Taxes on a growing portfolio of non-retirement accounts

[omega13]

Hey everyone. Have some questions while running some scenarios to plan for taxes on non-retirement accounts using the following example as a drill:

Example:

Investment type: Vanguard brokerage
Index fund: VTSMX/VTSAX
Income: $70k/year (assume no raises for the sake of simplicity)

Using the following assumptions:



I get the following results:



Questions:

1. If all goes as indicated above, would you be in theory making the following gross income?:

Year 1: $70k + $1,836
Year 2: $70k + $2,847
...
Year 10: $70k + $13,036

2. That's for one account. What if you have multiple non-retirement accounts that generate taxable events every time they are bought or sold or dividends paid out, are you carrying an ever increasing amount of taxes to deal with?

3. What are some recommended strategies for optimizing taxes on investments while you're employed full time?

Thank you very much.
O.

[Nothlit]

1. No, the chart you provided seems to make some poor assumptions about taxable investment growth. In reality, you only owe taxes on realized gains, i.e., dividends actually paid, or capital gains actually incurred by selling shares. The dividend yield on a fund like VTSAX is closer to 2%. The remainder of the growth is "unrealized" - and therefore not taxable - until you sell shares that have increased in value, presumably post-retirement.

2. Of course the more money you have invested in taxable accounts, the more tax impact it is likely to have. However, this has nothing to do with the number of accounts and is purely a function of how much is invested and what sort of taxable income those investments generate each year (see above).

3. A fund like VTSAX/VTSMX is pretty tax-efficient already. It typically only pays out "qualified dividends" which are taxed at a lower rate compared to regular income. You might want to peruse https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

[SeattleCPA]

3. A fund like VTSAX/VTSMX is pretty tax-efficient already. It typically only pays out "qualified dividends" which are taxed at a lower rate compared to regular income. You might want to peruse https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

To amplify the good point Nothlit makes above, on that nearly $250K balance in year ten, you'll probably have less than $5K of qualified dividends (i.e., the dividend yield is 2% or less ) and at your $70K income level, your qualified dividends tax rate might be 15% (so $750 in federal income taxes) if you're filing single and use the standard deduction...

But if you're filing married joint or head of household and using the standard deduction, you should be 0% capital gains/qualified dividends tax rate and so pay zero in federal income taxes.

[jim555]

Between long term capital gains and qualified dividends most people will be federally tax free.

[omega13]

Thank you all. This is great info. Makes sense.