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I have inherited some money most of which will need to be invested in a taxable account. All of my investing up to now has been focused on tax defferred accounts such as IRA's, 401's and such. Once we max out our Roth accounts I am wanting to know what is the difference in investing choices if any between taxable and tax defferred acounts?
Are you still able to invest in a 401k, trad. IRA or Roth IRA; based against your employment status and/or wage? As you noted; the Roth is the first best step in my opinion. Beyond that; very tax efficient funds could be used to take advantage of long term capital gains/dividends. Although the status of taxation of these two areas is a coin toss going into 2013. I don't have knowledge or a list of tax efficient funds; although I know there are those here who do; and a list could be found. One other plain jane option that I noted in a recent thread is a variable annuity that shelters current taxation, but would be taxed at the ordinary tax rate for withdrawals. Fidelilty offers such an account which consists of 57 funds, with about 8 or 9 being non-Fidelity, including 3 Pimco bond funds. From my recall the average expense ration is about .75% for the funds. The ER is the same as for a normal retail fund, without any markups. The only other fee is a .25% annuity expense fee. There are no surrender time frames and/or fees and this annuity is not the more traditional lifetime payout schedule and does not include any for of insurance protection. It is just an area where one may invest tax deferred after other avenues have been exhausted. Note; I do not recommend the various annuities offered by full service insurance companies. Another option could be muni bond funds which would keep taxes to a lower rate, depending on what type of fund was being used; being state specific or a more broad based U.S. muni bond fund. At the below link you will find info about the Fido annuity. Along the right page side you will find a funds list link in the research section. Also, you may have a Fidelity investor center in your area for a face to face discovery.
I have no affiliation with Fidelity; other than having personal accounts.
I would not alter my allocation because of tax considerations, e.g. I would not put everything into muni bonds just to avoid taxes. IMHO the question is how to invest in each bucket efficiently.
If you are a buy-and-hold indexer, then buying low turnover, broad based index funds (or tax managed funds, which are really not that much different) is a good way to go. You'll pay taxes on the dividends as you go along, but the funds won't generate capital gains, and you won't realize gains until you sell. And even then, I'm confident that the capital gains tax rate will be lower than the ordinary income rate. So you'll have a rough equivalent of a non-deductible IRA - funded with post tax dollars, tax-deferred (since you don't realize gains until you sell), but taxed at a lower rate than the IRA (cap gains, not ordinary income).
If you like to swap funds, even every few years, then Catch's suggestion of a VA (after maxing out all other tax-advantaged options) is worth consideration. I'll discuss VA options below.
On the bond side, I've read that one can build a diversified muni bond portfolio with $50K or more (I'm guessing that's 10 or more different bonds). If you're looking at bond funds, and you have a low or no state income tax, Vanguard has excellent national muni bond funds of all maturities. I would not go too long now, but then that's a bit of market timing, and I'm just as likely to be wrong as right. If you're in a high tax state, you'll likely want a state-specific fund. I'm not a fan of long term bond funds in any economic climate (too volatile for any extra yield you get), and especially not now. That rules out most muni bond funds, but there's still a pretty good selection of intermediate term state-specific funds.
Another option is to look at Vanguard's Tax-Managed Balanced Fund VTMFX. I don't know of another balanced fund that mixes low turnover equity with muni bonds.
Regarding VAs - to me, these only make sense if you're going to be investing for decades. Otherwise it's difficult to make up the wrapper costs and the fact that they convert capital gains into ordinary taxable interest upon withdrawal. Fidelity has a reasonable VA, but its fund offerings are either Fidelity funds (which are okay, not great, on the growth side, and pretty weak on the value side) or pretty expensive outside funds. A couple of different options are TIAA-CREF, which costs 35 basis points for a $100K annuity (but that drops down to a mere 10 basis points after a decade), and Monument VA from Jefferson National. It is priced at $240/year, independent of the assets in the account. (So for a $100K annuity, it costs 24 basis points.)
Both TIAA-CREF and Monument are no load VAs. TIAA-CREF offers several very cheap in-house funds as well as funds from over a dozen other houses (Calamos, PIMCO, Franklin Templeton, Royce, etc.). Monument offers a ridiculous number of funds (360), and includes very low cost funds like Vanguard (but for these low cost funds, you have to pay a $50 transaction fee, not unlike the TF you'd pay at a brokerage). TIAA-CREF is a highly rated insurance company, Jefferson National (that brings you Monument) is not highly rated. So if one buys Monument, one is likely better off not relying on any of the insurance, and just buying the VA for the underlying portfolios.
There are still a few tax shelters available, like investing in low income housing, but I don't suggest these unless you really know what you are doing.
If you are investing in taxable accounts, asset placement become more important. For taxable, I would look for assets that does not throw a lot of taxable dividends and low internal turnover. Broad based index/passive funds that cover wide swaths of market fit that bill nicely. For bonds, you will be looking at municipal bonds etc. There are also tax managed mutual funds trying to minimize the tax bill.
Comments
Are you still able to invest in a 401k, trad. IRA or Roth IRA; based against your employment status and/or wage? As you noted; the Roth is the first best step in my opinion.
Beyond that; very tax efficient funds could be used to take advantage of long term capital gains/dividends. Although the status of taxation of these two areas is a coin toss going into 2013. I don't have knowledge or a list of tax efficient funds; although I know there are those here who do; and a list could be found.
One other plain jane option that I noted in a recent thread is a variable annuity that shelters current taxation, but would be taxed at the ordinary tax rate for withdrawals.
Fidelilty offers such an account which consists of 57 funds, with about 8 or 9 being non-Fidelity, including 3 Pimco bond funds. From my recall the average expense ration is about .75% for the funds. The ER is the same as for a normal retail fund, without any markups. The only other fee is a .25% annuity expense fee. There are no surrender time frames and/or fees and this annuity is not the more traditional lifetime payout schedule and does not include any for of insurance protection. It is just an area where one may invest tax deferred after other avenues have been exhausted. Note; I do not recommend the various annuities offered by full service insurance companies.
Another option could be muni bond funds which would keep taxes to a lower rate, depending on what type of fund was being used; being state specific or a more broad based U.S. muni bond fund.
At the below link you will find info about the Fido annuity. Along the right page side you will find a funds list link in the research section. Also, you may have a Fidelity investor center in your area for a face to face discovery.
I have no affiliation with Fidelity; other than having personal accounts.
https://www.fidelity.com/annuities/variable-annuity
My two cents worth.
Regards,
Catch
If you are a buy-and-hold indexer, then buying low turnover, broad based index funds (or tax managed funds, which are really not that much different) is a good way to go. You'll pay taxes on the dividends as you go along, but the funds won't generate capital gains, and you won't realize gains until you sell. And even then, I'm confident that the capital gains tax rate will be lower than the ordinary income rate. So you'll have a rough equivalent of a non-deductible IRA - funded with post tax dollars, tax-deferred (since you don't realize gains until you sell), but taxed at a lower rate than the IRA (cap gains, not ordinary income).
If you like to swap funds, even every few years, then Catch's suggestion of a VA (after maxing out all other tax-advantaged options) is worth consideration. I'll discuss VA options below.
On the bond side, I've read that one can build a diversified muni bond portfolio with $50K or more (I'm guessing that's 10 or more different bonds). If you're looking at bond funds, and you have a low or no state income tax, Vanguard has excellent national muni bond funds of all maturities. I would not go too long now, but then that's a bit of market timing, and I'm just as likely to be wrong as right. If you're in a high tax state, you'll likely want a state-specific fund. I'm not a fan of long term bond funds in any economic climate (too volatile for any extra yield you get), and especially not now. That rules out most muni bond funds, but there's still a pretty good selection of intermediate term state-specific funds.
Another option is to look at Vanguard's Tax-Managed Balanced Fund VTMFX. I don't know of another balanced fund that mixes low turnover equity with muni bonds.
Regarding VAs - to me, these only make sense if you're going to be investing for decades. Otherwise it's difficult to make up the wrapper costs and the fact that they convert capital gains into ordinary taxable interest upon withdrawal. Fidelity has a reasonable VA, but its fund offerings are either Fidelity funds (which are okay, not great, on the growth side, and pretty weak on the value side) or pretty expensive outside funds. A couple of different options are TIAA-CREF, which costs 35 basis points for a $100K annuity (but that drops down to a mere 10 basis points after a decade), and Monument VA from Jefferson National. It is priced at $240/year, independent of the assets in the account. (So for a $100K annuity, it costs 24 basis points.)
Both TIAA-CREF and Monument are no load VAs. TIAA-CREF offers several very cheap in-house funds as well as funds from over a dozen other houses (Calamos, PIMCO, Franklin Templeton, Royce, etc.). Monument offers a ridiculous number of funds (360), and includes very low cost funds like Vanguard (but for these low cost funds, you have to pay a $50 transaction fee, not unlike the TF you'd pay at a brokerage). TIAA-CREF is a highly rated insurance company, Jefferson National (that brings you Monument) is not highly rated. So if one buys Monument, one is likely better off not relying on any of the insurance, and just buying the VA for the underlying portfolios.
There are still a few tax shelters available, like investing in low income housing, but I don't suggest these unless you really know what you are doing.
If you are investing in taxable accounts, asset placement become more important. For taxable, I would look for assets that does not throw a lot of taxable dividends and low internal turnover. Broad based index/passive funds that cover wide swaths of market fit that bill nicely. For bonds, you will be looking at municipal bonds etc. There are also tax managed mutual funds trying to minimize the tax bill.