VTI in taxable vs Roth IRA? (2024)

So I was reading Bogleheads tax efficiency chart and it suggest holding index funds in taxable account. Is it a bad idea to contribute to VTI in an IRA when I'm young and in a low tax bracket? Or would I want to start my tax-free/taxed upfront compounding earlier? Also my tax bracket is 15% w/no state tax. Would my current asset allocation be fine?

Roth Ira:
(70%-VTI)
(20%- VXUS)
(10%- SCHP/BND)

Taxable:
ICSH- Savings account alternative
Mad money 1+ year investments (no dividend)

Edit: Thank you so much to everyone for your help. The reason I'm avoiding tax deferred and choosing Roth IRA as of right now is that I will be making more money within the next year and am moving out soon so I do need some cash for payments. I would like to have as much money set aside as possible to max out either my Solo 401(K)- as I'll be an independent contractor (Real Estate Broker)- or if my brokerage offers a 401(K) I'll contribute to that as well first as they will likely match up to a percentage (depending on if the quality of the funds provided is adequate which hopefully shouldn't be a problem working for a large employer such as Berkshire Hathaway.) Note that if you're a real estate broker I would gladly take any advice on retirement planning that you have.

My updated plan is as follows (my broker is Charles Schwab)- please give any constructive criticism that you have:

1. Max Roth IRA for current year before income increases to get partial tax credit going into next year; (Asset Allocation- 100% VTI/ITOT)
2. Once working full-time contribute as much as possible to tax-deferred -either employer or Solo 401(K) in the upcoming year;(Asset Allocation- 70-80% VTI/ITOT; 20% VXUS; 10% BND?)
3. Once all tax-deferred and tax-advantaged accounts are maxed, contribute as much as possible of leftover savings to taxable account (preferably total stock market/S&P 500 index fund (VTI/ITOT; VOO/IVV), or buy direct T-Bills at auction ;
4. Work to increase my current income through continuing education as that will ultimately be my best investment and I have college assistance
5. Looking into higher interest rate savings account/SVNXX (Schwab money market); still need advice for leftover money but I need a highly liquid alternative to checking/savings account

It is fine to hold VTI in a Roth (or other) IRA. The tax efficiency chart is saying that index funds should be held in taxable accounts instead of actively managed funds as actively managed funds can generate taxable events through their stock sales and can result in a surprise tax bill at the end of the year. Index funds don’t sell stocks very often so they don’t generate taxable capital gains during the year.

Cheers.

AustinC27 wrote: ↑Tue Jul 13, 2021 11:53 pmExactly what I was looking for ty. Would it be okay to keep the bond fund in a taxable w/my low imcome tax rate. Sayyyy $8000 in it?

I would get rid of bonds in the Roth IRA. The deal with Roth is that, in exchange for upfront taxes, all future growth is tax free. Why would you want to dampen that tax free growth, including bonds in Roth?

With $8000 available for bonds investment, I would look to buy I bonds from Treasury Direct. I would not invest in bond funds in taxable account, or at least, it would be second preference to I bonds. One can only buy $10k of I bonds per SSN per year, so unless your bond fund needs exceed that limit, I would stick to I bonds. Unlike the dividends from bond funds, the interest paid on I bonds is tax deferred until you actually redeem the I bond(s). You can redeem as little as $25.

One other point I would like to make. Do not invest in VTI in both your taxable account and your Roth IRA. That could subject you to wash sales rules, if there were a downturn in the stock market, and you want to harvest the losses. I would switch the Roth IRA to ITOT, an equally tax efficient ETF tracking the US total stock market. OR, split it in a 4:1 ratio to VOO and VXF, which is shown to have identical risk and return to VTI over the past 20+ years. Then never buy ITOT or VOO or VXF in your taxable account again.

lakpr wrote: ↑Wed Jul 14, 2021 2:20 am

AustinC27 wrote: ↑Tue Jul 13, 2021 11:53 pmExactly what I was looking for ty. Would it be okay to keep the bond fund in a taxable w/my low imcome tax rate. Sayyyy $8000 in it?

I would get rid of bonds in the Roth IRA. The deal with Roth is that, in exchange for upfront taxes, all future growth is tax free. Why would you want to dampen that tax free growth, including bonds in Roth?

With $8000 available for bonds investment, I would look to buy I bonds from Treasury Direct. I would not invest in bond funds in taxable account, or at least, it would be second preference to I bonds. One can only buy $10k of I bonds per SSN per year, so unless your bond fund needs exceed that limit, I would stick to I bonds. Unlike the dividends from bond funds, the interest paid on I bonds is tax deferred until you actually redeem the I bond(s). You can redeem as little as $25.

One other point I would like to make. Do not invest in VTI in both your taxable account and your Roth IRA. That could subject you to wash sales rules, if there were a downturn in the stock market, and you want to harvest the losses. I would switch the Roth IRA to ITOT, an equally tax efficient ETF tracking the US total stock market. OR, split it in a 4:1 ratio to VOO and VXF, which is shown to have identical risk and return to VTI over the past 20+ years. Then never buy ITOT or VOO or VXF in your taxable account again.

How does ones Roth IRA have anything to do with ones taxable account?

Bama12 wrote: ↑Wed Jul 14, 2021 1:38 pmHow does ones Roth IRA have anything to do with ones taxable account?

https://www.irs.gov/pub/irs-drop/rr-08-05.pdf

VTI is fine in Roth IRA. The tax efficiency is page is more talking about what to put or not put in a taxable account relative to other accounts. VTI is relatively tax efficient so it is a good choice for a taxable account but that doesn't make it bad for a Roth IRA especially if most of your wealth is in the Roth IRA.

Personally I would not put bonds in a Roth IRA account. That space is just too valuable but then again I do traditional 401k and only Roth IRA so I have a lot of "space" is all my other accounts compared to the Roth IRA.

