No better example of the Pareto Principle in action. Watch at least three times for maximum impact. What are the 45 minutes that you spend each time watching worth? Literally thousands of dollars. Well done Eric, another Master Class presentation!
Or low dividend paying broad based index funds with very low turnover. Quite tax efficient, and NONE of the limitations of retirement accounts and (if you shop) NONE of the high fees of annuities. Thinking these through and NOT trading (or at least rarely trading) can pay off well over time, in terms of tax efficiency.
Your videos always seem much more useful to me than other "investment" channels. It might be lucky timing in regard to my current situation, but I think you do a good job explaining the material. One video that I would find helpful would be an overview (or checklist) of ALL the factors involved in retirement and cash flow planning. Income tax is always there, but there's a long list of other considerations like ordinary-vs-long-term gains, the SS Tax Torpedo, IRMAA, NIIT/Obamacare, state taxes, etc. I would expect only a 2-minute overview of each item, but you could insert an on-screen link to your detailed videos on each one. This top-level video would then be like a Table-of-Contents to all the factors involved in planning, and would give people like myself some confidence we didn't overlook something big.
Far too many "investment" videos on RU-vid are worthless "get rich quick" guesses on SPECULATING (not investing) in aggressive stocks. That's COMPLETELY worthless, re meaningful advice, vs. actual investment advice re long term strategy, including on taxes. I wish such info. had been easy to find in understandable form 4 decades ago when I was a young man learning how to invest after FINALLY having a decent income after college.
Great content. I made so many mistakes over the years in taxable accounts because I ignored (really,wasn’t aware) of tax consequences. One biggie was I held a 2030 vanguard target date fund that took a huge tax hit when Vanguard changes the rules in an institutional fund that forced them to sell a huge amount of stock within the fund. Took a huge capital gain hit and i hadn’t taken a penny out.
Yes. Even frugal savers raised to be aware of investing can completely miss tax efficiency, unless they stumble on it. I was lucky. My sister's husband complained about the magnitude of the taxes they were paying on some tech. mutual funds in the 80's I had steered them toward, based on historical performance. After reminding her that HAVING SIGNIFICANT CAPITAL GAINS was a good problem to have vs. the alternative (little gains or losses), I said that was a different issue than I'd thought about, and I'd look into it. That quickly led to finding Vanguard tax efficient index funds with low turnover or even more deliberately tax efficient funds (as a stated category) from Vanguard (which deliberately try to NEVER take net capital gains). Low dividends plus LOW turnover ends up with high tax efficiency, even for the "not a tax efficient class fund". So I advised them to switch to such funds, did so myself, and now have 30ish years of accumulated unrealized capital gains in those funds that is a massive proportion of my holdings in those funds. WIthout any limitations from tax deferred retirement accounts I maxed my (and my employer's) contributions to. Sweet.
Great video. Very informative. The only thing I disagree with slightly is dividends. For high income earners those annual dividends don’t really change my tax bracket. And if I max out my tax deferred account contributions and I don’t need to save that money from the dividends then I reinvest those dividends not by drip but by what I pick and choose to buy. Those dividends help me buy more shares of both dividend stocks and nondividend stocks. So every year I get taxable income (again high income earner regardless) but it’s already in my account that I use to buy more stock. I don’t have to take my savings from my job income to put in every year. That compounding over the years from buying more stocks that have growth (invest in good businesses for the most part) and more dividends that allows me to buy more stocks has grown my portfolio without adding that much more taxes. In addition my income has fallen over the years because I chose to go part time so the dividends dont even push me back up to my previous career high tax bracket. But imagine getting 10k a year to invest in the market, over the next 20 years that’s 200k of additional money you invested.
Dividends certainly aren't all bad. But he was correct that lots of them DO impact your taxable income, so he's right to point it out as a principle. I tend to balance things, but keep that principle in mind. My favorite investments are highly tax efficient funds in taxable accounts that I only pay a fraction of a percent of their value in re income tax (given my tax bracket and the dividend percentage). But I also have some moderate dividend growth stocks because over time, the yield on cost just becomes FABULOUS for good dividend growers.
yeah, that was the question I had: I've just put 60k into conservative timed fund (Fidelity 2030) in my taxable account, in order to park the money somewhere. (The general plan is to have enough to pay off my townhouse, if I want to.) But I was looking at it and going "wait, isn't that going to be giving me taxes a bunch, as it re-balances and spits out dividends?" ....and the answer is "yes. Yes, it is." ah, well - I was avoiding ETFs as I couldn't find a conservative enough one, but I think the answer is "have a split between a general index ETF and another one" - ie, do the 60/40 split in the account with ETF's, instead of having the diversification all in the same mutual fund. Is there any short-term issue with selling it at a slight loss? it's regained most of its value over the last few days, but it's still (slighly) underwater. I've been DCA'ing into it over the past half-year, but it's still all short-term.
Are short or long term capital gains computed before or after taking your standard deduction, such as married filing jointly? This could have an impact on a LT rate of owing 0 or 15% tax on gains.
Great video. One exception to holding bonds in a taxable account. If you don’t have enough room in your tax deferred to get to your preferred % of bonds, you can buy t notes with low interest rates. You can then sell them before maturity and pay long term cap gain rates.
Nuance and context are very much "things". As is listening / reading a thing, plus VERIFYING sources. Also, RU-vid is FULL of bad advice, so ALL video makers need to be viewed with a healthy dose of both skepticism and fact checking, at least until they do a good job proving themselves.
Thanks for sharing the list of non-dividend stocks. Is there an ETF that uses that as its criteria? I assumed it would likely be a Growth ETF but having one that specifically weeded out the dividend stocks would be interesting.
How about index funds? Would you treat these like ETFs or like mutual funds taxwise? Hold them preferably in taxable or non taxable/tax deferred accounts?
Index funds are subset of mutual funds. He neglects to clearly address that index funds [just like ETFs] are tax efficient and acceptable in taxable account.
Indexed mutual funds are about as tax efficient as ETF. Sometimes the maintenence fees are higher than ETFs and sometimes they are not. The thing you also need to be looking at is annual portfolio turnover in the mutual fund or ETF. There are some ETFs that are indexed but also have a higher turnover ratio due to the index sampling, change in weighting of some stocks etc.
In a taxable account, I think he’s saying that an index stock ETF is more tax efficient than an index mutual fund, which is at least more tax efficient than a managed mutual fund. In a retirement account there are no tax considerations to worry about.
Great information again from Eric and the team. One other point to consider - if you are going to make cash donations to charities anyway, you can use a donor advised fund to pull highly appreciated shares from your taxable account. You get the deduction on the appreciated value and avoid capital gains. It's a good way to rebalance if you will donate to charity anyway.
Yes. Or if you have a serious amount to donate, you can set up a charitable trust (the one I'm aware of is a CRT - Charitable Remainder Trust). You get a HUGE tax CREDIT for years after you set it up, based on some complex actuarial formula (which the lawyer handles for you), you keep getting the income for life on the stocks, and the assets pass to your charities of choice on a stepped up basis (no federal income tax) when you die. Using stocks with a huge unrealized capital gain to go into such a trust is icing on the cake, of course. And if you're worried about your estate "losing the value" of those stocks, you can buy a life insurance policy with a similar or somewhat higher value. Your estate gets those insurance proceeds tax free -- but of course, you have the annual premiums which add up but aren't terrible if you start at a reasonable rage and health status (like in your mid 60's (standard retirement age and you've taken care of yourself). In the case of my mother, the total premiums paid were under 30 percent of the value of the insurance policy, and my dad was positively gleeful about the tax credits and avoiding the capital gains on those stocks which her mother had held for multiple decades. Obviously that isn't free to set up, nor get the annual taxes prepared (the feds carefully track such things, even when they end up with lots of tax savings). So trade-offs. But if you plan to give a good chunk of your decent sized estate to charity -- worth at least considering.
What about international equity ETF index funds like VXUS? Is it okay to keep them in taxable? You get the foreign tax credit but they pay more dividends than the total US does. Thanks!
Good video as always. One of the challenges is finding risk free or liquid investments that throw off LTCG or qualified dividends instead of interest. Obviously stocks have risk. Municipal Bonds are tax free but their return is lower due to the tax advantage. Yes I could reallocate my IRA or 401k to bonds which would free up some room to move more to stock in the taxable account but I prefer taking my risks with the money I am sharing with Uncle Sam.
43:49. REITs good in taxable accounts? They give fairly large dividends, and those dividends are taxed at ordinary income. From articles I have read, they belong in NON-TAXABLE accounts. No?
REITs have higher ROI and only 80% of dividends are taxed as ordinary income. Much higher rate of return than qualifying dividends for income producing.
Great videos. Recently retired with large taxable and non taxable accounts. If you don't want to use dividend stocks for income to live on, and you are pre social security what is the best account to use for yearly income?
I’m in a similar boat. I’ve come to the opinion that the words “that you don’t need” are missing from this discussion. I personally feel that dividends that are needed to pay the bills in early retirement before other sources of income kick in don’t count. As long as they are qualified dividends, the tax rate is low. Ideally, this is money that the company doesn’t need, and is spinning off extra cash to make sure new investors are buying company, not more cash with their cash. That is investment efficiency. Better that money is in my pocket than theirs, is my opinion. “Theirs” is what would happen if either they kept the cash or did stock buybacks. The only problem with it is the “gains” are taxed on 100% of the dividend whereas a stock sale might be only 50% gains. However, this is also fair because the dividend is presumably reducing your deferred capital gains by 100%, so stock sales are ironically only more efficient if you never sell the stock. Anything else is just games with cost basis, e.g. tax loss harvesting. The remaining question is what to do when those RMDs and social security do kick in and you are still collecting dividends. Changing stock holdings is a taxable event.
I am in a similar situation. My plan is to use the taxable account to live off of and to pay taxes (as estimateds to the IRS and the state each quarter) on my Roth conversions, which I am making pretty aggressively now before I turn 63 and have to worry about IRMAA surcharges. I expect to keep up a lower level of Roth conversions until I turn 70 and start to collect social security. I go back and forth, but currently lean toward high dividends being ok in my taxable account since they do get the lower tax rate and I need spending money in any case. But I include them in my calculations for how much I can convert each year without bumping up my marginal tax rate on the Roth conversions.
Regarding Rule 1, when deciding between VTSAX vs. VTI in a taxable brokerage account, I didn’t see much of a difference in terms of tax efficiency. Your take please?
@ 10:20 Don't Hold Mutual Funds in a Taxable Account should instead read "Hold Only *_Tax Efficient Investments_* in Taxable Account." _Actively managed_ mutual funds are often tax *inefficient* however *_index funds_* and ETFs are usually very tax efficient and acceptable in taxable account. The 2 actively managed mutual funds he mentions are Front Load High Expense Ratio High Turnover and Morningstar > Price > 3 Year Tax Cost Ratio of 1.28 & 1.99: Those 2 mutual funds are absolutely horrible and shouldn't be held by anyone. Vanguard's Index Funds and their corresponding equivalent ETF share class are perfectly fine in taxable account. What you'll find surprising is comparing the 3 Year Tax Cost Ratio of the Vanguard ETFs mentioned here to their equivalent Index Funds: VTSAX = 0.38 VTI = 0.56 VIGAX = 0.16 VUG = 0.24 --- index funds better tax efficiency!
Great video. I always learn something new. I do need to respectfully disagree with your dividend analysis on multiple fronts. First, dividend stocks cannot be compared directly to growth stocks, as they are typically less volatile, thus they play a different role in your portfolio. For years I received and reinvested qualified dividends in my taxable account. I paid 18.8% tax vs 37% for ordinary income. If held in a tax deferred account it will be taxable later at ordinary income tax rates, which will be lower in retirement but still above 18.8%. I never sold a share of stock other than to harvest losses, therefore my basis has increased which will allow me to sell the high cost shares first either tax free or a small % taxable when retired and be taxed at 15% long term rates. For example, on one position where I have $100k of stock and $50k of basis, I can sell the high cost half and only recognize $10k of long term gain, which will be $1500 tax or 3% of the $50k.
Good point. Massachusetts too but it’s not taxed as ordinary income but long term cap gains do have the same 5% tax rate. The difference is important as I can utilize my loss carryovers against the cap gains. For purposes of my analysis, which was to refute the benefit of dividend stocks in retirement accounts vs taxable accounts, the state tax was not relevant so I ignored it.
I believe you said to hold REITs in a taxable account. No No No. Reits throw off dividends that are taxed at ordinary rates not dividend rates. Riets belong in tax deferred accounts.
@ 43:48 "So REITS for instance *aren't* a great solution in your taxable accounts" REITS acceptable in taxable once retired and need income for daily expenses
No, they still should be held in a Roth or tax-deferred accounts because they're taxed at higher rates. It's also advisable to keep one's income below IRMAA threshholds, so keeping REITs in Roths would help with that.
