Author Topic: I don't want this taxable account  (Read 2976 times)

FireAnt

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I don't want this taxable account
« on: February 16, 2019, 07:00:51 AM »
Switched from EJ to Vanguard a few months ago. We have a taxable joint mutual fund of about $10k that in 3 weeks I can finally sell it without a 1% penalty (it has an expense ratio of 1.68% GAHHH!!!). It was our EF and our advisor recommended this. We no longer need it as an EF and now have a separate fund for that in a high interest yielding online account. We are contemplating the following plan: Switch to Vanguard Lifestrategy Conservative or Moderate growth for a year, and use that that money next year to fund 2020 Roth IRA. Thought process is that we should be focusing on tax advantage accounts first.
 
Questions
1. Is this a sound plan or is it stupid?
2. Anything I should consider differently?
3. What are the tax implications?
« Last Edit: February 16, 2019, 07:05:04 AM by italianant »

walkwalkwalk

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Re: I don't want this taxable account
« Reply #1 on: February 16, 2019, 08:38:49 AM »
Questions
1. Is this a sound plan or is it stupid?
2. Anything I should consider differently?
3. What are the tax implications?
1. Sounds solid to me, as long as you understand the implications of selling a vanguard fund. Usually they make it so you can't reinvest in that fund until (I believe) a month or so later. Just something to think about. I don't think it applies across all accounts (just your taxable).
2. If you're fine with the above and below then go for it.
3. Potentially short term capital gains taxed at ordinary rates (if fund held less than 1 year), long term & short term capital gains - most taxed at capital gains rate, but the shares reinvested from the dividends would be taxed at ordinary rates (if the dividends are reinvested and fund held over one year), or  long term capital gains taxed at capital gains rates (if the dividends are not reinvested and held over 1 year)

FireAnt

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Re: I don't want this taxable account
« Reply #2 on: February 16, 2019, 10:29:38 AM »
Have you funded the 2019 IRA's yet?  If not, why not use that money to fund them right now?   If you've already funded the IRA's for 2019, is there some other type of tax advantaged account you could use that 10K for?

While we're talking IRA's, why are you doing a Roth instead of a Traditional?  (it may be the best for your tax scenario; it's just not clear from the info provided)

It gets complicated, but due to student loans we are filing taxes married filing single so we cannot contribute to a trad or roth IRA. We were able to have DH contribute to a backdoor Roth for 2018 and will plan to for 2019. Next year we should hopefully go back to married filing jointly and I can contribute to my trad IRA. I guess I was thinking Roth in my OP only because that's what our EJ advisor had us do. DH would not be able to do the trad IRA since we did a backdoor Roth and can't mix pre-tax and post-tax money (I believe... correct me if I'm wrong).

MustacheAndaHalf

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Re: I don't want this taxable account
« Reply #3 on: February 17, 2019, 02:07:17 AM »
Even Vanguard LifeStrategy Moderate Growth is 40% bonds:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vsmgx

A target retirement fund is probably a better choice.  That will hold 90% stocks, with both U.S. and international exposure.

FireAnt

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Re: I don't want this taxable account
« Reply #4 on: February 17, 2019, 08:54:07 AM »
Even Vanguard LifeStrategy Moderate Growth is 40% bonds:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vsmgx

A target retirement fund is probably a better choice.  That will hold 90% stocks, with both U.S. and international exposure.

True- we have most of our other funds in the 2055 retirement fund. We were thinking something more conservative since it would technically only be in there for about a year before we sold it and put it wards a trad or roth IRA. Didn't think it was a good idea to put it towards something more volatile.

FireAnt

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Re: I don't want this taxable account
« Reply #5 on: February 19, 2019, 07:57:21 AM »
Questions
1. Is this a sound plan or is it stupid?
2. Anything I should consider differently?
3. What are the tax implications?
1. Sounds solid to me, as long as you understand the implications of selling a vanguard fund. Usually they make it so you can't reinvest in that fund until (I believe) a month or so later. Just something to think about. I don't think it applies across all accounts (just your taxable).
2. If you're fine with the above and below then go for it.
3. Potentially short term capital gains taxed at ordinary rates (if fund held less than 1 year), long term & short term capital gains - most taxed at capital gains rate, but the shares reinvested from the dividends would be taxed at ordinary rates (if the dividends are reinvested and fund held over one year), or  long term capital gains taxed at capital gains rates (if the dividends are not reinvested and held over 1 year)

