Author Topic: Non-tax advantaged investing  (Read 4527 times)

kc_justin

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Non-tax advantaged investing
« on: July 23, 2014, 11:36:14 PM »
Greetings, everyone!  First, just want to say thanks...I'm a frequent lurker around here and, unfortunately, I am a little embarrassed to say that I take much more from this forum than I contribute.  But, I do have to say, it's rare to come across such a knowledgeable/supportive community (online or off)!

My Roth IRA is already maxed out for the year, and I am not yet eligible for my employer's 401k since I just switched jobs.  So I have some excess income that I'd like to put to work.  Are traditional brokerage funds the only option?  If so, I have some (very) basic questions....
  • If I diversify w/ a mix of stock funds/bond funds/etc., am I taxed on the earnings if/when I sell to occasionally rebalance?  Is there some sort of "grace period" to sell and immediately reinvest the earnings?
  • I have been considering some dividend-heavy funds but, if I understand correctly, I will need to pay taxes on the dividends even if they are automatically reinvested.  Is something like this best left in an IRA?
  • Are there any big "gotchas" I should be aware of going into this?

Sorry for the dumb questions...answers to such simple questions are surprisingly hard to find on Google. 

NorCal

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Re: Non-tax advantaged investing
« Reply #1 on: July 24, 2014, 08:16:33 AM »
Traditional brokerage funds are your only option if your goal is to invest in stocks/bonds, etc.

First off, I'm not a tax adviser, so don't take this as official tax advice.  Just a few notes from my knowledge on your questions.

1.  You are taxed on any capital gains when you sell stocks or bonds.  The taxes are calculated as your sale price minus your cost basis (generally what you bought the shares at).  So if you buy a stock for $100 and sell it for $120, you are taxed on $20.  Most importantly, the tax rate you pay depends on how long you've held the shares.  If you sell in less than a year, any gains are taxed at your normal income tax rate.  If you sell after a year, you pay the long term capital gains rate (typically 15%, but it can be 0% or 20% depending on your tax bracket).  Most people are best served by re-balancing after holding for more than a year.

2.  Dividends are taxed, even if they are reinvested.  However, the taxes are really immaterial until your portfolio gets sizable.  While there are plenty of exceptions, most people will pay a 15% rate on dividends.  If you have $1,000 invested, yielding 2% ($20), your tax bill at the end of the year will be $3.

Personally, I think it's good to hold some investments outside tax advantaged accounts.  While the excellent tax advantages of 401k/IRA's are indisputable, having money outside of these accounts opens up options.  For example, if you ever want to buy an investment property, or retire early without dealing with complex conversion/ROTH rules, having a free and clear investment account gives you options.

matchewed

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Re: Non-tax advantaged investing
« Reply #2 on: July 24, 2014, 08:22:25 AM »
Greetings, everyone!  First, just want to say thanks...I'm a frequent lurker around here and, unfortunately, I am a little embarrassed to say that I take much more from this forum than I contribute.  But, I do have to say, it's rare to come across such a knowledgeable/supportive community (online or off)!

My Roth IRA is already maxed out for the year, and I am not yet eligible for my employer's 401k since I just switched jobs.  So I have some excess income that I'd like to put to work.  Are traditional brokerage funds the only option?  If so, I have some (very) basic questions....
  • If I diversify w/ a mix of stock funds/bond funds/etc., am I taxed on the earnings if/when I sell to occasionally rebalance?  Is there some sort of "grace period" to sell and immediately reinvest the earnings?
  • I have been considering some dividend-heavy funds but, if I understand correctly, I will need to pay taxes on the dividends even if they are automatically reinvested.  Is something like this best left in an IRA?
  • Are there any big "gotchas" I should be aware of going into this?

Sorry for the dumb questions...answers to such simple questions are surprisingly hard to find on Google. 

1) Yesish. See tax loss harvesting. http://www.bogleheads.org/wiki/Tax_loss_harvesting

2) Depends on current dividend taxation law. http://en.wikipedia.org/wiki/Dividend_tax#United_States

3) Not really, try not to sell <1 year as you'll be subjected to short term capital gains is the main one I can think of.

kc_justin

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Re: Non-tax advantaged investing
« Reply #3 on: July 25, 2014, 02:24:20 AM »
Thanks for the info!  Especially concerning tax loss harvesting and not to sell in less than a year.
Good food for thought!  Granted, at my investment levels, it probably doesn't really matter all that much, but always better to know than to not!  :-)

seattlecyclone

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Re: Non-tax advantaged investing
« Reply #4 on: July 25, 2014, 10:15:28 AM »
Another thing to be aware of is that bond interest and REIT dividends do not get the preferential "qualified dividend" tax treatment that allows you to pay capital gains rates on this income. If you have these things in your asset allocation, you should make your retirement accounts heavier on bonds and/or REITs, while making your taxable account heavier on stocks.

Eric

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Re: Non-tax advantaged investing
« Reply #5 on: July 25, 2014, 11:59:07 AM »
When rebalancing you don't necessarily have to sell anything to do it.  If you want a 70/30 stock/bond split and your portfolio has shifted to 75/25, then just use your future purchases to re-weight.  In this case, just buy bonds until it's back to 70/30.

Also consider that your desired asset allocation is over your total investments across all accounts, and not for each account.  So it's okay to hold all stocks in your taxable account and the desired amount of bonds in your 401k, IRA, or whatever else.  Check out this Boglehead wiki about tax efficiency and what type of instruments are favorable to which accounts.

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement