Hotscot

Oh yes, absolutely.

kodokan

Interesting discussion about where the markets might go - I too have been driving myself mad trying to figure this.

We've actually got about $60k to find a home for now that the dust's settled on our recent home purchase, and we've finished onshoring money that we still had in the UK/ Switzerland from our previous existence, so as to opt out of 8938 and FBAR going forward (on the 'well, if we don't have to do the forms, we can't be getting it wrong about the pensions' basis ).

To balance risk, I'm splitting it half between investing, and half between paying a lump off the mortgage, for a guaranteed 3% return and the emotional satisfaction.

I'm thinking of $10k each in Vanguard Total Stock as mentioned above, and Vanguard Wellesley (VWIAX), which is 2/3 bond and 1/3 stock; it's a fund I'll want to own at some point anyway. Then watch for 6 months or so, then put the other 10k into whichever of those is doing worse at the time.

Otherwise I'll just sit on the sidelines for ever, waiting for the 'right' time. If I put the money in and they drop 10-20%, sure, that'll be annoying, but I'll grimly view it as a buying opportunity!

kodokan

One more essential thing I learned this week, which I'll include in case others are as stupid as me... I'd been assuming that the $17,500 max contribution for the 401(k) was the total allowed into the fund each year, from both the employee and employer (I think in the flurry of 'just moved over, it's all so new!' last year, I got it confused with how the HSA works, where we had to adjust our contributions to allow for the $1k bung that the employer put in to stop everyone moaning about going to a high deductible system).

But of course that's not the case - the $17,500 is just our bit, and the employer's matching goes on top. I'm very pleased I discovered this in time to fix this year, mostly, and max it out properly going forward. It would've been beyond annoying to have learned that in 10 years' time, having wasted all that tax.

Michael

kodokan,

I believe it was a post to you that I incorrectly stated that there was a maximum of $14,000 per person gift allowed each year without paying gift taxes. Although that is partially true in that gifts of $14,000 or less per person per year aren't reported to the IRS but the portion above $14,000 plus authorized educational and medical expenses must be reported on form 709 but there normally won't be any taxes owed due to the current lifetime exclusion of $5.25 million (same as the exclusion for estate taxes). Therefore current US law allows a person to give away his/her estate up to $5.25 million plus $14,000 per year per individual plus authorized medical and educational expenses prior to death without incurring federal gift taxes.

http://www.schwab.com/public/schwab/...tate_plan.html

nun

Wellesley is an excellent fund. However, it's high bond allocation means that it isn't very tax efficient. It is best held in a tax deferred account like an IRA. I would stick to broad market equity indexes in your taxable accounts.

robin1234

And folks over the age of 50 can contribute more, $23,000 being the limit for 2013.

kodokan

*beams at nun's approval of my fund-picking prowess*

Yes, I read about the bond/ tax thing. So... let's see if I've got this straight... The Wellesley fund might return me 2.75% income, of which say 2% is from the bond bit and 0.75% is from the stocks bit. So we'd be taxed 15% on the bit from stock dividends and marginal rate of income tax on the bonds bit; is that how it works?

And there might be some small capital gains from stock turnover; would there be some from bond turnover too, and how might that be taxed? Would that just be normal capital gains rates?

I'm inclined to put $10k in it anyway, as a hedge against being all in stocks; the bond fund in hubby's 401(k) is quite expensive. I don't imagine the tax on $10k will be too horrific..? And then it's up and running ready to move money in and out of, as circumstances take me.

Michael

Normally US stock fund dividends are taxed at the 15% rate. Bond interest will be taxed at your highest marginal tax rate since it is income on top of your normal income.
A good bond manager should be able to offset gains that may possibly occur within the fund by purchasing bonds above and below par value that have the same maturity date. Although an intermediate bond fund normally doesn't hold the bonds to maturity but may sell them when there is only a few years remaining to maturity, normally the bonds purchased above par value decreases towards par value and the bonds purchased below par value increases towards par value as time passes still offsetting each other. Normally if you do get hit by gains within the fund, the gain is distributed at year end and usually taxed at the long term capital gains rate and the NAV is reduced by the distribution amount.

For example if the current yield for a 7 year AAA bond is 2.75%, the bond manager could purchase a 2.50% coupon bond below par value and a 3.00% coupon bond above par value. This reduces the risk of realized gains occurring within the fund if bonds have to be sold due to redemptions. Also as the year progresses and gains are occurring in the fund, the fund manager then can sell more bonds that declined in value then increased in value during redemptions offsetting any gain that may have previously occurred in the fund.

nun

Using specific lot as a tax planning strategy and then holding income producing funds in a taxable account seems contradictory to me, but it depends on how you set up your asset allocation. The world won't stop if you keep Wellesley in a taxable account....in fact you'll probably see nice returns if thy are similar to the past ones.....but is is not a tax efficient strategy for the very reason Michael points out.

kodokan

'Spose it's the difference in the amounts - the Total Stock will be the main taxable retirement fund, so the opportunity to milk the tax breaks will be worth the effort; having to pay marginal rate tax on $1-200 doesn't seem too bad.

But you're right, it's not the purist approach, is it? I'll revisit the overall portfolio, and see if there are alternatives. Trouble is the tax-deferred funds are a bit rubbish as regards choices and charges. Shall build a spreadsheet...

kodokan

Ok, taken the plunge - have opened a Vanguard account and put the first $10k into VTSAX.

I'm not buying Wellesley - I re-analysed, and not only is nun right about the tax thing, but I don't really need the bond allocation anyway (have got some other bond funds in pensions, plus a couple of final salary pensions which John Bogle says I can consider the value of as bond funds). When I thought about WHY exactly I wanted that fund, it turned out not to be because of balance of risk - I'm quite comfortable about stocks generally - but because I want to be able to track, rebalance, and tinker about, and I can't do that with one fund, can I?

So I've promised myself that once I've built up a core holding in VTSAX, then I can have a small 'fun money' pot to punt about with. The urge to buy Wellesley has now mysteriously subsided.

Thanks for all the useful discussion; it's really increased my knowledge and helped me think through the issues. I'll hang fire for a bit with my remaining money - I'm guessing that once my Vanguard account is up and running properly (got to validate the bank account, etc) then I'll be able to have a money account there to put it in, ready for purchases.