Tips for starting a taxable account

[hightower]

This year I hope to be able to start putting some cash aside each month into a taxable brokerage account.  I've heard its better to put the riskier assets in the taxable account so that you can at least tax loss harvest if the economy crashes?  Is this a valid approach?  If so, which investments should I put in there assuming that they also have to be tax efficient if the economy is doing well?   My target asset allocation is 30% total stock mkt, 10% Large Cap, 10% Mid Cap, 10% Small Cap, 10% Total International Stock Mkt, 10% REIT, 20% Total Bond Market (50% domestic, 50% international).

How do you guys handle your taxable accounts?

[DarrVao777]

I use a variant of the 3 fund portfolio:

Total Stock Market and Total International Stock Market tend to be very tax-efficient

I use a muni bond fund in taxable

There are some who argue you should use different funds in taxable if you are going to tax loss harvest so you don't want into trouble with wash sales rules.

[Lithium]

The difference in tax efficiency between different classes of equities, with the exception of REITs, is pretty inconsequential.  I think that the first two rules are to avoid placing REITs and taxable bonds in taxable accounts.  After that, I agree with you that the best approach is to base asset location on volatility so as to maximize tax loss harvesting opportunities.  Emerging markets has by far and away the most TLH opportunities.  Though you don't have a separate allocation for EM, I imagine that since total international is ~15% EM, this is also one of the more volatile classes.  Generally after this, if you are putting US stocks in taxable, the smaller the index cap size, the more volatile, and the more opportunities to tax loss harvest.

Some will argue that you should be putting your higher-growth/riskier assets in your Roth IRA and shelter them from taxes, but this increases the overall tax-adjusted risk of your portfolio.

The Callan table of investment returns is a good source to review investment volatility:  http://topforeignstocks.com/2016/01/10/review-the-callan-periodic-table-of-investment-returns-2015/

 

[Bott1637]

You can put the cash aside monthly but I wouldn't invest it more often then quarterly as you'll end up with too many tax lots to keep track of. I started mine by automating it with monthly contribution and was thankful for last January's drop in the market to sell and consolidate all those tax lots. I run my international holdings in taxable. It's easy tax loss harvesting and no wash sale issues as I have no international anywhere else.

[Zaphod]

I think picking assets for taxable is actually more important since you have taxable consequences. Its not a big deal really but you should think about it. While TLH is great, its best to never have the need of course. Also something to remember with volatility is that while it will increase TLH opportunities it will also decrease your overall returns due to the geometric nature of them.

I also do Munis as part of my taxable account allocation.

[sealsmith217]

I have the Vanguard Total Stock Market and will begin a Vanguard Tax exempt bond fund this year. Not sure which tax exempt bond fund yet.

[PhysicianOnFIRE]

International funds in taxable give you a foreign tax credit, which you won't benefit from if you hold international funds in a tax advantaged account.

I don't quite understand the desire for 30% total stock market, 10% large cap, 10% mid cap, 10% small cap. According to Morningstar, VTSAX (Vanguard Total Stock Market) is approximately 71% large cap, 20% mid cap, 9% small / micro. So combining that allocation with the 10 /10 / 10 split for your 60% US Stock portion gives you:

• 31% large cap


• 16% mid cap


• 13% small cap

There's nothing wrong with tilting to mid-cap and small-cap (I have a very similar tilt) but you can accomplish it without buying a separate large cap fund. If I were you, I'd own VTSAX or equivalent in taxable, and mid and small cap (value tilt?) in tax deferred or Roth. It helps to not duplicate any class you hold in taxable in other places. Dividend reinvestment or automated investments in Roth / tax deferred can create a wash sale if you're not careful.

[hightower]

 

Bott1637 wrote:

You can put the cash aside monthly but I wouldn’t invest it more often then quarterly as you’ll end up with too many tax lots to keep track of. I started mine by automating it with monthly contribution and was thankful for last January’s drop in the market to sell and consolidate all those tax lots. I run my international holdings in taxable. It’s easy tax loss harvesting and no wash sale issues as I have no international anywhere else.

Click to expand...

I have a taxable brokerage account at Vanguard (currently empty).  So, if I just invest in say VXUS (vanguard total international stock market), each time I buy shares it will be considered a different "tax lot?"  I've never heard that term before.  I assumed I could just start buying shares now and add to it each month that I have extra cash to set aside?

[hightower]

PhysicianOnFIRE wrote:

International funds in taxable give you a foreign tax credit, which you won’t benefit from if you hold international funds in a tax advantaged account.

I don’t quite understand the desire for 30% total stock market, 10% large cap, 10% mid cap, 10% small cap. According to Morningstar, VTSAX (Vanguard Total Stock Market) is approximately 71% large cap, 20% mid cap, 9% small / micro. So combining that allocation with the 10 /10 / 10 split for your 60% US Stock portion gives you:

• 31% large cap


• 16% mid cap


• 13% small cap

There’s nothing wrong with tilting to mid-cap and small-cap (I have a very similar tilt) but you can accomplish it without buying a separate large cap fund. If I were you, I’d own VTSAX or equivalent in taxable, and mid and small cap (value tilt?) in tax deferred or Roth. It helps to not duplicate any class you hold in taxable in other places. Dividend reinvestment or automated investments in Roth / tax deferred can create a wash sale if you’re not careful.

