If you’re winning the game, then at some point you will start to max out your tax-protected retirement space. For a typical married filing jointly couple, each with a W-2 job, this would be $36,000 (401k x 2) + $11,000 (Roth IRA x 2) = $47,000 per year in tax-protected space. If you are able to save nearly 50K per year starting in your early 20s, you will be well on your way to becoming a millionaire by age 40.
However, if you’re like myself, who didn’t get out of debt and start saving for retirement financial freedom until age 34, then you need to step it up. 50K per year may not be enough. In such a case, instead of lamenting that there isn’t more tax-protected retirement space available, embrace the benefits of the taxable investment account.
Benefits of a Taxable Investment Account
A taxable investment sounds really bad. Why would I want to put money in an account that is subject to taxes? Well, if you have maxed out your tax-advantaged accounts, there really isn’t any other choice. When it comes down to it, the taxable account really isn’t that bad. It actually has quite a few benefits, including:
- You can invest in anything you like. There are no limitations like there is with an employer-sponsored 401k plan.
- You can take money out at any time without penalty. In a 401k, you will be required to pay a 10% penalty if you withdraw funds prior to age 59 1/2. In a Roth IRA, although you are able to withdraw contributions at any time without penalty, you will pay a penalty if you withdraw earnings prior to age 59 1/2.
- There is no limit to the amount you can place in a taxable account. In comparison, there are strict limits on contributions to 401k’s and IRA’s.
- You can Tax-Loss Harvest: Basically, if a fund in your taxable account loses value, you can sell it and use the loss (up to $3000 per year) to reduce your taxable income. We’ll cover more about tax loss harvesting in future posts, but for now you can read more about it in the bogleheads wiki.
How a Taxable Account is Taxed
The money that you place in a taxable account is post-tax money, meaning that you have already been taxed on it. This money (the contributions to the taxable account) will never be taxed again. However, you will be taxed on:
- Dividends and
- Earnings (Capital Gains)
I. Dividends are basically payments (income) that your stocks, bonds, or savings account will give you throughout the year. This is money that you get without doing anything. If you have never experienced the power of having your money make money, then you need to start investing TODAY. We’ll cover more about the power of passive income in future posts. For now, it’s important to understand that there are two types of dividends:
- Ordinary Dividends: These are taxed at your ordinary marginal tax rate (bad). This includes interest from CDs (certificates of deposit) and savings accounts, as well as dividends from bonds.
- Qualified Dividends: These are dividends that meet specific criteria to be taxed at the lower long-term capital gains rate (good). Stocks often produce primarily qualified dividends. It is important to understand that all dividends are ordinary, but not all ordinary dividends are qualified.
II. Earnings occur when a stock or bond increases in value. You will not owe any taxes until you sell, at which point, there will be realized capital gains. However, if you own a stock mutual fund, even if you don’t sell shares of the fund, the fund manager may be buying and selling shares, which may generate capital gains that you will owe taxes on at the end of the year. Like dividends, there are two types of capital gains:
- Short-term Capital Gains: apply if an investment (like a stock) is held less than 1 year. These are taxed at your ordinary marginal tax rate (bad).
- Long-term Capital Gains: apply if an investment is held longer than 1 year. These are taxed at the lower long-term capital gains rate (good).
Minimizing Taxes on the Taxable Account
As you can see, taxation of funds in your taxable account can get complicated. However, we’ll try to simplify it for you. Basically, to minimize your taxes in a taxable account, you want to pick funds that are taxed at the lower long-term capital gains and qualified dividends rate.
This essentially narrows it down to buying and holding individual stocks and total stock market index funds. Turnover (frequent buying and selling) is low, which reduces or eliminates short-term capital gains, and most of the dividends are qualified dividends.
Bond funds (including TIPS), high-yield savings accounts, CDs, and REITs (real estate investment trusts) are out because they generate interest income and ordinary dividends, which are taxed at the ordinary income marginal tax rate. Actively managed mutual funds are out because they generate high amounts of short-term capital gains.
