Tax Treatment of Brokerage Account Interest Over Time, Etc.

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Topic Author
Eda44
Posts: 65
Joined: Fri Jan 08, 2021 5:54 pm

Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by Eda44 »

Hello,

I have ~ $90K sitting in savings and I am preparing to transfer about $70K to a taxable brokerage account and invest in VTSAX or something similar. A quick background, all my tax-deferred accounts are maxed out annually (401K, backdoor Roth IRA, HSA) and some of the aforementioned savings will be set aside to fund a 2023 backdoor Roth and a I-bond, as I also did last year. Emergency account has already been established separately, and I will be taking advantage of CD rates with a different savings account and a short term CD or some laddering, also. And, I will be renting for the foreseeable future (HCOL area) *but* have been lightly considering inexpensive investment properties elsewhere, which wouldn’t come to fruition for at least a couple years.

1. Is there anything glaringly terrible about this brokerage decision? I’ve been dragging my feet on the taxable brokerage account because, well, taxes, and I’m nervous about the amount. It’s been untouched for years, yet I feel it will be “locked in” once I use it in the taxable account. I want to make sure I’m not missing anything.

2. Are broad-market ETFs or mutual funds preferable for the taxable brokerage account? I’m not married to VTSAX, but just rather familiar with it. Any disadvantages to selling either if I have to in the future?

3. I would appreciate if someone could help me understand tax treatment of interest earned in a brokerage account after 1 year, assuming I buy and hold/nothing is sold. Am I correct to assume I pay capital gains on interest the same way each year, and it’s based on AGI and taxed as income, irrespective of how long the funds are held? I believe I would be taxed at 15% based on my AGI, which falls under $150K.

4. Also, with a baby due Nov. 2023, aside from a future 529, are there any specific investment funds I should consider setting money aside for in 2023 before funding the taxable brokerage account? I-bonds for the kid, for example, or something more favorable?

Thank you so much in advance! I have greatly appreciated the excellent advice from this community.
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by FiveK »

1 & 4. Looks to be a good plan. It is a logical progression as suggested by the Prioritizing investments wiki article.

2. VTSAX would be fine. See Tax-efficient fund placement - Bogleheads for more.

3. Interest and short term capital gains earned in a brokerage account are taxed exactly the same as interest earned in a bank account. Doesn't matter how long you've had the bank account, and it doesn't matter how long you've had the brokerage investments. It is also taxed the same as W-2 income (except no FICA taxes) so the tax rate will depend on your total income.
Qualified dividends earned in a brokerage account, along with any long term capital gains, are taxed at different rates, such as the 15% you mention.
Topic Author
Eda44
Posts: 65
Joined: Fri Jan 08, 2021 5:54 pm

Re: Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by Eda44 »

Thanks so much!
JayDee37
Posts: 263
Joined: Sun Jan 17, 2021 1:08 pm
Location: California

Re: Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by JayDee37 »

Congrats on finally making the leap into a taxable investment account!

Several years back I received a windfall and let it sit in a HYSA for much longer than I should have for reasons similar to yours--I didn't really know enough about investing beyond retirement accounts and took a lot time to educate myself. I'm glad I found Bogleheads and now feel much more knowledgeable and able to manage my investment portfolio across taxable and retirement accounts since I don't do anything fancy, mostly index funds and chill.

I have found that investing in broad-based index mutual funds/ETFs in taxable has not created much of an issue re: taxes. With current HYSA yields, if you buy and hold VTSAX in taxable you will probably have LESS taxable income than you would if you left the money in your savings account. I believe the general rule of thumb for dividends from VTSAX is to estimate that you will receive ~2% of the account value each year. And then, as FiveK says, some portion of that amount will be "qualified" dividends taxed at your cap gains rate instead of your marginal income tax rate.

If you want to be a little more precise, you can go to the VTSAX page on the Vanguard website and take a look at their distribution history. That tells you the precise amount of the dividends per share paid out each quarter.

Investing in a taxable account also opens up the opportunity of tax-loss harvesting. TLH can be a little tricky to manage across multiple accounts, however, so make sure you feel very confident about that whole process before trying it! But once you figure it out it can be helpful. I usually generate my annual Roth IRA contribution by selling from my taxable holdings, and most years I am able to use tax-loss harvesting to ensure that this sale will be tax-neutral for me. I am also able to offset $3000/year of regular income with tax loss harvesting. So that can be another benefit of a taxable brokerage, once you feel comfortable with it.
Tell me, what is it you plan to do with your one wild and precious life? | ~Mary Oliver
Topic Author
Eda44
Posts: 65
Joined: Fri Jan 08, 2021 5:54 pm

Re: Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by Eda44 »

This is so reassuring — thank you so much for sharing! What resources did you find helpful when getting started with the practical aspects of tax-loss harvesting? I’m intrigued that you’re able to fund your Roth IRA that way.
billfromct
Posts: 2046
Joined: Tue Dec 03, 2013 8:05 am

Re: Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by billfromct »

Of course we don’t invest with the goal to “cost loss harvest” (TLH), but when we have stock market corrections or bear markets, we have the opportunity to do so, but when you TLH, you lower your cost basis on whatever investment you purchase with that money, so you still have “to pay the piper”, but if managed properly, it could be to your advantage.

I’ve been with Vanguard for about 35 years & have never TLHed, but as I sell some mutual fund shares to raise cash, I will take TLHing into account.

One thing you need to be aware of is cost basis calculations when selling mutual funds.

I believe Vanguard provides 5 cost basis methods:
-average cost (the default if you don’t choose another one)
-minimum tax
-highest in, first out
-first in, first out
-specific ID (most recommended by bogleheads)

You should google “cost basis methods at Vanguard” to see how you want to set up tax reporting for your taxable brokerage account.

bill
Topic Author
Eda44
Posts: 65
Joined: Fri Jan 08, 2021 5:54 pm

Re: Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by Eda44 »

Thank you!
placeholder
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Re: Tax Treatment of Brokerage Account Interest Over Time, Etc.

Post by placeholder »

I would look into a brokerage transfer bonus as well which won't be huge with that level of funding but is still free money: viewtopic.php?t=196884
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