Thursday, February 13, 2014

Selling Good Funds For More Tax Efficiency

Over at a Morningstar forum we came across the following discussion:   Selling Good Funds For More Tax Efficiency

02-11-2014, 11:38 AM | Post #3515738
Currently, I hold a few very good funds in taxable accounts that are not particularly tax efficient, such as VWENX, BERIX and FLPSX. However, I hold quite a lot of money in each and I am getting hit hard with capital gains/dividends distributions each year. I'm curious about your views on exchanging these funds for more tax efficient funds such as VTMFX to be held in taxable accounts. I would have to rearrange my tax-deferred accounts and purchase BERIX, etc in them instead.
Bear in mind that by selling those funds in taxable accounts, I would incur quite a lot of capital gains as they have really increased in value over the years. Damned if I do....
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    Re: Selling Good Funds For More Tax Efficiency
    02-11-2014, 2:32 PM | Post #3515808
    A quick search shows that VWENX spanks VTMFX over 1,3,5,10 and 15 years to the tune of :
    1. 13.70 to 10.29
    3. 10.32 to 9.40
    5. 14.59 to 11.97
    10 7.88 to 6.01
    15 7.57 to 5.40
    Couple in the fact that you would incur significant capital gains to sell your VWENX and it seems unlikely that this would be a good idea.
    A more complete calcution could take into account your distribution from VWENX and the taxes paid. Given the total distribution of 4.346 in 2013 (6.65% of the asset price) it is possible that the after tax numbers could be close. But only after you have paid a massive capital gains tax to make the change.
    E-m
    ail
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    Re: Selling Good Funds For More Tax Efficiency
    02-11-2014, 4:24 PM | Post #3515855
    Personally, I never allow tax consideration to influence my sell decision, especially if the fund is doing well. Nothing wrong in paying uncle Sam

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      Re: Selling Good Funds For More Tax Efficiency
      02-11-2014, 7:07 PM | Post #3515904


      BEmanuel:

      A quick search shows that VWENX spanks VTMFX over 1,3,5,10 and 15 years to the tune of :
      1. 13.70 to 10.29
      3. 10.32 to 9.40
      5. 14.59 to 11.97
      10 7.88 to 6.01
      15 7.57 to 5.40
      Couple in the fact that you would incur significant capital gains to sell your VWENX and it seems unlikely that this would be a good idea.
      A more complete calcution could take into account your distribution from VWENX and the taxes paid. Given the total distribution of 4.346 in 2013 (6.65% of the asset price) it is possible that the after tax numbers could be close. But only after you have paid a massive capital gains tax to make the change.




      I'm going to check and see if I can compare after-tax returns for both.
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        Re: Selling Good Funds For More Tax Efficiency
        02-11-2014, 8:14 PM | Post #3515920
        You can go here and get Tax-Adjusted returns for VTMFX and then use the "Compare" button to select others and um, compare. It appears that VWENX smokes VTMFX on a tax-adjusted basis.
        http://performance.morningstar.com/fund/tax-analysis.action?t=VTMFX&region=usa&culture=en-US

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          Re: Selling Good Funds For More Tax Efficiency
          02-11-2014, 10:01 PM | Post #3515944
          You don't have any capital losses to offset the gains?
          Are you subject to the 3.8% Medicare investor tax or the AMT? Are your state taxes high?
          Maybe you can at least stop dividend reinvestment into VWENX and reinvest the dividends after tax into VTMX?
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            Re: Selling Good Funds For More Tax Efficiency
            02-11-2014, 10:23 PM | Post #3515946


            dragonpat:

            You don't have any capital losses to offset the gains?
            Are you subject to the 3.8% Medicare investor tax or the AMT? Are your state taxes high?
            Maybe you can at least stop dividend reinvestment into VWENX and reinvest the dividends after tax into VTMX?




