As a retiree I confess to making a lot of these mistakes. My question. So what's the person to do? I try to diversify into various type of accounts and various type of classes. I am also dealing with RMDs. At some point, I recommend just doing the best you can, going with the flow, pay your taxes and enjoying your affluence. Trust me, life is too short.
Good video. I agree with your points, however I prefer holding mutual funds in my brokerage account because I am in the zero capital gains bracket and therefore my basis increases without paying tax currently and I will pay less tax when I sell even if I bump into the 15% cap gains bracket. If held in an IRA the forced capital gains will be taxed at ordinary income tax rates when eventually withdrawn.
Thanks for your insights. Most of them I knew ... but only in isolation. You helped integrate them into the bigger picture, explaining how one thing affects the other.
You always have such good content. Our taxable account right now are limited to a cash management account. When RMD's start, that will change. This video was really valuable to know what not to do. I suppose we'll probably invest excess money into ETFs in a brokerage account.
Why do people spend so much time to save a tiny bit of taxes? Tax drag(specifically from tax advantages dividend income) is only a major issue for people in high tax brackets. If that's not you, the tiny bit of taxes you pay just raises your basis and means you can take out more usable money when you're on social security without it seriously affecting your provisional income and keeping more of your SSI tax free. It also helps if you end up needing money for a large purchase. Selling those funds won't require much of a tax hit as you've already spread out much of the taxes on your increase over many years.
@everlastingarms3065 that small tax drag can very often be much smaller than the tax hit you will get from paying taxes on the gains later in life. Don't focus on having more money, instead focus on having a higher available spending money.
@@humanaffectation9021 Perhaps, perhaps not. Depends on a boatload of variables. When I look at my own spreadsheets, a 6% average return means I have some RMDs to deal with, but not prohibitive. Small savings now helps nicely. A 7% return means I have a boatload of RMDs to deal with, small savings now doesn't help much. A 5% return, I'm still perfectly fine, but RMDs aren't even a thing, and those little savings now make a tremendous difference. You're also ignoring inflation & the time value of those $$ though. That one $ today is worth a lot less 10 years from now. Your 2nd statement is spot on. :-)
@@humanaffectation9021 Actually, the rate of return affects RMDs far more than Roths do. (And the bigger the Roth conversion, the more drag.) And a great rate of return is a good problem to have. Solving merely for "paying less tax dollars" is only part of the picture. As always it's a balancing act, as there are far too many variables too far down the line to truly optimize. But we do know that inflation means those dollars now have way more buying power than those dollars later.
As someone whose investments are almost all in a rollover IRA from the 401k, this was very helpful as I approach RMD's a few years from now, and need somewhere to park the excess. (A good problem to have, to be sure!) All of this made sense; great job with this.
If you are willing to tell what not to do with type of account, can you please make a corresponding video telling possible strategies with this type of account to make it not so "leaky"?
Thanks for the great info. Just to clarify, is it not recommended to invest in a high dividend ETF such as SCHD & reinvest dividends in a taxable brokerage account? Thanks!
I own Qualified high yield Preferred stocks in my taxable account.. probably should reconsider this in my "leaky" bucket since it applies to my IRMAA in negative fashion. Instead of bonds or dividends in your taxable account.. maybe change the "income" part of portfolio to Buffer ETF's.. no dividend, only long term cap gains and only when you sell... or never sell and pass on to heirs tax free with a step up in basis.
Does rule #2 mainly apply when you don't intend to spend the dividend income? If you're living off the dividend income don't high income funds make more sense?
Less relevant the closer you are to retirement and using that income to pay bills. Especially if the dividends or distributions are taxed as LTCG. Major reason to focus on high growth funds when you’re younger and build income in as you approach retirement. 👍🏻
Not sure I fully understand why an ETF results in lesser taxable income than a mutual fund in a taxable account, but accept that this is the “answer”. Good to know. Thank you
ETFs and mutual funds both earn capital gains on stocks they sell (to buy something better, or to fund someone's withdrawal). Some of the shares the hold pay dividends. Every year, my mutual funds distribute the capital gains and dividends due to regulations. I have the option for the money to be deposited in my bank account, or used to buy more shares. If each of my shares had been valued at $1 and there is a 10% distribution, each share is now worth 90c, and they send me the dime. Or, they reinvest it and instead of nine shares @ $1 each, I have ten at 90c. Either way, I pay taxes on the distribution. Regulations for ETFs don't require distributing the gains and dividends periodically. The value of each share continues to increase over the years, and I have unrealized gains, until I sell the ETF.