What you should put in your taxable account
In general, the only thing you should put in your taxable account is a total stock market index fund. If you prefer more international exposure, then you may add a total international stock index fund. If you absolutely need bonds in your taxable account to maintain your chosen stock:bond allocation, then you can either take the tax hit, or if you are in a high tax bracket, you can use municipal bond funds, which are exempt from federal taxes.
My Taxable Account
Here’s what I have in my taxable account (my chosen asset allocation is 75% stocks and 25% bonds):
- 55% Vanguard Total Stock Market Index
- 20% Vanguard Total International Stock Market Index
- 25% Vanguard Intermediate Term Tax Exempt Bond Fund
How my taxable account is taxed
Vanguard Total Stock Market Index Fund: As you can see from the chart below, this fund does not produce any realized capital gains throughout the year (either short or long-term) and ALL of the dividends are qualified dividends. Therefore, you only pay taxes on the approximate 2% dividend disbursement. So, if you owned $100,000 of Vanguard Total Stock Market Index, you would receive $2000 in dividends, and even if you were in the top tax bracket, you would “only” pay a tax rate of 23.8% (20% + the ACA Medicare surcharge of 3.8%), or around $500. In comparison, if you had earned $2000 from a CD or savings account, assuming the highest tax bracket, you would owe around 43.4% or $900 in taxes, nearly twice as much. Of course, when it comes time to sell the shares of your Vanguard Total Stock Market Index Fund in “retirement”, there WILL be long-term capital gains, but that is quite a few years into the future.
Vanguard Total International Stock Market Index Fund: Like the Total Stock Market Index fund (as you can see from the chart below), there are no realized short or long-term capital gains to pay taxes on. However, unlike the Total Stock Market Index fund, not all of the dividends are qualified. In 2015, the dividend rate is 2.8%, so if you owned $100,000 worth of Total International, there would be $2800 in dividends. Only 70% or around $2000 is considered qualified dividends, taxed at the lower tax rate, and $800 is considered ordinary dividends, taxed at the higher tax rate. You’ll also notice from this table that there is a column for foreign tax credit. This represents the amount you paid in foreign taxes by holding an international fund, and you can deduct this from your taxes owed. You can read more about the foreign tax credit here.
Vanguard Intermediate Term Tax Exempt Bond Fund: This fund is fantastic because the income generated is exempt from all federal taxes. Note, however, that if you live in a state with a state income tax, you will pay state taxes on this income. I am fortunate to live in Alaska, which has no state income taxes (for now). The Vanguard Intermediate Term Tax Exempt Bond Funds pays out dividends monthly, currently at a rate of approximately 2.8% per year (this has varied over the last 10 years from around 1.5% to 4%). So, if you own $100,000 worth of this fund, you would have received approximately $2800 in dividends last year, which would be around $230 per month. This is not a large amount of income, but it IS tax-free. The closest thing to a free lunch you can get.
Wrap-up
The taxable account is not your enemy. In fact, the taxable account has several benefits, including the ability to take distributions whenever you want, which is particularly helpful to the early retiree. After you fill up all your tax-advantaged accounts (Roth IRA, 401k), don’t be afraid to start investing in a taxable account. If you understand the basics of how this account is taxed, you can select tax-efficient investments to minimize tax drag and eventually earn your freedom.
What do you think? Are you in the fortunate situation of being able to fill up all your tax-advantaged space and begin contributing to a taxable account? What investments do you have in your taxable account? Comment below!
Nice job! Great overview with just the right amount of detail. For every 1,000 articles I read about saving for “retirement” there may be one about money in a taxable account. For high earning professionals this is a critically important topic since MOST of our money is often outside of tax-deferred/tax-free accounts.