If I buy low-coupon -rate bonds at a relatively low price (high yield) which is possible in 2023 and occasionally now, is this a tax efficient way to own bonds?
@@stephenhegarty6179 It's still a net outflow if the amount is sizable High dividend yield single stocks have the exact same issue. They'll still be qualified because you held them long enough, but they're not the most efficient solution.
Well Eric, weren't you just prescient regarding don't hold mutual funds in a taxable account with what happened with Vanguard Target Date Funds in 2021.
Don't hold actively managed mutual funds in a taxable account. Stick to index funds. ETFs are mostly indexed but ETFs are not more inherently tax efficient than index mutual funds, particularly Vanguard funds.
There are still differences on average, across asset classes. Here's an article that may help - www.morningstar.com/articles/1077106/etfs-have-a-tax-advantage-over-mutual-funds
I think of my 401k as my primary retirement account and my Roth as a supplemental account, mainly because I get matching contributions for my 401k and I get compound interest and capital appreciation on the entire amount including the matching funds. I look at a Roth as building an emergency fund or extra money for extra expenses, and my 401k as my means of paying my primary bills, though I think that it makes a lot of sense for me to have both.
Only invest up to the company match in the 401(k). After that, put any additional retirement investments in a Roth. That way, those investments earn money tax free and the growth in those funds are tax free when you withdraw them. In a 401(k), they are taxed when you pull them out. Ideally, if your company has a Roth 401(k) (not many do), that’s the way to go. See if they’ll consider offering a Roth 401(k).
You are missing some important info for choosing Roth. Specifically, what is their tax rate now and what they expect to pay at retirement. If they are in their prime earning years then they will be paying the highest tax rate they will ever pay in their life on their income. In that case you are paying too high a rate upfront when you use Roth. You need to make choices of account on a case by case basis, there is no good universal rule of thumb.
I agree that when a dividend it paid the overall value of the paying company is reduced by the same amount as the payout. But, is the market really efficient enough to reduce the stock price to accurately reflect that reduction?
I believe he is in error on this point. Dividends are paid out of quarterly operational profit. That profit is the proceeds/purpose of that business. As long as the dividend per share is equal to or lower than the EPS earnings per share it will not have a material impact on the market's valuation of the underlying business.. ie business ability to continue to produce such quarterly profit in the future. Good luck.
Hi, great video and advice about taxable accounts. My Edward Jones advisor didn't tell me about this and I'm fuming upset right now that I want him to pay my taxes. Is there any legal way I can sue my advisor?
20:35 I’m new to this, and I’m probably wrong but is this chart backwards? I thought a bull market reflects market upswings whereas a bear market reflects downswings.
You’re paying taxes anyway but if you move it to cash you’re taking it as true income instead of income that is reinvested if that make sense. This is a decent video but I’m not sure he’s giving the whole story on dividend investing especially if you’re specifically trying not I snowball
I screwed up, I will be a high income earner ($160k) from rentals and a couple million in 401Ks. There is no getting out without paying taxes. Wife and I still earning almost $300k in wages. After I hit 59, the goal is to roll out in the Federal 35% tax bracket, up to $431k. If wife stays working, it is a a small% of total income. Opinions?
Question: What if someone like me who is only making less in a job, clearly will put in a low tax bracket, and needed more income in order to survive, and by doing so, I need to increase my income by taking short term capital gains to keep up with the expenses at the moment??? Also, I will not rely on a 2% to 3% annual salary increase from the company, and believe that it will save me from poverty. If I needed the money in less than a year, I will be happy to take those profits if I can double my income through short term capital gains. Instead of looking for a second and third job and by increase my working hours. Of course, I’m considering to invest for long term if I have the means to do so. To take advantage for lower tax rates. For now, the salary that I can earn on a job is only enough for a single person, but not enough for a family. By the way, I got laid off from my job and I’m solely relying on short term capital gains right now. Thank you for this video, I learned a thing or two. I find it helpful and beneficial, so I dropped a 👍. Personal finance is surely personal. New subscriber here. Have a great day.
I am confused when you say that long term capital gains taxes are less than short term capital gains taxes. Here is my confusion: For a tax filer that is married filing jointly with an income of $80K/yr, they are in the 12% income bracket. On the other hand, the tax rate on a long-term capital gain of $80K for the same tax filer is 15%. As I see it in this case, the long-term capital gain tax rate of 15% is MORE than the 12% income tax rate. In this case, can you help me understand why you say that LT capital gain tax rates are LESS than ordinary income tax rates? Thank you!