Why didn't you compare VUG to VIGAX? That would have been a direct comparison of an ETF to a mutual fund. Comparing VUG to totally different funds didn't make sense to me.
I’m having a hard time following your tax drag on dividends in a brokerage account thread. Dividends at my tax bracket are 0% and 15%. Those same dividends pulled out of my IRA are taxed at 22%. I’m retired, 63 with a pension and not taking SS yet. What am I missing here? I always enjoy your posts and learn something from them.
If your marginal tax bracket is 22%, all dividends in your taxable account will be taxed at 15%. The difference is that with the dividends in your IRA, you control when and how much you take out and therefore control your taxes. In taxable, you get taxed on them every year regardless. Controlling your taxes is key especially in retirement, as those dividends in taxable can potentially make you pay more tax based on other income. Ordinary income can push taxable dividends’ tax from 0% to 15% (or 18.8% with NIIT), push more of your SS to be taxed, loose ACA subsidies before 65, increase Medicare premiums after 65, etc. So, indirectly, other income combined with the dividends you cannot control can result in you paying more overall taxes than just the 15% tax on the dividend alone. Hope this helps.
I think the usual advice is bond funds in an IRA, high-div stock funds in a Roth, and low-div stock funds in a taxable account. Where possible, at least. If I didn't have a Roth, then I guess I'd first place my growth stocks in taxable and my bonds in IRA, then place my value stock allocation wherever I still had room. And consider Roth conversions. But maybe someone else has a better method in mind.
In retirement I found that I reached a point where growth no longer matters. I have no desire to leave anything to anyone and have enough in my accounts to live out my life comfortably with zero growth. Consequently I see no reason to invest for growth. Personally I feel no need to invest in stocks at all and would certainly never buy any sort of "fund". I also don't subscribe to the constant growth philosophy. When you have enough, why do you need more?
@@kevinconners3685 The last thing I want to do is leave anything to my dysfunctional family. There are a couple charities, but not enough. In this case it is about us since we will be making the decisions.
@@kevinconners3685 I definitely don't want anything to go to my family and my friends don't need anything. As far as charities go, I simply do not deal with "corporate" charities. I will leave some money to a couple of small entities that I think will benefit, but that doesn't amount to much. Finally it is actually all about me since I will be making the decisions.
Very good video, examples and excellent explanation Eric. I'll have to watch this a few times to digest it all. Thanks for your great content, it's always a learning experience. Larry, Central Valley, Ca.
@8:53 Rule #3: Don't Reinvest Dividends (Automatically) a. Spend the dividend as part of your retirement income. b. Use dividends strategically to rebalance. And, now, here's yet another reason: c. Create new stock lots with these unreinvested dividend proceeds. It's a royal pain to circumvent the IRS's average cost default accounting rules. But, by creating new stock lots with these freed-up funds, you effectively reset your basis for this tranche to zero -- effectively achieving the IRS's LIFO accounting option without the horrendous paperwork a co-mingled account would otherwise require. Food for thought ...
It is possible to systematically beat the market averages by a bit, if you invest in individual stocks in a field where you have professional expertise.
SCHD is an ETF instead of a mutual fund. Based on this video, that's a bonus. If you plan to retire soon, the income is better than having to sell shares of a non dividend holding, especially during down years. And if you are planning on retiring before 59.5, dividend producing assets in your taxable account will help since you'll pay a penalty to touch your retirement assets. And if you bought it at a good price, like in the fall of 2023, you have a better than average dividend, creating a great yield on cost. If you have to pay any taxes, long term Capital gains tax is the best. A number of people quality for 0% capital gains tax depending on their income. Look at your specific details before making changes. This is probably not an issue.
As a retiree I confess to making a lot of these mistakes. My question. So what's the person to do?
I try to diversify into various type of accounts and various type of classes. I am also dealing with RMDs.
At some point, I recommend just doing the best you can, going with the flow, pay your taxes and enjoying your affluence. Trust me, life is too short.
Low cost index funds. Buy and hold. Enjoy the growth.
Good video. I agree with your points, however I prefer holding mutual funds in my brokerage account because I am in the zero capital gains bracket and therefore my basis increases without paying tax currently and I will pay less tax when I sell even if I bump into the 15% cap gains bracket. If held in an IRA the forced capital gains will be taxed at ordinary income tax rates when eventually withdrawn.
