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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.
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?
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.
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%
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.