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Investing in a taxable account if in 15% tax backet.

edited February 2013 in Fund Discussions
Many retirees are in 15% tax bracket because they do not have taxable earned income and this rule applies:

"0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets"

To me this means, as long as I can remain in 15%, I can invest for total return, including qualified dividends.Any suggestions of funds(conservative to moderate) might be a good holding in a taxable account. No need to necessarily be tax efficient. After deductions, I expect to be able to have about $50,000 I can earn and remain in 15% bracket.


  • Staying in that 15% will probably mean you will have to have a very frugal and minimalistic life unless you are drawing most of your income something like Roth IRA.
  • ron
    edited February 2013
    no, at age 79 and with SS and RMD we only use the SS & RMD for expenses. No debt and not very frugal. Not drawing from Roth. Taxable income in 15% bracket can be $72,500. We are well below that.
  • edited February 2013
    Be very careful walking the tax tightrope. I manage a fairly large taxable account myself & you must pay attention to your cushion within your tax brackets.

    Lets pretend that the 15% tax rate stops at 40,000

    Your income from work is 30,000

    Your investment income (long-term gains and dividend income) is 15,000

    In this situation your "qualified" investment income has pushed you above the 15% rate. It is my understanding that any "qualified" money above that rate will be taxed at the higher level. Also, any bond/money market ( not municipal tax friendly types ) are taxed as ordinary income.

    Please keep in mind that all tax friendly investments are on the chopping block.....and i'm no enrolled agent.

    Edit: Before i invest in any dividend producing fund ( inside my taxable account ) I always call the fund company. I ask questions like: Last year what percentage of the funds income was qualified/ what percantage was income from other sources. You might be very surprised.
  • edited February 2013
    Those are all interesting observations. The average social security benefit at the start of 2012 was about $14760 per year. I used my tax software and assumed a household took the standard deduction. Quick and dirty calculations suggest a single person could receive the average social security benefit and about $33000 of qualified dividends before he/she would pay any federal tax. That equates to about $48,000 per year in total household income. A married couple, each receiving the average social security benefit, could receive about $45000 in qualified dividend income before paying any federal income tax. That equates to about $74,500 of total household income. The median household income in the U.S. in 2011 was $50,054. So, that's one definition of typical. It looks like "minimalistic life" and plenty of income are definitely in the eyes of the beholder if my numbers are correct.
  • I didn't mean to start an in depth discussion pertaing to taxes. Thats for you and your accountant or advisor. I was simply referring to retirees without taxable earned income who know they are in the 15% tax bracket.
  • Reply to @ron: Perpetual Bull made an important point. You have to be careful about what you mean by "in the 15% bracket".

    "Normally" (I use that term very cautiously):-), when one speaks of being in a tax bracket, one is talking about the tax rate that one would pay on the next dollar of ordinary income (e.g. wages, taxable interest). One usually doesn't include cap gains/qualified dividends.

    If one has $72,400 of "ordinary income", and $10,000 of cap gains/qualified dividends, then one is still in the 15% tax bracket by this common parlance. Yet nearly all of the cap gains are taxed at 15%, not 0%, because they push the total taxable income over $72,500.

    These calculations have the bizarre effect of creating a 30% tax bracket. Say you have $70K in ordinary income, and $2500 in cap gains. The cap gains are taxed at 0%. Now add $1 to your ordinary income. That $1 is taxed at 15%, but you've also pushed $1 of cap gains over the $72,500 line, so that $1 in cap gains is now taxed at 15% also. So for that extra $1 in income, you're paying 30c extra in taxes. That's a 30% marginal rate!

    On the other hand, if your total taxable income comes in under $72,500, you should think about doing a Roth conversion that brings your total income just up to the $72,500 limit. You cap gains/qualified divs will still get taxed at 0%, your conversion will get taxed at 15%, and you'll have reduced future RMDs (giving you the ability to generate more qualified divs at 0% tax rate).

    Specifically, you wrote that you have about $50K buffer. If you only generate $35K in qualified divs and cap gains, then you might want to convert $15K of IRAs. Alternatively, you could sell (and immediately repurchase) securities to generate a $15K cap gain. That would get taxed at 0%, and reset your basis so that in the future, you'd see $15K less gain when you "really" sold your securities.
  • Reply to @Investor: Aside from drawing cash from Roths, there are sources of cash where the taxable amount is less than the gross amount - nondeductible IRAs, capital gains assuming nonzero cost basis), annuity payments (but not withdrawals, where income comes out before principal).
  • Regarding funds - generally look for large cap value/blend funds that are moderately tax efficient. (If they're very inefficient, they're spinning off nonqualified dividends and interest, while you'd like to get qualified dividends).

    A fund that comes immediately to mind is Vanguard Dividend Appreciation (VDAIX, VIG). Using this as a template, I did a quick search for domestic equity fund with tax cost ratio under 0.9% and yield over 2%, and below average risk. M* shows only 43 distinct funds.

    Ignoring the load funds, the ones that mortals can't get (e.g. GMO), a few pop out:
    American Century Equity Income (TWEIX)
    Cullen High Dividend Equity (CHDEX)
    JPMorgan Equity Income A (OIEIX) - NL via Schwab
    Oseterweis (OSTFX) - a mid cap blend fund
    Parnassus Equity Income (PRBLX)
    Vanguard Dividend Growth (VDIGX)
    Vanguard Equity Income (VEIPX, VEIRX)

    Though it doesn't quite pass this screen, I'd add T. Rowe Price Equity Income (PRFDX). It's an average risk fund.
  • I second the nomination of VDAIX/VIG. Many of the other funds mentioned are very good as well. One of my favorites in this area is FVD. There are also several other newer funds built for the risk averse investor.
  • Reply to @Investor:
    In addition to msf's points, muni bond funds can be generating very healthy returns. Everyone's situation is different.
  • Reply to @msf:
    Bravo, msf. And this can be done by folk who don't employ accountants or tax advisors.
  • I appreciate the responses all have made. Very helpful to me. I will be using an ETF I have in IRA's, Schwab U.S. Dividend Equity SCHD, Perhaps will use others as well
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