Taxable Account

[sealsmith217]

I am a 37 y.o. EM doc married to a 37 y.o. IM doc, we're debt free, and own about $600,000 in tax deferred accounts. This will be my first time investing in a taxable account after 7.5 years of working towards debt free status. I am looking for advise before I put $75,000 of cash into a taxable account. I am thinking Vanguard index funds if I decide to do it as a DIY investor.

1. Do I also use the same asset allocation as my tax-deferred accounts currently at a 70/30 split?

2. Would you split up the money and invest over a few months to take advantage of dollar cost averaging? I understand that I need to pick tax efficient funds as a DIY investor and doing tax loss harvesting about once a year.

3. Anyone have experience with betterment.com since they have TLH+ making tax loss harvesting automated and possibly more effective?

4. Have I forgotten any other MUST DO regarding taxable account investing?

[Hatton]

1.  You need to consider both your tax deferred space and your taxable accounts as one when you figure your asset allocation.

2.  We are in a correction!!  Invest it all at once and take advantage of the sale.

3.  I have never used betterment but you need to learn about tax loss harvesting.  It is not hard to do yourself.  Learn about wash sale rules.  Basically you cant buy back the same stock or mutual fund for 30 days.  You can buy something similar to stay invested.

4.  Having some money in a taxable account will give you flexibility if you retire early.

[Hatton]

Oh,  if you buy bonds in the taxable account make sure they are munis. You could put all your bond position in the tax protected space.

[conniebird]

Consider the taxable account as part of your whole portfolio. Since it is taxable, you want tax efficient funds.

Betterment is fine, but you can def do it yourself and save $$ by investing it at vanguard. Funds like:

Total US stock market - VTSMX /VTSAX

Total Intl market - VTSMX/VTSAX

Muni bonds (if doing bonds, otherwise, don't do any, not tax efficient)

[PhysicianOnFIRE]

Good questions, sealsmith217.  Read the replies here and check out the Boglehead forum, where these exact questions are posed frequently.  Nearly half of my investments are in taxable.

1. Apply your asset allocation across all of you and your spouse's accounts.  70/30 overall might mean 100% stock in taxable, 50/50 bond in Roth or tax deferred.  You want the most tax efficient funds in taxable.  Tax inefficient investments (REIT, high yield bond) should be in tax deferred or Roth.  See the Boglehead wiki on tax efficiency.  WCI argues for bonds in taxable here.  I think it depends what type of bond fund.  Personally, I keep bonds in tax deferred.  Over the long haul, I expect bonds to have lower returns than equities, so I put them in the account that I will have to pay tax on when accessing.  Also, you'll have fewer (or smaller) tax loss harvesting opportunities with a bond fund.

2. A lump sum investment of that $75k will be best if the markets go up over the next few months.  Dollar cost averaging will win if the markets drop over the months that you gradually invest.  If you can't decide which you prefer, you can do a combination of the 2 by investing a big chunk (maybe half) now and then 1/x of the remaining $ over the next x months.  I imagine you will continue to fund taxable monthly indefinitely, so you'll be dollar cost averaging the rest of your career anyway.

3. I have no experience with Betterment or other roboadvisors.  I have heard others warn that their TLH could trigger a wash sale if Betterment holds identical funds to what you hold in your other accounts.  When you do it all with Vanguard, you have control over that.

4. Looks like you have much more knowledge than I did when I started mine, and you're seeking further advice.  Good job!  You didn't ask about ETF versus mutual funds.  WCI wrote about it here.  The difference is rather slight; I use mutual funds since that's what I grew up with.  I stick with admiral funds, which have a higher minimum investment of $10,000 typically, and the same low cost as the matching ETF.

 

[jz]

sealsmith217,  your thinking is right on target.  Tax loss harvesting at the granular level is a joy to experience; strongly consider the robos.

I use Wealthfront, and will mention the interaction between the plan and  investing behavior.  I don't see this written about elsewhere. My instincts are to get aggressive during downturns. It is easy to adjust risk tolerance at  preset market movements.  Previous SPY market high was 213.  When it dropped 10% in Sept. , I upped my risk tolerance. If it drops 20% from market high, I will up the risk level again. When the market recovers, and is up 10%, I will lower the risk tolerance. When up 20%, I will lower it again. The rule, of course, is to have preset triggers. Also, wealthfront will not allow more than 3 annual changes, so one's behavior is restricted.

Every investment plan interacts with investor behavior, even TDFs, life style plans, and robos.

[Toshi]

I am the resident Betterment TLH+ fanboi here. See my WCI guest post on the very same!

https://www.whitecoatinvestor.com/betterment-tax-loss-harvesting/

One update since that March 2015 post (written in December 2014 or January 2015) is that Betterment turned on TLH+ for accounts of all sizes since then. It's no longer for $50k+ accounts.

I have personally been using it and have seen it harvest about $2k in losses in an account that has seen an average balance of probably $25k over the past year, mostly in a not-very-volatile 35% stock allocation. Now I'm playing around with a component in a much more volatile 75% stock allocation in order to maximize the loss harvesting on the downside as well as the upside itself.

[Zaphod]

Interesting. I am starting to get very tempted to put a lump sum into one of these services and let the TLH go crazy. Was thinking myself a slightly more volatile portfolio would be great for that kind of thing.

[tex]

@Toshi

So you still hold exclusively target date funds in your tax-deferred to avoid a wash sale?

[pulmccMD]

I use Betterment. I like the fact that it's easy, automated and cheap--15 bps for an account over 100k.

Can I save $$ and do it myself?? Of course---but to me it's worth my time to have Betterment do it all. I have tax advantaged stuff with Vanguard, Tiaa-cref, or American funds--all Target date funds (load waved).

I would recommend Betterment for a taxable account. I'm sure Wealthfront and the other robos are about the same.

DG