Non-Tax Sheltered Investing Basics

[katstache92]

I'm finally ready to invest in a non-tax sheltered account.  I max out my 401k and roth/traditional IRA each year.  I have $2,500-$3,000(if that is the required min at Vanguard) from my tax return I would like to invest.  I already have my monthly IRA contributions automated - every other year I've done a lump sum.  I want to keep the automated contributions so that money isn't really ever available to be spent.  That's why I don't want to dump the $2,500 into my IRA for the year.  Unless that's stupid?

If it isn't dumb and I should contribute to a non-tax sheltered account, I know I can call up Vanguard and I'm sure they will help me out.  But I want to make sure what they suggest is the best option for me.  Maybe they won't even make a suggestion?

Everything I currently have invested is in the Vanguard 2050 fund.  I'm open to doing something other than that.  What are the tax implications of non-tax sheltered investing?  Some reading online tells me I might pay taxes on decisions the fund has made in the past.  Is that common?  How concerned should I be about this?  How costly might this be (probably impossible to answer) based on my available cash to invest?

I know these are basic questions and I'm probably talking myself in circles.  I just don't want to do something stupid and costly.

[Nothlit]

First you should decide what overall asset allocation you want (percentage of stocks vs. bonds, domestic vs. international, etc.) across your entire portfolio. Then decide where to place each type of asset for best tax efficiency: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

There is nothing catastrophically wrong with just buying the 2050 fund in your taxable account. It currently has a fairly low percentage of bonds, and I'm guessing most of its dividends are qualified, so in the end it's probably fairly tax efficient at the moment. But as L.A.S. points out, its percentage of bonds will grow over time, which could have tax consequences in the future as the amount of bond dividends it throws off increases. And if you ever decide to sell that fund and buy something else, that would be a taxable event.

Not sure what you might be referring to about "decisions the fund has made in the past" - can you post a link about that?

[katstache92]

Thanks L.A.S and Nothlit.  That was a lot of great information.  I picked the 2050 fund because it was easy at the time and lined up with how I wanted to split my money (stocks vs. bonds.)  I have my roth, tIRA, and 401k all in the 2050 fund.  I'm okay with putting this taxable money into something else, especially since, as you pointed out, that allocation is going to change at some point.  It sounds like it's best to have this account be straight stocks.

Nothlit - I was referring to "unrealized gains," from this page on Vanguard https://investor.vanguard.com/investing/taxes/realized-capital-gains.  It's probably just normal and everyone is used to dealing with it, but it sounded like I could put money in and immediately owe money even though I had only held shares for a week.


Now I'm wondering if I should change things around in my 401k, roth, and tIRA.  This stresses me out though.  I don't want to screw anything up and mistakes can be costly.  On the other hand, if I wait, then I'll have more money in the 2050 fund and I will most likely pay more to change everything.  Hmm, more thinking to do.

[katstache92]

Oh, thanks!

So the 401k and tIRA are okay if I do make a change at some point in the future when the fund diverges from my desired holdings.

However, the Roth, which has slightly over $10k in it, would probably be best to switch now, since it has a small amount in it as compared to what it will hopefully be in 5-6 years?  Or is the Roth still considered a retirement account, even though it's using post-tax dollars?

[Jrr85]

I'm finally ready to invest in a non-tax sheltered account.  I max out my 401k and roth/traditional IRA each year.  I have $2,500-$3,000(if that is the required min at Vanguard) from my tax return I would like to invest.  I already have my monthly IRA contributions automated - every other year I've done a lump sum.  I want to keep the automated contributions so that money isn't really ever available to be spent.  That's why I don't want to dump the $2,500 into my IRA for the year.  Unless that's stupid?

If it isn't dumb and I should contribute to a non-tax sheltered account, I know I can call up Vanguard and I'm sure they will help me out.  But I want to make sure what they suggest is the best option for me.  Maybe they won't even make a suggestion?

Everything I currently have invested is in the Vanguard 2050 fund.  I'm open to doing something other than that.  What are the tax implications of non-tax sheltered investing?  Some reading online tells me I might pay taxes on decisions the fund has made in the past.  Is that common?  How concerned should I be about this?  How costly might this be (probably impossible to answer) based on my available cash to invest?

I know these are basic questions and I'm probably talking myself in circles.  I just don't want to do something stupid and costly.

I would not put it into a lifestyle fund.  You're going to incur taxable events as they shift their portfolio over time.  If you really wanted to optimize, you could mimic the 2050 plans by buying the underlying stock index funds in your taxable accounts and any underlying bond funds in your tax advantaged accounts.
But if you are already putting $23.5k per year into 2050 plans, you can probably just put it all into one of Vanguard's stock index funds.  Total market or S&P 500.  That may not be optimal, but it's probably close enough if you don't just enjoy tinkering with your accounts. 

[katstache92]

But if you are already putting $23.5k per year into 2050 plans, you can probably just put it all into one of Vanguard's stock index funds.  Total market or S&P 500.  That may not be optimal, but it's probably close enough if you don't just enjoy tinkering with your accounts. 

Thanks!  I think that's what I'm going to do.  I do not yet enjoy tinkering with my account.  But I want to make sure I don't back myself into a corner if I do get to that point in the future.

[Proud Foot]

Nothlit - I was referring to "unrealized gains," from this page on Vanguard https://investor.vanguard.com/investing/taxes/realized-capital-gains.  It's probably just normal and everyone is used to dealing with it, but it sounded like I could put money in and immediately owe money even though I had only held shares for a week.

While this is true, Vanguard's Total Stock Market Index (VTSAX) has only a 33% unrealized gain while your 2050 fund has a 22% unrealized gain.  You are not guaranteed to realize any of that gain in VTXAX while the 2050 fund is guaranteed to shift their assets and realize some of those gains (or losses depending on what the market does).  And Vanguard is very good about managing those unrealized gains to help protect the shareholders.  IMHO the unrealized gains issue is very marginal when determining which funds to invest in.

Now I'm wondering if I should change things around in my 401k, roth, and tIRA.  This stresses me out though.  I don't want to screw anything up and mistakes can be costly.  On the other hand, if I wait, then I'll have more money in the 2050 fund and I will most likely pay more to change everything.  Hmm, more thinking to do.

What would be the purpose of changing things around in your 401k, Roth, and tIRA?  They are all tax sheltered accounts so the only time you will have a taxable event is when you take a withdrawal from your 401k or tIRA.  No reason to change your investment choices for fear of a taxable event due to the shifting of the allocation within the 2050 fund.

[Nothlit]

Oh, thanks!

So the 401k and tIRA are okay if I do make a change at some point in the future when the fund diverges from my desired holdings.

However, the Roth, which has slightly over $10k in it, would probably be best to switch now, since it has a small amount in it as compared to what it will hopefully be in 5-6 years?  Or is the Roth still considered a retirement account, even though it's using post-tax dollars?

The Roth IRA is no different from the Traditional IRA or 401k as far as exchanges within the account being tax-sheltered.

[katstache92]

The Roth IRA is no different from the Traditional IRA or 401k as far as exchanges within the account being tax-sheltered.

Woot!  Thank you!  So I haven't backed myself into any corners.  Since the taxable account will be all stocks I should be all set.

Thanks everyone!