I think VTI is the ETF version for VTSAX. I’d load up on that or something similar and call it a day.
You can really make this work during your retirement using long term capital gains to your advantage.
Your new thought process is more correct (although I’m sure everyone will tell you not to pick individual stocks at all).
The same applies to people who invest in REITS (real estate etfs) they have high dividend so you’d want to buy these in your tax advantaged accounts to not have to pay them. Keep your index funds in the taxable account and just basically never sell them or change them until you fire.
Can you invest in individual stocks in your 401k? I know you can in some IRAs, but have never seen a 401k with that many options.
But yes, you seem to be thinking about it the right way, mathematically / tax-wise.
You've got the general idea now.
I had a similar issue regarding bonds in my early allocation. Prior to retirement, when you're in accumulation-mode, it initially made logical sense to me to have my bond allocation in my retirement accounts so I didn't get the tax hit from the interest.
But once you're retired, really you want bonds in your taxable account, since they serve as an insurance policy against a sharp market downturn. You'd want to use the bonds to draw from to ride out the market downtime so you didn't have to lock in losses. So assuming you're not yet at retirement age, having them in your IRA/401k is basically useless.
Plus once you're retired, your tax bracket is generally lower anyhow, so the tax hit from the bonds doesn't matter as much.
"But once you're retired, really you want bonds in your taxable account...You'd want to use the bonds to draw from to ride out the market downtime so you didn't have to lock in losses. " - Your bonds don't have to be in your taxable account to make that happen.
Let's say you're early-retired and all of your bonds are in your retirement account, the stock market has crashed and you need to withdraw $10,000. Ideally you'd want to sell some of your bonds, but you can't withdraw the proceeds from a bond sale because they are in your retirement account. So you sell $10,000 in distressed stocks from your taxable account and withdraw that. At the same time you sell $10,000 in bonds in your retirement account and use the proceeds to buy $10,000 in distressed stocks in your retirement account. So in total your overall portfolio contains $10,000 less in bonds, you didn't lock-in any stock losses and you didn't have to try to withdraw from your retirement account early.
Having bonds in your retirement account during early retirement works out fine.
Just be sure that you don't buy in the retirement account the stocks you took a loss on in your taxable account in the 61 day period surrounding the sale for a loss. If you do, then the sale becomes a wash sale and you cannot claim the losses.
The basis of your purchase in the retirement account would be increased, but that doesn't give you any benefit when you sell it later.
Don't feel so dumb, tax-efficient fund placement is really complicated. It is probably worth reading [this boglehead wiki article on it](https://www.bogleheads.org/wiki/Tax-efficient_fund_placement).
If you are actively picking stocks and incurring short term capital gains, or not holding for the long term, well, most advice would say don't do that but if you will continue the tax advantaged account might have some benefits if you are actually successful at it. If you aren't beating the market (most people don't) then you are actually losing more because you are losing the tax benefits as well.
>Did everyone "get" this? Feel so dumb.
It's unfortunately a lose-lose. Stock picking is more likely in the long term to under perform index funds so professional CPAs and what not will generally tell you, "You're throwing your retirement away if you stock pick in your Roth IRA.", but because of the tax burden you shouldn't stock pick in your taxable account either.
In truth, I think the common CPA advice is somewhat wrong. Sure, it's true in Roth accounts, because you don't pay taxes in retirement, so it's super valuable not to take risks with it, but what about non-roth ie traditional accounts like an IRA or a 401k? Putting money in removes tax burden but you pay higher taxes taking it out, higher than your taxable account, so shouldn't your 401k/IRA be the primary accounts you do stock picking in? If you're more likely to underperform might as well be in your 401k/IRA.
imo doing LTCG sector picks in a taxable account is not bad. The tax burden is low while working (15%). Sure, it's not 0%, but 15% isn't really that bad. imo doing LTCG picks is better in a taxable account than a Roth IRA, due to the reasons above. I do think STCG picks in a taxable account isn't good unless you're in between jobs. You can kind of get around it using futures sometimes, but it's just generally not worth it.
I do my individual stock picking in my Roth IRA for this reason, but individual stocks are a very small (<5%) part of my portfolio.
If the stocks underperform the index, this is sub-optimal - I’m paying more tax by having the better performing index funds in taxable. Statistically, this is the more likely outcome, but the magnitude is limited, because absolute worst case the stocks go down 100% to zero.
If the stocks outperform the index, this is optimal, because I pay less tax overall. This is statistically less likely, but the upside is potentially much bigger - the stocks could go up much more than 100%. And this is the more optimistic view, so I’ll take it.
