Author Topic: Taxable Investments  (Read 4426 times)

ibleedirish

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Taxable Investments
« on: September 18, 2014, 02:33:35 PM »
My wife and I are now to the point where we are able to max out our 401Ks each year, and are doing so because we expect to be in a lower tax bracket when we retire. We have between 3-4k/month to invest outside of those retirement accounts, and are doing so with Vanguard in VFINX, where we have 4k currently.

In the past year, I've learned a great deal more than I used know about investing, read the jcollins series etc. I feel like I have a workable knowledge of investing, but really don't intend to spend all that much time on my investing. Nor do I want to. I know that things like loss harvesting are important, but I don't want to devote that much time, as my profession currently requires my focus. Knowing that, I'm looking for advice for my non-retirement account investing.

Should I:
1. Continue on this course, pouring all extra $ into VFINX?
2. Stay with Vanguard, but divide my $ into different funds. If so, which?
3. Open an account with Betterment and "set it and forget it"?
4. Do a combination of the above, or something else entirely?
5. We plan to use Roths to save for our 2 kids college. These are not open yet. Should I do them with Vanguard? Betterment?

I should add that I do have 3 paid for rental houses, so I feel like I have some diversification there, and have no desire to expand that portfolio at this time.

Thank you for all your help, and let me know if you need more info.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 928
  • Location: Alberta
  • Yes, I'm Canadian
    • The Rich Moose | A Better Canadian Finance Blog
Re: Taxable Investments
« Reply #1 on: September 18, 2014, 03:49:45 PM »
First, you may be better using VFIAX instead of VFINX if you can. Still the S&P 500 but the Admiral shares version which has lower MER.

For your regular investing account, generally this is a good place to put your international exposure due to foreign tax credits. If you have a Vanguard account already, consider investing in something like VFWAX (All-world ex-US) or VEMAX (Emerging markets). If foreign markets isn't your interest, VTSAX, VFIAX or VIMAX (US mid-market) are good options as well.

For your kids college funds, you can use a Vanguard Life Strategy or Target Retirement funds. If your kids are very young and still a long way away from college, the Target Retirement 2030 or 2025 are good options.

ibleedirish

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Taxable Investments
« Reply #2 on: September 18, 2014, 05:16:05 PM »
Thank you for the reply. I like the idea about the target date funds for the kids college. My children are very young, 8 months and not born :), so that should work well. Anyone else have input there?

Would you mind a little more explanation re: foreign funds? If I understand correctly, are you saying keep the VFINX (or VTSAX etc) and then in addition start the foreign index? What allocation? 90/10? I have to plead ignorance regarding the foreign tax credits. How do those work?
Is there any need to get into bond index funds in my taxable accounts? We do have a 90/10 stock/bond allocation in our 401Ks.

Thanks again for the info. This is such a great community to be able to turn to for advice.

KBecks2

  • Pencil Stache
  • ****
  • Posts: 618
Re: Taxable Investments
« Reply #3 on: September 18, 2014, 06:03:11 PM »
OK, as for tax loss harvesting, do you have an accountant do your taxes?  You may want to have an accountant do them for you.
If you are simply investing in the mutual fund and never selling, then you don't have to worry about deducting losses so much.  However, if you are invested in individual stocks and options, and you trade often, then you will want to use your deductions, and you will want help from an accountant.  In our experience, using an accountant saves time and they do our taxes better than I would (find more deductions and lower our tax bill.)  They know all the rules.  Network to find a good one.  I started using an accountant when I started a micro-business.

About saving for college -- how are you going to do that in an Roth IRA?   You could use a Coverdell or a 529 plan specifically for college, or an UTMA / UGMA for gifts to minors.  I understand that a Roth IRA needs to be earned income, so a chid needs to work a job to start their own Roth.  I might be mistaken, though.  Are you talking about withdrawing the principal from your own Roth account?

For your funds, S&P 500 will do a lot for you.  If you want to diversify, you could do Total Stock Market.  I would not personally mess with bonds, but that is up to you.  You should have an emergency fund set aside in cash, as well as cash set aside for anything you will need in the next 3 years. 