Click to expand...

Thanks for the suggestions.  The only reason I have the large cap right now is because my wife's 401K choices kind of suck and the two cheapest funds she has available are a columbia large cap (0.45% exp ratio) and a columbia small cap (0.45%).  I'd prefer to not have the large cap either, but I was just trying to pick what's cheapest.  She does have a columbia mid cap there but its exp ratio is 0.62%.  I could scrap the large cap and use the mid instead.  The only other fund she has that's not stupid expensive is a total bond fund with exp ratio of 0.55%.  Or they have a target retirement fund (BlackRock LifePath® Index 2045 Fund Investor A Shares) which is I believe 0.53% exp ratio.  I've been trying to help her talk to her employer about offering some cheap vanguard funds, but don't know if we'll be successful.  I've been meaning to do a separate post to ask about choosing investment options given the difficulty I have with her 401K.

[Lithium]

hightower wrote:

PhysicianOnFIRE wrote:

International funds in taxable give you a foreign tax credit, which you won’t benefit from if you hold international funds in a tax advantaged account.

I don’t quite understand the desire for 30% total stock market, 10% large cap, 10% mid cap, 10% small cap. According to Morningstar, VTSAX (Vanguard Total Stock Market) is approximately 71% large cap, 20% mid cap, 9% small / micro. So combining that allocation with the 10 /10 / 10 split for your 60% US Stock portion gives you:

• 31% large cap


• 16% mid cap


• 13% small cap

There’s nothing wrong with tilting to mid-cap and small-cap (I have a very similar tilt) but you can accomplish it without buying a separate large cap fund. If I were you, I’d own VTSAX or equivalent in taxable, and mid and small cap (value tilt?) in tax deferred or Roth. It helps to not duplicate any class you hold in taxable in other places. Dividend reinvestment or automated investments in Roth / tax deferred can create a wash sale if you’re not careful.

Click to expand…

Thanks for the suggestions.  The only reason I have the large cap right now is because my wife’s 401K choices kind of suck and the two cheapest funds she has available are a columbia large cap (0.45% exp ratio) and a columbia small cap (0.45%).  I’d prefer to not have the large cap either, but I was just trying to pick what’s cheapest.  She does have a columbia mid cap there but its exp ratio is 0.62%.  I could scrap the large cap and use the mid instead.  The only other fund she has that’s not stupid expensive is a total bond fund with exp ratio of 0.55%.  Or they have a target retirement fund (BlackRock LifePath® Index 2045 Fund Investor A Shares) which is I believe 0.53% exp ratio.  I’ve been trying to help her talk to her employer about offering some cheap vanguard funds, but don’t know if we’ll be successful.  I’ve been meaning to do a separate post to ask about choosing investment options given the difficulty I have with her 401K.

Click to expand...

Make sure there's not a hidden brokerage option in her account.  Mine has one, but it is so poorly advertised (and kind of cumbersome to use) that I don't know anyone else who uses it.

 

[Lithium]

hightower wrote:

 

Bott1637 wrote:

You can put the cash aside monthly but I wouldn’t invest it more often then quarterly as you’ll end up with too many tax lots to keep track of. I started mine by automating it with monthly contribution and was thankful for last January’s drop in the market to sell and consolidate all those tax lots. I run my international holdings in taxable. It’s easy tax loss harvesting and no wash sale issues as I have no international anywhere else.

Click to expand…

I have a taxable brokerage account at Vanguard (currently empty).  So, if I just invest in say VXUS (vanguard total international stock market), each time I buy shares it will be considered a different “tax lot?”  I’ve never heard that term before.  I assumed I could just start buying shares now and add to it each month that I have extra cash to set aside?

Click to expand...

This is what I do.  Time in the market is what matters.  It is not that difficult to keep track of the separate tax lots, and over time the market is going to go up to the point that you can forget about the lowest basis shares.

Each purchase is called a "tax lot" because they have a different cost basis (purchase price).  Your broker keeps track of all this in the cost basis section.

[hightower]

Lithium wrote:

hightower wrote:

PhysicianOnFIRE wrote:

International funds in taxable give you a foreign tax credit, which you won’t benefit from if you hold international funds in a tax advantaged account.