            I do not have any capital losses to offset the gains at this point. Nothing substantial at least. I have not been subject to the AMT in the past. I live in Mass., so the state income tax rate is 5.25% at this time.
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              Re: Selling Good Funds For More Tax Efficiency
              23 hours, 49 minutes ago | Post #3516000


              willt65:

              Currently, I hold a few very good funds in taxable accounts that are not particularly tax efficient, such as VWENX, BERIX and FLPSX. However, I hold quite a lot of money in each and I am getting hit hard with capital gains/dividends distributions each year. I'm curious about your views on exchanging these funds for more tax efficient funds such as VTMFX to be held in taxable accounts. I would have to rearrange my tax-deferred accounts and purchase BERIX, etc in them instead.
              Bear in mind that by selling those funds in taxable accounts, I would incur quite a lot of capital gains as they have really increased in value over the years. Damned if I do....


              I'm in the process of doing something similar. I own VWIAX in a taxable account (because I was stupid at the time I bought it) and am going to sell it off over the next 4 years before I have to take RMD from an IRA. The 4 year period lessens the capital gain in any single year.
              Although I own VTMFX (tax managed), I think I will put the proceeds into 50-50 VYM (dividend etf) and VWIUX (muni). The VYM/VWIUX mix has a higher yield than VTMFX and probably outperforms over time.
              Modenesi
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                Re: Selling Good Funds For More Tax Efficiency
                23 hours, 14 minutes ago | Post #3516008
                modenesi:



                I'm in the process of doing something similar. I own VWIAX in a taxable account (because I was stupid at the time I bought it) and am going to sell it off over the next 4 years before I have to take RMD from an IRA. The 4 year period lessens the capital gain in any single year.
                Although I own VTMFX (tax managed), I think I will put the proceeds into 50-50 VYM (dividend etf) and VWIUX (muni). The VYM/VWIUX mix has a higher yield than VTMFX and probably outperforms over time.
                Modenesi


                That's not a bad idea: Selling the fund in fourths over the course of four years. So, the proceeds from the sale would be used to purchase VTMFX over four years.
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                  Re: Selling Good Funds For More Tax Efficiency
                  22 hours, 48 minutes ago | Post #3516016
                  "Although I own VTMFX (tax managed), I think I will put the proceeds into 50-50 VYM (dividend etf) and VWIUX (muni). The VYM/VWIUX mix has a higher yield than VTMFX and probably outperforms over time."
                  By design, to minimize taxes, VTMFX has growth stocks [ie, low dividends] and muni bonds. VYM with higher-yielding dividend stocks would surely kick in more yield; remember that it is also the equity benchmark for VWINX/VWIAX and is quite similar [value+dividends] to the equity portion of VWELX/VWENX. Whether it will outperform isn't as clear. So, only marginal tax efficiency is achieved by switching to VYM/VWIUX combo from VWINX/VWIAX or VWELX/VWENX.
                  If a taxable fund is performing better, and the tax rate isn't very high, why worry so much about paying little more taxes? It is what you pocket that counts.
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                    Re: Selling Good Funds For More Tax Efficiency
                    22 hours, 33 minutes ago | Post #3516021
                    I use VWIUX as the bond portion in whatever allocation, with a dash of VMLUX for short term cash.
                    Then I use VYM for a little more yield
                    Pair it with VUG Growth index- for growth exposure and tax efficiency.
                    Tie it all together with VIG and VDIGX for Quality.
                    There is some overlapping, but I like the idea of owning more of whatever passes a growth, a quailty, and a yield screening.
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                      Re: Selling Good Funds For More Tax Efficiency
                      20 hours, 34 minutes ago | Post #3516050


                      yogibearbull:

                      If a taxable fund is performing better, and the tax rate isn't very high, why worry so much about paying little more taxes? It is what you pocket that counts.