This is good to know about not allowing to reinvest the fund for a month. Since it's a non-vanguard mutual fund I should be okay with selling that one, and buying a Vanguard one this year. Then selling whichever LifeCycle fund I put it in next year to fund 2020 Trad or Roth IRA.

robartsd

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Re: I don't want this taxable account
« Reply #6 on: February 19, 2019, 09:18:48 AM »
It gets complicated, but due to student loans we are filing taxes married filing single so we cannot contribute to a trad or roth IRA.
Technically you can always contribute to a Traditional IRA (you may however be above the income limits to deduct the contribution which could entirely negate the tax advantages - earnings would still grow tax deferred, but capital gains tax rates may be more favorable than personal income tax rates when you withdraw). I assume you already have some pre-tax money in a Traditional IRA which blocks your own backdoor Roth unless you want to Roth convert your traditional IRA to Roth or have an employer sponsored plan that would allow you to roll your pre-tax Traditional IRA in.

We were able to have DH contribute to a backdoor Roth for 2018 and will plan to for 2019. Next year we should hopefully go back to married filing jointly and I can contribute to my trad IRA. I guess I was thinking Roth in my OP only because that's what our EJ advisor had us do. DH would not be able to do the trad IRA since we did a backdoor Roth and can't mix pre-tax and post-tax money (I believe... correct me if I'm wrong).
Once the backdoor Roth is complete, the funds are in Roth and you are free to contribute to a tax deferred Traditional IRA. If DH is doing backdoor Roth in 2019, he should be able to start saving in Traditional in 2020 - the backdoor Roth in 2019 would not be in the way (but he would be closing the door on future backdoor Roth contributions).

FireAnt

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Re: I don't want this taxable account
« Reply #7 on: February 19, 2019, 07:13:48 PM »
Quote
Technically you can always contribute to a Traditional IRA (you may however be above the income limits to deduct the contribution which could entirely negate the tax advantages - earnings would still grow tax deferred, but capital gains tax rates may be more favorable than personal income tax rates when you withdraw). I assume you already have some pre-tax money in a Traditional IRA which blocks your own backdoor Roth unless you want to Roth convert your traditional IRA to Roth or have an employer sponsored plan that would allow you to roll your pre-tax Traditional IRA in.

Correct- Per IRS link below, I would not be able to deduct the contribution due to my filing status plus there is already pre-tax money in there as they were just rollovers from previous employers retirement accounts. I guess I don't see the reason why I would want to contribute to the trad IRA if I can't deduct it?

https://www.irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

 
Quote
Once the backdoor Roth is complete, the funds are in Roth and you are free to contribute to a tax deferred Traditional IRA. If DH is doing backdoor Roth in 2019, he should be able to start saving in Traditional in 2020 - the backdoor Roth in 2019 would not be in the way (but he would be closing the door on future backdoor Roth contributions).

That is the hope! We may have to do MFS again in 2019 taxes depending how long the process is to have my loans forgiven, but doubt this would be needed for 2020. We want the ability to contribute to the backdoor Roth depending on what happens with my loan forgiveness. I'm eligible to apply this upcoming December.

robartsd

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Re: I don't want this taxable account
« Reply #8 on: February 21, 2019, 08:49:24 AM »
Quote
Technically you can always contribute to a Traditional IRA (you may however be above the income limits to deduct the contribution which could entirely negate the tax advantages - earnings would still grow tax deferred, but capital gains tax rates may be more favorable than personal income tax rates when you withdraw). I assume you already have some pre-tax money in a Traditional IRA which blocks your own backdoor Roth unless you want to Roth convert your traditional IRA to Roth or have an employer sponsored plan that would allow you to roll your pre-tax Traditional IRA in.