Long term capital gains are taxed at zero if your AGI income is less than $89k. Short term capital gains are taxed at your tax bracket rate. Above $89k you are in the 22% bracket thus the 15% long term cap gain rate is better. Qualified Dividends are also zero tax if you are below $89k
Great videos, I've been working my way through all of yours. I agree about bonds being in tax-deferred accounts but I am shooting for a 60/40 asset allocation and my Rollover IRAs are not enough to make up the 40% so some is in a taxable account. What might you recommend in this case? Thanks
US Treasuries are state tax free. Could consider buying TIPS. Another option could be MYGAs. MYGAs are the insurance industry's version of a CD. Currently there are 5 and 7 year MYGAs paying 5.6 and 5.75 respectively. Also with MYGAs if you have a MYGA where you are taking the interest, the interest accumulates tax free, so it's like an IRA. If you roll the 5 year term of the MYGA into a new MYGA or other annuity, the interest and principal get rolled over tax free too until withdraw.
Jack, you could also could consider investing in stocks in a taxable account that put out "qualified dividends" if you keep yourself in the 12% tax bracket. The qualified dividends would be tax free.
Thanks for the great video! Unfortunately I have Vanguard Star Fund (VGSTX) & Bond fund in my Taxable account and now I know it's a BIG mistake to have them in taxable account. To correct it, I stopped reinvesting the dividends to use that money to invest in ETF. I was thinking transfer these funds to non-taxable account like Roth-IRA but would result in selling & rebuying which would cause tax consequences. Any suggestions?
I know this is late but thought I would chime in before a costly sell. If you meant to say VTSAX, it should be fine in a taxable account. It's a different share class of VTI (the ETF). This helps its tax efficiency. Most mutual funds don't have this model, but many Vanguard funds do.
What about spouses who don’t work and whose spouse earn too much to get any tax write-off benefit for contributing to an IRA? If we contribute $7,000 to an IRA, it’s AFTER tax money, and then we have to pay taxes on it again? Would you recommend that non-working spouses contribute to an IRA. We’ll have to deal with a mandatory retirement distributions (is that what its called?)
Does this apply to SP500 mutual funds as well, as they don't have as much ins/outs of different companies, as some other small/mid cap stock etas or actively managed ones?
Most index mutual funds will be more similar to ETFs in terms of their pass through tax liability. The more active, the more tax inefficient in general
Disagree on the way you talk about dividends being. A reminder companies are created to create profit, and dividend is a sign of a well run, established, PROFITABLE company. Investment is all about balancing risk and return, and taxation is one aspect only. It is important to have a balanced portfolio that includes a VALUE/INCOME strategy even if that generates taxes. I would rather have a profit and good returns and have to pay taxes, that losses and no taxes. Last, check historical returns,, over 75 of every decade VAlue has won over Growth. Only recently Growth outperformed Value. So one can not have a 100% growth portfolio just to avoid taxes, that is not a good recommendation
A lot to unpack here. I think you're straw manning the point of view in this video. 1. A profitable company does not have to release a dividend. A dividend is a management choice but there are a number of things a company can decide to do with a profit. Ex. Berkshire Hathaway is a profitable, value company that has no dividend 2. Your taxable account is one of three types of accounts many retirees hold. I am not against dividends but the place you hold those dividends is important. Hold them in tax-protected accounts. Optimal allocations will look different for each individual based on their situation 3. Value and growth outperformance cycles. We never recommended a 100% growth portfolio. Retirement investors should have a balance of both value and growth. Asset location is extremely important in this balance. 4. Taxes are a constant and should be a focus in line with risk and return. There is only so much an investor can do to improve risk/return metrics of a portfolio. Taxes can be affected in a great way, however.
VTSAX Vanguard Total Stock Market Index = 0.04% Expense Ratio VTI Vanguard Total Stock Market ETF = 0.03% Expense Ratio VTSAX is perfectly acceptable in taxable brokerage account
I am not 65 yet and am retired. My taxable account is where I make my income to live off. So if I take no dividends where am I supposed to get my income? I look at it as my regular paycheck. I paid taxes on my regular income while I was working so why would I not expect to pay taxes on this income.
