Over at Bogleheads we came across the following discussion: Tax Efficiency of Taxable Investments
by chabil » Sat May 24, 2014 6:29 pm
Please comment on our taxable portfolio. other than a one bond fund and the stocks all are in Vanguard. i worry that we have too many funds for no good reason. i also would like to make sure this is tax efficient. we contribute most if not all of the RMW from the retirement accounts into this fund but only to a few of them:
the total stock market, the inter-term tax exempt, small cap, med cap, and Ftse.
thank you for any advice, comment.
Taxable Holding
1 Total Stock Mkt Index 14%
2 500 Index Fund 7%
3 Mid-Cap Index 1%
4 Small-cap index 1%
5 Extended Mkt 6%
6 FTSE All World Ex US 2%
6 Company stocks 19%
7 Growth Index Fund 2%
7 Wellsley Income 3%
8 Wellington Fund 8%
9 Total Bond mkt index 2%
10 Tax_exempt (Dom Income Fund) 19%
11 Inter- Term Tax Exempt Fund 9%
12 Lifestrategy Growth fund 2%
13 REIT Index 3%
14 Cash 2%
TOTAL TAXABLE 100%
should we consolidate
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Re: Tax Efficiency of Taxable Investments
by Grt2bOutdoors » Sat May 24, 2014 6:34 pm
chabil wrote:Please comment on our taxable portfolio. other than a one bond fund and the stocks all are in Vanguard. i worry that we have too many funds for no good reason. i also would like to make sure this is tax efficient. we contribute most if not all of the RMW from the retirement accounts into this fund but only to a few of them:
the total stock market, the inter-term tax exempt, small cap, med cap, and Ftse.
thank you for any advice, comment.
Taxable Holding
1 Total Stock Mkt Index 14%
2 500 Index Fund 7%
3 Mid-Cap Index 1%
4 Small-cap index 1%
5 Extended Mkt 6%
6 FTSE All World Ex US 2%
6 Company stocks 19%
7 Growth Index Fund 2%
7 Wellsley Income 3%
8 Wellington Fund 8%
9 Total Bond mkt index 2%
10 Tax_exempt (Dom Income Fund) 19%
11 Inter- Term Tax Exempt Fund 9%
12 Lifestrategy Growth fund 2%
13 REIT Index 3%
14 Cash 2%
TOTAL TAXABLE 100%
should we consolidate
What is your tax bracket?
What jumps out at me as possible the most in-efficient holdings: Wellesley Fund, Lifestrategy Growth, Reit Index, Total Bond Market Index, Company Stock.
If you already own extended market, why do you also own Mid and Small Cap Index as well? What are your gains/losses in each of the holdings? It may not pay to consolidate just yet, if the holdings gains are substantial potentially impacting your taxes come 2015 when you file.
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Re: Tax Efficiency of Taxable Investments
by retiredjg » Sat May 24, 2014 7:48 pm
You do have too many funds and it appears to be for no good reason. But you have to compare the cost to "fix" it to just leaving it as is. It seems likely that these holdings have gains - is it worth it to pay tax to make the account more tax-efficient?
Also, it is meaningless to discuss whether your allocation is right if you don't show the rest of your portfolio. I agree with Grt2bOutdoors on which funds are not tax-efficient, but I don't entirely understand why he/she included Company stock.
No, several of those funds are not tax efficient. But that may or may not be important depending on things you did not mention. Your tax bracket. If you are spending the dividends.
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Re: Tax Efficiency of Taxable Investments
by Duckie » Sat May 24, 2014 9:29 pm
chabil wrote:Please comment on our taxable portfolio.
Taxable Holding
1 Total Stock Mkt Index 14%
2 500 Index Fund 7%
3 Mid-Cap Index 1%
4 Small-cap index 1%
5 Extended Mkt 6%
6 FTSE All World Ex US 2%
6 Company stocks 19%
7 Growth Index Fund 2%
7 Wellsley Income 3% <-- Contains taxable bonds. Better in tax-sheltered.
8 Wellington Fund 8% <-- Contains taxable bonds. Better in tax-sheltered.
9 Total Bond mkt index 2% <-- Contains taxable bonds. Better in tax-sheltered.
10 Tax_exempt (Dom Income Fund) 19%
11 Inter- Term Tax Exempt Fund 9%
12 Lifestrategy Growth fund 2% <-- Contains taxable bonds. Better in tax-sheltered.
13 REIT Index 3% <-- Kicks out large taxable dividends. Better in tax-sheltered.
14 Cash 2%
TOTAL TAXABLE 100%
should we consolidate
Yes. But you need to consider the tax hit.
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Re: Tax Efficiency of Taxable Investments
by anil686 » Sat May 24, 2014 9:47 pm
I would also add #3,4,5 have higher turnover which will lead (necessarily) to ST capital gains - IMO. Of course your allocation to such areas are very low and so it may not mean a great tax hit but it may also dampen the effect you are looking for.
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Re: Tax Efficiency of Taxable Investments
by grabiner » Sat May 24, 2014 11:50 pm
chabil wrote:1 Total Stock Mkt Index 14%
2 500 Index Fund 7%
3 Mid-Cap Index 1%
4 Small-cap index 1%
5 Extended Mkt 6%
There is overlap in the US stocks, but it doesn't hurt keeping your existing holdings; these are all tax-efficient, and there isn't much lost holding separate large-cap, mid-cap, and small-cap funds rather than Total stock Market. I wouldn't sell any of these unless you can sell for a small capital gain or need the money.
6 FTSE All World Ex US 2%
As with the US stocks, this is fine, although you might want to switch to Total International to get small caps if you can do it cheaply.
6 Company stocks 19%
If this is your own company, it must go; 19% of your portfolio in company stock is too much. If it is a diversified portfolio of individual company stocks, you can keep it, as it will behave much like a large-cap index fund.
7 Growth Index Fund 2%
This is tax-efficient but may not fit your investment needs; do you have a value fund in your IRA or 401(k)? If the fund doesn't fit your investment needs, sell it as soon as any gains are long-term.
7 Wellsley Income 3%
8 Wellington Fund 8%
These two are tax-inefficient; their actively managed stocks generate capital gains, and you may not want to hold their corporate bonds. They should be sold.
9 Total Bond mkt index 2%
10 Tax_exempt (Dom Income Fund) 19%
11 Inter- Term Tax Exempt Fund 9%
Thexe three can't all be right. You don't want both taxable and municipal bonds. If your tax bracket is over 25%, you probably want municipal bonds. (And you may not want any of these if you can hold bond in tax-deferred accounts instead.)
I don't know what the "Dom Income Fund" is; you may want to sell that fund and switch to something lower-cost. Selling bond funds will not result in significant capital gains.
12 Lifestrategy Growth fund 2%
This is a mixture of stock and bond index funds; it's not bad to keep (as long as you don't mind the taxable bonds), but it will be an annoyance in managing your portfolio.
13 REIT Index 3%
This is very tax-inefficient; if you want to hold a REIT fund, hold it in your IRA.
14 Cash 2%
Cash is fine in a taxable account, where it probably has some purpose such as an emergency fund. Yes, the returns on your cash will be taxable, but they are low and thus there isn't much to lose to taxes. (Right now, cash returns nearly zero, but even if rates rise, you don't lose much to taxes on bank accounts or money-market funds.)
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