Correct- Per IRS link below, I would not be able to deduct the contribution due to my filing status plus there is already pre-tax money in there as they were just rollovers from previous employers retirement accounts. I guess I don't see the reason why I would want to contribute to the trad IRA if I can't deduct it?

https://www.irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
</quote]
The non-deductible principle comes out tax free and the growth is tax-deferred - at first glance this seems like an advantage. However, because capital gains and qualified dividends are taxed favorably compared to ordinary income, the advantage depends on the type of investment returns expected and the tax situation of the investor. If you only expect long term capital gains and qualified dividends from the investment and you expect your average long term capital gains tax rate during accumulation to be no higher than your marginal tax rate during withdraw, you wouldn't expect a net tax benefit from deferring the gains. If you expect to spend much of your accumulation years paying 15% tax on capital gains, but your retirement tax bracket will likely be 12% or bellow, deferring the gains could save you a bit in taxes overall. Also accumulating in a state that taxes capital gains as ordinary income would also push your situation towards the benefit of deferred gains rather than taxable investing. Of course maximizing deferred income or Roth space before deferred gains space always makes sense.

FireAnt

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Re: I don't want this taxable account
« Reply #9 on: February 21, 2019, 09:29:07 AM »
Even Vanguard LifeStrategy Moderate Growth is 40% bonds:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vsmgx

A target retirement fund is probably a better choice.  That will hold 90% stocks, with both U.S. and international exposure.

@MustacheAndaHalf I reread this thread today and realized that you cannot do a Target Retirement fund for a taxable account... those are only for retirement accounts.

Louisville

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Re: I don't want this taxable account
« Reply #10 on: February 21, 2019, 09:51:17 AM »
Even Vanguard LifeStrategy Moderate Growth is 40% bonds:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vsmgx

A target retirement fund is probably a better choice.  That will hold 90% stocks, with both U.S. and international exposure.

@MustacheAndaHalf I reread this thread today and realized that you cannot do a Target Retirement fund for a taxable account... those are only for retirement accounts.
I don't believe that [bolded]. Can you point me to some literature confirming that?

FireAnt

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Re: I don't want this taxable account
« Reply #11 on: February 21, 2019, 10:55:56 AM »
Even Vanguard LifeStrategy Moderate Growth is 40% bonds:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vsmgx

A target retirement fund is probably a better choice.  That will hold 90% stocks, with both U.S. and international exposure.

@MustacheAndaHalf I reread this thread today and realized that you cannot do a Target Retirement fund for a taxable account... those are only for retirement accounts.
I don't believe that [bolded]. Can you point me to some literature confirming that?

I stand corrected :) I got it from a past thread- or how I understood it at least; I'm still in the learning phase of investing. I looked it up at vanguard and didn't see anything. However, a 2055 target retirement doesn't sound like a good idea if I want to sell it in a year or so.

MustacheAndaHalf

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Re: I don't want this taxable account
« Reply #12 on: February 21, 2019, 07:32:30 PM »
Provided you meet fund minimums, I don't know of any restriction on Vanguard mutual funds like you describe.  A target retirement fund combines two things: a mix of US stocks, international stocks, and bonds; and in the future the fund will shift to a higher bond allocation.  There's nothing special about them that is limited to retirement accounts.

I'd suggest you buy VTSAX (U.S. total stock market) if you have $3,000 or more, and buy VTI (also U.S. total stock market) if you don't meet the minimum $3,000 of VTSAX.  Then you should wait just 366 days or more, so that when you sell it's taxed as long-term capital gains (a better tax rate).

It's too bad you didn't invest in December, when everyone feared the worst and stocks were on sale.  Right now I assume you're invested in cash, which is inferior to all equity investments.  Even a high expense ratio fund beats cash over the long term, so I'd encourage you to start.

Finances_With_Purpose

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Re: I don't want this taxable account
« Reply #13 on: February 23, 2019, 09:33:14 AM »
2.  Fire your advisor?

FireAnt

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Re: I don't want this taxable account
« Reply #14 on: February 23, 2019, 10:53:35 AM »
2.  Fire your advisor?

He's been fired since October :)

FireAnt

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Re: I don't want this taxable account
« Reply #15 on: March 10, 2019, 07:27:13 PM »
Ok, wanted to follow up with what we decided to do. We are sell the very expensive expense ratio fund tomorrow! :) and we're going to put it in VTSAX 60% and VBTLX 40% since we'll be selling it next year to fund either our IRA's, Roth IRA's, or backdoor Roth, dependent on our status at that time. Thanks for your input!

MustacheAndaHalf

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Re: I don't want this taxable account
« Reply #16 on: March 11, 2019, 07:51:29 AM »
Sounds good!  Starting is important.