I don’t quite understand the desire for 30% total stock market, 10% large cap, 10% mid cap, 10% small cap. According to Morningstar, VTSAX (Vanguard Total Stock Market) is approximately 71% large cap, 20% mid cap, 9% small / micro. So combining that allocation with the 10 /10 / 10 split for your 60% US Stock portion gives you:

• 31% large cap


• 16% mid cap


• 13% small cap

There’s nothing wrong with tilting to mid-cap and small-cap (I have a very similar tilt) but you can accomplish it without buying a separate large cap fund. If I were you, I’d own VTSAX or equivalent in taxable, and mid and small cap (value tilt?) in tax deferred or Roth. It helps to not duplicate any class you hold in taxable in other places. Dividend reinvestment or automated investments in Roth / tax deferred can create a wash sale if you’re not careful.

Click to expand…

Thanks for the suggestions.  The only reason I have the large cap right now is because my wife’s 401K choices kind of suck and the two cheapest funds she has available are a columbia large cap (0.45% exp ratio) and a columbia small cap (0.45%).  I’d prefer to not have the large cap either, but I was just trying to pick what’s cheapest.  She does have a columbia mid cap there but its exp ratio is 0.62%.  I could scrap the large cap and use the mid instead.  The only other fund she has that’s not stupid expensive is a total bond fund with exp ratio of 0.55%.  Or they have a target retirement fund (BlackRock LifePath® Index 2045 Fund Investor A Shares) which is I believe 0.53% exp ratio.  I’ve been trying to help her talk to her employer about offering some cheap vanguard funds, but don’t know if we’ll be successful.  I’ve been meaning to do a separate post to ask about choosing investment options given the difficulty I have with her 401K.

Click to expand…

Make sure there’s not a hidden brokerage option in her account.  Mine has one, but it is so poorly advertised (and kind of cumbersome to use) that I don’t know anyone else who uses it.

 

Click to expand...

Good point...I've looked pretty hard for a self directed brokerage option and I don't think they offer it.  Mine does fortunately and you're right its kind of hidden.

True story...my employer recently changed 401k providers (we were with MetLife, now with Empower).  When I called to talk to the HR representative about what was changing I asked about the self directed option.  She said, "yes it will still be available for the 23 of you that actually use it."  I work for a large healthcare corporation.  So, I'm one of only 23 people out of thousands that are using the self directed option.  And its a great option too.  We have access to all the major vanguard funds and lots of others, most of which don't charge any additional transaction/trade fees.  Its a shame more people don't know to take advantage of it.

[WallStreetPhysician]

hightower wrote:

This year I hope to be able to start putting some cash aside each month into a taxable brokerage account.  I’ve heard its better to put the riskier assets in the taxable account so that you can at least tax loss harvest if the economy crashes?  Is this a valid approach?  If so, which investments should I put in there assuming that they also have to be tax efficient if the economy is doing well?   My target asset allocation is 30% total stock mkt, 10% Large Cap, 10% Mid Cap, 10% Small Cap, 10% Total International Stock Mkt, 10% REIT, 20% Total Bond Market (50% domestic, 50% international).

How do you guys handle your taxable accounts?

Click to expand...

I posted how I recommended investing taxable accounts here (http://www.wallstreetphysician.com/pick-taxable-account-allocation-wisely/), where I essentially recommend keeping it simple and using either a S&P 500 or Total Stock Market Index fund.  Since I already told you in another thread to use a target-date fund for your wife's 401K, do you have any other retirement accounts where you can complete your desired asset allocation?

[hightower]

WallStreetPhysician wrote:

hightower wrote:

This year I hope to be able to start putting some cash aside each month into a taxable brokerage account.  I’ve heard its better to put the riskier assets in the taxable account so that you can at least tax loss harvest if the economy crashes?  Is this a valid approach?  If so, which investments should I put in there assuming that they also have to be tax efficient if the economy is doing well?   My target asset allocation is 30% total stock mkt, 10% Large Cap, 10% Mid Cap, 10% Small Cap, 10% Total International Stock Mkt, 10% REIT, 20% Total Bond Market (50% domestic, 50% international).

How do you guys handle your taxable accounts?

Click to expand…

I posted how I recommended investing taxable accounts here (http://www.wallstreetphysician.com/pick-taxable-account-allocation-wisely/), where I essentially recommend keeping it simple and using either a S&P 500 or Total Stock Market Index fund.  Since I already told you in another thread to use a target-date fund for your wife’s 401K, do you have any other retirement accounts where you can complete your desired asset allocation?

Click to expand...

We have 2 Roth's, 2 401k's, and soon a taxable.  Oh and an HSA, but it doesn't let me direct the investments (I want to try to get a different one).  My 401k and the Roth's are the places where I have total control over the investment options.

[rich]

In terms of keeping things easy and minimizing time investment, Betterment has been a godsend! I get reports periodically saying how much TLH they have done on my behalf .... all at 0 investment of my time and no mess, no fuss.  I'm probably paying a tad more, or could spend lots more hours tracking lots in a DIY solution, but I'm pleased so far. However, now that we've built it up to 6 figures, I've considered moving some of that out to a brokerage account, but for now value the convenience and accessibility of the money (it also functions as the backup to checking account surplus as a level 2 Emergency Fund for me).