I think that what you are doing is okay. Everyone's situation is different. Eventually, you will have to pay taxes on this money anyway unless it gets passed on to your heirs, and then they would have to pay taxes on it. What he's talking about in the video, as I understand it, is to avoid making too much in capital gains, interest, and dividends in any given year, which would push you into a higher tax bracket, therefore costing you money that you could have saved.
qualified dividend income in taxable account is just fine for a retiree that is in the 10 to 12 percent tax bracket. qualified divs then are tax free as well as capital gains.
In my opinion you are mistaken regarding dividend stocks. You made a statement that when the company pays out a portion of its quarterly profits in the form of a dividend that doing so lowers the overall value of the company downward. As long as the quarterly dividend was being paid out of quarterly earnings and not exceeding the value of those earnings then it has zero downward impact on company value. The purpose of the company is to produce operational EARNINGS for the shareholders and then share some of those proceeds with the owners/shareholders. Look at payout ratio's. If the company is paying more than it is earning per quarter than that may be a problem.. ie a payout ratio over 100%. As the additional payout would need to come from cash on hand or from the company issuing additional debt to pay the quarterly earnings short fall. In that situation it may lower the company value. Otherwise, thanks for sharing your content, well done. Steve
I think you missed the point. With divided payers you lose control of then you're collecting income... something you should try to minimize in a taxable account. That's the issue. Nothing fundamentally wrong with dividend paying stocks.
Good info but you're not always as clear as you'd like in the explanation of those concepts. Apples to apples would be VUG vs FSPGX but it doesn't really prove your point does it? Yes FSPGX is a mutual fund...
The point remains but index mutual funds will do a better job controlling forced capital gains than actively manage mutual funds. FSPGX forced unnecessary ST and LT capital gains in 2020 and 2021
I disagree with point 3. Paying taxes isn't a problem. It is generating the returns / absolute buying value increase. If one gets a dividend growth stock with market appreciation and dividend increases over time, you get the best of both worlds. Yes, it is taxed. But long term tax view allows one to see selling stock at a loss can recoup some of the tax cost, but if at a gain, you gain both income and long term gains. From a simplistic POV, point 3 is a decent rule-of-thumb when no appreciation in market value occurs. But a more in-depth math approach shows dividend growth investing can be a powerful tool in a taxable account.
We don't have an issue with dividend stocks, just dividend stocks inside your taxable account. A dividend at the end of the day is a forced distribution. In tax planning, we want to avoid forced distributions. You're going to have to pay taxes, yes. But paying taxes at the wrong time in your specific situation can cause you to pay a lot more in taxes than if you have complete control over your tax situation.
I think it is a bit more complex. For example, I retired early and have built a sizeable taxable brokerage account mostly invested in dividend paying companies. Here is a key aspect of my situation: I don't have a pension and being only 53 not able or willing to draw down from IRA/401k. Hence, we can currently incur $80800 in long term capital gains/qualifying dividends each year for income purposes. Plus, if I add our $25,000 joint standard deduction, I can incur $106,000 or so in qualified dividends at 0% federal tax. While my situation might be different than others... if I had 50,000 in pension or traditional ira withdrawals it would change things a bit. but with no pension or traditional ira withdrawals I have found a taxable brokerage account with dividend paying companies to be and outstanding approach. Just food for thought. Steve
I have the same question. I need to unwind what I’ve done as well in my taxable account. I am looking at about a $27k tax bill on $180k in unrealized gains. I had sizable forced income this year. Do I do this all at once or over several years? I was also considering the same; sell during a market correction of 10-20% which has occurred in 11 of the past 20 years. Given the returns over the past 3 years a correction in ‘22 seems very likely.
@@joshhoward1289 you need to manipulate your income to get well below the 12% tax bracket to be able to fill up the bracket with the long term gains to the top of the bracket. So yes, sell your gains over several years. How to manipulate your income. . Contribute more to your 401k, your IRAs.
Tax-free, I wish. Sen Roth was brilliant to get our tax dollars up front (while he was still in office). I’m not saying Roth is bad, and you explain it well, I just always chuckle when I see people label it ‘tax-free’.
Please stop saying “each and every”, it’s redundant as well as distracting to a careful listener. You will be more effective and succinct if you choose “each” or “every” to describe the situation.