You're not spending the money 1 year from now, right?  It's just moving from one account to another?  It doesn't sound like it needs to be 40% in bonds.  But if that's what helps you start, that's far more important (especially since it's just 1 year out of your overall plan to invest for retirement).

FireAnt

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Re: I don't want this taxable account
« Reply #17 on: March 11, 2019, 09:13:12 AM »
Sounds good!  Starting is important.

You're not spending the money 1 year from now, right?  It's just moving from one account to another?  It doesn't sound like it needs to be 40% in bonds.  But if that's what helps you start, that's far more important (especially since it's just 1 year out of your overall plan to invest for retirement).

We moved it from EJ to Vanguard in October. It was a class C share, so we were just able to sell it today without a 1% load fee. We'd rather take advantage of the tax-advantage accounts instead of a non-tax advantage account so we want to apply it next year for our 2020 IRA contribution (2019 is set). We just want it sitting somewhere safe - the thought behind not putting it all in VSTAX is that it's so volatile and it's not a good idea if we plan to sell it next year to fund the 2020 IRA. Does that make sense?

leavesofgrass

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Re: I don't want this taxable account
« Reply #18 on: March 11, 2019, 09:53:23 AM »
We moved it from EJ to Vanguard in October. It was a class C share, so we were just able to sell it today without a 1% load fee. We'd rather take advantage of the tax-advantage accounts instead of a non-tax advantage account so we want to apply it next year for our 2020 IRA contribution (2019 is set). We just want it sitting somewhere safe - the thought behind not putting it all in VSTAX is that it's so volatile and it's not a good idea if we plan to sell it next year to fund the 2020 IRA. Does that make sense?

I do not think this is a good plan. You are going to be selling these taxable funds in about a year to fund your IRA.

First, how will you feel if the market heavily drops and this $10K is worth much less in one year? Any money that you need in the short term should not be invested in the market.

Second, there will be tax implications when selling in taxable. If you happen to have a capital loss, and you plan to invest in the same funds in your IRA, you will have a wash sale if you sell/buy within a 30 day window.

Third, you should ideally avoid bonds in taxable accounts because it's not tax efficient. You could increase you current IRA allocation by the % of bonds you're planning to allocate to taxable (since there are no tax implications of reallocating your IRA assets) and then invest 100% of the $10K in VTSAX/VTI in your taxable account.

If you want to get this $10K in the market, which I think is a good idea, I would invest 100% of $10K in VTI in the taxable account and keep it there long-term. Don't buy and sell.  Then increase your bond percentage in your current IRA by whatever OVERALL stocks/bonds percentage lets you sleep well at night. Think of your asset allocation in terms of your entire portfolio.

Then, save new money throughout 2019 in a high yield savings account to reach your 2020 contribution so you can fund it at the beginning of the year.

The funds that you are selling in EJ are already in a taxable account, correct?



FireAnt

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Re: I don't want this taxable account
« Reply #19 on: March 11, 2019, 10:26:46 AM »
Quote
First, how will you feel if the market heavily drops and this $10K is worth much less in one year? Any money that you need in the short term should not be invested in the market.
This is why we chose the 60/40 instead of 100% VSTAX as recommended by other posters.

Quote
Second, there will be tax implications when selling in taxable. If you happen to have a capital loss, and you plan to invest in the same funds in your IRA, you will have a wash sale if you sell/buy within a 30 day window.
Can you help me understand this more?

Quote
The funds that you are selling in EJ are already in a taxable account, correct?
Yes- and they were moved over (in the same fund) to Vanguard in October. I couldn't sell them until today due to it being Class C shares to avoid a 1% penalty.


..... so you're telling me I should stick with this taxable account? Ugh. Others have commented otherwise. I'm frustrated/overwhelmed by this investing stuff as it's so new to me. I really wish our dumb EJ advisor didn't have us put our money in this joint mutual fund in the first place.

leavesofgrass

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Re: I don't want this taxable account
« Reply #20 on: March 11, 2019, 10:53:54 AM »
Quote
First, how will you feel if the market heavily drops and this $10K is worth much less in one year? Any money that you need in the short term should not be invested in the market.
This is why we chose the 60/40 instead of 100% VSTAX as recommended by other posters.

