I finally, actually, really did it.

Man it’s been a long time coming. Over two years ago I wrote a blog post asking people to share their best short term investment strategies. Once you’ve saved for the present (emergency fund and savings account) and saved for the far future (retirement) there is only one thing left to do, save for the near future. Crap. I haven’t done that.

Like at all. 

Practice what you preach right? Just before the election I opened up a taxable investment account with Wells Fargo. Why Wells Fargo you ask? My Roth IRA balance qualifies me for a PMA account. PMA accounts have some pretty epic perks, one being that customers can make 100 free trades each year. No other banking product, that I’m aware of, offers something similar.

Anywhoozle, after my taxable investment account was created (took about 15 minutes on the phone), I moved $2,000 in to it. It sat there for two weeks. Untouched. I was scared.

Did I really want to pull the trigger?

Was I ready to start investing for the short-term? I can stomach a loss when I know my money has 40 years to play catch up, but can I really handle a tumble when I’ll want/need that money much sooner? Only one way to find out, right?

Yesterday, I bought $2,000 worth of VTWNX, a Vanguard retirement mutual fund. Yeah, that’s right, to accomplish my plan of investing outside of retirement, I invested in a retirement fund. Suck on that Personal Finance gurus. 

My actual retirement accounts are all stocks, since no other investment has outperformed the stock market over the long haul. For my short-term investments, however, I wasn’t willing to stomach as much risk.

This 2020 fund is balanced as follows….

As each year passes, the asset allocation of bonds will increase, and stocks will decrease. Each year my investments become more and more conservative, since my time horizon to needing that money decreases. How sexy is that? Answer: Extremely Sexy.

Now I obviously don’t expect to earn a 10% return on my taxable investments, but it sure as heck should beat the crappy 0.8% my “high yield” savings account pays. After we’ve reached our $100,000 savings goal, we’ll likely begin shoveling virtually all of our discretionary income each month in to this fund, and/or a few other funds like it.

It’s scary and exciting all at the same time, but man does it feel good to be proactive about saving for my 30’s and 40’s. How many of you have taxable investment accounts? Aside from retirement accounts, what investments tickle your fancy (real estate, creating passive income, buying gold, etc)?

18 thoughts on “I finally, actually, really did it.

  1. We invested about $10k in taxable accounts last year. It’s been going well since the markets are doing well. We did a mostly low-risk funds (stocks and bonds) and a couple stock market index funds and have about a 7% return to date, which I’m very happy with. We barely paid any tax on it last year as our capital gains rate was 0%, so that was awesome but not expected to continue.

  2. Most of my assests are in a taxable account (I invested a lot there before learning about a ROTH). My sister is pretty pleased with Wells Fargo, but if you are only investing in Vanguard products, you could have opened an account with them and all their ETFs are free to trade within your account (I believe Schwab and Fideilty have similar programs). But I also understand wanting to have all your accounts in one place, it is just easier to track.

  3. Hey Ninja, congrats on opening the taxable account. I have mine with Vanguard and invest in a mix of ETFs and common stocks. Bank of America offers something similar to the Well Fargo PMA, but just a quick heads, it seems like you need to have at least $25,000 in CASH (not securities) to qualify for the PMA, as I had also looked into this. Based on the wording below, the “bank deposit accounts” would not include securities you’ve purchased in your IRA. You may want to open up a CD with Wells Fargo (or make sure you hold $25k cash between accounts) to ensure you don’t get charged the $30 monthly fee.

    “The PMA Package is free of the $30 monthly service fee for each month that one of the requirements in statement-ending balances are met: $25,000 or more in qualifying linked bank deposit accounts (checking, savings, time accounts (CDs), FDIC-insured IRAs); “

    • You are partially correct.

      We do have PMA status. This last summer Wells Fargo upped the threshold for qualifying for a PMA account. The information you provided is for the NEW standard.