AustinC27 wrote: ↑Tue Jul 13, 2021 11:53 pmExactly what I was looking for ty. Would it be okay to keep the bond fund in a taxable w/my low imcome tax rate. Sayyyy $8000 in it?

AustinC27,

You pay 15% income tax on your bond fund income. You pay 0% long-term capital tax on the VTI qualified dividend income.

0% is smaller than 15%.

So, why would you want to pay more taxes by putting the bond into the taxable account?

At this moment with only 8K in the bond fund, it may not matter. But, this does not change the fact that 0% is smaller than 15%.

By the way that, there is no 15% tax bracket. Only 10%, 12%, 22%, 24%.

Ditto, on 12% tax bracket, your capital gain is 0%. You can harvest your VTI growth at 0% too.

The standard advice of putting 100% stock in your taxable account works for you too.

KlangFool

lakpr wrote: ↑Wed Jul 14, 2021 1:40 pm

Bama12 wrote: ↑Wed Jul 14, 2021 1:38 pmHow does ones Roth IRA have anything to do with ones taxable account?

https://www.irs.gov/pub/irs-drop/rr-08-05.pdf

Thanks! I never knew that.

I like having VTI in taxable and in Roth, guess I will change my Roth.

Bama12 wrote: ↑Wed Jul 14, 2021 1:53 pm

lakpr wrote: ↑Wed Jul 14, 2021 1:40 pm

Bama12 wrote: ↑Wed Jul 14, 2021 1:38 pmHow does ones Roth IRA have anything to do with ones taxable account?

https://www.irs.gov/pub/irs-drop/rr-08-05.pdf

Thanks! I never knew that.

I like having VTI in taxable and in Roth, guess I will change my Roth.

That is what I would do too! Good luck.

Statistical wrote: ↑Wed Jul 14, 2021 1:46 pmVTI is fine in Roth IRA. The tax efficiency is page is more talking about what to put or not put in a taxable account relative to other accounts. VTI is relatively tax efficient so it is a good choice for a taxable account but that doesn't make it bad for a Roth IRA especially if most of your wealth is in the Roth IRA.

Personally I would not put bonds in a Roth IRA account. That space is just too valuable but then again I do traditional 401k and only Roth IRA so I have a lot of "space" is all my other accounts compared to the Roth IRA.

Sorry for my tiny brain, correct me if I'm wrong, but you're saying why use up the limited contribution space in an IRA for a low yielding investment when I could get substantially more growth for my limited amount by investing in VTI which would also be more tax efficient?

AustinC27 wrote: ↑Wed Jul 14, 2021 2:17 pm

Statistical wrote: ↑Wed Jul 14, 2021 1:46 pmVTI is fine in Roth IRA. The tax efficiency is page is more talking about what to put or not put in a taxable account relative to other accounts. VTI is relatively tax efficient so it is a good choice for a taxable account but that doesn't make it bad for a Roth IRA especially if most of your wealth is in the Roth IRA.

Personally I would not put bonds in a Roth IRA account. That space is just too valuable but then again I do traditional 401k and only Roth IRA so I have a lot of "space" is all my other accounts compared to the Roth IRA.

Sorry for my tiny brain, correct me if I'm wrong, but you're saying why use up the limited contribution space in an IRA for a low yielding investment when I could get substantially more growth for my limited amount by investing in VTI which would also be more tax efficient?

I am not @Statistical, but yes that is exactly the reason why bonds do not belong in Roth IRA.

KlangFool wrote: ↑Wed Jul 14, 2021 1:50 pm

AustinC27 wrote: ↑Tue Jul 13, 2021 11:53 pmExactly what I was looking for ty. Would it be okay to keep the bond fund in a taxable w/my low imcome tax rate. Sayyyy $8000 in it?

AustinC27,

You pay 15% income tax on your bond fund income. You pay 0% long-term capital tax on the VTI qualified dividend income.

0% is smaller than 15%.

So, why would you want to pay more taxes by putting the bond into the taxable account?

At this moment with only 8K in the bond fund, it may not matter. But, this does not change the fact that 0% is smaller than 15%.

By the way that, there is no 15% tax bracket. Only 10%, 12%, 22%, 24%.

Ditto, on 12% tax bracket, your capital gain is 0%. You can harvest your VTI growth at 0% too.

The standard advice of putting 100% stock in your taxable account works for you too.

KlangFool

Why am I able to harvest growth at 0% asode from long term capital gains? Is there a difference in how dividends are taxes? I'm getting mixed answers on this page. Some people are saying not to put bond in taxable and others are saying to not put it into Roth? Is that just due to the low contribution limit and wanting to get more for your contribution limit?

The wiki page on tax efficient fund placement might help with some of your questions about "which fund goes where".

Link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

The general rule about bonds is that they typically belong in a tax-deferred account like a traditional 401k. However, if you don't have one of those, and you only have a taxable account and a Roth IRA, then you have to choose a "second-best option" for where to put your bond holdings.

Just because you don't have the "ideal" account for holding bonds doesn't mean that you shouldn't hold bonds. Your personal asset allocation (stock/bond mix) desires are more important than which account the assets reside in.

Regards,

AustinC27 wrote: ↑Wed Jul 14, 2021 2:21 pm

KlangFool wrote: ↑Wed Jul 14, 2021 1:50 pm

AustinC27 wrote: ↑Tue Jul 13, 2021 11:53 pmExactly what I was looking for ty. Would it be okay to keep the bond fund in a taxable w/my low imcome tax rate. Sayyyy $8000 in it?

AustinC27,

You pay 15% income tax on your bond fund income. You pay 0% long-term capital tax on the VTI qualified dividend income.

0% is smaller than 15%.

So, why would you want to pay more taxes by putting the bond into the taxable account?

At this moment with only 8K in the bond fund, it may not matter. But, this does not change the fact that 0% is smaller than 15%.

By the way that, there is no 15% tax bracket. Only 10%, 12%, 22%, 24%.