Ask yourself why are you even investing in taxable funds for 1 year at a 60/40 allocation? It sounds like you want all of the upside to having it be in the stock market (growth) and none of the downside (loss) for 1 year. That's not the way to play it. If you just want a safe place to guarantee that this $10K is available, stash it in a high yield savings account or buy T-bills.

You should be looking at your portfolio as a whole, which includes your IRA. Since bonds in taxable isn't efficient (see https://www.bogleheads.org/wiki/Tax-efficient_fund_placement), use this taxable account for equity today. Get that $10k in the market for LONG-TERM growth.

Nothing wrong with having a taxable account filled with low-cost index funds. It's a good problem to have, assuming you're investments are correctly allocated between IRA/taxable accounts.

Can you put the $10k in VTI now and save up another $10k in cash during 2019? Then you'll essentially be ahead by $10k at the beginning of next year rather than using "old" money to fund next year's IRA, which would also have tax consequences.


FireAnt

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Re: I don't want this taxable account
« Reply #21 on: March 11, 2019, 05:38:38 PM »
Quote
Ask yourself why are you even investing in taxable funds for 1 year at a 60/40 allocation? It sounds like you want all of the upside to having it be in the stock market (growth) and none of the downside (loss) for 1 year. That's not the way to play it. If you just want a safe place to guarantee that this $10K is available, stash it in a high yield savings account or buy T-bills.

Yes that was what we were looking for. We just maxed out both of our retirement accounts through work, my husband put the max towards a back door Roth in 2018 and in process for 2019 (I'm not eligible this year), and we are maxing out our HSA. I was trying to think towards the future to fund our IRA's since that is non-taxable. It seems like it's better to focus on that over taxable accounts. I also just hate having to pay taxes every year on the gains of this fund when I'm not seeing any progress/growth. We've had that money in the mutual fund through EJ for 4 years or so and we are only making $300-350 off it, yet we have been taxed on about $300 in gains each year as it's reinvested.

Quote
Can you put the $10k in VTI now and save up another $10k in cash during 2019? Then you'll essentially be ahead by $10k at the beginning of next year rather than using "old" money to fund next year's IRA, which would also have tax consequences.

Maybe I just need to get over it and put it 100% towards VTSAX. Start saving money this year to put towards our IRA next year... I'll have to change some things around in our budget to fund both my husband's and mine but it could be done by the end of 2020.

leavesofgrass

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Re: I don't want this taxable account
« Reply #22 on: March 12, 2019, 08:42:05 AM »
Quote
Yes that was what we were looking for. We just maxed out both of our retirement accounts through work, my husband put the max towards a back door Roth in 2018 and in process for 2019 (I'm not eligible this year), and we are maxing out our HSA. I was trying to think towards the future to fund our IRA's since that is non-taxable. It seems like it's better to focus on that over taxable accounts. I also just hate having to pay taxes every year on the gains of this fund when I'm not seeing any progress/growth. We've had that money in the mutual fund through EJ for 4 years or so and we are only making $300-350 off it, yet we have been taxed on about $300 in gains each year as it's reinvested.

It sounds like your EJ investments were not very tax efficient. Bonds kick off dividend income, which is taxed at ordinary income if they're in your taxable account. And actively managed stock funds can create taxable income from high-turnover of stocks.

It's great you're leaving EJ!

Quote
Maybe I just need to get over it and put it 100% towards VTSAX. Start saving money this year to put towards our IRA next year... I'll have to change some things around in our budget to fund both my husband's and mine but it could be done by the end of 2020.

Also consider monthly 2020 IRA contributions rather than growing a lump sum for investment in 2019. Put the $10k in VTI now (better tax efficiency than VTSAX, in my opinion), and stick to your 2019 budget. Increase your IRA bond percentage so that you achieve your desired overall stock/bonds AA. In 2020, DCA your IRA contributions. This will allow you to get all the money you want in the market into the market ASAP so it doesn't sit idle in a savings account.

Sounds like you're on track. Good job!

FireAnt

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Re: I don't want this taxable account
« Reply #23 on: March 14, 2019, 07:33:30 AM »
Well so much for the title of this thread.

We discussed more. We're just keeping it and putting it all towards VTSAX. It's pending right now in Vanguard so it's basically a done deal.