Help With Setting Up Taxable Account

[TrumpetS3]

Dear Fello Mustachians,

Let me introduce myself, this is my first post but I've been lurking for a short time. I have been a big follower of the Bogleheads principal which appears to mirror a good number of best practices here. I stumbled across MMM and the savings plan for early financial independence really jumped out at me!

I'm 39, and reside in FL.

I recent built up my current tax sheltered profile and I think I'm in a good position with my 401k and IRA.

For reference here is how it is setup:

401k:
SpartanŽ 500 Index Fund - Institutional Class (FXSIX) 0.04% 0.05% -- Large caps, 80% of US stock market ALLOCATED 40%
SpartanŽ Extended Market Index Fund - Fidelity Advantage Class (FSEVX) 0.07% -- Mid/small caps, 20% of US stock market ALLOCATED 10%
SpartanŽ Global ex U.S. Index Fund - Fidelity Advantage Class (FSGDX) 0.12% 0.28% -- ~Complete international stocks ALLOCATED 20%
SpartanŽ U.S. Bond Index Fund - Fidelity Advantage Class (FSITX) 0.07% 0.17% -- US bonds ALLOCATED 30%

Roth IRA:
Vanguard Total Stock Mkt Idx Adm (VTSAX) 12% of overall portfolio.

I am in a pretty good position where I after putting together all the numbers, I think I can save between 60-65% of my take home pay and I plan to use the 4% rule.

My next task is building my taxable account. These are my specifics:

- I currently (right now) have $4k cash to invest. However I'll be bringing in from my UK account around $50k once the GBP/USD gets a little better, either way within the next 6 months this will be in my taxable. I'm staying in the US indefinitely.
- I will be contributing about 60-65% (between $3k - $4k per month) of my take home income into my taxable to grow my investments.
- I will not be selling these investments for at least the next 10 years, likely longer to compound.
- My current AA is 30% bonds; 15% international stocks; and 55% domestic stocks. I am ok with getting more aggressive for now with purchasing more stock in taxable.
- I have US / International stock and US bonds in my 401k and all US stock VTSAX in my Roth IRA. I'll rebalance my 401k to bring my bonds back in line later this year when the 90 day trade limit is up, since I rebalanced that last month.
- Both my 401k and IRA are maxed out with contributions.
- I have an Ally account I just setup, currently this has the emergency fund in. But I read a lot of people use this account to transfer to their brokerage account. Not sure the advantage of this vs a regular checking account which I have currently linked to my Vanguard account.
- I'd like to earn dividends from what I buy, but will begin with reinvesting to accumulate return.
- I'm 39 with a 3 month emergency fund and my only debt is my mortgage.
- I'm in the 15% tax bracket.

The part I'm struggling with is what funds to buy, I was leaning towards the Vanguard VTI and VXUS since the expense ratios are low. But it wouldn't be long until I'd get to Admiral status if I purchased the equivalent mutual funds of VTSMX and VGTSX. I read MMM often suggests an equal split between US and International Stocks in taxable, I'd welcome advise on this? Prior reading suggests a more conservative allocation of 80% Domestic / 20% International.

I've been reading MMM blogs on REITs, these sound appealing. I'd be open to a small allocation in this too, to balance my taxable should stocks fall. But I have limited knowledge of REITs, any imput on this would be great.

This taxable account will be where the majority growth will occur so I want to be sure I start it off right.

Many thanks!

[tonysemail]

Welcome to the forums :)

Do you already have an Investment Policy Statement written down?
If not, that's a good first step that will require you to define asset allocation and tax optimization strategies.

here are some tips I've been considering as I wrote my own.

1) https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
based on the advice there, I would rotate international ETFs out of 401k and into your taxable account.

2) roth IRAs are the only account I hold REIT funds in.
I use VNQ and SCHH.

3) If you plan to tax loss harvest in the future, then automatically re-investing dividends increases the likelihood of wash sales.
I choose to re-invest my dividends manually.

[NoStacheOhio]

Agreed on moving as much international as possible to the taxable account. VTI vs. VTSAX doesn't really matter that much. They're both going to get you about the same returns, and since you won't be making frequent trades, the ETF doesn't really have any upside beyond the marginally lower expense ratio.

[MDM]

- I will be contributing about 60-65% (between $3k - $4k per month) of my take home income into my taxable to grow my investments.
- I'm in the 15% tax bracket.

Good advice on asset allocation and funds by previous posters.

Just curious: even taking the lowest calculation, $3K/65%, that gives you ~$55,400/yr after tax.  For a single filer (didn't see any mention of a spouse), that puts you firmly in the 25% federal bracket.  Not important - except for how it should influence your Roth vs. traditional decisions.

