Author Topic: Should I open a taxable account?  (Read 12421 times)

cbr shadow

  • Bristles
  • ***
  • Posts: 471
Should I open a taxable account?
« on: July 10, 2013, 12:34:26 PM »
My wife and I are considering opening a taxable investment account with Vanguard.  Already our 401k's and Roth IRA's are through Vanguard.  I figure a taxable account is the next step in saving - am I right?  Below is our info

Both of us are 29 y.o.

No debt except mortgage
Mortgage = $197k @ 3.25% for 15yr

Both maxing our 401k's which we started doing this year
Combined 401k = ~$50k   <Both in Target 2050 retirement fund>

Both max Roth IRA's
Combined Roth IRA's = ~$24k  <Both in VTSAX>

Wife has a couple old IRA's worth about $6k right now

Net Worth = ~$120k

Savings/checking = ~$26k

If I'm doing calculations right, I believe our savings rate is roughly 55%.

Anyways I'd like to take some of our "Savings/Checking" and open a Vanguard taxable account.  Is that referred to as a Money Market account?  I'd probably put it mostly in VTSMX (probably start with $5000) until we got up to $10k and could switch to the admiral fund VTSAX.

Does this sound reasonable?  What things should I consider when doing this?  We were thinking just 1 account for now with ~$5k.

Thanks,
Ryan
« Last Edit: July 10, 2013, 12:48:15 PM by cbr shadow »

BadassCPA

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Re: Should I open a taxable account?
« Reply #1 on: July 10, 2013, 01:42:05 PM »
First of all, huge congrats on maxing out both your 401ks and Roth IRAs.  That already gets you to saving $46k per year which is great.  I first maxed out all of those last year (I'm a year older than you guys), and this year had the same predicament.  It wasn't as hard as I thought and we still had leftover funds to invest.  I opened two new accounts, a Vanguard taxable and a Lending Club account as well. 

Obviously LC doesn't have a tried and tested track record like the stock market so I wouldn't invest more than 5-10% of your net worth there ($6-12k for you).  Personally I have about $12k in there at the moment, although it's a lower percentage of my net worth just because homes are really expensive here in Los Angeles.  You can use MMM's link to help out his charity, or use this one and get $100 when you invest $2,500 (instant 4%): https://www.lendingclub.com/landing/invest.action?reg_referrer=maximoney&progId=2009

As for the Vanguard taxable, they require you to choose a money market account but it's only for any uninvested funds.  (You want to avoid having those!)  In my situation, I'm trying to have close to zero cash in my bank account.  The taxable account also ends up being my emergency fund, so I'm not as risky in there as in the 401k.  Currently I have it invested in the Vanguard Wellington fund which is an actively managed fund holding about 65% stocks and 35% bonds.  You'll have to choose whatever investment makes you comfortable.  If you invest in bond funds, I believe Vanguard will let you write checks directly out of your investment account (not sure on the details but remember reading about the perk).

One last question, you're doing great and are saving 55% of your income.  Why'd you choose the year 2050 fund?  I would say at your pace you'll be fine by maybe 2025 right?

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Should I open a taxable account?
« Reply #2 on: July 10, 2013, 01:57:36 PM »
Assuming you have more money that you are saving above and beyond the 401k & Roth maximums (congrats on that!), then yes, I'd open a brokerage account.  That way you can invest anything above and beyond your emergency fund too.  Your total stock market funds would be a great choice.

Anyways I'd like to take some of our "Savings/Checking" and open a Vanguard taxable account.  Is that referred to as a Money Market account?  I'd probably put it mostly in VTSMX (probably start with $5000) until we got up to $10k and could switch to the admiral fund VTSAX.

Does this sound reasonable?  What things should I consider when doing this?  We were thinking just 1 account for now with ~$5k.