Very informative video. I'm just wondering if you have any video or cheat sheets to list out which investment funds go to which buckets (Taxable, IRA and Roth) for retired people? Thanks
Very good video- worth the whole 45 minutes! About six months ago I moved all my taxable and tax-advantaged investments away from two paid managers to Fidelity (the bulk) to manage myself and Vanguard (small amount) to use the Personal Advisor Service, which costs 0.3% of AUM. I did this to learn the Vanguard way. Vanguard put all the bond ETFs in the Roth IRA's and the stock ETFs in the taxable account. They look at asset allocation across the whole portfolio so the individual Roth IRA's are not 60/40 stocks/bonds but all investments added up are 60/40. I did the same thing in the Fidelity accounts so the inherited IRA I have contains only bond funds- your explanation of "controlling taxable events" makes sense. I really wanted to put some big growers in the IRA because they'll grow tax free, but they get taken out at regular income tax rates (and not the lower long term capital gains rates) and I must take them due to RMD requirements. I did make one adjustment based on your video: I set all individual common stocks in my taxable Fidelity account to not reinvest dividends. I plan to wind down the stocks through donations to charity (no taxes and a full charitable deduction) and take the cash I would give the charity to invest in stock index ETF's; I don't like the volatility/lack of diversification of individual stocks. Not reinvesting dividends will give me cash to make the move to stock index ETF's more quickly. I went back and checked the statements from when a "pro" (national registered broker and investment advisor) everyone would recognize managed the accounts, they had access to taxable and tax advantaged accounts, and to get a 80/20 portfolio there was plenty of room to put all bond funds in the IRA account, but they put both mutual funds and bond mutual funds in the taxable account- doh!. I think between reading really good books and watching videos like this, I'll be way ahead doing things myself. At a minimum I save the ~1% AUM fee.
Vanguard does a really great job, given the fees and the quality of service, for their mutual funds. I manage things myself, but for the cost to service ratio, it's been just fantastic as a customer for nearly 4 decades now, PLUS great tax efficiency for taxable accounts. I've heard good things about low cost Fidelity funds, but have no personal experience with those.
You can also do the same thing through Fidelity with the Separate Managed Account (SMA) the fee is .4% with a minimum of $500k. Then self manage the rest of your money and Fidelity will look at your entire portfolio and give advice based on eMoney. Unfortunately fidelity does not incorporate Holistiplan for tax planning or Income Lab for withdrawal strategies. They do it all from within eMoney. But at a cost of only $2k regardless of portfolio size (SMA $500k x .4%). I would love to go with Eric but it’s been 10 months and I am already doing conversions and cannot get an initial appointment.
whats the reasoning it does not apply to this situation? are you referring to index mutual funds (backed by an ETF), if so then i understand based on the already low turnover with index mutual funds. just checking! thanks
Lots of good information on what not to do for a taxable account. I’m retired and am ready to start a taxable investment account. I have enough retirement income where I won’t have to withdraw from this taxable account for living expenses. I also have traditional and Roth IRA accounts I don’t need to live on. I’m 62 and would look to invest for another 20 years. I was considering a Vanguard S&P 500 mutual fund so I could invest monthly automatically. From your presentation, is my best option for a taxable investment account an ETF. Thoughts on the Vanguard S&P 500 ETF?
I am still learning but I believe a good thing about funding a taxable account is if you don’t necessarily need the funds, funds left as an inheritance is at a stepped-up cost basis. So I believe the best to leave for inheritance is 1) Roth IRA, 2) Taxable Acct, and 3) Real Estate…all inherited at a stepped-up cost basis.
Re your VERY general statement of the first rule: Not all mutual funds are even REMOTELY CLOSE to being the same re tax efficiency. Lumping a high tax efficiency Vanguard index fund with a high turnover actively managed mutual fund is RIDICULOUS from a tax planning angle. Saying don't hold high turnover and high yield mutual funds in taxable accounts makes sense -- not ALL mutual funds, as a rule. For example, a variety of good Vanguard tax efficient admiral class mutual funds are EXACTLY THE SAME THING, re the holdings, as a Vanguard ETF. The only real difference is the ETF is easier to trade. Your purpose and overall material is great -- but you need to be CAREFUL what you say, when stating "rules". Even per your chart, the tax efficient mutual funds were roughly on par overall vs. the ETF's, so it's NOT like "mutual funds BAD" from a tax perspecitve. It's more like -- be aware what you're doing, and plan accordingly. Also, until relatively recently, ETF's didn't even exist. They require LOTS of computer power to work, which wasn't a thing until recent decades.