[EnjoyIt]

How much international to have is a great question.  Bogleheads argue this all the time.  Recently Vanguard has increased its international asset allocation up to 40%.  While warren buffet and john Boggle (creator of Vanguard) believe you don't need any international.  Many books talk about an allocation of anywhere between 20-40% international.  I chose 30% in my asset allocation based on it being between 20 and 40%.

In all honesty, it doesn't matter much what you pick as long as you stick with it for the next 50-60 years.

As for REITs, don't worry about those right now.  Learn more about them, and if you think they are for you, you can put new contributions into REITs to get to your desired asset allocation.  just for your information, REITs do not belong in a taxable account since their dividends are taxed at your marginal tax rate. Also, you have real estate in Vanguard Total Stock market index fund.  By buying REITs individually you feel that tilting outside of the market weighting is somehow beneficial. It very well might be, but you should understand why you are doing it before tilting into REITs.

Also, many believe you should put international into your taxable account since the international taxes that you pay will be a tax deduction here in the US if kept in taxable.

lastly, consider your portfolio in its entirety.  You add up everything you have in all your accounts and make your asset allocation work between all of them.

Ohh, and one more thing.  Just because you chose a 70/30 stock bonds with 30% international and 10% REITs portfolio, does not mean you have to keep it exactly at that ratio no matter what.  Just try and keep it close with new contributions and dividends.  Rebalance if  the drift becomes large.  Many people follow the 5%/20% rule.  For example if your asset allocation slips by 5% for example bonds drops to 25% from 30%, then it is worthwhile to sell some equities to rebalance.  the 20% rule works on your smaller holdings.  For example you 10% REITs allocation drifts up by 20% up to 12% (20 percent of 10 percent is a change of 2 percent. In this example from 10 to 12) of your equities portfolio.  Then you may sell 2% of them to get back to 10% REITs

I hope this helps.

[TrumpetS3]

Welcome to the forums :)

Do you already have an Investment Policy Statement written down?
If not, that's a good first step that will require you to define asset allocation and tax optimization strategies.

here are some tips I've been considering as I wrote my own.

1) https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
based on the advice there, I would rotate international ETFs out of 401k and into your taxable account.

2) roth IRAs are the only account I hold REIT funds in.
I use VNQ and SCHH.

3) If you plan to tax loss harvest in the future, then automatically re-investing dividends increases the likelihood of wash sales.
I choose to re-invest my dividends manually.

Thanks for the info. Yes I've studied the placements of funds quite a bit.
I need to look into the reinvest vs not reinvesting more, as I believe I have my Vanguard setup to automatically reinvest. There appears to be a good amount of info on this on the forums so I'll keep reading..

- I will be contributing about 60-65% (between $3k - $4k per month) of my take home income into my taxable to grow my investments.
- I'm in the 15% tax bracket.

Good advice on asset allocation and funds by previous posters.

Just curious: even taking the lowest calculation, $3K/65%, that gives you ~$55,400/yr after tax.  For a single filer (didn't see any mention of a spouse), that puts you firmly in the 25% federal bracket.  Not important - except for how it should influence your Roth vs. traditional decisions.

I'm filing single currently but getting married in January, I have one dependent. Good to know on the tax bracket, I will look at this.

[TrumpetS3]

How much international to have is a great question.  Bogleheads argue this all the time.  Recently Vanguard has increased its international asset allocation up to 40%.  While warren buffet and john Boggle (creator of Vanguard) believe you don't need any international.  Many books talk about an allocation of anywhere between 20-40% international.  I chose 30% in my asset allocation based on it being between 20 and 40%.

In all honesty, it doesn't matter much what you pick as long as you stick with it for the next 50-60 years.

As for REITs, don't worry about those right now.  Learn more about them, and if you think they are for you, you can put new contributions into REITs to get to your desired asset allocation.  just for your information, REITs do not belong in a taxable account since their dividends are taxed at your marginal tax rate. Also, you have real estate in Vanguard Total Stock market index fund.  By buying REITs individually you feel that tilting outside of the market weighting is somehow beneficial. It very well might be, but you should understand why you are doing it before tilting into REITs.

Also, many believe you should put international into your taxable account since the international taxes that you pay will be a tax deduction here in the US if kept in taxable.

lastly, consider your portfolio in its entirety.  You add up everything you have in all your accounts and make your asset allocation work between all of them.

Ohh, and one more thing.  Just because you chose a 70/30 stock bonds with 30% international and 10% REITs portfolio, does not mean you have to keep it exactly at that ratio no matter what.  Just try and keep it close with new contributions and dividends.  Rebalance if  the drift becomes large.  Many people follow the 5%/20% rule.  For example if your asset allocation slips by 5% for example bonds drops to 25% from 30%, then it is worthwhile to sell some equities to rebalance.  the 20% rule works on your smaller holdings.  For example you 10% REITs allocation drifts up by 20% up to 12% (20 percent of 10 percent is a change of 2 percent. In this example from 10 to 12) of your equities portfolio.  Then you may sell 2% of them to get back to 10% REITs

I hope this helps.

