Monday, September 30, 2013

International Fund, Dividends and Tax Efficiency

Over at Bogleheads we read: International Fund, Dividends and Tax Efficiency

International Fund, Dividends and Tax Efficiency

Postby Griffin » Sun Sep 29, 2013 10:18 am
I have both a taxable and account that contain Vanguard Total Stock and Vanguard Total International Stock funds. Is there any reason to favor either the domestic or international stocks in my taxable account? It seems that recently the international fund has paid higher dividends. Is this generally true? If so, is this offset by the foreign tax credit?
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Re: International Fund, Dividends and Tax Efficiency

Postby livesoft » Sun Sep 29, 2013 10:47 am
Thanks for bringing this up as I need to make a decision on whether to purchase VTI or VXUS in my taxable account (I will adjust holdings in tax-advantaged to reflect my changes in taxable.)

I'm not sure I have the most up-to-date info, but the answer will depend on your tax bracket. My spreadsheet calculations suggests that in 2012 the tax hit to VTI was 0.32% and to VXUS was 0.44%. This assumes that the qualified dividend fraction for VXUS was 0.69 which could be wrong since I don't own this fund*.

Should the 0.12% difference matter to anyone? After all, one can overcome the 0.12% difference by which hour they purchased their shares.

In any event VWO (large-cap emerging markets index) appears to be more tax efficient than either VTI or VXUS. Or one can use VEA which has 100% qualified dividends. So a combo of VEA + VWO would be tax-efficient, but would neglect small-cap foreign (so use VSS in tax-advantaged) and Canada (use EWC).

*If you send me the info for Total Int'l from your 1099DIV, then I can plug in the numbers. Or point to a link. I usedhttps://advisors.vanguard.com/VGApp/iip ... tlFund2012
Last edited by livesoft on Sun Sep 29, 2013 11:24 am, edited 1 time in total.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: International Fund, Dividends and Tax Efficiency

Postby House Blend » Sun Sep 29, 2013 11:22 am
I agree that it is likely to depend on your Fed and state tax bracket.

I take a look back at the tax costs every year, and have found the tax differential for me to be as follows:

CODE: SELECT ALL
2009    8bp
2010  -13bp
2011    7bp
2012   15bp

That is, 3 out of 4 years, I've lost less to taxes from TSM than from TISM.

One could go back further, but note that VG Total International has been eligible for the Foreign Tax Credit only since 2009. And qualified dividends didn't exist before (I think) 2003. Also, perhaps related to the switch to the CRSP index, Vanguard reports that through August this year, only ~94% of the TSM dividends have been qualified. So TSM may be a bit costlier this year.

FWIW, if I could switch today without paying capital gains, I would put Total International in tax-advantaged (employer offers Institutional shares). But I don't feel strongly enough about this cost to stop adding new money to TISM in taxable.

US Small Blend is another category that may be more tax-efficient than either TSM or TISM. It will depend on the yield, the percentage of QDI, and your Fed and state tax brackets. (It also has a greater danger of cap gain distributions.)
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Re: International Fund, Dividends and Tax Efficiency

Postby bsteiner » Sun Sep 29, 2013 11:31 am
House Blend wrote:...if I could switch today without paying capital gains, I would put Total International in tax-advantaged (employer offers Institutional shares).


On the one hand, a larger percentage of the dividends in the U.S. index are qualified dividends than in the international. On the other hand, if you have the international in the taxable account, you can claim a foreign tax credit for the foreign taxes withheld on the dividends, which you can't if you have the international in the retirement plan, you can't.

Has anyone compared the results taking that into account?
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Re: International Fund, Dividends and Tax Efficiency

Postby House Blend » Sun Sep 29, 2013 11:34 am
bsteiner wrote:Has anyone compared the results taking that into account?

Maybe it wasn't clear from my post, but my calculations do take that into account.

In any case, you can't quantify the results without knowing your Fed and state tax rates.
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Re: International Fund, Dividends and Tax Efficiency

Postby Doc » Sun Sep 29, 2013 12:00 pm
livesoft wrote:Should the 0.12% difference matter to anyone? After all, one can overcome the 0.12% difference by which hour they purchased their shares.


Exactly, this is all just noise. In the 25% you may be better off with both equities in tax advantage and putting short bonds in taxable and intermediate bonds in tax advantaged.

But back to the original question. Assuming the international and domestic both have the same total return the slightly higher LTCG rate and therefore greater benefit from tax deferment gives another slight benefit to domestic in taxable but it still doesn't matter enough to worry about.
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Re: International Fund, Dividends and Tax Efficiency

Postby livesoft » Sun Sep 29, 2013 12:47 pm
bsteiner wrote:Has anyone compared the results taking that into account?

Like House Blend's numbers, the numbers I presented take all this into account, too.

@Doc, a short-term bond fund will present fewer (and unmeaningful) tax-loss harvesting opportunities compared to using equities in taxable.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: International Fund, Dividends and Tax Efficiency

Postby Blue » Sun Sep 29, 2013 2:39 pm
The bogleheads wiki, under Vanguard/distributions has incredible detail and spreadsheets estimating annual expected tax cost per Vanguard fund by marginal tax rate. I think it is very helpful.
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Re: International Fund, Dividends and Tax Efficiency

Postby Doc » Sun Sep 29, 2013 3:01 pm
livesoft wrote:@Doc, a short-term bond fund will present fewer (and unmeaningful) tax-loss harvesting opportunities compared to using equities in taxable.


The tax loss harvesting if any is accounted for either by a decrease in total return and/or by lengthening the effective time of the investment. These both reduce the effective LTCG tax rate. The effective LTCG rate can be much lower than the statutory rate but you can't count both the "tax loss harvesting" and a lower effective LTCG rate. That's double counting and can only be justified in Washington DC.

The exception to this is if you can take tax loss harvesting against ordinary income. But at $3k a year the amount is not very significant. 

FWIW this year all my tax loss harvesting this has been from FI not equities. :annoyed
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