Ditto, on 12% tax bracket, your capital gain is 0%. You can harvest your VTI growth at 0% too.

The standard advice of putting 100% stock in your taxable account works for you too.

KlangFool

Why am I able to harvest growth at 0% asode from long term capital gains? Is there a difference in how dividends are taxes? I'm getting mixed answers on this page. Some people are saying not to put bond in taxable and others are saying to not put it into Roth? Is that just due to the low contribution limit and wanting to get more for your contribution limit?

AustinC27,

It is in the order of priority and amount of money you to invest.

A) Put all your bond into your tax-advantaged accounts: Tax-deferred first and then Roth

B) Put the stocks into Roth IRA and then the taxable account.

C) In your case, both stock and bond fit within your Roth IRA. Hence, you are done.

KlangFool

lakpr wrote: ↑Wed Jul 14, 2021 2:20 am

AustinC27 wrote: ↑Tue Jul 13, 2021 11:53 pmExactly what I was looking for ty. Would it be okay to keep the bond fund in a taxable w/my low imcome tax rate. Sayyyy $8000 in it?

I would get rid of bonds in the Roth IRA. The deal with Roth is that, in exchange for upfront taxes, all future growth is tax free. Why would you want to dampen that tax free growth, including bonds in Roth?

With $8000 available for bonds investment, I would look to buy I bonds from Treasury Direct. I would not invest in bond funds in taxable account, or at least, it would be second preference to I bonds. One can only buy $10k of I bonds per SSN per year, so unless your bond fund needs exceed that limit, I would stick to I bonds. Unlike the dividends from bond funds, the interest paid on I bonds is tax deferred until you actually redeem the I bond(s). You can redeem as little as $25.

One other point I would like to make. Do not invest in VTI in both your taxable account and your Roth IRA. That could subject you to wash sales rules, if there were a downturn in the stock market, and you want to harvest the losses. I would switch the Roth IRA to ITOT, an equally tax efficient ETF tracking the US total stock market. OR, split it in a 4:1 ratio to VOO and VXF, which is shown to have identical risk and return to VTI over the past 20+ years. Then never buy ITOT or VOO or VXF in your taxable account again.

Why is tax efficiency important in a Roth account? I can see ITOT as a proxy for cost and an it's similarity to VTI as a total market index, but why tax efficiency?

KlangFool wrote: ↑Wed Jul 14, 2021 2:28 pmAustinC27,

It is in the order of priority and amount of money you to invest.

A) Put all your bond into your tax-advantaged accounts: Tax-deferred first and then Roth

B) Put the stocks into Roth IRA and then the taxable account.

C) In your case, both stock and bond fit within your Roth IRA. Hence, you are done.

KlangFool

Isn't putting bonds in a Roth IRA a waste? A regular IRA makes sense for bonds... but since the Roth has tax-free growth, wouldn't you want your highest growing asset in there? Is it really worse to have bonds in taxable?

AustinC27 wrote: ↑Tue Jul 13, 2021 11:18 pmSo I was reading Bogleheads tax efficiency chart and it suggest holding index funds in taxable account. Is it a bad idea to contribute to VTI in an IRA when I'm young and in a low tax bracket? Or would I want to start my tax-free/taxed upfront compounding earlier? Also my tax bracket is 15% w/no state tax. Would my current asset allocation be fine?

Roth Ira:
(70%-VTI)
(20%- VXUS)
(10%- SCHP/BND)

Taxable:
ICSH- Savings account alternative
Mad money 1+ year investments (no dividend)

Vanguard Total Stock Market ETF (VTI) ER 0.03% use suitable for any type of account, not just a taxable brokerage account. It is a good idea to buy VTI in an IRA.

There currently is no federal 15% tax bracket. You might want to double check what tax bracket you are in.

In general it is best to prioritize contributions to tax-advantaged accounts like a 401k or an IRA, rather than a taxable brokerage account. Wiki article, "Prioritizing Investments", link.

Is there a plan offered at work such as a 401k, 403b, 457b, SIMPLE IRA, SEP IRA, or a TSP? That should be the top priority for contributions if an employer match is available, or if good low cost funds are offered.

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?

For preferences on fund placement in different types of accounts see the wiki article, "Tax-efficient Fund Placement" , link.

"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy

jibantik wrote: ↑Wed Jul 14, 2021 2:40 pm

KlangFool wrote: ↑Wed Jul 14, 2021 2:28 pmAustinC27,

It is in the order of priority and amount of money you to invest.

A) Put all your bond into your tax-advantaged accounts: Tax-deferred first and then Roth

B) Put the stocks into Roth IRA and then the taxable account.

C) In your case, both stock and bond fit within your Roth IRA. Hence, you are done.

KlangFool

Isn't putting bonds in a Roth IRA a waste? A regular IRA makes sense for bonds... but since the Roth has tax-free growth, wouldn't you want your highest growing asset in there? Is it really worse to have bonds in taxable?

That debate is long going and there are proponents in both camps. Personally I am not going to waste my valuable Roth space for ultra low yield bonds. IMHO pre-tax (traditional) is ideal for bonds but if that wasn't an option I would pay taxes on bonds in my taxable account over wasting space in my Roth (currently 100% in VTI).

Bonds - Traditional 401k/IRA
Stocks - Roth IRA/Roth 401k/Taxable

If possible.

jibantik wrote: ↑Wed Jul 14, 2021 2:40 pm

KlangFool wrote: ↑Wed Jul 14, 2021 2:28 pmAustinC27,

It is in the order of priority and amount of money you to invest.

A) Put all your bond into your tax-advantaged accounts: Tax-deferred first and then Roth

B) Put the stocks into Roth IRA and then the taxable account.

C) In your case, both stock and bond fit within your Roth IRA. Hence, you are done.