Thanks for your insights. Most of them I knew ... but only in isolation. You helped integrate them into the bigger picture, explaining how one thing affects the other.
Normally I say 'always good Eric', but really, you are Great. The best info explained well.
Thank you.
You always have such good content. Our taxable account right now are limited to a cash management account. When RMD's start, that will change. This video was really valuable to know what not to do. I suppose we'll probably invest excess money into ETFs in a brokerage account.
1:30 It's worth mentioning that Vanguard has a mechanism for converting its mutual funds to their ETF equivalents without triggering a taxable event.
Why do people spend so much time to save a tiny bit of taxes? Tax drag(specifically from tax advantages dividend income) is only a major issue for people in high tax brackets. If that's not you, the tiny bit of taxes you pay just raises your basis and means you can take out more usable money when you're on social security without it seriously affecting your provisional income and keeping more of your SSI tax free.
It also helps if you end up needing money for a large purchase. Selling those funds won't require much of a tax hit as you've already spread out much of the taxes on your increase over many years.
A small tax drag, compounded over many years, adds up to a very large tax drag. That's why. He explained it well in the video.
@everlastingarms3065 that small tax drag can very often be much smaller than the tax hit you will get from paying taxes on the gains later in life. Don't focus on having more money, instead focus on having a higher available spending money.
@@humanaffectation9021 Perhaps, perhaps not. Depends on a boatload of variables. When I look at my own spreadsheets, a 6% average return means I have some RMDs to deal with, but not prohibitive. Small savings now helps nicely. A 7% return means I have a boatload of RMDs to deal with, small savings now doesn't help much. A 5% return, I'm still perfectly fine, but RMDs aren't even a thing, and those little savings now make a tremendous difference.
You're also ignoring inflation & the time value of those $$ though. That one $ today is worth a lot less 10 years from now.
Your 2nd statement is spot on. :-)
@@humanaffectation9021 Actually, the rate of return affects RMDs far more than Roths do. (And the bigger the Roth conversion, the more drag.) And a great rate of return is a good problem to have.
Solving merely for "paying less tax dollars" is only part of the picture. As always it's a balancing act, as there are far too many variables too far down the line to truly optimize. But we do know that inflation means those dollars now have way more buying power than those dollars later.
As someone whose investments are almost all in a rollover IRA from the 401k, this was very helpful as I approach RMD's a few years from now, and need somewhere to park the excess. (A good problem to have, to be sure!) All of this made sense; great job with this.
If you are willing to tell what not to do with type of account, can you please make a corresponding video telling possible strategies with this type of account to make it not so "leaky"?
Thanks for the great info. Just to clarify, is it not recommended to invest in a high dividend ETF such as SCHD & reinvest dividends in a taxable brokerage account? Thanks!
Good one!
It’s all very confusing. Thanks for this info. I can see strategy is important.
I own Qualified high yield Preferred stocks in my taxable account.. probably should reconsider this in my "leaky" bucket since it applies to my IRMAA in negative fashion.
Instead of bonds or dividends in your taxable account.. maybe change the "income" part of portfolio to Buffer ETF's.. no dividend, only long term cap gains and only when you
sell... or never sell and pass on to heirs tax free with a step up in basis.
Does rule #2 mainly apply when you don't intend to spend the dividend income? If you're living off the dividend income don't high income funds make more sense?
Less relevant the closer you are to retirement and using that income to pay bills. Especially if the dividends or distributions are taxed as LTCG.
Major reason to focus on high growth funds when you’re younger and build income in as you approach retirement. 👍🏻
Not sure I fully understand why an ETF results in lesser taxable income than a mutual fund in a taxable account, but accept that this is the “answer”. Good to know. Thank you
ETFs and mutual funds both earn capital gains on stocks they sell (to buy something better, or to fund someone's withdrawal). Some of the shares the hold pay dividends.
Every year, my mutual funds distribute the capital gains and dividends due to regulations. I have the option for the money to be deposited in my bank account, or used to buy more shares. If each of my shares had been valued at $1 and there is a 10% distribution, each share is now worth 90c, and they send me the dime. Or, they reinvest it and instead of nine shares @ $1 each, I have ten at 90c. Either way, I pay taxes on the distribution.
Regulations for ETFs don't require distributing the gains and dividends periodically. The value of each share continues to increase over the years, and I have unrealized gains, until I sell the ETF.
Thank you
Why didn't you compare VUG to VIGAX? That would have been a direct comparison of an ETF to a mutual fund. Comparing VUG to totally different funds didn't make sense to me.
