• Dan

    Great post, I am a big believer in a taxable account that never gets taxed. Remember, after 31 days, you can exchange back to the Total market fund from the S&P 500 if that is your preferred fund. When stock markets are up all year, you can likely harvest losses in your bond funds the same way.

    • Good points, Dan.

      I prefer to TLH only into a fund I’m willing to keep indefinitely. You can switch back after 31 days, but if the new fund has appreciated at all, you’ll be canceling out some of your harvested losses by taking in the switch back to the original fund.

      If the newly purchased fund has remained flat or dropped, by all means exchange back into the original fund.

      The more volatile the fund, the more likely you are to have TLH opportunities. I’ve heard this as an argument for keeping emerging markets in taxable (and you also get the foreign tax credit).

      The taxable fund isn’t entirely tax-free (I paid ~$6,000 in taxes on $20,000+ in dividends last year), but it represents a very small percentage of the total. I believe my “tax drag” on the account is about 0.58% and that will be cut dramatically when I retire and drop my income.


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  • I never knew about the step-up in basis at death. Sounds like that could, in some instances, factor into clever estate planning. Like, if you have a child in a higher tax bracket than you who would appreciate immediate access to the money and you want to give them that, moving money from a tax-advantaged account to a taxable account when you’re literally on your deathbed may be a smart move. I wonder if this is common advice, or if there is some kind of downside I’m missing?

    • I guess it depends. You wouldn’t want to do that with a large tax-deferred account because you’d realize all that income and pay tax on it. A Roth can be passed along to heirs and remain tax-free.

      A “stretch IRA” can make sense for some.


  • A little more than half of our total investments were in our taxable account before we retired early. A lot of people don’t think about it, but having most of your money locked into retirement accounts (at least unavailable without a penalty or special situation) prevents an early retirement situation.

    • While there are quite a few ways to access retirement assets, there’s none simpler than collecting dividends or selling shares in a taxable account.ways to access retirement assets Like you, more than half of our assets are now in our taxable account and I have no intention of touching the Roth or 401(K) money “early,” other than to convert more of it to Roth.


  • Gary E Kolb

    Anybody who thinks taxes will go down in retirement is living with your head in the sand. One only has to look at the spend crazy congress along with mounting federal deficit to realize some one will have to pay. That’s why now is the time to convert to roth, although I look for that to be taken away from us in the future too.

    • That depends, Gary. If you’re in a lower tax bracket now (few physicians are) and you expect to work many more years (I don’t), your assertion may be true.

      But for me and many of my readers, marginal tax rates are almost certain to drop dramatically if we retire in the next few years.

      Why pay >40% to convert now when some free conversions will be available soon enough?


  • Working as a Tax CPA for high net worth clients, I can tell you that the majority of the returns I’ve seen include multiple taxable investment accounts. Many of these clients use a separate account for their tax-free investments, which can make it easier to manage as far as withdrawals (your CPA will likely also appreciate it). Great post, thanks for sharing!

    • Thanks, Ryan. Can you elaborate on what you mean by using a separate account for tax-free investments?

      • What I meant was that it seems many of the clients open two or more separate investment accounts with the same brokerage and keep their tax-free investments (muni bonds, etc.) isolated to one account. I’m not positive on the exact reasoning, but I would imagine it makes it easier to understand the tax implications of any withdrawals.

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