KlangFool

Isn't putting bonds in a Roth IRA a waste? A regular IRA makes sense for bonds... but since the Roth has tax-free growth, wouldn't you want your highest growing asset in there? Is it really worse to have bonds in taxable?

jibantik,

A) At OP's tax bracket, he get tax-free growth for the stock in the taxable account too.

B) OP has enough room for both the stock and the bond in the Roth IRA.

KlangFool

goodenyou wrote: ↑Wed Jul 14, 2021 2:38 pmWhy is tax efficiency important in a Roth account? I can see ITOT as a proxy for cost and an it's similarity to VTI as a total market index, but why tax efficiency?

True, tax efficiency is NOT a required attribute within the Roth accounts. The point I was trying to make is to choose an ETF or mutual fund that is different than the taxable account holdings. I meant to more precisely say: if you hold VTI already in taxable, then use ITOT in Roth; if you hold VTI already in Roth, and taxable investing hadn't begun yet, choose ITOT for your taxable (at which point the tax efficiency kicks in).

Note that the text you quoted I wrote at 3:20 AM in the middle of the night when I was half asleep and half awake ...

ruralavalon wrote: ↑Wed Jul 14, 2021 2:41 pm

AustinC27 wrote: ↑Tue Jul 13, 2021 11:18 pmSo I was reading Bogleheads tax efficiency chart and it suggest holding index funds in taxable account. Is it a bad idea to contribute to VTI in an IRA when I'm young and in a low tax bracket? Or would I want to start my tax-free/taxed upfront compounding earlier? Also my tax bracket is 15% w/no state tax. Would my current asset allocation be fine?

Roth Ira:
(70%-VTI)
(20%- VXUS)
(10%- SCHP/BND)

Taxable:
ICSH- Savings account alternative
Mad money 1+ year investments (no dividend)

Vanguard Total Stock Market ETF (VTI) ER 0.03% use suitable for any type of account, not just a taxable brokerage account. It is a good idea to buy VTI in an IRA.

There currently is no federal 15% tax bracket. You might want to double check what tax bracket you are in.

In general it is best to prioritize contributions to tax-advantaged accounts like a 401k or an IRA, rather than a taxable brokerage account. Wiki article, "Prioritizing Investments", link.

Is there a plan offered at work such as a 401k, 403b, 457b, SIMPLE IRA, SEP IRA, or a TSP? That should be the top priority for contributions if an employer match is available, or if good low cost funds are offered.

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?

For preferences on fund placement in different types of accounts see the wiki article, "Tax-efficient Fund Placement" , link.

Sorry, I was just doing a rough calculation of how much is gwtting taking out of my gross paycheck. I'm in 12% bracket. Also, I'm planning on investing at least $5500 a year into Roth IRA, but w/my career in real estate that could very well flucuate. My goal is at least $10,000 a year into a solo 401k if my employer doesn't offer one which I believe they do (Berkshire Hathaway)

KlangFool wrote: ↑Wed Jul 14, 2021 3:01 pm

jibantik wrote: ↑Wed Jul 14, 2021 2:40 pm

KlangFool wrote: ↑Wed Jul 14, 2021 2:28 pmAustinC27,

It is in the order of priority and amount of money you to invest.

A) Put all your bond into your tax-advantaged accounts: Tax-deferred first and then Roth

B) Put the stocks into Roth IRA and then the taxable account.

C) In your case, both stock and bond fit within your Roth IRA. Hence, you are done.

KlangFool

Isn't putting bonds in a Roth IRA a waste? A regular IRA makes sense for bonds... but since the Roth has tax-free growth, wouldn't you want your highest growing asset in there? Is it really worse to have bonds in taxable?

jibantik,

A) At OP's tax bracket, he get tax-free growth for the stock in the taxable account too.

B) OP has enough room for both the stock and the bond in the Roth IRA.

KlangFool

If I may ask, why is it tax-free growth in a taxable? Wouldn't I still get taxed at the regular 15% rate on the sale of my shares and on any dividends received as income? My plan is to reinvest all dividends if I do decide on ITOT or VTI in a taxable

AustinC27 wrote: ↑Wed Jul 14, 2021 3:38 pm

ruralavalon wrote: ↑Wed Jul 14, 2021 2:41 pm

AustinC27 wrote: ↑Tue Jul 13, 2021 11:18 pmSo I was reading Bogleheads tax efficiency chart and it suggest holding index funds in taxable account. Is it a bad idea to contribute to VTI in an IRA when I'm young and in a low tax bracket? Or would I want to start my tax-free/taxed upfront compounding earlier? Also my tax bracket is 15% w/no state tax. Would my current asset allocation be fine?

Roth Ira:
(70%-VTI)
(20%- VXUS)
(10%- SCHP/BND)

Taxable:
ICSH- Savings account alternative
Mad money 1+ year investments (no dividend)

Vanguard Total Stock Market ETF (VTI) ER 0.03% use suitable for any type of account, not just a taxable brokerage account. It is a good idea to buy VTI in an IRA.

There currently is no federal 15% tax bracket. You might want to double check what tax bracket you are in.

In general it is best to prioritize contributions to tax-advantaged accounts like a 401k or an IRA, rather than a taxable brokerage account. Wiki article, "Prioritizing Investments", link.

Is there a plan offered at work such as a 401k, 403b, 457b, SIMPLE IRA, SEP IRA, or a TSP? That should be the top priority for contributions if an employer match is available, or if good low cost funds are offered.

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?

For preferences on fund placement in different types of accounts see the wiki article, "Tax-efficient Fund Placement" , link.

Sorry, I was just doing a rough calculation of how much is gwtting taking out of my gross paycheck. I'm in 12% bracket. Also, I'm planning on investing at least $5500 a year into Roth IRA, but w/my career in real estate that could very well flucuate. My goal is at least $10,000 a year into a solo 401k if my employer doesn't offer one which I believe they do (Berkshire Hathaway)

I suggest making the maximum annual contribution to your Roth IRA. That is $6k annually if under age 50, $7k annually if age 50 or more.