Have fun, it's pretty simple, so I'd set up an auto deposit to your fund(s) of choice and let it roll.   There are many places that will suggest a fund mix for you. You should pick something that you feel good about.
« Last Edit: September 18, 2014, 06:08:37 PM by KBecks2 »

Eric

  • Magnum Stache
  • ******
  • Posts: 3934
  • Location: On my bike
Re: Taxable Investments
« Reply #4 on: September 18, 2014, 06:39:23 PM »
You say that your 401k is 90/10 stock/bond split.  Is that your desired Asset Allocation (AA)?  What is the 90% invested in?  Ideally, you'll want some exposure to small caps, large caps (like your S&P fund), and international.  Keep in mind that it's not necessary to have every account reflect your AA, only that when you total them all up, they should equal your desired AA.

I wouldn't put bonds in your taxable account, as they are less tax efficient than your stocks.  Instead, I'd add only stocks to your taxable account, and consider changing your future 401k contribution to be more bond heavy to keep your desired AA.

I'll add that while I love the Jim Collins Stock Series, I disagree with his take that you don't need international exposure.  (and I'm not alone on this one)  Diversity is the only free lunch in investing and there's no reason to ignore most of the world's markets.  If you want to keep your 90/10, I'd encourage you to consider something like 60% USA / 30% Int'l / 10% Bonds

I'd also like to hear your reasoning behind using a Roth to fund college tuition.

ibleedirish

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Taxable Investments
« Reply #5 on: September 18, 2014, 08:39:26 PM »
Again, thanks all. Super valuable info.

@Kbecks2:(AND ANYONE ELSE)
I think I finally found a good accountant. The jury is still out. He's handling my small real estate llc./partnership, as well as my personal finances, but its early in our relationship, and I'm trying to stay ahead a little bit, so that I ask the right questions.
I feel like I'm maybe trying to follow 2 masters? MMM is all like, index and chill...Go Curry Cracker seems much more interested in gain/loss harvesting, and being more active. Any insight? What am I missing? Do I understand that if I already pay a good accountant for my small biz, I dont need a service like Betterment, in your opinion?

@Eric (and anyone else) I'm a short-term lurker here, but long enough to greatly appreciate your input Eric, thank you.  90/10 is what I thought my allocation should be. I'm 34. I wanna retire when
I'm 42. Maybe not? Maybe I stated it wrong. 401K is 90% S&P index through John Hancock(horrible expense ratio compared to vanguard). That exposes me to small/large caps right? 10% bond index, I forget the name.  How do I go about the 30% international investment? God, that scares the shit out of me.... I know, irrational, but please explain?

Re: Roth for kids college.
Yes, I'm talking about OUR Roths for kids college. Until now, we haven't been able to contribute, and we really value being home as much as possible with our kids, so I don't see a scenario where we wont be able to contribute. So, that said, we haven't counted on that as part of our retirement to this point. Again, we max our 401Ks and contribute to taxable accounts 3-4k/month.  So...I don't like 529 (especially in MI) due to their limitations and expenses. I don't need our Roths for retirement purposes, and they do allow principal withdrawals for college expenses, tax and fee free.  The other factor here is that I come from a very blue collar background.  I embrace the fact that my kids may very well be tradesmen/women...have a talent in their hands, and not attend a 4 year college. this plan would allow us to pay for their training, and also enable us to use the excess (or not) as befitting to us.

Completely open to anyone's advice.

KBecks2

  • Pencil Stache
  • ****
  • Posts: 618
Re: Taxable Investments
« Reply #6 on: September 19, 2014, 02:44:41 AM »
I had not heard of Betterment before and took a quick look at it yesterday and I don't see the value of the service, to be honest.  I think you should use Vanguard (just because it is low cost and has a good reputation), pick your funds, and set up a very easy monthly auto deposit.  Then, you can review your accounts there from time to time, and if you want, you can adjust as needed.   You are doing fine right now, if you want more funds, go for it.  I would set up the ROTHs at Vanguard too.  Everything will come on one statement and you only have one Web site to check.  They have good customer service and you can do anything you need to with their service. 

In one of my accounts I have a mix of S&P 500,  mid cap index ad small cap index funds.   Vanguard can help you choose an allocation.  I am not a fan of target retirement funds, I think it's easy to make those adjustments yourselves.

Funds are just so easy and that sounds like what you are looking for.   I an getting into individual stock investing with the assistance of an advisory service (Motley Fool Pro / Motley Fool Options).  But, I am watching the portfolio all the time and trading a few times a month.  It iis more complicated because there is more activity to keep track of for taxes.

For your wants, it sounds like funds will be great.  You will be fine.  You should not set it and forget it, keep an eye on the market and your accounts as part of your financial life, but you can have less stress over the details. 

