need the money. If you are investing in taxable consistently, you probably have high cost basis shares that would result in very low gains or even losses. You also have the option for preferential tax treatment for LTCG for long term shares. This is the whole point to be more tax efficient.

If you instead try to shift your taxable to cash, bonds or tax exempt bonds, you are guaranteeing yourself to either get subject to ordinary income tax or choosing lower yielding tax exempt bonds vs keeping "normal" bonds in a 401k or similar.
Marseille07
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Re: when to sell equities when using taxable and no EF

Post by Marseille07 »

MrJedi wrote: Sat Oct 16, 2021 2:26 pm I guess I don't understand the aversion to selling out of taxable if you need the money. If you are investing in taxable consistently, you probably have high cost basis shares that would result in very low gains or even losses. You also have the option for preferential tax treatment for LTCG for long term shares. This is the whole point to be more tax efficient.

If you instead try to shift your taxable to cash, bonds or tax exempt bonds, you are guaranteeing yourself to either get subject to ordinary income tax or choosing lower yielding tax exempt bonds vs keeping "normal" bonds in a 401k or similar.
When they have 150K of bonds in 401K, they want to spend that down before equities. It doesn't make any sense to sell stocks and keep 150K of bonds in 401K.

The solution is simple, they need to slash some of the 150K fixed income in 401K and hold bonds in taxable so they can slash if they run into a cashflow issue.
tomsense76
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Re: when to sell equities when using taxable and no EF

Post by tomsense76 »

masrepus wrote: Sat Oct 16, 2021 12:36 pm Both of the points above are where I am at. 90/10, all index funds, total market/sp500, total intl, total bonds. I have 150k bonds in the 401k, and then some 0 to 25k cash in savings. The 25k cash gets depleted too quickly causing the cash flow. The bonds just sit there since I prefer more a floor rather than percentage and don't rebalance.

Growing up I was poor as dirt. Now I have been fortunate to make some money and save it, but always thinking how to optimize it. I have been through the dot com and lost a bundle of real and paper money, and the great recession and lower 401k. In both I never changed, just kept plugging away with contributions. What has changed over last few years is the RSUs allowing me to build up the taxable and more fixed costs. But I dont have a good feel on how to use the taxable efficiently.

Building up a larger fixed income to even out the cash flow is the priority. I can sell equities in taxable and balance in the 401k. Or I can build up fixed income in the taxable.

As shess says also, I have worked through the different methods and they are all pretty close, so I cant differentiate based on cost alone. My feel right now is saying fixed income in the taxable, but not much reasoning behind it. I am stuck on pure cash or bonds. I have 5k of VTEB municipal bonds, but those have the 6 month issues on qualified dividends, so I need something else. At Fidelity so I can't buy VG funds. I will look at Fidelity funds. There is still the issue on how to build up the bigger fixed income. The next RSU dump I will use to get most of the way there.

I also like the idea of margin, if I need to float for a couple weeks or a month. I am at Fidelity where the rates are high. I will attempt to get the rate lower. Other option is a heloc, and I might try that as I am about as low as I think I would get with a 15 year 2.0% and no more refis. Credit card is also the first line but you have to pay the bill in full at the next due date.
Ok so knowing that you are at Fidelity, one option might be Fidelity Municipal Bond Index Fund (FMBIX). While the fund is somewhat new, it is a low cost, broadly diversified, high quality, intermediate-term index fund. Also critically it includes this line in the prospectus.
The fund normally declares dividends daily and pays them monthly.
This is what we are looking for in terms of avoiding the 6 month issue. Though the caveat "normally" is interesting. Not sure if that is just lawyer speak or there are cases where it does deviate and if so how one would know. Maybe someone else will have thoughts on this.

In any event would take a look at this fund. Also this thread discusses a couple other Fidelity munis ( viewtopic.php?t=333618 ) and this thread ( https://bogleheads.org/forum/viewtopic.php?t=326406 ) is discussing something similar to what we are here (using munis for bonds/liquidity in taxable).

The nice thing about using munis for liquidity like this is the interest is tax-free Federally (though state taxes may be owed). Also bonds are mostly generating income and not generally seeing large capital gains (like stocks). On average the gains and losses in bonds typically net to zero, which should minimize the tax drag when selling. Plus in your tax bracket, you are going to be making more than an equivalent taxable bond fund. Munis tend to take a (small) hit around the same time the stock market does, which would allow one to harvest some losses then.

One can hold stocks in their 401k instead or if holding all munis. This will avoid some tax drag on these stocks (due to dividends being taxed likely with NIIT & possibly also at a higher qualified tax rate). While some may worry about their 401k growing faster with so much in stocks, this is less of an issue for a high income individual with high rate of saving simply because they will be putting way more in taxable than any other account. So one wants their 401k and Roth to grow a bit more to have a bit more tax diversification (as opposed to being heavy in taxable).

One can improve on this by following grabiner's suggestion above ( viewtopic.php?p=6273674#p6273674 ) and finding a long-term tax-exempt bond fund that is state specific and using a nationally diversified short-term tax-exempt bond fund. One then barbells these 50/50 for intermediate term. The main challenge is at Fidelity these may be higher expense funds. Still might be worth it though. We might be able to help pick through these with you if you are comfortable sharing what state you are in.

Margin can also be a tool, but I think it interacts with munis in funny ways from a tax perspective. IIUC muni income then becomes taxable, but am a little fuzzy on how much and under what circumstances. Maybe someone else can comment here. Though if you are able to put $150k in munis in taxable (or even half that), it would be straightforward to just sell munis and skip using margin altogether.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
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