A couple of questions:
1. What do you think of Vanguard’s tax-managed accounts? I’m not sure there is a big advantage over what you recommend. I started investing in them a long time ago though and now I don’t want to sell them due to the tax hit.
2. Why intermediate bonds. I don’t disagree necessarily, but thought other readers might like to know also. Some recommend taking your risk and return from equities and keep the bond money safe and short. I’m assuming it is a interest rate risk vs. return sweet spot for you?
Hi Wealthy Doc. Thank you for the great questions:
1. The Vanguard tax managed funds are reasonable choices. There appears to be 3 major tax-managed funds offered by Vanguard: (1) Tax-managed balanced fund; (2) Tax-managed Capital Appreciation Fund; and (3) Tax-managed small cap.
The Tax-managed balanced fund is a near 50:50 mix of intermediate-term municipal bonds and large cap stocks, for an expense ratio of 0.11%.
The Tax-managed Capital Appreciation Fund is a mid and large-cap stock market index fund that selectively invests in stocks with low dividend payouts, for an expense ratio of 0.11%.
The Tax-managed Small cap fund is similar to the capital appreciation fund, in that it selectively invests in stocks with low dividend payouts, but focuses on small cap stocks. It also has an expense ratio of 0.11%.
The tax-managed funds essentially utilize the concepts presented in this post. In particular, they use municipal bonds, low fund turnover (to minimize realized capital gains), and preferentially invest in stocks with low dividend payouts. With less dividend payouts, more of the company’s profits are invested back into the company to increase the company’s value. This essentially defers your long-term capital gains until retirement, when you are likely to be in a lower tax bracket.
I did not select the tax-managed balanced fund because I wanted to choose the proportion of municipal bonds in my portfolio. The tax-managed capital appreciation fund and tax-managed small cap fund would be reasonable choices, but I wanted to keep things simple with a total stock market index fund, which invests in an entire range of stocks (growth and value, small, mid and large cap) for a lower expense ratio of 0.05%. The dividend payout of VTSAX (~1.8%) is only very slightly higher than the dividend payout of the tax-managed funds (~1.6%), so it’s probably a wash in the end.
2. With regard to municipal bonds, you can select either short-term, intermediate term, or long-term. The longer the term, the higher the dividend yield. However, with a longer term comes higher interest rate risk. This means that as interest rates rise (as they are likely to do since we are in a historically low interest rate environment), the value and dividend yield on the bonds is likely to decrease. I chose intermediate term because this seemed like a decent balance between return and risk. However, I can understand why someone would chose short term. Again, this is probably an individual choice, and one that is not likely to make or break your financial situation.
Thank you so much for helping me to clarify these points. Cheers!
Two other reasons I love investing in a taxable account that I don’t think you mentioned:
# 1 The Step-up in basis at death
# 2 The ability to donate appreciated shares to charity in lieu of cash
Yes indeed. Your post on the advantages of a taxable account contains a much more comprehensive list that what I have provided here.
http://whitecoatinvestor.com/retirement-accounts/the-taxable-investment-account-2/
Excellent job.
I caught your comment on WCI and followed the link. Just Like POF examples, your’s was easy to follow. I myself have just simplified with Bogleheads.Org and fine tuned my Portfolio for the final round (I’ll base retiring on if I want to redo my ABIM).
Welcome Billy. Thank you for the feedback. I agree that the licensing and Maintenance of Certification requirements in medicine are becoming excessively costly and burdensome. It’s nice to have the freedom to decide whether you want to play their game, or make your own game.
Great Job!, I came here from WCI. Please keep it up, the information was very useful. I have a similar allocation in taxable with 25% Vanguard International Stock market index; 25% Long Term Vanguard Municipal bond fund and 50% Vanguard Total Stock Market Index. (Overall portfolio including retirement accounts 80% Stocks 20% Bonds). I was not aware that not all the dividends from the international fund are qualified, so that was new to me.
It was news to me as well until I did my taxes this year. Personal experience is the best way to learn this stuff!
