A Portfolio Question (Tax Minimization) / Tax Efficient Investing Prospects

Over at Bogleheads we read a discussion:

A Portfolio Question (Tax Minimization)

by R Wins » Fri Jun 07, 2013 12:18 am

Hi, I am seeking to implement Dan Solin's supersmart portfolio by investing in the following funds amongst a taxable account with 146k and a tax sheltered account (Roth) with 65k. I would like to stay close to the allocations listed while also minimizing taxes:

Vanguard Large Cap Index Admiral Fund (VLCAX) 16%
Vanguard Value Index Admiral Fund (VVIAX) 16%
Vanguard Small Cap Value ETF (VBR) 16%
Vanguard REIT Index Admiral Fund (VGSLX) 8%
IShares MSCI EAFE Value ETF (EFV) 8%
IShares MSCI EAFE Small Cap ETF (SCZ) 8%
Vanguard Emerging Markets Stock Index Admiral Fund (VEMAX) 8%
IShares Barclays Short Treasury Bond ETF (SHV) 10%
SPDR Barclays Capital Short-Term International Treasury Bond ETF (BWZ) 10%

Any advice you could provide on how to split these funds between the taxable and tax sheltered account to minimize taxes would be helpful. Thanks!

R Wins

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Joined: 13 Jan 2013

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Re: A Portfolio Question (Tax Minimization)

by grabiner » Sat Jun 08, 2013 3:48 pm

Welcome to the forum!

Wiki article link: Principles of Tax-Efficient Fund Placement

This would be my estimated order of tax-efficiency, from most efficient (should be in taxable) to least efficent).

Temporarily tax-efficient (you'll need to switch these to tax-deferred if rates rise, but current yields are near zero):
IShares Barclays Short Treasury Bond ETF (SHV) 10%
SPDR Barclays Capital Short-Term International Treasury Bond ETF (BWZ) 10%

Tax-efficient:
IShares MSCI EAFE Small Cap ETF (SCZ) 8%
Vanguard Emerging Markets Stock Index Admiral Fund (VEMAX) 8%
Vanguard Large Cap Index Admiral Fund (VLCAX) 16%

Moderately tax-efficient:
Vanguard Small Cap Value ETF (VBR) 16%
IShares MSCI EAFE Value ETF (EFV) 8%
Vanguard Value Index Admiral Fund (VVIAX) 16%

Must be in IRA:
Vanguard REIT Index Admiral Fund (VGSLX) 8%

You might also consider VSS (Vanguard FTSE All-World Ex-US Small-Cap) instead of SCZ: it's less expensive, and it includes small-cap emerging markets, which Vanguard's emerging markets fund doesn't have.

 David Grabiner

grabiner

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Re: A Portfolio Question (Tax Minimization)

by R Wins » Sun Jun 09, 2013 12:17 am

Thank you! Your advice is invaluable and very helpful. Initially, I plan to invest 100% in stock funds and wait for interest rates to rise before investing in bonds since prices will likely fall. I will consider VSS instead of SCZ, especially since it has a lower expense ratio and covers small-cap emerging markets. I believe SCZ (small/blend) was recommended because it was more consistent with the Fama/French theory of small/value versus VSS which is small/growth.

I am new to this forum and can clearly see there is a wealth of experience and knowledge. I have a lot to learn...