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!
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
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 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.
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.
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 UA-cam 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.
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.
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.
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.
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.
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.
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.
So, if I sell/move my Mutual fund to an ETF do I have to show the Mutual fund as income for the year I close that account? If so is there a way to close one account(Mutual Fund) buy into an ETF without showing the Mutual fund amount as income for that year?
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.
I currently have some total stock market index funds in my brokerage account and I know they are not tax efficient. Do you think municipal bonds would be an option?
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.
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?
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"?
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!
@@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.
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.
In 2023, I decided to shift my focus to taxable accounts, prioritizing investments that generate minimal taxable income. I’ve seen how the wrong moves-like excessive trading or ignoring asset location-can create a hefty tax bill.
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.
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.
Not to belabor the point, since you provide a very good explanation of the false notion that an average investor can be in a position to beat the market systematically, but I'd like to add: 1. There is an exhaustive body of research that very clearly demonstrates that trading rules and other investing strategies using public information cannot systematically outperform the market (i.e., produce abnormal positive returns.) That body of research strongly supports what is referred to as the weak form of the efficient market hypothesis. 2. During my PhD program, I had a student (Finance degree) who got a job on Wall Street with ML (the large investment firm of the same initials.) During that Spring semester, he attended an orientation for all new hires for that office. The roster was like reading a list of the top business schools in the country - Harvard, Wharton, etc. And that happens with every single graduating class from those schools. They take those talented, smart, highly educated people, stuff them into tall buildings in lower Manhattan, give them all the resources they could ever imagine having, and let them loose. To think a person can beat those people sitting at home, trading on the basis of high and low P/E ratios using their TDAmeritrade account comes close to delusional. The one concession I'll make is that short term trading is actually a pretty good alternative when it comes to feeding a gambling addiction. At least the expected value in the case of the stock market over time is positive. 😉 Terrific video. I do have sizeable holding in dividend aristocrat stocks, basically pursuing a reasonable return while managing risk. Of course, I absolutely hold nearly all the equity securities I invest in for the long term. I do also invest in fixed income securities (primarily bond funds in my 403(b) account just to balance risk.) And, finally, I do invest in CDs, but only to park larger amounts of money in the short term when I am going to need it in, say, a 1-6 month window.)
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
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.
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 understood it to mean automatic dividend reinvestment. Because if your investments are out of your intended balance, dividend reinvestment may make it moreso. Use the cash from dividends to buy what you need to rebalance, and avoid having to sell to do that.
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.
The rule of thumb to not hold high DIV stocks in post-tax is a good one, but I'm pretty sure that I am an example where it makes sense to not follow the rule. I am 65 and have a large pre-tax account. These are the years I try to max my Roth conversions while still trying to stay in stocks and be able to weather a stock market downturn and not have to sell depressed stocks. If my living expenses are covered by fixed income, that is income subject to ordinary income taxes that reduce my Roth conversion ceiling given any specific tax bracket I want to not exceed. My solution is to hold enough high DIV stocks in post-tax to cover my annual expenses, thereby also being able to max my Roth conversion. Since DIVs are poorly correlated with the stock price, I'll have a good chance of getting through a down market without much damage. I'll pay 15% capital gains tax on the extra amount, but that is a good deal compared to the 24% - 32% I would otherwise have paid on that money to get it out of the pre-tax account.
The total bond index fund generates taxable interest income so it's preferable, if possible, to hold it in an IRA rather than a taxable account. Just my two cents.
@chris I also have some VBTLX in my brokerage account. I’m retired with only a Roth IRA and brokerage account. I also have some bonds in my Roth. I currently have a 80/20 stocks allocation. Asset location can be confusing. Any thoughts?
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
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
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.
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.
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.
Great, thanks. Towards the end yiu said Reits were good in a taxable account, which confused me, did you mean in a tax deferred account? Also, are bonds a better buy now (in a tax deferred account if course). Cheers, Jef
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
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?)
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?
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
Aren't capital gains good if it doesn't push you into a higher tax bracket? Also, what about muni's if a person is not near the next IRMA bracket increase?
@@heartcomedy5 So, here was my thinking. Say I make $500 in a taxable account in capital gains. Yes, I would have to pay taxes on the $500, which if it is long term capital gain would be $75, netting me a profit of $425. If that $500 doesn't push me into a higher taxes bracket isn't making $425 better than making $0, or am I missing something?