Great overview of the “taxable” account, LFMD.
We really should start calling it a post-tax account, since taxes on the account depend entirely on one’s situation. Play your cards right, own the right investments, put yourself in a low tax bracket in retirement, and (as you point out in the table) your taxable account can act like a Roth account without the restrictions.
Cheers!
-PoF
I really like that characterization: “A Roth account without the restrictions”. Makes it sound much more friendly!
Great post. I also did not realize the foreign dividends were taxed as non-qualified (partly). I also split the difference with the intermediate muni fund.
It was somewhat of a shock to me as well when I did my taxes this year. Luckily it’s not too big of a hit, but I’m glad I have a larger proportion of my equities in domestic funds.
Like you mention, I felt pretty fortunate when I reached a point where taxable accounts were my next best option. Thanks for the great overview.
I currently have put everything in my taxable account into the Vanguard Total Stock Market Index and will likely start adding an international index fund as well. However, this year my husband and I decided to invest in our first real estate property, so my extra investment income is being put to other uses for now.
Congrats on your first investment property! I think it’s a great idea to diversify into real estate. Personally, I’m still waiting to see how the crowdfunding real estate market shakes out. Not quite ready to be a landlord while I’m working 60 hours per week at my primary job.
Thanks for the article. I am researching striking out on my own from my advisor (1% AUM just feels like too much). Having this explained so clearly really helps.
Hi Dan. In my humble opinion, with a small amount of motivation, ANYONE can learn to invest on their own. Consider that with a 1% AUM fee, you will be paying your advisor $10,000 per year for every $1 million invested. Over 30 years, that would be $300,000, not counting compound interest if that yearly $10,000 was invested. It probably only requires a few hours of work to learn how to invest and match market returns. Is a few hours of work worth hundreds of thousands of dollars? You be the judge.
Thanks for such a succinct and clear summary. Saw your most recent post on WCI and will now need to investigate your recommendations as I’m currently contributing to the Life Strategy fund. Right now I’ve got such a small amount of money in my taxable account that the taxes on the dividends will be small but as the account grows…
How often do you tax loss harvest? Once a year pre taxes?
Hi Amy. Thank you for the feedback.
If you can find a way to tax loss harvest, I think this is a great way to reduce your taxes. Through tax-loss harvesting, you are essentially able to deduct up to $3000 per year in losses from your taxable income. If you are in the 33% marginal tax bracket, that means you will save 0.33 x $3000 or $1000/year in taxes.
In my particular case, I have not figured out a way to reliably get around the “wash sale” rule. I hold “substantially similar” Vanguard funds in my Roth IRA and 401k, and I have dividends set to reinvest, so this is likely to trigger a wash sale. I could just wait 30 days (after selling) before purchasing the same fund, but being out of the market for 30 days could limit my returns.
Tax loss harvesting is in the back of my mind as something to look into and learn more about, but right now I’m primarily focusing my energy on maximizing my savings rate and reducing investment fees, which is likely to be the most effective method for increasing portfolio value in the long term.
Again, thanks for stopping by, and please let me know If you have any other questions!
Excellent post! I also came here via WCI.
Currently my taxable account is entirely in VTI, subscribing to the investing meme that ETFs are tax efficient and easy to loss-harvest. However, I’m now interested to add muni bonds, and to my knowledge there is no such ETF at Vanguard (not to mention that Bill Bernstein doesn’t believe in bond ETFs in general).
My question is whether I should go all-in for admiral shares (VWIUX) over investor shares (VWITX) to lower expenses. It would tilt my taxable account heavier in bonds (not as much of an overall portfolio effect), but only temporarily because I could accumulate more VTI afterward, with plan to TLH into internationals if needed. Bogle says not to obsess over asset percentages, especially at a young age.
I am also debating intermediate vs short muni’s, but leaning toward intermediate.
Thoughts?