      We opened our account back in 2010, when the requirement was as follows:

      “$25,000 or more in any combination of qualifying linked banking, brokerage (available through Wells Fargo Advisors, LLC) and credit balances (including 10% of mortgage balances, certain mortgages not eligible).”

      Fortunately, we were grandfathered in so we are still PMA eligible, even though our current Roth IRA and checking combination doesn’t meet their minimum threshold.

      GOOD CATCH!

  4. Haha, sometimes with money my wife and I do the same thing. We decide to pull the trigger on something, move the money to where it needs to go, and then… nothing. We wait. Days, months. And then finally get hte balls to do what we said we’d do! Lol, change is tough. Good job though, man, good job.

  5. All investments are ultimately taxable, the only question being when and what rates. You’ve chosen a Vanguard target fund with a relatively quick maturity, as opposed to one with a later date where the glide path to more bonds might not start for a few decades yet. I can understand your desire for stability in a near-term fund, but I don’t see that you’ve considered the tax implications. The usual advice for taxable accounts is to use them mainly for stocks, as you thereby benefit from the reduced long-term capital gains rate when you sell. Some people recommend keeping all your bonds in a tax-deferred account and your international in a taxable account if you can. And within the taxable account, if you have both capital gains and capital losses in a given year, you can offset your gains against your losses. If you only have capital losses, you can deduct up to $3000 a year and carry the excess to the following year. (When you withdraw from a tax-deferred account like an IRA, on the other hand, all that money is taxed as ordinary income.) See for instance: http://www.fairmark.com/capgain/capgain.htm

    I’m honestly not sure what the tax implications are of holding a fund of funds (which is what your VTWNX is: a hybrid of Total Stock, Total Bond, and Total International) in a taxable account. Is it all taxed at the preferred capital gains rate, or as ordinary income? You might want to ask someone like Mike Piper if this is the best tax strategy for this kind of account. Disclaimer: I guarantee nothing about the information in this post until you talk to a professional.

    • This is getting a little more advanced, but I agree with you, Larry.

      Ninja, from a tax perspective, you may be better off putting your stocks in the taxable account (taxed at the capital gains rate ~15% [FOR NOW]) and any bonds in the retirement account. The idea being you avoid the higher tax rate on the bonds (taxed as ordinary income). Right now you are under-utilizing the tax-advantaged nature of the retirement accounts by only saving the capital gains rate on the stocks when you could be saving the ordinary income rate on the bonds.

      Obviously this depends on how much you have allocated to each stocks and bonds. But regardless, it is likely inefficient to hold any taxable bonds outside of your retirement accounts.

      Food for thought.

      • From the Bogleheads wiki:

        http://www.bogleheads.org/wiki/Vanguard_Target_Retirement_Funds#Detailed_fund_allocations
        Because the TR Funds all have an increasing and/or large allocation to taxable bonds, they are most suitable for investors holding their entire portfolios in tax-advantaged accounts. They also might be appropriate for individuals with entirely taxable portfolios, if there is high likelihood of a low tax bracket for the intended holding period, which is usually a lifetime. Investors having both taxable and tax-advantaged accounts are generally better served by splitting their equity and fixed income allocations, concentrating on tax-efficient asset location.

        http://www.bogleheads.org/wiki/Vanguard_Target_Retirement_Funds_(2005-2025)_Tax_Distributions
        The Vanguard Target Retirement Funds (TRFs) are questionable candidates for placement in taxable accounts. . . . The funds are often recommended as a simple indexed one fund solution for implementing a three-fund portfolio consisting of total market domestic stock, international stock, and investment grade bond funds. . . . TRFs are usually singled out for use in tax deferred (employer provided or individual Traditional IRA accounts) or tax-free (Roth IRA) accounts.

        • This makes my head hurt. I’m going to email Piper and see what his two cents are. I know a TRF is not the ideal way to manage short term investments, but I like to keep it simple. Even though this may not be the most tax efficient method, it is definitely one of the most brainless. Haha. I’ll see what Piper says and if I’m gonna get hammered with taxes then I’ll switch the money around, but if the tax implications are low then I’ll probably just stick with it.