@@heartcomedy5 It would be better in a Roth, but in a Traditional IRA eventually, when you take the money out, you will pay regular income taxes and not all people can have a Roth or are limited to how much they can put in like a retired person with no income or a person that makes too much money to have a Roth. Also, that extra money in a Traditional IRA may push you into a higher tax bracket when you have to take out your RMD.
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.
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.
Nuance and context are very much "things". As is listening / reading a thing, plus VERIFYING sources. Also, UA-cam 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.
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!
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.
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?
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.
Good video but I don’t agree with 3b. I don’t believe in rebalancing unless you are in your withdrawal years. Selling your S&P500 stock to buy bonds is like having a horse that wants to run fast and then you pull the reins. Not only that but also you end up paying more short term taxes on your bonds interest. I’d say, let your horse run as fast as he can if you’re on your accumulation years and invest for the long term.
@ if you’re retired, then it’s a completely different ball game, you now want to reduce volatility as much as possible, so bonds make a lot of sense, but I would not turn your portfolio into 100% bonds. The optimum stock to bonds ratio can be tricky, and depends on many personal variables and goals so I suggest you work with a professional financial advisor.
@@Roman49837 @Roman. Thanks. I only have a Roth IRA and a brokerage account. I’m currently 80% stocks 20% bonds. I don’t have a pre-tax IRA which I understand is where all your bonds should go. I thought about hiring someone to help me with this, but I thought I could do this myself.
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.
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
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 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
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!
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
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 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.
Great add! A great double tax benefit gifting strategy
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.
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.
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.
watching all these videos feels like a college semester's course in personal finance/retirement investing/tax planning.
Pray i
Far too many "investment" videos on UA-cam 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.
Came back to this video! Fixed my taxable acct 2 yrs ago from this video! Thank you! THANK YOU!!
You can always buy stocks that pay no dividends such as Google or BRK B. Pay no taxes until you sale them, hold them over a year for long term rates.
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.
I have a variable annuity with no fees and has performed very well. They're tough to find but they're out there.@@rogergeyer9851
@@rogergeyer9851can you recommend some low dividend broad based index funds with low turnover?
This is so useful. Thank you. I have been clearly making mistakes the past 30 years, but better late than never.
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.
Excellent video. Thank you for making this info so easy to understand
You are on the money. I explain the mutual fund disadvantages to my friends till I'm blue in the face. Well done
This is great. Thanks for putting this out, and not degrading everyone who didn’t know all this.
Thank you very much for crystalling all of these intersecting rules for tax efficient retirement investing!
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.
thanks so much for all the videos, they are always helpful. I am a self- directed investor for my retirement, the guidance is so helpful
What about index funds like VTSAX? Instead of ETFs?
I loved this video. Thank you sir.
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.
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.
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.
I relistened and I think he said "aren't"
@@CC-sf8jn That is correct! He said "aren't." Thanks.
consider SCHD for a taxable account if you are in the 12% tax bracket.
So, if I sell/move my Mutual fund to an ETF do I have to show the Mutual fund as income for the year I close that account? If so is there a way to close one account(Mutual Fund) buy into an ETF without showing the Mutual fund amount as income for that year?
Great summary. Thank you!
Very helpful
Great info!
So for ETF’s, example VOO or SPLG has a low yield that’s okay to hold in a taxable account?
What about S&P 500 index fund in a taxable account with a muni etf?
Really helpful! Thank you!
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.
I currently have some total stock market index funds in my brokerage account and I know they are not tax efficient. Do you think municipal bonds would be an option?
If I have already mutual fund, what should I do. Sell them, pay capital gains now?
Are you sure qualified dividend income impact the tax bracket?
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?
@@genderfluid thanks!
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.
How about expense ratio? Does mutual fund have an edge over EFT on that lines?
love it ! i learned a lot. i am subscribed. i need to learn more. thanks again!
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?
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"?
I just recently discovered this channel and it is my new favorite channel. Your videos are excellent in both content and presentation. Thanks.
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!
I personally don’t because of the added hassle when filing your taxes
how does SCHD ETF measure up as a tax issue or decent investment?
That would be considered high yield so that shouldn't be in a taxable account
@@damemethief even though the dividends are qualified capital gains?
@@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.
Very informative, thank you
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.
Thanks for sharing this. This was extremely helpful
Excellent information
Thanks!
30:00 What shoud you do with your dividends then ? Most ETFs yield dividends
I do accelerated payments on my mortgage. Which is tax free return on investment ..