Hi there. I would recommend adding in municipal bonds at your desired percentage, first using investor shares if needed and then eventually converting them to admiral shares. The difference in cost will be insignificant especially if you will be transferring over to admiral shares in a relatively short period of time (a year or so).
I would also recommend an intermediate term municipal bond fund (yield 1.74%), which I feel is a good balance between interest rate risk and yield. The short term municipal bond fund only has a yield of 0.93%, which is hardly better than the (much safer) municipal money market fund (yield 0.65%). The long term municipal bond fund has a nice yield of 2.38% but carries a higher interest rate risk.
I hope this helps! Please let me know if you have any additional questions.
Thanks for the reply!
What would you think about using the ETF VTEB in a taxable account?
It is total tax-exempt bond but I’d assume the short- and long-term would average out to intermediate, effectively. Expense ratio is the same, but no minimum investment. I know Bill Bernstein isn’t a fan of bond ETFs, but seems like it could be a slick addition to add to an ETF taxable portfolio (+VTI, VXUS).
VTEB, The Vanguard Tax-exempt bond ETF, would be a fine choice for a taxable account, quite similar to VWIUX (Vanguard Intermediate Tax Exempt Bond Fund). The average durations are 5.9 (VTEB) and 5.3 years (VWIUX), so they have similar sensitivity to interest rate changes. They also have similar dividend payouts (SEC yield is 2.03 for VTEB and 1.92 for VWIUX).
Thanks again. One more nuanced question…
My 401k only has decent international fund options in developed countries. To get an emerging market tilt, I am thinking about using an EM fund (VWO or VEMAX) in my taxable account. The other issue is that I carry VTIAX in my HSA so worry that VTIAX or VXUS in taxable could trigger a wash sale in tax loss harvesting.
Based on what I’m seeing on the bogleheads wiki for VEMAX/VWO, there are no short- or long- term capital gains, and dividend rate was 2.68% in 2016. Foreign tax credit still applies. So probably just as tax-efficient as a total international fund?
Were you able to find any information on the type of dividends distributed? Ordinary dividends are taxed at your marginal tax rate. Qualified dividends are taxed at the (lower) long-term capital gains rate.
Great post! I came by way of Google while looking for this exact info. I recently opened a taxable acct with Vanguard. My research led me to a similar asset allocation and same funds as you. I am curious of whether you are auto reinvesting dividends. I’ve read conflicting info on auto reinvesting on a taxable account with muni bond fund. I do not know enough yet to make a decision against auto reinvesting. I am 35 an not planning to touch the money for 20 years.
I reinvest all of my dividends at this point. Keep in mind that if you are doing tax-Loss harvesting and you have the exact same funds in your retirement accounts (401k, Roth IRA) as your taxable account, reinvesting dividends could potentially invoke a “wash sale”.
I am not aware of any disadvantages of reinvesting dividends with a muni bond fund. However, once I retire, I may have the dividends sent to my money market settlement account as a source of income.
Some of this is just preference. I decided to not reinvest my dividends automatically. They go to my money market account. I can then invest them quarterly or whenever to whatever funds I want to boost up. Also, this makes for fewer “tax tranches” Each time a new investment is made it can affect taxes at the time of sale. It is less confusing for me if I invest less frequently. This may lose some of the benefits of DCA though.
Great article–one of the better ones on a simple taxable account–my taxable account is a mess between different brokerages, funds, etc…
I am going to use your portfolio as a guide for mine at Vanguard (50% total stock, 25% international index, and 25% intermediate tax exempt). Now if I can just leave it alone..haha.
Thanks for all the great content you write.
DSG
You’re very welcome. Thank you for the feedback.
Finally some information that is devoid of clutter. Structured in an excellent manner. If you ever wrote a book I will definitely buy it.
The website might become a book someday. Thank you for the encouragement.
