Expanding into taxable account, sanity check please

[CrankAddict]

Hello,

Up until this year I have been focused on maxing out my retirement accounts and have not put any money into a taxable savings.  Now that I have more money to invest beyond what the 401k can accommodate, I'm going to add a new taxable account.  My target AA is:

40% total US stock market (VTSAX)
40% total US bond market (VBTLX)
20% REIT index (VGSLX)

I have read people saying that bonds and REITs are bad for taxable accounts, and further that all your accounts do not need to have the same AA, only the sum total of everything.  This would seem to suggest that the new taxable account would be VTSAX only (at least for now until it gains significantly more value) and the 401k would maintain a mixture of the 3.  Is that the right approach?  And in terms of being good or bad for a taxable account, is the following info all I need to consider?

VTSAX - 10 year perf:  before tax - 13.09%, after tax on dist - 12.62%, after tax on dist & sale of shares - 10.89%
VGSLX - 10 year perf:  before tax - 12.89%, after tax on dist - 11.56%, after tax on dist & sale of shares - 10.02%
VBTLX - 10 year perf:  before tax - 3.69%, after tax on dist - 2.50%, after tax on dist and sale of shares - 2.36%

I know that represents worst case numbers assuming the highest tax bracket, whereas my situation should be better (24% federal).  But there would still always be the same relative ordering of suitability for a taxable account I would assume, right?

And finally, in the taxable account is it always best to avoid selling shares (during years where you are trying to grow, not while using for income obviously)?  For example, if it comes time to rebalance (assume it got to the point where there was more than just VTSAX in the taxable account) would you always try to rebalance completely by buying new shares of the fund you need more of vs selling shares of the fund you have too much of?

Thanks!

[terran]

It sounds like you've got a pretty good handle on it already, but you might find https://www.bogleheads.org/wiki/Tax-efficient_fund_placement helpful.

[CrankAddict]

I hadn't seen that one, thanks for posting it!

[RWD]

Yeah, you should avoid putting VGSLX in a taxable account.

[seattlecyclone]

It sounds like you've got a pretty good handle on it already, but you might find https://www.bogleheads.org/wiki/Tax-efficient_fund_placement helpful.

That is an excellent source of information. One caveat for an aspiring early retiree is that you may want to avoid holding enough foreign funds in your taxable account that you exceed $600 of foreign tax withholding that would be eligible for the foreign tax credit. The assumptions underlying the recommendation in the Bogleheads link to prioritize foreign funds in your taxable account break down a bit if you can't actually claim the full amount of the foreign tax credit. Below $600 of foreign withholding you can just take a credit for the full amount. Above that you have to fill out Form 1116, which could potentially reduce the amount of credit you get to take. If you're still working and earning a pretty decent salary you'll probably still get to claim the full amount even if you file Form 1116, but as an early retiree this looks much less like a sure thing.

[CrankAddict]

One follow-up question now that I've set this plan in motion... I'm so used to the 401k and using the admiral mutual funds that I didn't think much about the ETFs for this taxable account.  Looking now I can see that VTI is slightly better (0.02% over 10 years) than VTSAX, so I believe I should start purchasing VTI going forward.  That said, I already did a fairly significant initial buy-in of VTSAX... should I exchange this for VTI or will that trigger some kind of other problem (either tax wise or in terms of them preventing me from re-buying within X days of selling, etc)?

[BECABECA]

One follow-up question now that I've set this plan in motion... I'm so used to the 401k and using the admiral mutual funds that I didn't think much about the ETFs for this taxable account.  Looking now I can see that VTI is slightly better (0.02% over 10 years) than VTSAX, so I believe I should start purchasing VTI going forward.  That said, I already did a fairly significant initial buy-in of VTSAX... should I exchange this for VTI or will that trigger some kind of other problem (either tax wise or in terms of them preventing me from re-buying within X days of selling, etc)?

You don’t want to sell it, you can call vanguard and get them to convert it to VTI and it won’t be a taxable event. But make sure you understand the trade off, because this is a one way conversion and you can’t go back the other direction.

Here’s a link that outlines the trade offs: https://forum.mrmoneymustache.com/investor-alley/vti-or-vtsax-in-brokerage-account

[seattlecyclone]

Furthermore there's no guarantee that the 0.02% difference over ten years will repeat itself. I think it's likely just noise in the markets. Look at the trailing ten years again in a week and you'll probably see a different result.

[NWOutlier]

before the below - I take the same approach to taxable as I do with 401k and IRA - MAX IT....

The one mistake I feel I made, was not funding a taxable account sooner; I've maxed 401k's, IRA's --- but did not realize the benefit of a taxable account... I'm currently 51... the "light bulb" moment was around 2013 and I started a taxable with VTSAX and haven't stopped.... it's now over 220k... 

I don't know your age, but - the bond allocation for me is way to high from your post.. I'm still 100% stocks, large cap, vtsax, only... I don't care about volatility.. because it's all paid off for me over the years...

as for REIT's -- I used to have them in my ROTH, but - I dropped them for VTSAX (the REIT was also a vanguard fund) - not sure this was the best decision, but - just being transparent.

So, I'm bias ... I want the dividend of a REIT, but I love the growth of a VTSAX...  which may yield something close to the REIT div, but not equal or more if you include the growth itself.

My Money is Worth More than Your Money:
https://www.physicianonfire.com/mymoney/

A quote from the pysicianonfire article.  "Taxable dollars are like Friday — part weekday, part weekend. You’ve already paid taxes on these dollars once, and the worst you’ll do is pay some tax on the growth of these dollars. At best, “taxable” dollars can be treated the same as Roth dollars."

quote from me "steve, nwoutlier"
taxable dollars grow at the same rate as 401k, roth, etc... you don't pay "taxes" on them until you sell them... but you do pay taxes on dividends -- which I do not consider, because taxes on dividend come out of my ordinary income, not the account itself....