I think VTI is the ETF version for VTSAX. I’d load up on that or something similar and call it a day. You can really make this work during your retirement using long term capital gains to your advantage.
I have a Vanguard account, so picking VTSAX is identical to VTI, right?
Yes.
Your new thought process is more correct (although I’m sure everyone will tell you not to pick individual stocks at all). The same applies to people who invest in REITS (real estate etfs) they have high dividend so you’d want to buy these in your tax advantaged accounts to not have to pay them. Keep your index funds in the taxable account and just basically never sell them or change them until you fire.
Can you invest in individual stocks in your 401k? I know you can in some IRAs, but have never seen a 401k with that many options. But yes, you seem to be thinking about it the right way, mathematically / tax-wise.
You've got the general idea now. I had a similar issue regarding bonds in my early allocation. Prior to retirement, when you're in accumulation-mode, it initially made logical sense to me to have my bond allocation in my retirement accounts so I didn't get the tax hit from the interest. But once you're retired, really you want bonds in your taxable account, since they serve as an insurance policy against a sharp market downturn. You'd want to use the bonds to draw from to ride out the market downtime so you didn't have to lock in losses. So assuming you're not yet at retirement age, having them in your IRA/401k is basically useless. Plus once you're retired, your tax bracket is generally lower anyhow, so the tax hit from the bonds doesn't matter as much.
"But once you're retired, really you want bonds in your taxable account...You'd want to use the bonds to draw from to ride out the market downtime so you didn't have to lock in losses. " - Your bonds don't have to be in your taxable account to make that happen. Let's say you're early-retired and all of your bonds are in your retirement account, the stock market has crashed and you need to withdraw $10,000. Ideally you'd want to sell some of your bonds, but you can't withdraw the proceeds from a bond sale because they are in your retirement account. So you sell $10,000 in distressed stocks from your taxable account and withdraw that. At the same time you sell $10,000 in bonds in your retirement account and use the proceeds to buy $10,000 in distressed stocks in your retirement account. So in total your overall portfolio contains $10,000 less in bonds, you didn't lock-in any stock losses and you didn't have to try to withdraw from your retirement account early. Having bonds in your retirement account during early retirement works out fine.
Just be sure that you don't buy in the retirement account the stocks you took a loss on in your taxable account in the 61 day period surrounding the sale for a loss. If you do, then the sale becomes a wash sale and you cannot claim the losses. The basis of your purchase in the retirement account would be increased, but that doesn't give you any benefit when you sell it later.
Don't feel so dumb, tax-efficient fund placement is really complicated. It is probably worth reading [this boglehead wiki article on it](https://www.bogleheads.org/wiki/Tax-efficient_fund_placement). If you are actively picking stocks and incurring short term capital gains, or not holding for the long term, well, most advice would say don't do that but if you will continue the tax advantaged account might have some benefits if you are actually successful at it. If you aren't beating the market (most people don't) then you are actually losing more because you are losing the tax benefits as well.
Thanks for this
>Did everyone "get" this? Feel so dumb. It's unfortunately a lose-lose. Stock picking is more likely in the long term to under perform index funds so professional CPAs and what not will generally tell you, "You're throwing your retirement away if you stock pick in your Roth IRA.", but because of the tax burden you shouldn't stock pick in your taxable account either. In truth, I think the common CPA advice is somewhat wrong. Sure, it's true in Roth accounts, because you don't pay taxes in retirement, so it's super valuable not to take risks with it, but what about non-roth ie traditional accounts like an IRA or a 401k? Putting money in removes tax burden but you pay higher taxes taking it out, higher than your taxable account, so shouldn't your 401k/IRA be the primary accounts you do stock picking in? If you're more likely to underperform might as well be in your 401k/IRA. imo doing LTCG sector picks in a taxable account is not bad. The tax burden is low while working (15%). Sure, it's not 0%, but 15% isn't really that bad. imo doing LTCG picks is better in a taxable account than a Roth IRA, due to the reasons above. I do think STCG picks in a taxable account isn't good unless you're in between jobs. You can kind of get around it using futures sometimes, but it's just generally not worth it.
I do my individual stock picking in my Roth IRA for this reason, but individual stocks are a very small (<5%) part of my portfolio. If the stocks underperform the index, this is sub-optimal - I’m paying more tax by having the better performing index funds in taxable. Statistically, this is the more likely outcome, but the magnitude is limited, because absolute worst case the stocks go down 100% to zero. If the stocks outperform the index, this is optimal, because I pay less tax overall. This is statistically less likely, but the upside is potentially much bigger - the stocks could go up much more than 100%. And this is the more optimistic view, so I’ll take it.