What you're opening is a brokerage account.  You'll want your money invested in the funds you mention.  Any cash leftover from your deposit after buying your funds, such as $32.46 that was remaining because they won't let you buy a half of a share for instance, will usually default to be "invested" in a money market account that pays about the same interest (or maybe slightly higher) as your savings account would.  However, the total stock market funds are the place to invest your money, not in the money market account.

Also, you'll only need one account, for now and forever.  You can own any combination of any stocks or stock funds, bonds or bond funds, REITs, or cash within the same account.

fiveoclockshadow

  • Stubble
  • **
  • Posts: 216
  • Location: Baltimore
Re: Should I open a taxable account?
« Reply #3 on: July 10, 2013, 02:46:54 PM »
Great job on saving!

Yes, I think it is very sensible to have a taxable account - either brokerage or mutual fund.  And Vanguard is of course a great place for either.

As others said, the MM account is just where they put cash you haven't invested yet.  And right now MM accounts suck, there are a lot of better higher return savings accounts out there.  So you won't want anything sitting in the MM account for a long time.  It is just a way to park money as it moves into or out of your account.

One thing to be aware of - make sure you consider taxes within your taxable account.  You want to minimize the number of taxable events occurring in there as well as keeping any events as long term capital gains or qualified dividends.  What you've chosen - a total market fund - is a great pick for a taxable account.  Avoid funds that include bonds and anything that has companies frequently leave the tracked index (e.g. sub-sectors index funds that either track growth or value stocks will have more transactions than a total market fund).  There is also the very esoteric topic of comparing ETFs to index funds from a taxable perspective, but I wouldn't worry about that now.  There is rarely a straight answer on that and Vanguard already does their best to optimized index funds for taxable accounts.

@BadassCPA - Target date funds just define a changing policy allocation over time.  Different companies choose different dates for the same policy schedules - so one company's 2030 would be another's 2050.  Also, different people would choose a different policy schedules based on their view of risk/return.  A lot of FIRE folks view having a higher equity allocation for a longer time to be preferable to the standard rules since the assumption is you are modeling on an infinitely sustainable SWR rather than assuming an amortization of earnings and balance trending to zero balance sometime after death.  Because of this a lot of FIRE folks want to stay equities heavy for a lot longer and picking a later date fund allows you to do this.  Also, within 401k plans where there are limited options sometimes a late target date fund is the most cost efficient way to get a high equity allocation with a little bit of asset diversification at the same time.  Though one has to be careful, depending on the company sometimes the late target date retirement funds have a much higher ER than a SP500 index and if the later is available it is probably preferable to the target date fund.  You'll just need to remember to eventually reallocate yourself.

sheepstache

  • Handlebar Stache
  • *****
  • Posts: 2424
Re: Should I open a taxable account?
« Reply #4 on: July 10, 2013, 09:05:47 PM »
Put another way, you want to think about asset allocation for _all_ your assets, your entire portfolio.  Then think in terms of taxes advantages.  So if you want to buy bonds, think of what percentage of all your assets (including your spouse's, including retirement accounts, etc.) you want to be bonds.  Then try to have all the bonds in retirement accounts since they get taxed at a higher rate than dividends. 

Sorry if this is explaining something you already know.

So, for example, if you wanted the Wellington, you might instead buy all equities in your taxable account while adjusting the proportion of bond purchases higher in your retirement accounts. 

Of course, psychology matters a lot.  If you're planning on putting extra cash on hand into the taxable account rather than automatic investment, you'd have to recalculate the proportions each time which would require more effort.  And you want the process to have as few barriers and require as little thinking as possible.  Or if you just know you're going to think of the taxable account as a separate thing, you might want it to be less volatile so you aren't tempted to mess with the investments when the market swings.  A 'set it and forget it' approach is key to success for most people.

cbr shadow

  • Bristles
  • ***
  • Posts: 471
Re: Should I open a taxable account?
« Reply #5 on: July 11, 2013, 08:25:27 AM »
That's all really helpful information - thanks everyone.