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Taking Shelter

Sanjib Saha, 4:03 am ET

EARLIER THIS YEAR, I swapped the Vanguard Short-Term Bond Index Fund (symbol: VBIPX) in my 401(k) for an inflation-indexed Treasury ETF (VTIP). The trade worked out well: The replacement fund has since fared better, thanks to this year’s accelerating inflation.

To buy the inflation-indexed ETF, I had to open a brokerage subaccount within my company’s retirement plan—a feature some 401(k)s offer, though these “brokerage windows” typically aren’t heavily promoted for fear employees will end up trading too much. Initially, I didn’t think I’d use the subaccount for anything else. But I’ve come to realize that the flexibility to choose from thousands of securities in a tax-deferred account could come in handy.

For instance, in my regular taxable account, I had bought income-producing funds that own real estate investment trusts (REITs). I like the generous dividends, but not the tax bill, even after the 20% deduction. I wish I owned these in my 401(k) subaccount instead. That way, I could defer the taxes, instead of footing the bill during my high-earning years.

Another problem I often face: headaches caused by tax-loss harvesting. In the past, I’d sell an investment to book a loss and use the proceeds to buy a similar, but not substantially identical, investment to preserve my market exposure. I’d then look to switch back to the original investment after the 30-day wash-sale period. But if the temporary investment had gone up in the intervening period, often I’d be reluctant to reverse course. The reason: The short-term capital gain from the sale would partly negate the harvested tax loss. Result? I’d be stuck with the temporary fund indefinitely.

Now, I can simply buy the temporary fund in the tax-deferred subaccount instead of my taxable account. Even if the temporary fund climbs in value, I can sell it after 30 days—with no taxes owed—and then buy back the original investment in my taxable account.

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An
An
5 months ago

How do you get the money from the tax-loss fund in taxable into your tax-deferred account, and the reverse? Do you have cash sitting in each account?

Last edited 5 months ago by An
Sanjib Saha
Sanjib Saha
5 months ago
Reply to  An

Thanks for asking, An. Yes, for this to work, I need to have cash in the tax-deferred account (which I do as most of my cash-like investment is there). I also need some extra cash in the taxable account in case the original fund is up before I buy it. The extra cash is for the difference of the sell price and the new buy price.

Golda Meir's Liaison w/ Egypt American Optimist
Golda Meir's Liaison w/ Egypt American Optimist
5 months ago

Do you have an opinion on Vanguard Balanced Index fund (VBIAX). It targets a 60/40 mix of stocks and bonds. It lagged the S&P, but suffers much less during down spikes. Three year average return of 14.65%

Sanjib Saha
Sanjib Saha
5 months ago

VBIAX is a Morningstar Silver-rated, low-cost fund and there’s a lot to like about it. It has no exposure to international stocks – so it probably isn’t a true representative of a conventional 60/40 portfolio. Given that it has only 60% money allocated to stocks, its performance is expected to lag the US Total Stock performance proportionately. For the same reason, the 40% money in non-stock would absorb the shock as well.

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