Excellent article! Like some others have posted, my head is spinning from contradicting advice on the internet. I file head of household and am able to keep just within the 15% tax bracket. Does your advice for taxable account funds change if I don’t have to worry about LTCG? Am I unnecessarily complicating things if I dollar cost average monthly into my taxable account?
If you can stay within the 15% tax bracket, you don’t need to worry about long-term capital gains, but you still need to worry about SHORT-term capital gains, so I would still invest in low-turnover index funds such as a Total Stock Market Index Fund and Total International Stock Market Index.
If you are in a low tax bracket, and you need a bond fund in your taxable account to maintain your asset allocation, then you may find that a total bond market index fund (rather than a municipal bond index) yields higher overall returns. To figure out which to use, you need to compute the “Taxable Equivalent Yield” of the municipal bond fund. This is described in the following article: https://www.aaii.com/journal/article/munis-vs-taxables-how-to-determine-the-taxable-equivalent-yield.touch
Taxable Equivalent Yield = (Tax-Exempt Yield) / (1-Marginal Tax Rate)
If the Taxable Equivalent Yield of the municipal bond fund is lower than the yield of the total bond index, then go for the total bond index fund.
Here’s an example to make this more concrete:
According to Vanguard’s website, the total bond market index fund has a yield of 2.56%. The Intermediate Term Municipal bond index has a yield of 1.99%.
Assuming a 15% marginal tax bracket, the Taxable Equivalent Yield of the Intermediate Term Municipal bond index is 2.34% (using the formula above). Since the total bond market index fund has a yield of 2.56%, you are better off using the Total Bond Market Index Fund.
I hope this helps!
Excellent post! I think this really answers most people questions about taxable accounts. You did a great job here. Nailed it! I too prefer low cost index funds as they are tax efficient and easier to manage. Best to stick with funds with as low of of an expense ratio as possible such as anything under 1%.
Thanks,
GBM
Holy cow! This is so clear and succinct. I am a newbie investor so I appreciate the easy to understand language you used in this post. I generally don’t comment on blogs but wanted to let you know this Post was awesome. Thank you!
I’m glad you found it helpful. Thank you for visiting!
This was a very helpful review. Thank you.
I am finishing up fellowship and very slowly figuring these things out. I am not sure how to plan to allocate the different assets among the 403b, 457, Roths and eventual taxable at our disposal. Our Roths are Admiral Total Stock Market (VTSAX) and Internation Stock Market Index Funds (VTIAX). We are 100% equities right now, but I am slowly being convinced we should start adding bonds. Either way probably not a big deal because we have such little money in retirement accounts at this point.
The only good options for the 403b are Vanguard Institutional Index (VINIX) and Vanguard Mid Cap Index Admiral (VIMAX). My wife has a nice low expense bond fund (iShares US Aggregate Bond WFBIX) and Extended Market Index Fund (FSEVX) at her 403b from a previous employer. However, this will eventually become a very small % of our portfolio even though these are great options.
I lay out our limited options to make the point that I think there will be significant “overlap” throughout all our accounts. It may not be a bad thing (i.e. Boglehead 3 fund portfolio), but I am not sure how to plan to eventually re-balance things. Should we change Roth allocations to REIT/small cap/bonds indexes and instead invest the VTSAX/VTIAX in taxable? I understand that savings rate and actually pulling the trigger on investments is the best thing at this stage, but I have become a bit obsessive at this point so that I can eventually have everything in place so we can just “set it and forget it” with semi annual re-balancing based on our desired asset allocation.
Figuring out asset allocation among different accounts can be challenging, but try not to overthink it. As you mention, the most important thing is your savings rate. It is also important to do things right with the taxable account at the onset to avoid having to sell and generate capital gains.
I have target date retirement funds in all of my retirement accounts (Roth, 401k), so these rebalance automatically. For my taxable account, I have the 3 funds as mentioned in this blog post. The ONLY rebalancing I do is in my taxable account. I don’t actually sell anything in my taxable account, but I do figure out how to allocate each monthly paycheck to the 3 funds to maintain my desired percentages.
