Is more in my taxable my only option now?

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Topic Author
TNWoods
Posts: 48
Joined: Sun Feb 10, 2019 10:04 am

Is more in my taxable my only option now?

Post by TNWoods » Sun Feb 10, 2019 11:14 am

Been lurking and reading a while now.

Back in the fall of 2008 I had a bit over $10,000 to spare, and opened an ordinary taxable ScotTrade (now TD Ameritrade) account, and bought individual stocks, since they were on sale at such a huge discount. (This was before I ever heard of this website, or John Bogle.) I made some great decisions and some bad decisions, and overall, the great decisions have far outweighed the bad ones. Since then I have sold a few here & there and bought a few here & there. (Over the 10 year lifetime of the account I have only made 21 Buys and 10 Sells, and a lot of those buys were multiple DCA purchases of the same stock. (Currently have 5 stocks.)

The current value of the account is a bit over $140,000.00, so there are a lot of unrealized capital gains in there.

I have a 401(k) with my current employer, and I am maxing it out including the "catch-up" amount I am allowed, (I'm 55).

I have a Roth account that I am maxing out, including the catch-up amount.

I have an HSA that I am maxing out.

I have a rollover IRA with Mass Mutual.

All of the above are invested in Boglehead-approved funds, the specific funds & values are not important.

I have another rollover IRA with TD Ameritrade that was managed (poorly and expensively) for a while by Morgan Stanley, until I transferred it and took over the management, (thus saving 2% per year in AUM fees!) It is currently in 6 individual stocks, most of which were selected by the Morgan Stanley guy before I transferred the account. At this point the account is performing about as well as an index fund, but I am still in the process of deciding if I want to leave it as is, or switch to a Boglehead-approved strategy. (I know what y'all have to say on this, I'm not asking for advice on this account, which is the smallest of all the above accounts.)

I have too much in my bank account, significantly more than 3-6 months of expenses. (I purposely kept this amount high last year because of my need for a new roof, and a new vehicle, both of which have now been purchased. So for the last 9 months, cash has been accumulating.)

I am 100% debt-free, including my house. (In early 2008 I had over $20,000 in credit card debt, and owe $80,000 on the house. I began hard-core frugality measures, and found a better job, leading me to this point.)

I make $102,000.00, and after all the deductions for 401(k), HSA, insurance, & taxes I take home about $45,000, (and $7000 goes to the Roth), leaving about $38,000. My regular monthly expenses are only around $1500.00, leaving me with $20,000 per year to do something with. (I reliably expect salary to rise 5% per year consistently.)

So...from all my reading here, I am pretty sure my only option for investing that is left for me is to add to my taxable account, (and, of course, purchase ETFs, not individual stocks.)

I want to retire in 5 to 7 years. With a realistic SWR based on my current account values, plus the SS amount at 62, plus an additional Defined Benefit plan that my employer has just started, I expect at 62 to pretty much match my current take home pay, and 3 years later when the Defined Benefits begin, to increase that amount by 30% or more.

So two questions:

1) Are there any other recommended options for the cash other than adding to the taxable account (& buying ETFs)?

2) Is it a good idea to realize some of the taxable account's gains, pay the tax, and buy ETFs with the proceeds? (I have a couple stocks that have had huge gains in the past, but which have been pretty sideways for a couple years now.) Or should I just hold everything and sell in the future only as I need cash, and pay the tax then?

Final note: I don't want to buy any real estate, if anyone was going to recommend that.

Thanks,

TNWoods

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Is more in my taxable my only option now?

Post by mhalley » Sun Feb 10, 2019 12:04 pm

Looks like you are already maxing tax advantaged accounts. If there are any losers, sell those, otherwise it is ok to have 10% of your equities in individual stocks.

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Raybo
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Re: Is more in my taxable my only option now?

Post by Raybo » Sun Feb 10, 2019 12:51 pm

You might look into IBonds. They pay a (tiny) real interest rate and get an inflation adjustment, so, essentially, they keep pace with inflation. The good thing for you is that the interest and inflation adjustments are tax deferred, only being recognized as income when the bond is cashed. They can't be cashed for 1 year after buying and there is (I think) a 3-month interest penalty if you cash them before 5 years.