You cannot use an individual (solo) 401k plan unless self employed.

Does your current employer offer a 401k or other work-based plan? If so is an employer match available? What funds are offered in your employer's plan? Please give fund names, tickers an expense ratios.

What fund firm is your Roth IRA with?

Please simply add any new information to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

As mentioned before, using available tax-advantaged accounts should usually be a priority over using a taxable brokerage account.

"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy

AustinC27 wrote: ↑Wed Jul 14, 2021 3:42 pm

KlangFool wrote: ↑Wed Jul 14, 2021 3:01 pm

jibantik wrote: ↑Wed Jul 14, 2021 2:40 pm

KlangFool wrote: ↑Wed Jul 14, 2021 2:28 pmAustinC27,

It is in the order of priority and amount of money you to invest.

A) Put all your bond into your tax-advantaged accounts: Tax-deferred first and then Roth

B) Put the stocks into Roth IRA and then the taxable account.

C) In your case, both stock and bond fit within your Roth IRA. Hence, you are done.

KlangFool

Isn't putting bonds in a Roth IRA a waste? A regular IRA makes sense for bonds... but since the Roth has tax-free growth, wouldn't you want your highest growing asset in there? Is it really worse to have bonds in taxable?

jibantik,

A) At OP's tax bracket, he get tax-free growth for the stock in the taxable account too.

B) OP has enough room for both the stock and the bond in the Roth IRA.

KlangFool

If I may ask, why is it tax-free growth in a taxable? Wouldn't I still get taxed at the regular 15% rate on the sale of my shares and on any dividends received as income? My plan is to reinvest all dividends if I do decide on ITOT or VTI in a taxable

AustinC27,

No. Long-term capital gain and qualified dividend are tax at a different rate. At your 12% tax bracket, the long-term capital gain and qualified are taxed at 0%.

https://www.bankrate.com/investing/long ... gains-tax/

KlangFool

1789 wrote: ↑Wed Jul 14, 2021 3:00 pmBonds - Traditional 401k/IRA
Stocks - Roth IRA/Roth 401k/Taxable

If possible.

So would you recommend Roth IRA stocks when young and then transferring it to a Traditional IRA with some bonds when older?

anthonypals wrote: ↑Wed Jul 14, 2021 8:44 pm

1789 wrote: ↑Wed Jul 14, 2021 3:00 pmBonds - Traditional 401k/IRA
Stocks - Roth IRA/Roth 401k/Taxable

If possible.

So would you recommend Roth IRA stocks when young and then transferring it to a Traditional IRA with some bonds when older?

.

The principles of tax-efficient placement determine what goes where, once you have already determined which accounts you have. If you have a traditional 401(k) or IRA and a Roth IRA, you would prefer to hold stocks in the Roth account and bonds in the traditional account. (This may also depend on the options; if your 401(k) has better stock than bond options, you should hold stocks there.)

But the "if possible" is important; if your traditional account is the best place for bonds but isn't large enough for your bond holdings, you should hold bonds in either your Roth or taxable account.

So I was reading Bogleheads tax efficiency chart and it suggest holding index funds in taxable account. Is it a bad idea to contribute to VTI in an IRA when I'm young and in a low tax bracket? Or would I want to start my tax-free/taxed upfront compounding earlier? Also my tax bracket is 15% w/no state tax. Would my current asset allocation be fine?

Roth Ira:
(70%-VTI)
(20%- VXUS)
(10%- SCHP/BND)

Taxable:
ICSH- Savings account alternative
Mad money 1+ year investments (no dividend)

This is an extension from my previous post which I'll link (sorry mods I muddied up the comment section by not using the edit tool on original post and excessively commenting/quoting so this is my attempt at rectification)

Link to previous post: viewtopic.php?f=1&t=353514

Edit: Thank you so much to everyone for your help on my previous post- seriously. The reason I'm avoiding tax deferred and choosing Roth IRA as of right now is that I will be making more money within the next year and am moving out soon so I do need some cash for payments. I would like to have as much money set aside as possible to max out either my Solo 401(K)- as I'll be an independent contractor (Real Estate Broker)- or if my brokerage offers a 401(K) I'll contribute to that as well first as they will likely match up to a percentage (depending on if the quality of the funds provided is adequate which hopefully shouldn't be a problem working for a large employer such as Berkshire Hathaway.) Note that if you're a real estate broker I would gladly take any advice on retirement planning that you have.

My updated plan is as follows (my broker is Charles Schwab) (12% tax bracket)- please give any constructive criticism that you have:

1. Max Roth IRA for current year before income increases to get partial tax credit going into next year; (Asset Allocation- 100% VTI/ITOT)
2. Once working full-time contribute as much as possible to tax-deferred -either employer or Solo 401(K) in the upcoming year;(Asset Allocation- 70-80% VTI/ITOT; 20% VXUS; 10% BND?)
3. Once all tax-deferred and tax-advantaged accounts are maxed, contribute as much as possible of leftover savings to taxable account (preferably total stock market/S&P 500 index fund (VTI/ITOT; VOO/IVV), or buy direct T-Bills at auction ;

Extra Considerations
1. Work to increase my current income through continuing education as that will ultimately be my best investment and I have college assistance;
2. Looking into higher interest rate savings account/SVNXX (Schwab money market); still need advice for leftover money but I need a highly liquid alternative to checking/savings account

lakpr wrote: ↑Wed Jul 14, 2021 3:17 pm

goodenyou wrote: ↑Wed Jul 14, 2021 2:38 pmWhy is tax efficiency important in a Roth account? I can see ITOT as a proxy for cost and an it's similarity to VTI as a total market index, but why tax efficiency?

True, tax efficiency is NOT a required attribute within the Roth accounts. The point I was trying to make is to choose an ETF or mutual fund that is different than the taxable account holdings. I meant to more precisely say: if you hold VTI already in taxable, then use ITOT in Roth; if you hold VTI already in Roth, and taxable investing hadn't begun yet, choose ITOT for your taxable (at which point the tax efficiency kicks in).

