Author Topic: taxable account questions  (Read 4404 times)

michaelrecycles

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taxable account questions
« on: May 07, 2013, 11:47:00 AM »
I'm in the fortunate position of having already fully funded my Roth IRA while also staying on track to max my 401k contribution for the year. Since I need to wait until the next open enrollment to switch to an HSA-eligible High Deductible Health Plan, it seems I'm running out of tax-advantaged space and am nearing the point of opening a taxable account.

Since I've been happily living in a mostly tax-advantaged world to-date, I am not familiar with the tricks of the trade when it comes to taxable account strategy.

My domestic stock and bond allocations are both in my tax-advantaged funds. I've determined that I do want international stocks in my portfolio, and I understand that they would make most sense in a taxable account (according to this Bogleheads page). I'm targeting one of Vanguard's Total International Stock funds (VGTSX / VTIAX / VXUS).

Since I don't have enough to go straight to Admiral Shares, should I start with the Investor Shares and later convert to Admiral? Or should I jump straight into the ETF version?
Does conversion from Investor to Admiral Shares in a taxable account create a taxable event, along with more cost basis tracking?
Should I allow dividends to reinvest automatically or ...?
Any other taxable account tips?

Let me know if you need more info. Any help is appreciated!

icefr

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Re: taxable account questions
« Reply #1 on: May 07, 2013, 02:06:31 PM »
Awesome!

Since I don't have enough to go straight to Admiral Shares, should I start with the Investor Shares and later convert to Admiral? Or should I jump straight into the ETF version?

If you want to use ETFs, then use ETFs. If you want to use mutual funds, start with Investor Shares. I've personally tried both and decided I like mutual funds better. To each their own.

Does conversion from Investor to Admiral Shares in a taxable account create a taxable event, along with more cost basis tracking?

Vanguard does this automatically! It's not a taxable event.

Should I allow dividends to reinvest automatically or ...?

I do, but I won't when I have multiple funds in my taxable account. Other people send the dividends to a money market fund at Vanguard and manually re-invest them when they feel like it. Their concern is around creating lots of small tax lots.

Any other taxable account tips?

Don't sell/exchange things too often. Be cognizant of your tax bracket, long-term/short-term capital gains. Keep records. Vanguard will help with the last two.

the fixer

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Re: taxable account questions
« Reply #2 on: May 07, 2013, 02:28:51 PM »
Should I allow dividends to reinvest automatically or ...?

I do, but I won't when I have multiple funds in my taxable account. Other people send the dividends to a money market fund at Vanguard and manually re-invest them when they feel like it. Their concern is around creating lots of small tax lots.
If you plan on regularly contributing to the investment, don't auto-reinvest dividends. Let's say you're contributing $200/month to VGTSX. Then in June you get a dividend for $30. If you reinvest dividends, you'll have a bunch of $200 lots plus a $30 lot. If you don't reinvest dividends automatically you'll have one less $200 lot and one $230 lot (you lumped the dividend in with your normal monthly purchase). Fewer lots makes tracking your basis easier.

Here's an even better reason: Suppose you decide you don't want to keep VGTSX and want to exchange into another fund instead, so you stop contributing for a few months. When it comes time to sell, VGTSX has gone down and you realize a capital loss. But, whoops! VGTSX threw off a dividend two weeks before you sold, and now you have a wash sale. The tax consequence is minor in terms of actual dollars, but it's a pain to deal with all this on your taxes and make sure you report everything correctly.

Something very similar to the above happened to me last year. Now I prefer to make sure any event that might have tax consequences for my investments is something I initiate myself, to make sure I really want it done.

michaelrecycles

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Re: taxable account questions
« Reply #3 on: May 09, 2013, 09:49:49 PM »
Thanks icefr and the fixer!

If you want to use ETFs, then use ETFs. If you want to use mutual funds, start with Investor Shares. I've personally tried both and decided I like mutual funds better. To each their own.

Gotcha. Why did you decide you like mutual funds better?

Don't sell/exchange things too often. Be cognizant of your tax bracket, long-term/short-term capital gains. Keep records. Vanguard will help with the last two.
Now I prefer to make sure any event that might have tax consequences for my investments is something I initiate myself, to make sure I really want it done.
Great bottom-line advice. Thanks again!

icefr

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Re: taxable account questions
« Reply #4 on: May 09, 2013, 11:16:58 PM »
Why did you decide you like mutual funds better?

A few reasons:
* ETFs have to be traded during the business day, whereas you can buy index funds at any specific time.
* You can only buy whole shares of ETFs, but you can buy $ amounts / partial shares to three decimal places. Only buying whole shares of ETFs made the math a bit annoying.
* The expense ratios are the same for Vanguard ETFs and Admiral shares and the difference isn't much at that $ amount.
* You can't set up automatic trades with ETFs, making index funds better for the accumulation phase.
* I felt that index funds were more passive than ETFs.