I treat mine as part of my cash position. The main limitation, other than return, is that you can only buy $10K/year.

It is hard to comment on capital gains realization without knowing your tax status. If you can arrange your yearly income below the capital gain threshold, then gains realized up to the threshold are tax free. I am retired and I am using the capital gains I have to pay my expenses while I wait to take SS at 70. Since I have no income, the capital gains are tax-free to me.

Might this strategy work for you?

Do you reinvest dividends? If so, you might have some losers from them that you can use to offset a small bit of capital gain.

Ultimately, the tax code is so tilted toward minimal capital gains taxes that paying them isn't all that burdensome, if you need the money.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

cherijoh
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Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Is more in my taxable my only option now?

Post by cherijoh » Sun Feb 10, 2019 1:18 pm

TNWoods wrote:
Sun Feb 10, 2019 11:14 am
So two questions:

1) Are there any other recommended options for the cash other than adding to the taxable account (& buying ETFs)?

2) Is it a good idea to realize some of the taxable account's gains, pay the tax, and buy ETFs with the proceeds? (I have a couple stocks that have had huge gains in the past, but which have been pretty sideways for a couple years now.) Or should I just hold everything and sell in the future only as I need cash, and pay the tax then?
1) Variable annuities are sometimes sold as a way to defer taxes, but I wouldn't touch them with a 10-ft pole due to high initial fees and surrender charges. EFTs in taxable are the way to go.

2) I was never an individual stock investor, but I did invest in no-load actively managed mutual funds before becoming a Boglehead. I turned off reinvesting cap gains and dividend distributions and sent all new money to index funds. But I kept the funds for a few years because I wanted to avoid paying cap gains. I eventually sold them during the Great recession when much of the embedded capital gains had disappeared. I immediately invested the sales proceeds into the same type of index fund (TSM or TISM depending on the original investment), which has of course recovered nicely since I made the switch. All in all I am happy with the results of my plan.

But I didn't have to worry about any industry or specific stock risks by holding onto the funds. You could end up paying more of a penalty for holding onto the stocks until a stock market correction or until you retire.

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dratkinson
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Re: Is more in my taxable my only option now?

Post by dratkinson » Sun Feb 10, 2019 2:53 pm

Yep. Sounds like you are ready to branch into taxable investing.


Individual stocks. Can let your individual stocks ride until you can dispose of them tax efficiently. During a market downturn. Or sell in retirement (lower tax bracket) to pay your living expense by harvesting LTCG (long-term capital gains).

Cash. A simple thing to do with your cash is to put (some of) it into a bond fund in taxable. In this way it does double-duty: as an extended EF (emergency fund) tier if you need it, and as a portion of your retirement bonds if you don't.


Since you expect to retire in 5-7 years and start SS at 62, would we be correct to guess you're 55 YO now. So your desired AA (asset allocation) is 50/50 (stocks/bonds)?

Specific bond fund recommendation in taxable. To make a suggestion on which bond fund(s) to choose for your taxable account depends upon your fed and state tax brackets, and state of residency. What are they?



You can make your taxable investments tax efficient.

See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _Placement
See Wiki topic: https://www.bogleheads.org/wiki/3-fund_portfolio


Taxable and tax-deferred accounts. Without knowing more about your financial situation, one way to keep your investments tax-efficient is to skew your taxable account toward stock funds, and skew your tax-deferred accounts toward bond funds. Why?
--Since everything withdrawn from a tax-deferred account is taxed as ordinary income, putting bonds into tax-deferred does not increase their taxation. But putting stocks into tax-deferred loses the benefits of QDI (qualified dividend income) and LTCG (long-term capital gains).
--So putting stocks into your taxable account preserves the QDI/LTCG benefits.

Tax-free accounts. It's also recommended that we skew our tax-free accounts toward stock funds for long-term tax-free growth/withdrawals.


Options for bonds in taxable depend upon your federal/state tax brackets.

--Total bond market index fund (TBM, VBMFX). In a low fed tax bracket (<25%, old tax code), TBM is recommended.