He said to use the cash from dividends for rebalancing. They’re still reinvested, just not automatically reinvested in the same thing.
In 2023, I decided to shift my focus to taxable accounts, prioritizing investments that generate minimal taxable income. I’ve seen how the wrong moves-like excessive trading or ignoring asset location-can create a hefty tax bill.
I’m having issues with my asset location in retirement. Where best to keep my bonds with only a taxable account and a Roth.
Loved the video (and that Wisconsin accent.)
Some very great learnings / advice in this video. Thank you!
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.
Is there a way to get CC = closed captions?
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.
If you live in California or New York dividends are taxed as regular income. The dividend enthusiasts rarely point this out.
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.
Not to belabor the point, since you provide a very good explanation of the false notion that an average investor can be in a position to beat the market systematically, but I'd like to add:
1. There is an exhaustive body of research that very clearly demonstrates that trading rules and other investing strategies using public information cannot systematically outperform the market (i.e., produce abnormal positive returns.) That body of research strongly supports what is referred to as the weak form of the efficient market hypothesis.
2. During my PhD program, I had a student (Finance degree) who got a job on Wall Street with ML (the large investment firm of the same initials.) During that Spring semester, he attended an orientation for all new hires for that office. The roster was like reading a list of the top business schools in the country - Harvard, Wharton, etc. And that happens with every single graduating class from those schools. They take those talented, smart, highly educated people, stuff them into tall buildings in lower Manhattan, give them all the resources they could ever imagine having, and let them loose. To think a person can beat those people sitting at home, trading on the basis of high and low P/E ratios using their TDAmeritrade account comes close to delusional.
The one concession I'll make is that short term trading is actually a pretty good alternative when it comes to feeding a gambling addiction. At least the expected value in the case of the stock market over time is positive. 😉
Terrific video. I do have sizeable holding in dividend aristocrat stocks, basically pursuing a reasonable return while managing risk. Of course, I absolutely hold nearly all the equity securities I invest in for the long term. I do also invest in fixed income securities (primarily bond funds in my 403(b) account just to balance risk.) And, finally, I do invest in CDs, but only to park larger amounts of money in the short term when I am going to need it in, say, a 1-6 month window.)
Excellent analysis thank you
No mention of the 12% tax bracket and it's 0% LTCG/QD rate, missing in the charts? It's my favorite bracket! ;)
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
Unless his point is really just to control your tax burden
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?
your situation is exactly like mine; i hope someone will answer your question
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.
So index fund is not good for a taxable account?
If I don't reinvest dividends in a taxable brokerage account, what do I do with he dividends, specifically?
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 understood it to mean automatic dividend reinvestment. Because if your investments are out of your intended balance, dividend reinvestment may make it moreso. Use the cash from dividends to buy what you need to rebalance, and avoid having to sell to do that.
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.
@@margaretmarshall3645 do you have any bonds in your taxable account?
The rule of thumb to not hold high DIV stocks in post-tax is a good one, but I'm pretty sure that I am an example where it makes sense to not follow the rule.
I am 65 and have a large pre-tax account. These are the years I try to max my Roth conversions while still trying to stay in stocks and be able to weather a stock market downturn and not have to sell depressed stocks. If my living expenses are covered by fixed income, that is income subject to ordinary income taxes that reduce my Roth conversion ceiling given any specific tax bracket I want to not exceed. My solution is to hold enough high DIV stocks in post-tax to cover my annual expenses, thereby also being able to max my Roth conversion. Since DIVs are poorly correlated with the stock price, I'll have a good chance of getting through a down market without much damage. I'll pay 15% capital gains tax on the extra amount, but that is a good deal compared to the 24% - 32% I would otherwise have paid on that money to get it out of the pre-tax account.
Awesome video
I have a Vanguard VBTLX in a taxable. Does that count as a bond?
The total bond index fund generates taxable interest income so it's preferable, if possible, to hold it in an IRA rather than a taxable account. Just my two cents.
@chris I also have some VBTLX in my brokerage account. I’m retired with only a Roth IRA and brokerage account. I also have some bonds in my Roth. I currently have a 80/20 stocks allocation. Asset location can be confusing. Any thoughts?
Great video.
What about people who live on their Dividends?
The dividend community is HUGE on youTube.
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
@@deadcityhauntedhouse9132
So if retired, not yet drawing SS, where do I keep cash if not something like vanguard money market paying approximately 3%?
short term treasuries
What is your opinion on holding dividend ETF like SCHD which is qualified dividends?