                      I'm slightly embarrassed to say that my Federal taxes are ~ 0.25% of my net worth. I achieve such a low tax rate by using muni's and dividend paying stocks (and funds) on which my rate is zero. I am really close to pushing my income above a level which would increase my dividend and cap gain rate to 15%. I realize the rates are marginal, but I'm comfortable when I can stay in the safety zone. I've had some tax-loss carryover, but that ends with the 2013 tax season. I know that I can eek out a little more yield from my bond funds (over the muni funds) and I have recently added some muni CEFs to increase yield.
                      For me, I'm aiming for a simple portfolio that my wife can live with after I'm gone. The CEFs may not seem part of something simple, but I bought them at such bargains that I believe they can be held for the long term. We'll see; nothing is permanent, but I aim for it.
                      Modenesi
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                        Re: Selling Good Funds For More Tax Efficiency
                        20 hours, 23 minutes ago | Post #3516059


                        yogibearbull:

                        By design, to minimize taxes, VTMFX has growth stocks [ie, low dividends] and muni bonds. VYM with higher-yielding dividend stocks would surely kick in more yield; remember that it is also the equity benchmark for VWINX/VWIAX and is quite similar [value+dividends] to the equity portion of VWELX/VWENX. Whether it will outperform isn't as clear. So, only marginal tax efficiency is achieved by switching to VYM/VWIUX combo from VWINX/VWIAX or VWELX/VWENX.


                        I'm actually thinking through the VTMFX or VYM/VWUIX choice. My original thinking was in favor of VTMFX because of the growth stock tilt which I am missing. But as I said, VYM/VWUIX means more cash in hand. It may be that I favor managment over indexing in muni funds. Decisions, decisions!
                        Modenesi
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                          Re: Selling Good Funds For More Tax Efficiency
                          19 hours, 24 minutes ago | Post #3516086

                          modenesi:

                          I'm in the process of doing something similar. I own VWIAX in a taxable account (because I was stupid at the time I bought it) and am going to sell it off over the next 4 years before I have to take RMD from an IRA. The 4 year period lessens the capital gain in any single year.
                          Although I own VTMFX (tax managed), I think I will put the proceeds into 50-50 VYM (dividend etf) and VWIUX (muni). The VYM/VWIUX mix has a higher yield than VTMFX and probably outperforms over time.
                          Modenesi

                          Modenesi,
                          I'd suggest that Vanguard Wellesley (VWIAX) in a taxable account isn't the real issue as everybody's LT Cap Gain rate is the same as their dividend rate and Wellesley's ST gains have been quite minimal.
                          As far as the 50-50 VYM (dividend etf) and VWIUX (muni) split goes ... I did a deeper dive as I thought you might be on to something.
                          VYM went from 25.18 to 60.84 per share in the last 5 years whereas VWIAX went from 40.41 to $60.34 over the same time period. Let's say that you're going to invest cash on the sidelines (just to make this easier) and let's say the assumption is that the stock performance of these two positions will continue. So, in essence ... you'll get the equivalent of 17.83 in stock appreciation of VYM (half of 35.66) because of your 50/50 split over the next five years versus the 19.93 you would be getting in VWIAX.
                          Keeping in mind that both VWIAX and VYM are about the same per share right now ... and as VWIAX delivered more in dividends than VYM last year (1.89 versus 1.75) and you're (in essence) only getting half that amount ... plus VWIAX had a 1.53 in LT distribution ...so ... only going on last year, VWIAX delivers 1.015 more in distributions (tossing the ST gain aside).
                          So ... based on last year distribution only and the stock price assumptions used .... an investment of $100,000 in both options ...
                          At $60.00 per share ... VWIAX delivers a total return of 6.726 per share after tax (at the 35 percent bracket) or 12.1 percent post-tax. Total One-Year After-Tax Return = 11,210
                          At $60 per share VYM delivers a total return of 7.83 per share after tax at the 35% bracket. Total One-Year After-Tax Return = $6,525
                          Thus the 50 percent ($50,000) invested in Vanguard Intermediate-Term Tax-Exempt (VWIUX) needs to deliver 4,685 per year tax free to break even (if my math is correct ... never a given). As VWIUX is currently yielding 3.4 percent ... that would be coming up thousands short.
                          Hope that helps.
                          ctyankee

