How am I doing (portfolio) with respect to tax efficiency?

We read the following discussion at Bogelheads: 

How am I doing with respect to tax efficiency?

by ikuttath » Tue Jan 28, 2014 7:39 pm

Hello all,

Looking to improve my portfolio. Please take a look.

Emergency funds: 
I keep about $5,000 in checking/saving as emergency fund, which is about 2 months 

worth of expenses. Taxable account is the backup for job loss or other emergencies.

Debt:
Mortgage on primary home $187,065 @3.75, 28 yrs remaining
Mortgage on rental 1 $98,393 @5.125, 30 yrs remaining
Mortgate on rental 2 $118,400 @4.625, 30 yrs remaining

No other debts except some 0%APR CCs, for which I already have a repayment 

plan in place. All CCs that are used for day-to-day expenses are paid in full monthly.

Tax Filing Status: MFJ 
Tax Rate: 25% federal
State of Residence: UT
Age: 48 (Started earning only at 35, didn't start investing until 2 yrs later and then 

had a period of unemployment), spouse: 39
Desired Asset allocation: 90% stocks / 10% bonds 
Desired International allocation: 30% of stocks

Size of current portfolio: low-to-mid six figures.

Current retirement assets

Taxable
2.05% Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) (0.33%)
6.10% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05%)
1.03% Vanguard Total World Stock Index Fund Investor Shares (VTWSX) (0.35%)
1.62% Vanguard Value Index Fund Admiral Shares (VVIAX) (0.10%)
3.18% TD Ameritrade (all stocks)
3.11% ESPP

Her 401(K)
8.57% T.Rowe 2055 Active Trust (Premixed Portfolio) (??) (0.58%)
5.87% MSIF Capital Growth (MSEQX) (Large U.S. Equity) (MSEQX) (0.72%)
8.84% CRM Mid Cap Value (CRIMX) (Mid U.S. Equity) (CRIMX) (0.82%)
8.67% Jennison Small Cap (Small U.S. Equity) (??) (1.00%)
9.83% Dodge & Cox Intl (DODFX) (International) (DODFX) (0.64%)
1.68% Company Stock

Her Rollover IRA at Fidelity
0.49% Cash
0.27% Barrick Gold Corp (ABX)
1.71% Fidelity Contrafund (FCNTX) (0.74%)
2.12% Fidelity Magellan (FMAGX) (0.51%)
6.14% Fidelity Select Software & Computer (FSCSX) (0.82%)
5.14% Fidelity Select Medical Equip&System (FSMEX) (0.83%)
1.41% Infosys Ltd (INFY)
1.82% Mcdonalds Corp (MCD)

Her HSA
0.31% Cash
2.07% American Funds Growth Fnd -F (GFAFX) (0.71%) (will check if there are any

 better funds with lower ER)

Her Roth IRA at Vanguard
3.56% Vanguard Target Retirement 2060 Fund (VTTSX) (0.18%)
1.40% Vanguard Total World Stock Index Fund Investor Shares (VTWSX) (0.35%)

Her Roth IRA at TD Ameritrade
9.90% all stocks

529 for child who is Junior in college
3.10% Equity—10% International 0.22%

Have some cash and a paid off house overseas, just as a backup.

Contributions

New annual Contributions 
$17,500 her 401k
$5,500 her Roth IRA
$5,500 his Roth IRA
$18,000 taxable (for retirement & short term goals such as emergency fund and 

rental repairs)
$5,550 H.S.A
$9,500 her 401k (after tax)

Available funds in her 401(k): (he doesn't have a 401(k) option)

Premixed Portfolio 
T.Rowe Ret Inc Active Trust (0.58%)
T.Rowe 2010 Active Trust (0.58%)
T.Rowe 2015 Active Trust (0.58%)
T.Rowe 2020 Active Trust (0.58%)
T.Rowe 2025 Active Trust (0.58%)
T.Rowe 2030 Active Trust (0.58%)
T.Rowe 2035 Active Trust (0.58%)
T.Rowe 2040 Active Trust (0.58%)
T.Rowe 2045 Active Trust (0.58%)
T.Rowe 2050 Active Trust (0.58%)
T.Rowe 2055 Active Trust (0.58%)

GIC/Stable Value 
Wells Fargo Stable Return Fund (0.48%)

Bond 
PIMCO Total Return (PTTRX) (0.46%)

Large U.S. Equity 
Dodge & Cox Stock (DODGX) (0.52%)
Mellon S&P 500 Index (0.05%)
MSIF Capital Growth (MSEQX) (0.72%)
Victory Large Cap (0.51%)

Mid U.S. Equity 
CRM Mid Cap Value (CRIMX) (0.82%)

Small U.S. Equity 
Jennison Small Cap (1.00%)

International 
Dodge & Cox Intl (DODFX) (0.64%)
Pyramis Select International (0.72%)


Areas where I need advice:
1. Is my portfolio tax efficient? If not, how can I make it more tax efficient without adding 

more bonds to tax deferred accounts? Since I got a late start in investing, I am deliberately 

swaying more to equities right now.

2. Is there a lot of overlap? Can I combine any within the same account? 

I am gradually transitioning from stocks to MF in Roth and from TD Ameritrade to Vanguard.

3. Expected cash flow from the rentals is about $820 a month (this is included in the 

annual contribution above) which I am planning to put in the taxable account with 

Vanguard in the form of mutual fund. I may not need to pull from this unless there 

is a major repair. Which fund would be appropriate for this?

I am looking for suggestions/comments.

Thank you.

ikuttath

Posts: 6

Joined: 28 Jan 2014

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Re: How am I doing w.r.t tax efficiency?

by Calm Man » Tue Jan 28, 2014 7:44 pm

It seems to me that tax efficiency of your stock and bond portfolio is not really the main 

question because it looks like your investments are dominated by real estate. And if the

 real estate holdings are throwing off $800 of positive cash flow, I assume that translates 

into taxable income. And that would be fully taxable and the least tax efficient investment 

there could be. This does not mean it is a bad investment, just that you are not focused 

on tax efficiency with the largest investments you have. So why are you focused on the tax 

efficiency of a smaller part of the portfolio? You also seem to be exposed to tremendous 

focused risk in one or two rental properties. I will be interested if others see this similarly 

to me or if I am all wet....

Calm Man

Posts: 1848

Joined: 19 Sep 2012

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Re: How am I doing w.r.t tax efficiency?

by ikuttath » Tue Jan 28, 2014 8:01 pm

Thank you Calm Man for the comment. I agree real estate is a big part of my portfolio at 

the moment. Rental real estate is about 19% of my total investments. But if you see my 

planned annual contributions, I am not contributing any more into rental real estate. So,

 that % is going to go down each year. Out of the remaining 80%, I am sure there is a lot 

of room for improvement w.r.t tax efficiency.

ikuttath

Posts: 6

Joined: 28 Jan 2014

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Re: How am I doing w.r.t tax efficiency?

by retiredjg » Tue Jan 28, 2014 8:06 pm

ikuttath wrote:1. Is my portfolio tax efficient? If not, how can I make it more tax efficient without

adding more bonds to tax deferred accounts?

Tax efficiency is accomplished by using only tax-efficient funds in your taxable account. 

Yours is not terrible, but it could be improved. For example, the Value Index, if you need

 it at all, probably should not be in taxable. And maybe not the emerging markets.

But I think you are focusing on the wrong question. Tax-efficiency is important, but not 

as important as some other things. For example...

Since I got a late start in investing, I am deliberately swaying more to equities right now.

I seriously question this approach. Especially at your age. Many of us believe that all 

portfolios need at least 20% bonds. Some say 25%. And at your age, I think 90/10

 is somewhere on the "are you nuts?" scale. At 48 years old, 28% bonds would be 

the minimum I'd suggest, 30% just to work with a round number.

2. Is there a lot of overlap? Can I combine any within the same account? I am

gradually transitioning from stocks to MF in Roth and from TD Ameritrade to Vanguard.

Yes. You could actually use a makeover, in my opinion. This portfolio could be 

streamlined and simplified considerably. I can't make a suggestion today, but if

someone else doesn't do it, I can probably get to it tomorrow.

3. Expected cash flow from the rentals is about $820 a month (this is included in

the annual contribution above) which I am planning to put in the taxable account

with Vanguard in the form of mutual fund. I may not need to pull from this unless

there is a major repair. Which fund would be appropriate for this?

There will be a major repair and it will come at the worst possible time and both rental 

repairs will probably happen at the same time. 

Your rental property needs an emergency fund of probably $5k - $10K (to cover furnace/AC 

on both at the same time) mostly invested in something very safe such as a short term bond, 

or CDs or money market.

Link to Asking Portfolio Questions

retiredjg

Posts: 15796

Joined: 10 Jan 2008

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Re: How am I doing w.r.t tax efficiency?

by ikuttath » Tue Jan 28, 2014 9:34 pm

Thank you retiredjg for the insight.

For example, the Value Index, if you need it at all, probably should not be in taxable.

And maybe not the emerging markets.

So, if I needed to have some value funds, where would I add it and which fund would I 

choose? I thought having emerging markets in the taxable lets me take advantage of the 

foreign tax paid. 

Yes. You could actually use a makeover, in my opinion. This portfolio could be

streamlined and simplified considerably. I can't make a suggestion today, but if

someone else doesn't do it, I can probably get to it tomorrow.

I am open to it.

Your rental property needs an emergency fund of probably $5k - $10K

I do have some cash reserve. CC will cover the rest which will give me at least a

 month to liquidate something from my taxable to cover. I am willing to take that risk.

ikuttath

Posts: 6

Joined: 28 Jan 2014

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Re: How am I doing w.r.t tax efficiency?

by retiredjg » Tue Jan 28, 2014 11:40 pm

ikuttath wrote:Thank you retiredjg for the insight.

For example, the Value Index, if you need it at all, probably should not be in taxable.

And maybe not the emerging markets.

So, if I needed to have some value funds, where would I add it and which fund would

I choose? I thought having emerging markets in the taxable lets me take advantage of

the foreign tax paid.

"Needed to have some value funds"? Can you explain to me why you need to have some 

value funds and whether any of your other holdings contain value funds? Also, why do you 

need the emerging markets fund? Do any of your other holdings contain emerging markets?

I'm not meaning to be argumentative, but it appears that you may have latched onto a 

few ideas that get tossed around from time to time, but you don't really understand the 

basis for the ideas or how to implement them. So you have ended up with a jumble of

 things that overlap in all kinds of ways - resulting in not really knowing what you have or

 why you have it.

Until you know what is in the funds and until you know why and how to implement some of the

 alternatives that people sometimes discuss, it would probably be better to simplify to 

something like the 3 fund portfolio (so often discussed here) and perhaps add on some 

of these other things at a later time when you actually know what you are doing and why 

you are doing it. Or maybe not add on some of these other things - there is no assurance

 they will help you have more money in the end.

Please forgive if this sounds harsh as I don't mean to be. But it appears to me that you

 are so intent on making up for past mistakes (starting later than you should have) that 

you are taking all manner of short cuts in hopes of "making up lost time". 

Unfortunately, shortcuts in investing have a way of backfiring. I think you need to 

re-evaluate and get on a more reasonable and stable course. You need to be more 

focused on how much you are saving (the most important factor in your success) and

 less focused on some of these other things that may help or may hurt in the long run.

You say the "expected" cash flow from the rentals is $820 a month. How long have you 

held these rental houses?

If you can save $61k a year, are you sure you are in the 25% marginal tax bracket? 

Did you guess or did you calculate it?

retiredjg

Posts: 15796

Joined: 10 Jan 2008

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Re: How am I doing w.r.t tax efficiency?

by retiredjg » Wed Jan 29, 2014 12:56 pm

Here's a preliminary stab at a simplified portfolio which eliminates overlap and reduces 

costs. As you can see, it is much simpler than what you currently have. 



Taxable 17.09%
6.10% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05%)
4.7% Vanguard Total International Index
3.18% TD Ameritrade (all stocks)
3.11% ESPP

Her 401(K) 43.46%
15.78% Mellon S&P 500 Index (0.05%)
1.68% Company Stock
26% PIMCO Total Return (PTTRX) (0.46%)

Her Rollover IRA at Fidelity 19.1%
11.34% Spartan Global Except US Index FSGDX (good fund but missing small caps 

so try to migrate your international holding to Vanguard as you can)

Her HSA 2.38%
0.31% Cash
2.07% American Funds Growth Fnd -F (GFAFX) (0.71%) (will check if there are any 

better funds with lower ER)

Her Roth IRA at Vanguard 4.96%
4.96 Vanguard Total International Index

Her Roth IRA at TD Ameritrade 9.9%
9.90% all stocks

529 for child who is Junior in college 3.1%
3.10% Cash or short term bonds

This portfolio idea is roughly 70% stocks, 30% bonds and other fixed assets, with 30% 

of stocks (21% of portfolio) in international. Right now, it is missing the mid and small cap 

US stocks because there is really no place to put them because you've got a lot of space 

encumbered by individual stock. The lack of mid and small cap can be eliminated over time

 with new contributions.

Individual stocks - you have too much of your money (almost 18% of your portfolio) tied up

 in individual stock. These holdings carry more risk than mutual funds. You don't have to sell

them, but if you are willing to sell that 9.9% block at TD Ameritrade and roll the money

 into your Roth at Vanguard, things would be much more flexible. 

If you don't sell the stocks at TD, you do not need to buy any more individual stock for a 

long time - let the percentage drop as your portfolio grows. Try to keep the amount of 

individual stock at or under 10% of your portfolio.

I "sold" stuff in your taxable account. That may or may not be wise depending on the taxes

 involved. Do you have large gains in those funds? Any losses? Are these recent purchases 

(short term gains carry a big tax bite).

We also need to nail down your tax bracket. Compare your taxable income (line 43 on 

Form 1040) to this chart to see what your marginal tax bracket

is.http://www.moneychimp.com/features/tax_brackets.htm

You'll notice I did not make a suggestion at 90/10. That's a reckless approach in

 my opinion...but I don't know you, I could be wrong. How were you invested during

 the 2008 crash and what did you do when the bottom fell out?

I won't go into how to invest your contributions at this point. We can discuss that after

you decide how you feel about this type of portfolio.