Monday, January 19, 2015

Taxable investments

The early days of January heralded a fruitful and efficient year to come for the Dina-Sebastien household.  First, I cajoled/bullied Sebastien into agreeing to limit our things for an 8-day trip to Belize to one carry-on sized suitcase, one regular backpack, and one tiny backpack.  The feeling of accomplishment (woo traveling lightly and theoretically gracefully), I can’t even tell you.  Felt even better when we were crammed on a bus from Belize City to Orange Walk Town, about 1.5 hours (47 bumpy miles) on one of the yellow school busses that serves the country’s transportation needs, our bags on our laps and under our feet.  Before our trip, with some trepidation, we also dumped 10K into a taxable investment account.  Which, much to my dismay but not surprise, was down to about $9,500 on our return (And back to $9,819 today).  Ah, the joys of the risks and fluctuations inherent in investing.

But follow me, my friends, into the sexy and slightly terrifying world of joint investment accounts.  Maybe it’s just me?  I think there’s something sexy about a joint investment account, knowing that we’re partners in this together, and that the other person could potentially abscond with ALL THE MONEYS, but we trust that totally won’t happen.  (Love is crazy, y’all.)  There can come a time in one’s life when individual tax-advantaged accounts can’t hold all your investments.  Maybe this is because you invest a lot, and you max out your 401k ($18K for 2015), and your IRA ($5,500 for 2015), HSA, whatever else.  Or maybe you’re in the unfortunate position of not having access to these accounts with special tax benefits, like we are.  As a grad student and engineer contractor with  less than 1,000 hours worked, we don’t have 401ks (me for as long as I’m a student, him until he works all those hours and some other BS conditions).  So we’ve just got the IRAs, and are in the fortunate position of having cash on hand.  That, combined with our mutual laziness and fondness for the options money can give you, means we figured it was high time to put that money to work for us (as an investment that grows and yields dividends and compounds oh so beautifully).

The actual logistics were pretty straight-forward.  The important thing to note is that a taxable account … means you have to pay taxes on your earnings (theoretically this is true of your normal bank account too - we all should be reporting and paying taxes on those dollars of interest we make).  So this affects what you choose to invest in - you want to be efficient and avoid paying taxes if you can.  This is actually the primary reason I’m afraid of taxable accounts - I don’t, like most people, really understand the US tax code. (Though I’m pretty psyched to learn about it and write blog posts that only (and maybe not even) my mother will bother reading.)  When you pay taxes on your investment gains, short-term capital gains (assets held < 1 year) are taxed at your marginal bracket, while long-term capital gains are taxed at a lower rate.  Stock index funds or ETFs are a good, tax-efficient choice because stocks are traded relatively infrequently, which means they rack up fewer "realized gains" than actively managed funds do.  Our index fund of choice?  VSTAX (Vanguard Total Stock Market), which gives you exposure to all of the US stock market, including small-cap (small size), mid-cap (medium size), large-cap (large size), growth (growing quickly) and value (low price relative to earnings) stocks.

The amount we contributed was calculated - 10K is the amount necessary to qualify for Admiral Shares which give you an expense ratio of .05% (vs .17% if you invest less than 10K).  We’re paying $5 in expenses for each $10,000 in investments -  95% lower than the average expense ratio of funds with similar holdings.  Good news, since the less you pay in expenses, the more you get to keep, and the more of your money that keeps compounding.  The other good news, since we’re very lazy?  We’ve set up automatic monthly contributions to said taxable account (and put our Roth IRA contributions on auto-pilot).  It’s actually a bit underwhelming how little time being a decent investor requires (says she while lazing on the couch and eating lindt truffles).

Do you invest in taxable accounts?  If not, what’s stopping you?  How terrifying (or not) is the idea of a joint investment account?  Which lindt truffle is the greatest? (Saved the best question for last.)

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