Note that the text you quoted I wrote at 3:20 AM in the middle of the night when I was half asleep and half awake ...

Lol. You need some sleep

lakpr wrote: ↑Wed Jul 14, 2021 1:56 pm

Bama12 wrote: ↑Wed Jul 14, 2021 1:53 pm

lakpr wrote: ↑Wed Jul 14, 2021 1:40 pm

Bama12 wrote: ↑Wed Jul 14, 2021 1:38 pmHow does ones Roth IRA have anything to do with ones taxable account?

https://www.irs.gov/pub/irs-drop/rr-08-05.pdf

Thanks! I never knew that.

I like having VTI in taxable and in Roth, guess I will change my Roth.

That is what I would do too! Good luck.

I like having VTI in both.

Couldn't you THL by just turning have dividends reinvesting in Roth and taxable?
You could even leave reinvesting on and turn it off for 90 or so days and still THL.

Bama12 wrote: ↑Thu Jul 15, 2021 10:50 am I like having VTI in both.

Couldn't you THL by just turning have dividends reinvesting in Roth and taxable?
You could even leave reinvesting on and turn it off for 90 or so days and still THL.

What if the reinvested dividends occurred in the 30 days prior to the date where a loss occurred in taxable? You can control your FUTURE actions, but how can you change what happened in the PREVIOUS 30 days?

Turning off the automatic reinvestment of dividends exposes you to underperformance relative to the market. Why not simply sidestep the question altogether by resolving not to have any identical securities in both Roth IRA and taxable? Much simpler, no?

lakpr wrote: ↑Thu Jul 15, 2021 11:19 am

Bama12 wrote: ↑Thu Jul 15, 2021 10:50 am I like having VTI in both.

Couldn't you THL by just turning have dividends reinvesting in Roth and taxable?
You could even leave reinvesting on and turn it off for 90 or so days and still THL.

What if the reinvested dividends occurred in the 30 days prior to the date where a loss occurred in taxable? You can control your FUTURE actions, but how can you change what happened in the PREVIOUS 30 days?

Turning off the automatic reinvestment of dividends exposes you to underperformance relative to the market. Why not simply sidestep the question altogether by resolving not to have any identical securities in both Roth IRA and taxable? Much simpler, no?

It's not simple for someone who is OCD and has to have his spread sheet look good.

Taxable
Vanguard Federal M.M-VMFXX- 50%
Vanguard Total Stock Market-VTI- 50%

Roth
Vanguard Wellesley Income-VWINX- 25%
Vanguard Total Stock Market-VTI- 25%
Vanguard S&P Small Cap 600 Value-VIOV-25%
Vanguard Real Estate-VNQ- 25%

401K
Vanguard Total Stock Market-VTSAX 15%
Vanguard Value Index-VVIAX 15%
Vanguard Small Cap Index-VSMAX 15%
Vanguard Small Value-VSIAX 15%
Vanguard Developed-VTMGX 15%
Vanguard Emerging-VEMAX 15%
Vanguard Total Bond-VBTLX 10%

Bama12 wrote: ↑Thu Jul 15, 2021 2:56 pmIt's not simple for someone who is OCD and has to have his spread sheet look good.

Taxable
Vanguard Federal M.M-VMFXX- 50%
Vanguard Total Stock Market-VTI- 50%

Roth
Vanguard Wellesley Income-VWINX- 25%
Vanguard Total Stock Market-VTI- 25%
Vanguard S&P Small Cap 600 Value-VIOV-25%
Vanguard Real Estate-VNQ- 25%

401K
Vanguard Total Stock Market-VTSAX 15%
Vanguard Value Index-VVIAX 15%
Vanguard Small Cap Index-VSMAX 15%
Vanguard Small Value-VSIAX 15%
Vanguard Developed-VTMGX 15%
Vanguard Emerging-VEMAX 15%
Vanguard Total Bond-VBTLX 10%

Looks to be a mess ... I think you will benefit from posting a Portfolio review, preferably a separate thread -- we are veering so far away from the original poster's question.

In your 401k for example, you have allocated equal weight between developed markets and emerging markets. Emerging markets, as you may know, constitute only 25% of international equities, and only 10% of the global market cap. By allocating 15% of your portfolio to it, you are massively overweighting that asset class.

Ditto with the value index and small cap index and small cap value. Firstly, the small cap value portion of the market is contained within the value index. Secondly, the small cap index of the entire market is only about 15% to 18%, but you are allocating 30% of your 401k allocations to this tiny slice of the market.

Wellesley income allocates 65% of its portfolio to bonds. What are bonds doing in your Roth IRA? The deal with the Roth IRA is that, in exchange for upfront taxes, all future growth is completely tax free. Why do you want to smother that tax free growth with bonds?

You should invest in exactly the market weight proportions in the market, nothing more; only then you are assured exactly the market returns, nothing less. If you deviate from that rule, your returns may be higher or lower -- that's not Bogleheadish at all.

lakpr wrote: ↑Thu Jul 15, 2021 3:16 pm

Bama12 wrote: ↑Thu Jul 15, 2021 2:56 pmIt's not simple for someone who is OCD and has to have his spread sheet look good.

Taxable
Vanguard Federal M.M-VMFXX- 50%
Vanguard Total Stock Market-VTI- 50%

Roth
Vanguard Wellesley Income-VWINX- 25%
Vanguard Total Stock Market-VTI- 25%
Vanguard S&P Small Cap 600 Value-VIOV-25%
Vanguard Real Estate-VNQ- 25%

401K
Vanguard Total Stock Market-VTSAX 15%
Vanguard Value Index-VVIAX 15%
Vanguard Small Cap Index-VSMAX 15%
Vanguard Small Value-VSIAX 15%
Vanguard Developed-VTMGX 15%
Vanguard Emerging-VEMAX 15%
Vanguard Total Bond-VBTLX 10%

Looks to be a mess ... I think you will benefit from posting a Portfolio review, preferably a separate thread -- we are veering so far away from the original poster's question.

