Author Topic: Taxable accounts in 15% tax bracket  (Read 4413 times)

Cottonwood28

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Taxable accounts in 15% tax bracket
« on: June 22, 2013, 02:46:56 PM »
We have $10,000 currently invested in taxable accounts with high expense ratios that we would like to combine into a Vanguard account. My husband makes $45,000 a year and I stay home so we are well within the 15% tax bracket. My understanding is that we will be taxed very little if at all on dividends and capital gains. Is that correct? Would you recommend a total index fund or a fund focusing on dividends as eventually we would like to have this be a substantial part of our passive income stream? I will keep our asset allocation in line with our goals but can do so with either options. Or is there something else you would suggest?

Both Roth's are maxed out and we just upped husbands 401k to 27%. 38% is maxing and we plan on upping it to that next quarter but was worried about the shock of going from 7% to 38% all at once. Thank you for your help!

NYD3030

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Re: Taxable accounts in 15% tax bracket
« Reply #1 on: June 22, 2013, 04:24:26 PM »
1)  That is correct - the tax on dividends and long term capital gains is going to be 0% unless you hit the 25% tax bracket.
2)  From what I've seen, the evidence points towards total index over dividends.  Whenever a dividend is given, the stock price goes down to reflect the dividend distribution.  Over the long haul, you'll get better returns in a fund that encompasses more corporations than just those that w/ high dividends.   Though people will argue this one to the ends of the earth...

George_PA

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Re: Taxable accounts in 15% tax bracket
« Reply #2 on: June 22, 2013, 09:22:38 PM »
yes since you don't make very much per year, you really don't have to worry about taxes much; you can invest either in total index or dividends;

if you are looking for the highest possible return over a really long time period, if I remember reading from the The Intelligent Asset Allocator by William Bernstein (this books talks about this), the highest returns comes from the most volatile high risk investments, i.e. small cap type companies (I think going off memory alone); however, you will do just fine getting the total index fund, that too will give you a really high return if you are investing for a long time period.

For high dividend companies, the stock price is not necessary "losing value" just because it goes down from a dividend distribution; instead it is better to think of it gaining extra price value above and beyond where it should normally be priced a few weeks before the ex-dividend date do the anticipation of getting that dividend; thus once its goes ex-dividend, the drop is taking it back to its original true market value; that extra value reflected in the price going temporarily higher has now been distributed back to the investors by way of the dividend


Joel

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Re: Taxable accounts in 15% tax bracket
« Reply #3 on: June 22, 2013, 09:49:42 PM »
If the capital gains push your total income into the 25% bracket, you will actually be taxed at a 30% marginal rate. So it may make sense to disburse these funds over different tax years if it would result in large capital gains. Or you could contribute some money to a retirement account to reduce your ordinary income so that your total income is not in the 25% marginal bracket.

aj_yooper

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Re: Taxable accounts in 15% tax bracket
« Reply #4 on: June 23, 2013, 05:32:41 AM »
We have $10,000 currently invested in taxable accounts with high expense ratios that we would like to combine into a Vanguard account.

+1 Saving money on the ER is very wise!

I have found it helpful to have Vanguard initiate the transfer of funds, rather than have the high expense ratio firm transfer to Vanguard.  You may be able to avoid having the funds sold in the first account that way, which could save you some expense.  Call Vanguard ( 800-319-4254) while you are online and they can walk you through the paperwork.

Cottonwood28

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Re: Taxable accounts in 15% tax bracket
« Reply #5 on: June 23, 2013, 03:47:04 PM »
Thank you all! I'll call Vanguard to get it going. They were very helpful in the roll over process. I'm thinking the total stock fund is probably a good start for us. We have no risk of hitting the 25% rate this year. I know I have a lot of learning to do but we are moving in the right direction.

teen persuasion

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Re: Taxable accounts in 15% tax bracket
« Reply #6 on: June 28, 2013, 12:23:18 PM »
We have $10,000 currently invested in taxable accounts with high expense ratios that we would like to combine into a Vanguard account. My husband makes $45,000 a year and I stay home so we are well within the 15% tax bracket. My understanding is that we will be taxed very little if at all on dividends and capital gains. Is that correct? Would you recommend a total index fund or a fund focusing on dividends as eventually we would like to have this be a substantial part of our passive income stream? I will keep our asset allocation in line with our goals but can do so with either options. Or is there something else you would suggest?

Both Roth's are maxed out and we just upped husbands 401k to 27%. 38% is maxing and we plan on upping it to that next quarter but was worried about the shock of going from 7% to 38% all at once. Thank you for your help!

I'm late to this thread, but the tax implications have my mind whirring.

If understand you correctly, DH has put 7% of $45k in for ~1/2 the year, will do 27% for a 1/4, and 38% for the final 1/4, for about $8900.  So AGI ~$36k, and assuming MFJ and standard deduction, taxable ~$16k, w/ tax ~$1600.  You seem to be eligible for the savers credit, at the 20% level , or $800.  If you could get your AGI below $34.5k, you'd jump up to the 50% level, or $2k, enough to wipe out your tax bill entirely.  Increasing the 401k contribution might not hurt as much as you think if you adjust withholdings.

teen persuasion

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Re: Taxable accounts in 15% tax bracket
« Reply #7 on: June 28, 2013, 12:49:58 PM »
Things are different again if you have any kids; I think you mentioned you were SAH.  AGI in the $36k range with kids makes you eligible for the EIC, if you don't have investment income over $3200.  There's also the Child Tax Credit.  Both the EIC and CTC are refundable.  The saver's credit is not.  My state matches the EIC (30%) and CTC (33%), for even more savings.

I bring this up, since investment income (from shifting taxable accounts) could impact your taxes.  You may want to check all the details BEFORE you do anything.

Cottonwood28

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Re: Taxable accounts in 15% tax bracket
« Reply #8 on: June 28, 2013, 09:55:03 PM »
Things are different again if you have any kids; I think you mentioned you were SAH.  AGI in the $36k range with kids makes you eligible for the EIC, if you don't have investment income over $3200.  There's also the Child Tax Credit.  Both the EIC and CTC are refundable.  The saver's credit is not.  My state matches the EIC (30%) and CTC (33%), for even more savings.

I bring this up, since investment income (from shifting taxable accounts) could impact your taxes.  You may want to check all the details BEFORE you do anything.

Thanks for the response. We have one child and claim the standard deduction.  I will look into how moving the investments could impact our tax liabilities beyond capital gains.