          • Bear in mind that if it’s a small amount it won’t matter much, and I doubt Mike would say otherwise. Just something to consider if you plan to expand your taxable investments considerably.

            • Yeah definitely. The thought right now is to save $100k liquid. Use probably $70kish to buy a house. Up to another $10kish for renovations, furniture, etc we may want to do immediately. Keep $20k cash for the emergency fund.

              Don’t have a desire to keep more liquid at this point and imagine by March 80ish% of our discretionary income will be go to our short term investing account. Which would mean around $2,000 at current savings levels.

  6. I am also tired of my .08% “high yield” taxable savings account. However my investment strategy involves 50 powerball numbers I just bought :). Good luck to us both!

  7. On a side note, I am getting anxious on getting that new house (mini mansion). Makes me ponder the inverse relationship of a home’s price and corresponding interest rate. Once I buy my house with the low rate, will the value of my house go down if interest rates rise???

  8. I have one! I have had it for 25+ years. I like the idea of multiple income streams and the growth is at the capital gains rate. I paid the taxes on the growth as the years go by. I have a 403B, IRA and Roth iRA too. I also had income property, collectibles, antiques, art, and commodities.

  9. Congrats on getting the ball rolling with that, it’s something I’ve been talking about for a couple years and just haven’t done yet, although I’m looking for more of a day-trading account rather than something like that. My wife gave me the ok, and I’ve always done well in stock market sims throughout college, but there’s just something about it being my own real money…..

  10. I dig simplicity, so I definitely see why an all-in-one fund would be desirable. 🙂

    As far as the tax-efficiency or inefficiency, there are a few issues to consider.

    First, as mentioned above, if you have to hold something in a taxable account, for the last several years it’s been advantageous to hold stocks in the taxable account and bonds in the tax-sheltered accounts (that is, IRA, 401k, TSP, etc.) due to the fact that dividends and long-term capital gains have been taxed at advantageous rates. However, that’s no longer so clear cut given that:

    Interest rates are super low right now, so the amount of return lost due to having bonds in a taxable account is fairly slim, and
    It’s not an entirely sure thing that the current tax rates for dividends and LTCGs will be extended.

    Another (probably more important) issue to consider is that you lose out on some tax-loss harvesting opportunities by using a fund-of-funds. That is, there will be times when one of the underlying funds falls in value, but the other two underlying holdings (or at least one of them) are doing fine, meaning that either a) you don’t get to tax-loss harvest or b) the tax-loss that you harvest is smaller than it would be if you held the underlying funds individually.

    Next up is the question of muni bonds. Right now, Vanguard’s Intermediate-Term Tax-Exempt Fund has almost the same yield as their Total Bond Market Fund (1.47% as opposed to 1.50%), but it’s entirely exempt from Federal income taxes. So if you’re going to be holding bonds in a taxable account, it’s likely that you could achieve higher returns with tax-exempt bonds than with the taxable bonds in the Target Retirement funds, even after accounting for the fact that the muni fund has somewhat higher credit risk than the Total Bond fund, about 2/3 of which is made up of Treasuries.

    Finally, there’s the foreign tax credit. When mutual funds pay taxes to foreign governments (which they do, when they hold international stocks), they’re allowed a credit (which gets passed through to the fund’s shareholders) for the taxes paid. Funds-of-funds, however, are not eligible for this credit. David Grabiner of the Bogleheads forum has, http://www.bogleheads.org/forum/viewtopic.php?p=1297083#p1297083" estimated the value of the foreign tax credit for Vanguard’s Total International Stock Index Fund to be about 0.2% per year.

    So you have a lot of little things that when taken together can lead to a meaningful increase in percentage return.

    Of course, it’s dollars (not percentages) that matter. And everybody will have a different point at which they decide the additional dollars are worth the additional hours.

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