It's okay in a taxable account if you stay in the 12% tax bracket, which makes the dividends tax free.
The first rule (don't hold mutual funds in a taxable account) does not apply to Vanguard mutual funds backed by an ETF
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
@@saajanypatel vanguard mutual funds with an etf share class also enjoy the heartbeat process of etfs
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.
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.
You need to figure out emergency funds... If the stockmarket drops, and u need cash, then you lock in the losses
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.
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.
THANK YOU
Great, thanks. Towards the end yiu said Reits were good in a taxable account, which confused me, did you mean in a tax deferred account?
Also, are bonds a better buy now (in a tax deferred account if course).
Cheers,
Jef
@ 43:48 So REITS for instance *aren't* a great solution in your taxable accounts
Thank you so much! your video is so helpful! Best actually!
Great video...thank you
How about VTSAX in a taxable account?
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
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?)
Convert your traditional IRA to Roth IRA
just contribute to a Roth if you can. If you can't contribute due to income limitations, contribute to your 401k or Roth 401k.
What do you mean by re-balance dividends?
What is timestamp of that reference?
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?
Me to
Can you explain the tax difference between qualified and non-qualified dividends in an after tax brokerage account?
Qualified - taxed as long term capital gains
Non qualified (ordinary) a taxed as ordinary income
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
Aren't capital gains good if it doesn't push you into a higher tax bracket? Also, what about muni's if a person is not near the next IRMA bracket increase?
@@heartcomedy5 So, here was my thinking. Say I make $500 in a taxable account in capital gains. Yes, I would have to pay taxes on the $500, which if it is long term capital gain would be $75, netting me a profit of $425. If that $500 doesn't push me into a higher taxes bracket isn't making $425 better than making $0, or am I missing something?
@@heartcomedy5 It would be better in a Roth, but in a Traditional IRA eventually, when you take the money out, you will pay regular income taxes and not all people can have a Roth or are limited to how much they can put in like a retired person with no income or a person that makes too much money to have a Roth. Also, that extra money in a Traditional IRA may push you into a higher tax bracket when you have to take out your RMD.
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.
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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.
Municipal bonds based in your own state would be free of state and federal taxes.
Great video thanks
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?
Wait for a 1 year then sell it and take the hit.
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.
Learned from UA-cam today:
Buy dividend stock
Dont buy dividend stock
Nuance and context are very much "things". As is listening / reading a thing, plus VERIFYING sources.
Also, UA-cam 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.
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!
Fir those two there is no difference in tax efficiency. That's one of the flaws in this video.
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.
Correct, do not hold REITS in a taxable account.
@ 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.
Are municipal bonds OK to hold in a taxable account?
I would rather pay LTCG rates on my dividends vs ordinary income tax rates in a tax deferred account.
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?
consult a financial planner. They could possible save you 100s of thousands of dollars in taxes. It will be well worth the fee for a fee-only planner.
Sir, you have not screwed up. Joe Biden loves you.
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.
REITs in taxable accounts @ 43,50 ??? Probably not what you wanted to mean ???
Good video but I don’t agree with 3b. I don’t believe in rebalancing unless you are in your withdrawal years. Selling your S&P500 stock to buy bonds is like having a horse that wants to run fast and then you pull the reins. Not only that but also you end up paying more short term taxes on your bonds interest. I’d say, let your horse run as fast as he can if you’re on your accumulation years and invest for the long term.
What about if you’re retired? Bonds in a taxable ok?
@ if you’re retired, then it’s a completely different ball game, you now want to reduce volatility as much as possible, so bonds make a lot of sense, but I would not turn your portfolio into 100% bonds. The optimum stock to bonds ratio can be tricky, and depends on many personal variables and goals so I suggest you work with a professional financial advisor.
@@Roman49837 @Roman. Thanks. I only have a Roth IRA and a brokerage account. I’m currently 80% stocks 20% bonds. I don’t have a pre-tax IRA which I understand is where all your bonds should go. I thought about hiring someone to help me with this, but I thought I could do this myself.
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.
Re mutual funds vs etfs:
vtsax beats vti, and vtwax beats vt for the past 5 years. Seems like that is more apples to apples than the funds/etfs picked
ty
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
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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 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
The Vanguard ETFs mentioned are not as tax efficient as their corresponding index fund equivalent as per Morningstar.