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                            Re: Selling Good Funds For More Tax Efficiency
                            18 hours, 48 minutes ago | Post #3516106
                            My goal is to be in the highest tax rate possible when I retire and then hope that the voters set it at a reasonable rate.
                            Message To Washington: Let me become rich and then I should be quite happy to Do My Patriotic Duty and pay big taxes.
                            Fat men with fat purses make for good patriots.
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                              Re: Selling Good Funds For More Tax Efficiency
                              18 hours, 44 minutes ago | Post #3516109
                              Thanks for that work Ctyankee, enlightening.
                              I am not good at calculations or typing, but I was wondering what difference it would make if you threw in the mix.
                              50% VWIUX + 25% VYM(yield) + 25% VUG(growth)
                              A mixture of growth and income.
                              I am thinking it may take up the slack. Maybe not.
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                                Re: Selling Good Funds For More Tax Efficiency
                                17 hours, 55 minutes ago | Post #3516128


                                ctyankee:


                                I'd suggest that Vanguard Wellesley (VWIAX) in a taxable account isn't the real issue as everybody's LT Cap Gain rate is the same as their dividend rate and Wellesley's ST gains have been quite minimal.
                                As far as the 50-50 VYM (dividend etf) and VWIUX (muni) split goes ... I did a deeper dive as I thought you might be on to something.
                                VYM went from 25.18 to 60.84 per share in the last 5 years whereas VWIAX went from 40.41 to $60.34 over the same time period. Let's say that you're going to invest cash on the sidelines (just to make this easier) and let's say the assumption is that the stock performance of these two positions will continue. So, in essence ... you'll get the equivalent of 17.83 in stock appreciation of VYM (half of 35.66) because of your 50/50 split over the next five years versus the 19.93 you would be getting in VWIAX.
                                Keeping in mind that both VWIAX and VYM are about the same per share right now ... and as VWIAX delivered more in dividends than VYM last year (1.89 versus 1.75) and you're (in essence) only getting half that amount ... plus VWIAX had a 1.53 in LT distribution ...so ... only going on last year, VWIAX delivers 1.015 more in distributions (tossing the ST gain aside).
                                So ... based on last year distribution only and the stock price assumptions used .... an investment of $100,000 in both options ...
                                At $60.00 per share ... VWIAX delivers a total return of 6.726 per share after tax (at the 35 percent bracket) or 12.1 percent post-tax. Total One-Year After-Tax Return = 11,210
                                At $60 per share VYM delivers a total return of 7.83 per share after tax at the 35% bracket. Total One-Year After-Tax Return = $6,525
                                Thus the 50 percent ($50,000) invested in Vanguard Intermediate-Term Tax-Exempt (VWIUX) needs to deliver 4,685 per year tax free to break even (if my math is correct ... never a given). As VWIUX is currently yielding 3.4 percent ... that would be coming up thousands short.
                                Hope that helps.
                                ctyankee


                                ctyankee
                                Thanks for the DD that is was too lazy to do on my own. Interesting proposition. I'll rethink my idea and perhaps convert my VWIAX to I-bonds ($20K per year) until I'm rid of it my taxable account. It is obvious to me that I'm anal about taxes, and I'm in the 15% bracket even though I have more than $1M in taxable accounts.
                                One thing you didn't consider is that VWIUX has appreciated about 25% over the past 5 years (looking at its M* chart), although that's unlikely to hold up over the next 5. I'm not sure if the 5 year gain has interest reinvested.
                                Modenesi
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                                  Re: Selling Good Funds For More Tax Efficiency
                                  17 hours, 54 minutes ago | Post #3516131
                                  "My goal is to be in the highest tax rate possible when I retire and then hope that the voters set it at a reasonable rate."
                                  Ba Humbug.
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                                    Re: Selling Good Funds For More Tax Efficiency
                                    17 hours, 47 minutes ago | Post #3516136
                                    "I have not been subject to the AMT in the past. I live in Mass., so the state income tax rate is 5.25% at this time. "
                                    Your tax rate on capital gains then ought to be quite modest. I am going to also assume that you would not trigger the 3.8% Medicare investro tax (AGI of $250,000 for a couple). Your taxes would only be 20.25% which to me seems very reasonable.
                                    In contrast my own taxes on capital gains is 15+ 7 (AMT exemption loss) + 3.8 (medicare investor tax) +9.85% (MN state tax)= 35.65%.
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                                      Re: Selling Good Funds For More Tax Efficiency
                                      17 hours, 46 minutes ago | Post #3516137