For international, if it scares you, skip it.  Warren Buffet says to invest in good American companies.  Many US companies work globally now anyway.  It's a small world.  If you want international, stick 10% of it into a international index fund at Vanguard and don't worry over it.   







Eric

  • Magnum Stache
  • ******
  • Posts: 3934
  • Location: On my bike
Re: Taxable Investments
« Reply #7 on: September 19, 2014, 10:42:41 AM »
@Eric (and anyone else) I'm a short-term lurker here, but long enough to greatly appreciate your input Eric, thank you.  90/10 is what I thought my allocation should be. I'm 34. I wanna retire when
I'm 42. Maybe not? Maybe I stated it wrong. 401K is 90% S&P index through John Hancock(horrible expense ratio compared to vanguard). That exposes me to small/large caps right? 10% bond index, I forget the name.  How do I go about the 30% international investment? God, that scares the shit out of me.... I know, irrational, but please explain?

If you're okay with 90/10, then I'm okay with 90/10.  I didn't mean to make it seem like that was bad.  It was just the way you stated it in your original post made it seem like you just happened to have that allocation in your 401k, not that you chose it.  I'm pretty close to that myself, but that's more aggressive than most, and of course can carry greater volatility.  (both up and down)

If you're not comfortable with investing internationally, that's probably okay too.  I just thought you should consider it, as while the S&P 500 is great, it's only 500 companies.  Granted they're are the 500 largest companies in the US and have diverse worldwide holdings, but it's still only 500.  Vanguard has some good international funds which make it really easy.  Do a little research on VGTSX/VTIAX, which is the Total International Stock Index fund.  That invests everywhere but the US.  And of course the top holdings are solid companies headquartered overseas like Toyota, Shell Oil, Nestle, and companies like that, but you also get some emerging markets too.  So you'd be getting lots of global exposure in one fund.  There are many similar funds out there as well.

It's just something to consider.  Honestly, no one really knows what will be the "best" way to invest without hindsight.  Jim Collins is a pretty sharp guy and I'd have no problem following his outlined allocations either.  As long as you keep your expense ratios low, and have some diversification (which is why index funds rule, as they check both boxes), there's not really a right or wrong answer.

I'll also add that I don't own any individual stocks, don't worry about tax loss harvesting, and generally don't pay much attention to my investments at all.  I just plow as much money into my index funds as I can find and carry on with my life.
« Last Edit: September 19, 2014, 10:47:22 AM by Eric »

RichMoose

  • Pencil Stache
  • ****
  • Posts: 928
  • Location: Alberta
  • Yes, I'm Canadian
    • The Rich Moose | A Better Canadian Finance Blog
Re: Taxable Investments
« Reply #8 on: September 19, 2014, 11:16:35 AM »
Basically the best thing to do is first choose your overall asset allocation plan so that you know you are going to stick with it good or bad. 90/10 is okay if you have the nerve to stomach 30%+ drops in your portfolio value and not sell out when its low. If your total portfolio is worth $300,000 and it drops by $100,000, that's a lot of money for most people and it can really rattle you. Personally my plan (outside of my pension) is 100% stock moving to 85/15 when retirement is within reach.

As far as foreign exposure goes, its completely up to you. The S&P 500 is quite well diversified, has a lot of companies that earn a lot from foreign operations, doesn't expose you much to currency fluctuations, and tracks about 80% of the U.S. total market cap. Sounds pretty good and it's very simple to understand. You may get some higher performance with foreign funds but its no guarantee and does add some complications as far as balancing goes.

After you have your overall AA plan sorted out, you need to decide what should be held where for optimal tax benefits. Rule says, if you want to own foreign stock funds, put them in your taxable account. Next, domestic stock funds go taxable or 401(k). Finally, domestic bonds go "only" in your 401(k). So lets say your 401(k) is worth $300k and your taxable is worth $100k, you decide on a 90/10 split with stock split 75/25 S&P 500/foreign funds. Your portfolio may look like this:

401(k): $40,000 VBTLX, $260,000 VFIAX
Taxable: $90,000 VFWAX, $10,000 VFIAX

You still have a 90/10 split with 75/25 stock split, but you'll notice all your bonds are in 401(k) and all your foreign are in taxable. It's a relatively simple method to execute that's quite tax-efficient as well. There is some good info on Bogleheads wiki about tax-efficient asset allocation as well. Worth checking out!

ibleedirish

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Taxable Investments
« Reply #9 on: October 08, 2014, 11:52:36 AM »
Thank you all for the thoughtful replies. Very helpful