Author Topic: Too much Emergency Fund  (Read 3200 times)

postvmvs

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Too much Emergency Fund
« on: March 22, 2015, 06:07:01 PM »
I have over a year's expenses sitting in an Ally savings account (which currently earns 0.99% APY). Which I then pay taxes on the interest earned (at my 25% marginal tax rate). Not very smart. I am looking to take a step in a better direction.

If I were to put some of it into Vanguard LifeStrategy Conservative Growth Fund (VSCGX) in a regular brokerage account would I get a 1099 form and have to pay taxes on the earnings every year, or would it only be "capital gains" when I sell it? How much less liquid would this make in terms of being able to access the money?

johnny847

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Re: Too much Emergency Fund
« Reply #1 on: March 22, 2015, 06:26:34 PM »
I agree, that's a ton of money to be sitting in a savings account. 

I think an emergency fund has limited usefulness, and some people are actually better off without one than with one. I can get into my reasoning there if you want, but for the rest of this post I'm going to assume you still want an emergency fund.

You'll probably want to tier your emergency fund. Keep some amount in Ally still, and then the rest in a more profitable investment vehicle.

VSXGX is 40/60 stocks and bonds. Which is good from the point of view from preservation of capital, which is what an emergency fund should do. It's bad from the point of view from taxes.

If you look here https://personal.vanguard.com/us/funds/snapshot?FundId=0724&FundIntExt=INT#tab=4 you can see the distribution history. VSCGX has distributed short term and long term capital gains, along with dividends. All three types of distributions are taxable events, regardless of whether you reinvest them back into the fund or not.
Short term capital gains distributions are always taxed at your marginal rate.
Long term capital gains distributions are always taxed at a rate lower than your marginal rate - it is 15% for you.
Some dividends are qualified dividends. From http://www.bogleheads.org/wiki/Vanguard_LifeStrategy_Fund_tax_distributions we can tell that unlike VTSAX, not all of the dividends from VSCGX are qualified dividends, which are taxed at your LTCG rate (15%), not your marginal rate. Non qualified dividends are taxed at your marginal tax rate.

When you go to sell, you will pay taxes on the capital gains.

Any sale of a Vanguard MF should be transferred to your bank account within a few business days.

GGNoob

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Re: Too much Emergency Fund
« Reply #2 on: March 22, 2015, 06:27:59 PM »
You would pay taxes on the dividends you earn each year and then capital gains taxes when you sell. But it's much better than earning 0.99%...


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kpd905

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Re: Too much Emergency Fund
« Reply #3 on: March 22, 2015, 07:01:32 PM »
Are you currently maxing out all tax advantaged accounts?

Indexer

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Re: Too much Emergency Fund
« Reply #4 on: March 22, 2015, 07:11:34 PM »
Well first off you can keep 5k at MangoMoney and earn 6%.


Any 'short' term money should probably be kept in something safe.  Personally I use VASIX for that.  Same concept as VSCGX, but even more conservative.  I  just keep 6 months expenses in EF. 

Normally the best thing to keep in a taxable account is a stock index ETF or international stock ETF.

postvmvs

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Re: Too much Emergency Fund
« Reply #5 on: March 22, 2015, 07:12:30 PM »
Thanks for the information.

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I think an emergency fund has limited usefulness, and some people are actually better off without one than with one.
Yeah, I have read some of the arguments against emergency funds, but as of right now I am uncomfortable not having one.

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Which is good from the point of view from preservation of capital, which is what an emergency fund should do. It's bad from the point of view from taxes.
Are there more tax efficient funds with similar characteristics that you would recommend?

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Are you currently maxing out all tax advantaged accounts?
I plan to: http://forum.mrmoneymustache.com/investor-alley/high-401k-fees/

I have to admit the various tax implications (long and short term capital gains etc.) are bit much for me to wrap my head around. Would I get a form or forms at the end of the year that breaks these down for tax filing purposes?

johnny847

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Re: Too much Emergency Fund
« Reply #6 on: March 22, 2015, 07:35:19 PM »
Quote
Which is good from the point of view from preservation of capital, which is what an emergency fund should do. It's bad from the point of view from taxes.
Are there more tax efficient funds with similar characteristics that you would recommend?
VTSAX is highly tax efficient - no capital gains distributions and 100% of dividends are qualified. However, that is 100% US stocks, and not a good place to park an emergency fund.

I have to admit the various tax implications (long and short term capital gains etc.) are bit much for me to wrap my head around. Would I get a form or forms at the end of the year that breaks these down for tax filing purposes?
Yes. You will get a 1099-DIV for capital gains distributions and dividends. You will get a 1099-B if you sell mutual funds.

Financial.Velociraptor

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Re: Too much Emergency Fund
« Reply #7 on: March 22, 2015, 07:36:50 PM »


I have to admit the various tax implications (long and short term capital gains etc.) are bit much for me to wrap my head around. Would I get a form or forms at the end of the year that breaks these down for tax filing purposes?

LT/ST capital gains are on separate sections of the 1099 - sometimes your broker will not report basis for these however and will supplement with 8498.  Dividends including qualified and non qualified go on 1099 as well.  You get a separate 1099 for interest.  Some non-dividend distributions will be on K-1.