In your 401k for example, you have allocated equal weight between developed markets and emerging markets. Emerging markets, as you may know, constitute only 25% of international equities, and only 10% of the global market cap. By allocating 15% of your portfolio to it, you are massively overweighting that asset class.

Ditto with the value index and small cap index and small cap value. Firstly, the small cap value portion of the market is contained within the value index. Secondly, the small cap index of the entire market is only about 15% to 18%, but you are allocating 30% of your 401k allocations to this tiny slice of the market.

Wellesley income allocates 65% of its portfolio to bonds. What are bonds doing in your Roth IRA? The deal with the Roth IRA is that, in exchange for upfront taxes, all future growth is completely tax free. Why do you want to smother that tax free growth with bonds?

You should invest in exactly the market weight proportions in the market, nothing more; only then you are assured exactly the market returns, nothing less. If you deviate from that rule, your returns may be higher or lower -- that's not Bogleheadish at all.

Thanks for your thoughts.

I'm a slice and dice guy. I'm very happy with my Portfolio.

lakpr wrote: ↑Thu Jul 15, 2021 11:19 am

Bama12 wrote: ↑Thu Jul 15, 2021 10:50 am I like having VTI in both.

Couldn't you THL by just turning have dividends reinvesting in Roth and taxable?
You could even leave reinvesting on and turn it off for 90 or so days and still THL.

What if the reinvested dividends occurred in the 30 days prior to the date where a loss occurred in taxable? You can control your FUTURE actions, but how can you change what happened in the PREVIOUS 30 days?

Turning off the automatic reinvestment of dividends exposes you to underperformance relative to the market. Why not simply sidestep the question altogether by resolving not to have any identical securities in both Roth IRA and taxable? Much simpler, no?

Just came here to say I’ve been reading some threads on TLH and it seems that it is an arcane topic where no really knows what are not substantially equivalent funds/etfs. Apparently rule is old, never really updated for indexing and esp etf world, and no real irs guidance. A true OCD type person (me) really dislikes this vagueness

DebiT wrote: ↑Thu Jul 15, 2021 4:45 pm

lakpr wrote: ↑Thu Jul 15, 2021 11:19 am

Bama12 wrote: ↑Thu Jul 15, 2021 10:50 am I like having VTI in both.

Couldn't you THL by just turning have dividends reinvesting in Roth and taxable?
You could even leave reinvesting on and turn it off for 90 or so days and still THL.

What if the reinvested dividends occurred in the 30 days prior to the date where a loss occurred in taxable? You can control your FUTURE actions, but how can you change what happened in the PREVIOUS 30 days?

Turning off the automatic reinvestment of dividends exposes you to underperformance relative to the market. Why not simply sidestep the question altogether by resolving not to have any identical securities in both Roth IRA and taxable? Much simpler, no?

Just came here to say I’ve been reading some threads on TLH and it seems that it is an arcane topic where no really knows what are not substantially equivalent funds/etfs. Apparently rule is old, never really updated for indexing and esp etf world, and no real irs guidance. A true OCD type person (me) really dislikes this vagueness

The one thing that is not ambiguous is that a fund is substantially identical to itself. If you sell VTI in taxable, and reinvest dividends in VTI (or the mutual fund class VTSAX) in your Roth IRA, everyone agrees that is a wash sale even though your brokerage is not required to report it.

Vanguard's article on tax loss harvesting suggests what Vanguard considers the main issues: Are two index funds from the same provider? Do they track the same index? If not, how similar are the indexes?

grabiner wrote: ↑Thu Jul 15, 2021 5:47 pm

DebiT wrote: ↑Thu Jul 15, 2021 4:45 pm

lakpr wrote: ↑Thu Jul 15, 2021 11:19 am

Bama12 wrote: ↑Thu Jul 15, 2021 10:50 am I like having VTI in both.

Couldn't you THL by just turning have dividends reinvesting in Roth and taxable?
You could even leave reinvesting on and turn it off for 90 or so days and still THL.

What if the reinvested dividends occurred in the 30 days prior to the date where a loss occurred in taxable? You can control your FUTURE actions, but how can you change what happened in the PREVIOUS 30 days?

Turning off the automatic reinvestment of dividends exposes you to underperformance relative to the market. Why not simply sidestep the question altogether by resolving not to have any identical securities in both Roth IRA and taxable? Much simpler, no?

Just came here to say I’ve been reading some threads on TLH and it seems that it is an arcane topic where no really knows what are not substantially equivalent funds/etfs. Apparently rule is old, never really updated for indexing and esp etf world, and no real irs guidance. A true OCD type person (me) really dislikes this vagueness

The one thing that is not ambiguous is that a fund is substantially identical to itself. If you sell VTI in taxable, and reinvest dividends in VTI (or the mutual fund class VTSAX) in your Roth IRA, everyone agrees that is a wash sale even though your brokerage is not required to report it.

Vanguard's article on tax loss harvesting suggests what Vanguard considers the main issues: Are two index funds from the same provider? Do they track the same index? If not, how similar are the indexes?

Thanks for the article.

grabiner wrote: ↑Thu Jul 15, 2021 5:47 pm

DebiT wrote: ↑Thu Jul 15, 2021 4:45 pm

lakpr wrote: ↑Thu Jul 15, 2021 11:19 am

Bama12 wrote: ↑Thu Jul 15, 2021 10:50 am I like having VTI in both.

Couldn't you THL by just turning have dividends reinvesting in Roth and taxable?
You could even leave reinvesting on and turn it off for 90 or so days and still THL.

What if the reinvested dividends occurred in the 30 days prior to the date where a loss occurred in taxable? You can control your FUTURE actions, but how can you change what happened in the PREVIOUS 30 days?