You are correct that the less tax-efficient investments (REIT, small cap, bonds) are better suited in tax-protected accounts, so it would be perfectly fine to keep those in your tax-protected accounts and keep VTSAX and VTIAX in taxable. If you really want to get into the nitty gritty with asset allocation, then I recommend starting with the White Coat Investors 7-part series on Portfolio Design. Part 1 is found here: https://www.whitecoatinvestor.com/designing-your-portfolio-part-1-goal-setting/. I also think that Physician on Fire has a very nice portfolio design, with excellent attention to tax-efficiency and being able to tax-loss harvest. https://www.physicianonfire.com/the-pof-portfolio/. Thanks for visiting and good luck!
Would using a taxable account to load up on Dividend focused ETF’s be considered tax smart?
The most tax-efficient strategy is to buy and hold a stock (or stock mutual fund) that MINIMIZES dividends. This is because dividends are taxed every year. Ordinary (non-qualified) dividends are taxed at your marginal tax bracket. Qualified dividends are taxed at your long-term capital gains rate. If your income is below $77,200 (married filing jointly, 2018), then you won’t owe any taxes on your qualified dividends, but you will owe taxes on your ordinary non-qualified dividends.
For this reason, some investors prefer to hold a stock that gives NO dividends, namely Berkshire Hathaway. I just use a total stock market index fund in my taxable account (dividend yield around 2%). If I used Vanguards high-dividend yield index fund (yield 2.7%), I would pay higher taxes every year due to the higher dividend yield. I hope this makes sense. Please let me know if you have any other questions.
finally an article i can read on dividends and capital gains that didn’t give me a headache midway. wonderfully written!!! there is a wealth of knowledge you shared! besides taxable and tax-deferred accounts, do you recommend or do real estate investing?
I definitely recommend diversification through real estate. I do not currently invest in real estate, but I plan to start within the next several years as income and time allows. The trick is to find a real estate investing avenue that fits with your knowledge, personality and time constraints. This is a nice overview from Passive Income MD: https://passiveincomemd.com/16-different-ways-invest-real-estate/
Great article…. Just can’t you thank you enough… succinct and clear…
I have a question… I am transitioning my taxable account to all etfs with fidelity, but I have been investing for a while and majority of my money is in actively managed funds that generate significant LTCGs. Do I just sell all my funds gradually and pickup etfs and just take the tax hit year over year or just stay with them??? I can not do any bonds due to religious reasons…
Hi Abdul. This is a difficult situation. Ideally, when you first open up a taxable account, you start with low cost passively managed funds (low turnover). In your situation, you will need to determine whether it is worth it to you to keep with the actively managed funds or sell them and purchase ETFs. One option to minimize taxes is to sell the shares with the highest cost basis (lowest long term capital gains) first. Another option is to wait for the next bear market and sell the actively managed funds at a wash or loss. A final option is to keep the actively managed funds until you are in a lower tax bracket. I don’t think there’s a perfect answer here. Good luck!
Thanks so much again for your advice… My approximate tax amount is 50k long term capital gains. When should I sell to avoid capital gains distributions? I was thinking of splitting the tax burden for ‘19 and ‘20 at the 15% LTGC rate (~$3750/year). These funds average 0.78 expense ratio and about $3/share LTGCs; the etfs would be approximate 0.1 expense ratio with little to no LGCG. For religious reasons, I can not do bonds or have expose to the financial sector; can not do index funds.
Thanks again.
Abdul.
VTI or VTSMX in Vanguard Taxable account?
Vanguard ETFs and mutual funds have equivalent tax treatment. Therefore, it doesn’t matter whether you use VTI or VTSAX. If I understand correctly, this is not true for all mutual fund companies (such as Fidelity). Therefore, for other fund companies, I recommend the ETF versions, which generally have superior tax treatment.