Author Topic: Next, Vanguard Taxable Account - Correct?  (Read 2756 times)

cbr shadow

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Next, Vanguard Taxable Account - Correct?
« on: December 03, 2013, 09:00:28 AM »
My wife and I are 30 year old D.I.N.K.'s with no plans for kids anytime soon.  Our combined income is ~$180k.  We became mustachians about 14 months ago and really turned our lives around for the better. 
We max both of our 401k's and Roth IRA's right now.  There is some extra money above our emergency fund in our savings/checking account that I would rather invest than see it sit there.  All of our investments are through Vanguard, so I'd like to open a vanguard taxable account as well.  I was thinking of starting with the $3000 minimum for now and buying a bit every month.

Right now:
Both 401k's = Target Retirement 2050 Fund - ~$80k
Both Roth IRA's = VTSAX - ~$26k

My plan was to buy VTSMX with the first $3000.  When I get to $10,000 I could switch it over to the admiral (VTSAX).  Then I'd just buy VTSAX from then on.  Are there flaws to this logic?

the fixer

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Re: Next, Vanguard Taxable Account - Correct?
« Reply #1 on: December 03, 2013, 10:11:54 AM »
A good plan.

My advice when you set up the account is not to have dividends reinvest automatically. Send them to a savings account instead, and lump them in with your regular (biweekly, monthly, ...) purchases of VTSMX. Here's why this will benefit you in the long run:
  • It makes keeping track of your tax lots a little easier, since you only have large $1000+ chunks of shares instead of $1000+ chunks plus a bunch of $10-20 chunks. It gets annoying really fast.
  • It could save you from accidentally triggering the wash sale rule if you sell shares for a loss, but forget to account for that automatic dividend reinvestment. I learned this lesson the hard way last year.
Also set Vanguard to do your sales by specific identification of shares (SpecID) instead of the default average cost. This will let you control how much taxes you pay when you sell.

rs02011988

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Re: Next, Vanguard Taxable Account - Correct?
« Reply #2 on: December 03, 2013, 10:21:09 AM »
@the fixer--what about capital gains? Should you reinvest those or put them in a savings account? Is it okay if I put my divs into a money market through vanguard?

Also--can you explain "Also set Vanguard to do your sales by specific identification of shares (SpecID) instead of the default average cost. This will let you control how much taxes you pay when you sell."?? I am on the vanguard site and cannot find where to change this setting.

I am new to this and have about $4000 in VTSMX....any advice would help..thanks!

the fixer

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Re: Next, Vanguard Taxable Account - Correct?
« Reply #3 on: December 03, 2013, 10:47:17 AM »
Capital gains also shouldn't get reinvested automatically. I forgot about these because VTSMX rarely if ever distributes capital gains.

A money market account works if that's where your money is before it gets invested. The way I set mine up is I have a savings account with Capital One 360 where I keep a few grand in cash (5% of my portfolio as a semi-"emergency fund"). My taxable dividends all go in there, and I periodically rebalance to keep the allocation at 5%. A simpler way to do it if you don't want to keep a fixed allocation of cash is to just have those dividends go into your main checking account. Whenever you take all the excess out of that account to buy more shares, the dividends will get swept out and you don't have to think about it. The key is not to create extra tax lots, and instead just make tax lots you need to create anyway a bit bigger.

Illustrating the second example to make sure it's clear:
  • You set a rule that your checking account always has at least $500 in it. You also set a rule that you want to invest monthly.
  • At the end of the month, after accounting for all of your bills you notice your projected account balance is $900. So you invest the extra $400 by buying VTSMX with it.
  • Next month all of your income and spending is identical, except your mutual funds threw off a $40 dividend. It got deposited into your checking account. So at the end of next month your projected account balance is $940. So you invest the $440 in VTSMX, effectively reinvesting the dividend but without requiring an extra purchase beyond what you'd have done anyway.

After you buy shares, the setting for SpecID is called "cost basis method" under "bank and money management." This is a setting that won't do anything until you sell, and since I assume that won't be for a while you don't have to worry about it right now. Getting it set up sooner rather than later is good so you don't forget about it.

rs02011988

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Re: Next, Vanguard Taxable Account - Correct?
« Reply #4 on: December 03, 2013, 01:24:21 PM »
Thank you so much for your detailed reply. I understand and changed my settings :)