Taxes on Taxable Accounts

[rampagefc]

After some good advice from a previous thread, my wife and I are interested in investing in a taxable account (outside of our 401Ks and Roths). I have been trying to figure out the tax implications of these, but haven't found any concise information. Here would be the plan... Invest in a combination of low ER index funds (stocks, bonds) through vanguard and reinvest all dividends. This money would not be touched for several years, and likely the majority of it will not be touched until retirement. So my question is, when/what taxes are paid at different times? Would there be a yearly tax burden on dividend interest and capital gains even if reinvested? When money is pulled from the account, I'm aware that there are taxes and capital gains/losses at that time.

Any information or links to articles would be greatly appreciated!

[Wile E. Coyote]

All income (capital gain distributions and dividend distributions) will be taxed currently regardless of reinvestment.   Then when you sell, you will be taxed on any gain in the shares.


Here is a decent discussion of the rules.

http://news.morningstar.com/classroom2/course.asp?docId=2871&page=1&CN=com

[Wile E. Coyote]

You may want to consider ETFs as an alternative. See here for a discussion of the difference:

https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency

[Frankies Girl]

You probably shouldn't put any tax inefficient funds (like bonds) in a taxable account either. Low turnover stocks (the total market index funds tend to be very tax efficient) are pretty great for taxable accounts.

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

And keep in mind as long as you stay in the 15% taxable income bracket or below, any cap gains and qualified dividends generated aren't taxed. I have about 7K in cap gains/dividend reinvestment that gets reported each year, but I'm below that income bracket, so it just gets reported and doesn't increase my actual taxes.

[humblefi]

The bogleheads link about tax efficient placement is a most wonderful page....you should definitely start with that....esp the picture about tax eff placement!

When tax efficient investing was proposed to me, I was shocked that I did not know about this. I spent some time studying it and what I did learn is documented at http://humblefi.com/category/personal-lessons-in-investing/tax-related-lessons/. I have used my learnings to build a set of passive income streams based on mutual funds...which is mostly tax efficient. Caveat: I am not a financial planner or a tax consultant. So, please treat my learnings as one reference.

Hope that helps. Wish you all the success in your tax-efficient investing life :-)

[BooksAreNerdy]

Also, vanguard has tax advantaged bond funds that go well in a taxable acct.