Loved the video. Thanks. I will sell my house soon and have some extra funds from the sale. I will do Roth conversions with this money over a few years. How do I have some protection for this money since I will use it over 3-5 years for Roth conversions? I was thinking it should go in a taxable account but after listening to this presentation this does not seem like a good plan. Suggestions?
42:52 is his guidance, I guess - but most of his comments for tax efficiency over a longer period of time, not 3-5 yrs which is relatively short term. I noticed a few folks have been using i-bonds lately due to the rate increase. Many new vids on this onYT by advisers.
I suggest the following two options, if you want to gradually convert it into a Roth. Park those funds in a municipal bond fund for your State. That way you have income that is federal and state tax free, and then withdraw what you need each year to convert into a Roth. Those funds only make only 2%, but it’s much better than money in a bank, making hardly anything and is also taxable. For example, I live in Georgia, and have money in GTFBX, a Georgia municipal bond fund. Another option is to buy a growth stock that doesn’t pay a dividend. Make sure it’s a leader in its industry and that it’s actually growing. Hold it for a year before selling and converting it into a Roth, to avoid ST capital gains tax. Depending on your income, you might have to pay long term Capital gains tax, though.
I have a sizeable taxable brokerage account filled with dividend stocks. I plan to use the dividends to pay taxes for my Roth conversions. So the dividends generates the income / the cost of what I owe in tax when I convert. My IRA, unfortunately has done extremely well over the years and now I need to convert portions to ROTH as quickly as possible using my taxable dividends generated each year. I thought this was a good strategy. I'm 62 and retired last year. Don't plan on Using SS until full retirement. What other strategy could I use?
Condolences on how well your IRA has done over the years! How unfortunate. 😉 I guess he would say selling stocks or funds in your taxable account when you need the money gives you more control than collecting the dividends every year. But since you need the steady income anyway and at least qualified dividends are taxed at the favorable long term capital gains rate, your strategy sounds fine to me.
This is a good video. Very informative. I would just quibble a bit with the notion that dividends in taxable accounts should always be avoided. Take any number of examples: my floating rate fund has a 30-day SEC yieldof 8.56% vs. a lot of municipal bond funds today list a 30-day SEC yield around 3.4%. Now compare $10K invested in 2023 in each. Even if 15% dividend tax, net $727 dollars after paying that tax for the floating rate dividends vs. $340 dividends tax-free for the municipal bond fund - is that $387 or 3.87% gain really consistent with calling it a "leaky bucket"?
Good video and very much in alignment with my own realization. I did learn some new perspectives, which is nice. I’ll say it a different way. How much you make is important but how you get to keep and grow over time is the the real game changer.
Best video I've seen on this topic! Thank you. You made everything clear, concise and very actionable. I get why we should avoid putting mutual funds in a taxable account but INDEX mutual funds typically don't pay capital gains since the stocks in the index don't change much. So are they OK to leave in a taxable account?
Yes index funds particularly Vanguard index funds are perfectly acceptable [very tax efficient] in taxable brokerage account. Avoid actively managed mutual funds in taxable accounts.
No, he is saying in a taxable account you should always buy the equivalent ETF instead of the mutual fund. Index mutual funds are more tax efficient than actively managed funds, but they are LESS tax efficient than the equivalent ETF.
Less tax efficient but wouldn’t you rather the income with a small loss? Versus the lower distribution in the other? Assuming they both grow at the same rate? Maybe I’m missing something there
Successful investing isn't about minimizing taxes. It's about finding stocks that represent increasing value over years. The tax loss harvesting assumes short term gambling or desperation during a recession. Recessions happen and depressions can. . That;s why an intelligent investor who doesn't have so much wealth that a depression wont affect his necessary income, does NOT invest all he has in the volatile market, but has bonds and other things sufficient to weather at least two. There is no reason to sell a stock that has declined in value unless you were foolish enough to buy the overvalued stock of a company with known declining value. Without selling a depressed stockcan be held in many ways long enough to rise again, patience, using it as collateral for a loan, gifting it to someone who doesn't need to cash it in for years, donating it, and making someone the beneficiary upon death of an account are the most obvious.
Don't think rule #1 is correct, just compared distribution of VTSAX vs. VTI, VTIAX vs. VXUS and the mutual funds distributions are either as good or better.