                                      dragonpat:
                                      "My goal is to be in the highest tax rate possible when I retire and then hope that the voters set it at a reasonable rate."
                                      Ba Humbug.




                                      I shall do what I can to minimize what I pay in taxes with Muni Funds, low turnover funds, and other reasonable tax strategies. While I am a Patriot, I am nobody's patsy.
                                      But if after doing all that stuff I still get hammered with an enormous tax bill, then that probably is a good thing.
                                      Lord grant me stable tax rates and an ever-increasing tax bill.
                                      I would rather pay 50% on millions than on thousands, thanks for that. I win, Washington wins, America wins.
                                      Win!
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                                        Re: Selling Good Funds For More Tax Efficiency
                                        17 hours, 43 minutes ago | Post #3516139
                                        Of course, if The Voters decide to LOWER the tax rate, that would suit me fine.
                                        And if my tax bill went up even with a lower tax rate, then I should be quite happy to pay it.


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                                          19 hours, 5 minutes ago | Post #3516143
                                          "I shall do what I can to minimize what I pay in taxes with Muni Funds, low turnover funds, and other reasonable tax strategies. "
                                          I am afraid that a lot of this other than investing in muni fund doesn't helop me much. My best moves would be:
                                          1. getting a quiet legal divorce and continuing to live with my husband like nothing happened.
                                          2. Move to another state and find a job at a place willing to hire an old dinosaur and still pay whast I make at the current job.
                                          3. Get a more "executive" profit-sharing package like Mitt Romney had at his previous employer. All my stock options, and profit sharing monies are taxed at salary rates, and I pay SS taxes on therm unitl I reach that year's limit.
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                                            Re: Selling Good Funds For More Tax Efficiency
                                            19 hours, 0 minutes ago | Post #3516147
                                            dragonpat:

                                            "I have not been subject to the AMT in the past. I live in Mass., so the state income tax rate is 5.25% at this time. "
                                            Your tax rate on capital gains then ought to be quite modest. I am going to also assume that you would not trigger the 3.8% Medicare investro tax (AGI of $250,000 for a couple). Your taxes would only be 20.25% which to me seems very reasonable.
                                            In contrast my own taxes on capital gains is 15+ 7 (AMT exemption loss) + 3.8 (medicare investor tax) +9.85% (MN state tax)= 35.65%.


                                            That is correct: I do not trigger the Medicare tax. Based on my AGI, long term cap gains and qualified divs are taxed at 15% and short term cap gains are taxed at 25%. Regular dividends are taxed at 25% as well.
                                            The rates aren't terrible - however, I have a rather large portfolio (more than $1 million) so the cap gains and divs add up quickly. This is why I'm trying to make a few moves so that my portfolio becomes more tax efficient.
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                                              Re: Selling Good Funds For More Tax Efficiency
                                              18 hours, 46 minutes ago | Post #3516150



                                              dragonpat:
                                              "I shall do what I can to minimize what I pay in taxes with Muni Funds, low turnover funds, and other reasonable tax strategies. "
                                              I am afraid that a lot of this other than investing in muni fund doesn't helop me much. My best moves would be:
                                              1. getting a quiet legal divorce and continuing to live with my husband like nothing happened.
                                              2. Move to another state and find a job at a place willing to hire an old dinosaur and still pay whast I make at the current job.
                                              3. Get a more "executive" profit-sharing package like Mitt Romney had at his previous employer. All my stock options, and profit sharing monies are taxed at salary rates, and I pay SS taxes on therm unitl I reach that year's limit.