This is great info, thank you! I think I've decided upon purchasing VTSMX Vanguard Total Stock Mkt Idx Inv for my taxable. I'll contribute to this every month to get it to Admiral status, this should only take a couple months. I was then considering purchasing the VGTSX Vanguard Total Intl Stock Index Inv and doing the same thing up to Admiral. Allocation of both like you've suggested at 30% sounds perfect.

After a number of months I'll likely have enough stock in my Roth IRA and taxable to bring my 401k to almost all bonds.

Does that all sound ok, or are there other funds I should put in my taxable that I should consider?

[MDM]

I'm filing single currently but getting married in January, I have one dependent. Good to know on the tax bracket, I will look at this.

If you can file "Head of Household" instead of single, and the dependent is eligible for child tax credit and/or earned income credit, some of the standard rules of thumb won't apply to you.

You can use the graph near cell 'Calculations'H74 in the case study spreadsheet to look at your marginal rates for various 401k, HSA, and/or IRA contributions.  If you can afford to put a lot into pre-tax, you might get into some interesting (and favorable for you) tax situations.

[EnjoyIt]

How much international to have is a great question.  Bogleheads argue this all the time.  Recently Vanguard has increased its international asset allocation up to 40%.  While warren buffet and john Boggle (creator of Vanguard) believe you don't need any international.  Many books talk about an allocation of anywhere between 20-40% international.  I chose 30% in my asset allocation based on it being between 20 and 40%.

In all honesty, it doesn't matter much what you pick as long as you stick with it for the next 50-60 years.

As for REITs, don't worry about those right now.  Learn more about them, and if you think they are for you, you can put new contributions into REITs to get to your desired asset allocation.  just for your information, REITs do not belong in a taxable account since their dividends are taxed at your marginal tax rate. Also, you have real estate in Vanguard Total Stock market index fund.  By buying REITs individually you feel that tilting outside of the market weighting is somehow beneficial. It very well might be, but you should understand why you are doing it before tilting into REITs.

Also, many believe you should put international into your taxable account since the international taxes that you pay will be a tax deduction here in the US if kept in taxable.

lastly, consider your portfolio in its entirety.  You add up everything you have in all your accounts and make your asset allocation work between all of them.

Ohh, and one more thing.  Just because you chose a 70/30 stock bonds with 30% international and 10% REITs portfolio, does not mean you have to keep it exactly at that ratio no matter what.  Just try and keep it close with new contributions and dividends.  Rebalance if  the drift becomes large.  Many people follow the 5%/20% rule.  For example if your asset allocation slips by 5% for example bonds drops to 25% from 30%, then it is worthwhile to sell some equities to rebalance.  the 20% rule works on your smaller holdings.  For example you 10% REITs allocation drifts up by 20% up to 12% (20 percent of 10 percent is a change of 2 percent. In this example from 10 to 12) of your equities portfolio.  Then you may sell 2% of them to get back to 10% REITs

I hope this helps.

This is great info, thank you! I think I've decided upon purchasing VTSMX Vanguard Total Stock Mkt Idx Inv for my taxable. I'll contribute to this every month to get it to Admiral status, this should only take a couple months. I was then considering purchasing the VGTSX Vanguard Total Intl Stock Index Inv and doing the same thing up to Admiral. Allocation of both like you've suggested at 30% sounds perfect.

After a number of months I'll likely have enough stock in my Roth IRA and taxable to bring my 401k to almost all bonds.

Does that all sound ok, or are there other funds I should put in my taxable that I should consider?

My taxable holds those 2 funds, and I also keep half my bond allocation in taxable as well.  I keep Vanguard intermediate term tax exempt bond fund there.  I do that because

1)  I am in a high tax bracket and tax exempt works well there.  Bond interest is taxable at your marginal rate.
2)  Having bonds in taxable makes it easier to rebalance though I have yet to need it.  So far all my rebalancing has been done with contributions.
3)  Currently with low interest rates, there is good discussion if it is better to keep bonds in taxable vs tax-exempt.  Usually when finance gurus squabble over something like this and can't decide, both answers are correct.  So I do both. 

In your case keeping all of your bonds in your pre-tax account is A OK.

[TrumpetS3]

You got me thinking about bonds in my taxable. The reason is I have 4 months emergency fund in my Ally account making only 1% / yr. I was thinking about keeping the tier 1 cash in the Ally. Then having a tier 2 in my taxable as bonds that I could pull if necessary. It'd be great to get advice on this strategy. This bond was one I had considered: Vanguard Short-Term Bond Index Adm  VBIRX. Or perhaps VWITX Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares.