Author Topic: Lending club or ETFs - Which to use for Roth?  (Read 1836 times)

tb43

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Lending club or ETFs - Which to use for Roth?
« on: January 01, 2016, 11:11:10 PM »
Hey guys,

I plan to contribute the max amount to a roth ira as long as my income level allows it. Already max out 401k if it matters.

Option 1) Have the Lending Club account as a roth ira
Option 2) Invest the 5500 in to a roth ira through vanguard and have a taxable lending club account.

I feel like I'm missing something..if the returns are expected to be around the same long term does it really matter?

Thanks in advance!

MDM

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Re: Lending club or ETFs - Which to use for Roth?
« Reply #1 on: January 01, 2016, 11:58:56 PM »
See https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement for much more information.

In short, if you have already decided that your asset allocation will contain a certain amount of Lending Club, and if the LC earnings are treated as ordinary income, it may be better to have LC in the Roth while the taxable account holds relatively tax-efficient (e.g., taxed at Qualifying Dividend and Long Term Capital Gain rates) index funds.

starguru

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Re: Lending club or ETFs - Which to use for Roth?
« Reply #2 on: January 02, 2016, 12:35:37 PM »
I always fill my Roth space with US index funds.  I want my potential highest earning investments in accounts that are tax free. 

I would put LC in tax deferred retirement accounts so they can grow in a tax efficient manner. 

JZinCO

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Re: Lending club or ETFs - Which to use for Roth?
« Reply #3 on: January 02, 2016, 12:55:38 PM »
I choose option 2 because I have less comfort investing with LC, knowing it is less tax optimal.
IRA space is valuable to me. Sacrificing 90% of two years' contribution space in order to avoid custodial fees is a tough pill to swallow. Nor do I want to hold $10,000 in LC notes as this point in time. I also do not know if/when LC pulls the rug out of the promotion to pay custodial fees.

Eventually (1) I will have enough invested in LC notes whereby the consequential risk of having to pay the custodial fees is less than the taxes paid in a regular account and (2) I will want $10,000 in LC notes, but not at this point in time.

MustacheAndaHalf

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Re: Lending club or ETFs - Which to use for Roth?
« Reply #4 on: January 02, 2016, 01:24:38 PM »
Vanguard Total Stock Market has a yield of 2.14%.  Both the long-term gains (when you sell) and the yield are taxed at lower rates (for 25% bracket, at 15% rate).  So paying 0.3% now (2.14% yield at 15%), and 15% of gains later.  For the same investor in Lending Club, the interest is taxed at 25%.  So notes paying 6% interest would result in 1.5% tax each year.

If you had to locate one of Vanguard Total Stock Market or Lending Club notes in taxable, the Vanguard Total Market fund seems much more tax efficient to have in taxable.