                                              Were I to wave my partisan political banner and go on my Tax Rant, I feel certain that I should be banned from the site.
                                              My tongue in cheek posts above point out the idea that we want to make so much money that we have to pay high taxes. Our goal is to get positively hammered at tax time.
                                              Every move we make should be to maximize what ends up in our pocket. To that end, if you have a fund that is spanking down double digit returns on average every year and generates a bit of tax in the deal, well, that is good. No tax bill would be better. But double digit gain is good.
                                              We should all aim for tax efficiency but NOT at the price of making less in the process. The bottom line is the bottom line, no matter how many line items are above it.
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                                                18 hours, 29 minutes ago | Post #3516159
                                                "My tongue in cheek posts above point out the idea that we want to make so much money that we have to pay high taxes. Our goal is to get positively hammered at tax time."
                                                A past article in Barron's on the AMT convinced me that I really should be aiming to make over $500,000 per year. I feel however that I cannot achieve that aim. it is these doughnut holes that are created by our tax code that are often maddening.
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                                                  Re: Selling Good Funds For More Tax Efficiency
                                                  18 hours, 15 minutes ago | Post #3516164
                                                  By using Backtest a combination of
                                                  VWIUX-50% and 25% VUG+25%VYM= for the last year a return of 10.64% vs.
                                                  VWIAX return of 7.58%
                                                  Maybe having a slice of growth is what is needed.
                                                  But it is probably the 10% more exposure to stock over VWIAX.
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                                                    Re: Selling Good Funds For More Tax Efficiency
                                                    17 hours, 20 minutes ago | Post #3516188

                                                    fishingrod:
                                                    By using Backtest a combination of
                                                    VWIUX-50% and 25% VUG+25%VYM= for the last year a return of 10.64% vs.
                                                    VWIAX return of 7.58%
                                                    Maybe having a slice of growth is what is needed.
                                                    But it is probably the 10% more exposure to stock over VWIAX.


                                                    Interesting. I don't know enough about VUG's portfolio to speak to it let alone its risk/reward attributes. Obviously a big thing in these things is one's core objectives. If the market cools for three years straight is someone going to lament why they weren't just in dividend payers?
                                                    At first blush, VUG does seem set up to be a potential candidate for someone with heirs that they care about. ;-) Something with quite limited distributions, thus tax-efficient. Per Vanguard, VUG currently has $33.00 in undistributed capital gains per share, applicable to long-term fundholders and that's going to grow. So if you were a long-term shareholder of VUG, passing those gains on to your estate and then the step-up for your heirs might not be the worst idea around. YMMV.
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                                                      Re: Selling Good Funds For More Tax Efficiency
                                                      17 hours, 16 minutes ago | Post #3516191



                                                      dragonpat:
                                                      "My tongue in cheek posts above point out the idea that we want to make so much money that we have to pay high taxes. Our goal is to get positively hammered at tax time."
                                                      A past article in Barron's on the AMT convinced me that I really should be aiming to make over $500,000 per year. I feel however that I cannot achieve that aim. it is these doughnut holes that are created by our tax code that are often maddening.


                                                      Maybe you can't.
                                                      But maybe someday Herro and others can make it for you.
                                                      We are each Lords of our own Manor with sharecroppers out there making hay for us. Let us hope for a good crop.
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                                                        Re: Selling Good Funds For More Tax Efficiency
                                                        16 hours, 58 minutes ago | Post #3516196
                                                        Ctyankee,
                                                        Thanks for your feedback. My intention is to have VUG as a long term holding to pass to heirs, You were spot on. :>)

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