--Municipal bond fund. If in a higher fed tax bracket (>=25%, old tax code), it is recommended to substitute a municipal bond fund for the 3-fund portfolios recommended TBM. (VWITX, intermediate-term national muni bond fund, or equivalent, is the recommended TBM replacement.)

See: https://www.bogleheads.org/wiki/Municipal_bonds

--US savings bonds. EE series double in value in 20years. I series offer inflation protection. Both are tax deferred until redeemed, then state tax exempt. Both are easy to redeem for an emergency. However there are annual purchase limits.

See: https://www.bogleheads.org/wiki/EE_savings_bonds
See: https://www.bogleheads.org/wiki/I_savings_bonds



Suggest searching the Wiki for recommended "books" and reading both bond books before making a bond decision for your taxable account. Why? Where both authors agree, that is the safest route---to follow/avoid. Where they disagree, those are alternate routes and probably more risky. You need to know you can withstand the increased risk before going an alternate route.

From your reading you will learn which bond funds are recommended for your tax brackets (fed/state, now/retirement), which might be acceptable if you can tolerate the extra risk, and which to avoid. The simplest solution is to choose the bond fund(s) that work for you both now and in retirement.



Additional books to help with your retirement planning.
--The Boglehead's Guide to Retirement Planning.
--How to Make Your Money Last, Quinn.



Disclosure.

In my beginning I followed the forum's safe advice while I learned more about my risk tolerance. (It took a while but I learned that very safe bonds bored me to tears.)

The majority of my investments are in taxable and I believe them to be as tax-efficient as I can make them: TSM (total stock market) + TISM (total international stock market) + munis. My small Roth IRA is all stock funds and is my play money account.


I used savings bonds (in taxable) for a while. But redeemed them and switched to municipal bonds to simplify my life.
--One less account to manage.
--My heirs and I will appreciate this when I'm older and my mind goes.


It's recommended that we not use munis below the 25% fed tax bracket. But I bought my first while in the 15% fed tax bracket. But! the only way that works (more after-tax income than TBM) is if we go to a long-term (LT) muni, which is more risky, so not recommended.

Using munis in the 15% tax bracket did provide another advantage, they kept me in the 15% tax bracket (longer) so all QDI + LTCG from my taxable investments---the major component of TSM + TISM---were taxed at 0%.


It took me a while to learn that I can withstand extra risk. Why? With pension and SS I didn't foresee the time when I would be forced to sell LT munis, so their greater price fluctuations from increased interest-rate risk didn't worry me too much.

And since in total-return investing (capital appreciation + distributions (dividends + capital gains)), the largest component of bond fund total return comes from dividends, so within reason I preferred more dividends.

I do avoid all HY (high-yield) bond funds. In this I follow the forum's advice to choose my bond funds for (relative) safety, and my equities for risk/growth.



Welcome.
Last edited by dratkinson on Sun Feb 10, 2019 4:13 pm, edited 2 times in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
TNWoods
Posts: 48
Joined: Sun Feb 10, 2019 10:04 am

Re: Is more in my taxable my only option now?

Post by TNWoods » Sun Feb 10, 2019 3:31 pm

Thanks for the replies, everyone, it really helps. I'll have some more reading to do.

@Raybo, thanks for bringing up the point about getting below the cap gains threshold.

If I am able to retire at 60, it will be 2 years before SS starts at 62, and 5 years before the Defined Benefit starts, so I had just sort of planned to live like a monk off of savings, and possibly do occasional labor, or farmer's market stuff, or whatever for those two years.

But I could use those two years as an opportunity to realize some of those gains instead, (or in addition to), since there would be no actual job income.

I don't want much, or need much, so this may play very well into my plans.

Thanks!

Topic Author
TNWoods
Posts: 48
Joined: Sun Feb 10, 2019 10:04 am

Re: Is more in my taxable my only option now?

Post by TNWoods » Sun Feb 10, 2019 3:38 pm

In response to a couple questions about maybe selling some losers, I sold all of them last year, and have carried $2827 loss into this year.

The remainder are in the black, and doing ok.

For now...

Thanks

TNWoods

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