Turning off the automatic reinvestment of dividends exposes you to underperformance relative to the market. Why not simply sidestep the question altogether by resolving not to have any identical securities in both Roth IRA and taxable? Much simpler, no?

Just came here to say I’ve been reading some threads on TLH and it seems that it is an arcane topic where no really knows what are not substantially equivalent funds/etfs. Apparently rule is old, never really updated for indexing and esp etf world, and no real irs guidance. A true OCD type person (me) really dislikes this vagueness

The one thing that is not ambiguous is that a fund is substantially identical to itself. If you sell VTI in taxable, and reinvest dividends in VTI (or the mutual fund class VTSAX) in your Roth IRA, everyone agrees that is a wash sale even though your brokerage is not required to report it.

Vanguard's article on tax loss harvesting suggests what Vanguard considers the main issues: Are two index funds from the same provider? Do they track the same index? If not, how similar are the indexes?

+1

Until the IRS states further clarification it is left up to the millions of investors to interpret the meaning. Some are willing to say that S&P500 index funds from different brokerage firms that use the exact same S&P500 index are not substantially identical, others say if the index is different then it is not substantially identical even though those indexes are basically the same S&P500 companies but in slightly different proportions, and others say you need even more difference. Vague yes, but what does each person feel they could justify if audited by IRS because of a wash sale.

KlangFool wrote: ↑Wed Jul 14, 2021 4:09 pm

AustinC27 wrote: ↑Wed Jul 14, 2021 3:42 pm

KlangFool wrote: ↑Wed Jul 14, 2021 3:01 pm

jibantik wrote: ↑Wed Jul 14, 2021 2:40 pm

KlangFool wrote: ↑Wed Jul 14, 2021 2:28 pmAustinC27,

It is in the order of priority and amount of money you to invest.

A) Put all your bond into your tax-advantaged accounts: Tax-deferred first and then Roth

B) Put the stocks into Roth IRA and then the taxable account.

C) In your case, both stock and bond fit within your Roth IRA. Hence, you are done.

KlangFool

Isn't putting bonds in a Roth IRA a waste? A regular IRA makes sense for bonds... but since the Roth has tax-free growth, wouldn't you want your highest growing asset in there? Is it really worse to have bonds in taxable?

jibantik,

A) At OP's tax bracket, he get tax-free growth for the stock in the taxable account too.

B) OP has enough room for both the stock and the bond in the Roth IRA.

KlangFool

If I may ask, why is it tax-free growth in a taxable? Wouldn't I still get taxed at the regular 15% rate on the sale of my shares and on any dividends received as income? My plan is to reinvest all dividends if I do decide on ITOT or VTI in a taxable

AustinC27,

No. Long-term capital gain and qualified dividend are tax at a different rate. At your 12% tax bracket, the long-term capital gain and qualified are taxed at 0%.

https://www.bankrate.com/investing/long ... gains-tax/

KlangFool

+1

AustinC27, maybe this Michael Kitces article will help further see/understand the 2 parallel tax rates scales - income tax and capital gains tax. https://www.kitces.com/blog/long-term-capital-gains-bump-zone-higher-marginal-tax-rate-phase-in-0-rate/

lakpr wrote: ↑Wed Jul 14, 2021 2:20 amOne other point I would like to make. Do not invest in VTI in both your taxable account and your Roth IRA. That could subject you to wash sales rules, if there were a downturn in the stock market, and you want to harvest the losses. I would switch the Roth IRA to ITOT, an equally tax efficient ETF tracking the US total stock market. OR, split it in a 4:1 ratio to VOO and VXF, which is shown to have identical risk and return to VTI over the past 20+ years. Then never buy ITOT or VOO or VXF in your taxable account again.

I hold VTSAX (aka VTI) in my Roth IRA and and VLCAX (aka VV) in my taxable. This allows me to avoid any wash sales while holding two Vanguard index funds. VLCAX is a bit more diversified than VFIAX (VOO) so I prefer it for that reason.

lakpr wrote: ↑Wed Jul 14, 2021 2:20 am

AustinC27 wrote: ↑Tue Jul 13, 2021 11:53 pmExactly what I was looking for ty. Would it be okay to keep the bond fund in a taxable w/my low imcome tax rate. Sayyyy $8000 in it?

I would get rid of bonds in the Roth IRA. The deal with Roth is that, in exchange for upfront taxes, all future growth is tax free. Why would you want to dampen that tax free growth, including bonds in Roth?

With $8000 available for bonds investment, I would look to buy I bonds from Treasury Direct. I would not invest in bond funds in taxable account, or at least, it would be second preference to I bonds. One can only buy $10k of I bonds per SSN per year, so unless your bond fund needs exceed that limit, I would stick to I bonds. Unlike the dividends from bond funds, the interest paid on I bonds is tax deferred until you actually redeem the I bond(s). You can redeem as little as $25.

One other point I would like to make. Do not invest in VTI in both your taxable account and your Roth IRA. That could subject you to wash sales rules, if there were a downturn in the stock market, and you want to harvest the losses. I would switch the Roth IRA to ITOT, an equally tax efficient ETF tracking the US total stock market. OR, split it in a 4:1 ratio to VOO and VXF, which is shown to have identical risk and return to VTI over the past 20+ years. Then never buy ITOT or VOO or VXF in your taxable account again.

Would add I Bonds can make a reasonable emergency fund as well. They are inflation indexed. So currently are the only fixed income instrument that is returning 0% real (so no loss to inflation) atm. One can get paper I Bonds as well by overpaying in taxes. There is a 1 year lock up with I Bonds. So something to consider if you do start moving the emergency fund over.

At some point EE Bonds may make sense. These have a very low yield, but double in 20 years. So this is effectively a 3.53% annualized return. However this only works if they are held for 20 years. So something to think about. Not sure if it is the right choice for you yet though.

I removed an off-topic post. As a reminder, see: General Etiquette

At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.