Always look forward to your segments. Great content
Had the same thought.
I’m having a hard time following your tax drag on dividends in a brokerage account thread. Dividends at my tax bracket are 0% and 15%. Those same dividends pulled out of my IRA are taxed at 22%. I’m retired, 63 with a pension and not taking SS yet. What am I missing here? I always enjoy your posts and learn something from them.
Agree. Unless all those are unqualified dividends.
If your marginal tax bracket is 22%, all dividends in your taxable account will be taxed at 15%. The difference is that with the dividends in your IRA, you control when and how much you take out and therefore control your taxes. In taxable, you get taxed on them every year regardless. Controlling your taxes is key especially in retirement, as those dividends in taxable can potentially make you pay more tax based on other income. Ordinary income can push taxable dividends’ tax from 0% to 15% (or 18.8% with NIIT), push more of your SS to be taxed, loose ACA subsidies before 65, increase Medicare premiums after 65, etc. So, indirectly, other income combined with the dividends you cannot control can result in you paying more overall taxes than just the 15% tax on the dividend alone. Hope this helps.
I think the usual advice is bond funds in an IRA, high-div stock funds in a Roth, and low-div stock funds in a taxable account. Where possible, at least.
If I didn't have a Roth, then I guess I'd first place my growth stocks in taxable and my bonds in IRA, then place my value stock allocation wherever I still had room. And consider Roth conversions. But maybe someone else has a better method in mind.
@captsorghum good formula. I have VTI, QQQM in taxable account and VUG in ROTH. SCHD, VANGUARD BALANCED in Trad IRA
In retirement I found that I reached a point where growth no longer matters. I have no desire to leave anything to anyone and have enough in my accounts to live out my life comfortably with zero growth. Consequently I see no reason to invest for growth. Personally I feel no need to invest in stocks at all and would certainly never buy any sort of "fund". I also don't subscribe to the constant growth philosophy. When you have enough, why do you need more?
@@_-Karl-_ Inflation doesn't bother me much since I don't buy a lot. The cost of what I buy is a small part of my income.
You don’t have any charity or friends or family that could use some help? It’s not all about you. Look at the bigger picture.
@@kevinconners3685 The last thing I want to do is leave anything to my dysfunctional family. There are a couple charities, but not enough. In this case it is about us since we will be making the decisions.
@@kevinconners3685 I definitely don't want anything to go to my family and my friends don't need anything. As far as charities go, I simply do not deal with "corporate" charities. I will leave some money to a couple of small entities that I think will benefit, but that doesn't amount to much. Finally it is actually all about me since I will be making the decisions.
I know reducing taxes is important for sure, but it almost seems that you would rather make 5% tax free gain verses a 10% taxable gain.
Very good video, examples and excellent explanation Eric. I'll have to watch this a few times to digest it all. Thanks for your great content, it's always a learning experience. Larry, Central Valley, Ca.
Great update.
@8:53 Rule #3: Don't Reinvest Dividends (Automatically)
a. Spend the dividend as part of your retirement income.
b. Use dividends strategically to rebalance.
And, now, here's yet another reason:
c. Create new stock lots with these unreinvested dividend proceeds.
It's a royal pain to circumvent the IRS's average cost default accounting rules. But, by creating new stock lots with these freed-up funds, you effectively reset your basis for this tranche to zero -- effectively achieving the IRS's LIFO accounting option without the horrendous paperwork a co-mingled account would otherwise require. Food for thought ...
It is possible to systematically beat the market averages by a bit, if you invest in individual stocks in a field where you have professional expertise.
Great video. I learned something new.
Target funds have benefit of "hands-off"
Sure, at a cost. If simplicity is worth that cost to you, great. I'm just pointing out the cost
You are the GOAT! I'm living by your advice. Thank you.
I hold some SCHD in my taxable account. Reevaluating after watching this. Thanks for the info!
@@Brent233 me too. May sell and move to VTI
SCHD is an ETF instead of a mutual fund. Based on this video, that's a bonus.
If you plan to retire soon, the income is better than having to sell shares of a non dividend holding, especially during down years. And if you are planning on retiring before 59.5, dividend producing assets in your taxable account will help since you'll pay a penalty to touch your retirement assets.
And if you bought it at a good price, like in the fall of 2023, you have a better than average dividend, creating a great yield on cost.
If you have to pay any taxes, long term Capital gains tax is the best. A number of people quality for 0% capital gains tax depending on their income.
Look at your specific details before making changes. This is probably not an issue.