Author Topic: Optimize tax efficiency?  (Read 405 times)

jeromedawg

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Optimize tax efficiency?
« on: July 12, 2017, 10:41:44 PM »
Hey guys,

Sorry for such a noobish question but I've been reconsidering my portfolio allocations per https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

I primarily have FSTVX, FUSVX, FSEVX and FSGDX spread out across a some taxable, tax-free, and tax-deferred accounts. Our Roth IRAs have FSTVX, FUSVX, and FSEVX; the Traditional IRA has FUSVX in it; and the taxable account has FUSVX, FSEVX and FSGDX. I have another taxable account with several ETFs as well (DVY, ITOT, IVV and IXUS). I have a Wells Fargo 401k where I'm fully invested in their S&P 500 fund (very low cost and minimal expenses) as well - not sure if I should mess with that.

Between all the accounts, where should these funds belong? I'm thinking FSTVX (tax-efficient?) should go to the taxable along with FSGDX (per foreign tax credit). What about FUSVX and FSEVX though? Seems those would still fall under tax-efficient funds the least tax-efficient of the bunch. And what about the ETFs? Are those OK being in a taxable account or should I consider moving those to tax-free and/or tax-deferred?

On that note, I'm likely going to start rebalancing to add FSITX into the mix as I'm not sure I'm as comfortable primarily invested the way I am now. It sounds like FSITX should stay in the tax-free and/or tax-deferred accounts (not sure which though if not both)?

« Last Edit: July 14, 2017, 11:14:19 AM by jeromedawg »

jeromedawg

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Re: Optimize tax efficiency?
« Reply #1 on: July 14, 2017, 11:14:53 AM »
Anyone?

L.A.S.

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Re: Optimize tax efficiency?
« Reply #2 on: July 14, 2017, 11:43:20 AM »
If you are going to add taxable bonds, the place to put them would be in the tax-deferred accounts like a trad-401(k) or trad-IRA.  There is no sense putting them in a taxable account first since all interest is taxed at the ordinary income rate, or in Roth account since over the long term bonds don't produce as good of returns as stocks. 

I like to put international stocks in Roth accounts since they have the growth aspects of stocks but pay dividends that include a lower percentage in the form of qualified dividends than U.S. stocks.  However, you will give up use of the foreign taxes paid credit for foreign taxes paid with respect to holdings in the Roth or tax-deferred accounts.  I don't think this is a big deal, fwiw. 

Radagast

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Re: Optimize tax efficiency?
« Reply #3 on: July 14, 2017, 01:45:55 PM »
Wells Fargo S&P500 fund has an expense ratio of 0.25%. Not bad, but there is a 100% chance you can get an extra .21% compounded per year if you move it to an S&P500 index fund with an expense ratio of .04%. So do it if it is not your current employer.

What's up with all the FUSVX and FSEVX? If possible use total market funds when available, although FSEVX is ok to make up for an employer having only an S&P500 fund.

ETFs are more tax efficient than mutual funds. Mutual funds distribute short and long term capital gains. Short term capital gains are taxed at your marginal tax rate = ouch. Try to use ETF's in taxable accounts (exception: Vanguard). Mutual funds are good in tax-advantaged accounts.

Taxable bonds should go in a tax-advantaged account. But if you want them to double as an emergency fund consider tax-exempt bonds in a taxable account as well. You'll have to figure it out based on your own tax situation.

For me, right now, international funds are best used in taxable accounts because I get the full foreign tax credit but I have no state and 15% federal taxes. If you are in a higher tax bracket it may make sense to put them in tax advantaged accounts and use US stocks in taxable. You'll have to figure it out though. Tax efficiency spreadsheet and discussion: https://www.bogleheads.org/forum/viewtopic.php?t=208818


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jeromedawg

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Re: Optimize tax efficiency?
« Reply #5 on: July 15, 2017, 01:18:12 PM »
Wells Fargo S&P500 fund has an expense ratio of 0.25%. Not bad, but there is a 100% chance you can get an extra .21% compounded per year if you move it to an S&P500 index fund with an expense ratio of .04%. So do it if it is not your current employer.

What's up with all the FUSVX and FSEVX? If possible use total market funds when available, although FSEVX is ok to make up for an employer having only an S&P500 fund.

ETFs are more tax efficient than mutual funds. Mutual funds distribute short and long term capital gains. Short term capital gains are taxed at your marginal tax rate = ouch. Try to use ETF's in taxable accounts (exception: Vanguard). Mutual funds are good in tax-advantaged accounts.

Taxable bonds should go in a tax-advantaged account. But if you want them to double as an emergency fund consider tax-exempt bonds in a taxable account as well. You'll have to figure it out based on your own tax situation.

For me, right now, international funds are best used in taxable accounts because I get the full foreign tax credit but I have no state and 15% federal taxes. If you are in a higher tax bracket it may make sense to put them in tax advantaged accounts and use US stocks in taxable. You'll have to figure it out though. Tax efficiency spreadsheet and discussion: https://www.bogleheads.org/forum/viewtopic.php?t=208818

I misinformed on the WF S&P500 fund ... it's actually the SSGA S&P 500 Index Non-Lending Series Fund Class K that I hold through my employer:

Gross Total Annual Operating Expense Ratio
0.01%
Gross Total Annual Operating Expense ‐ $ per $1,000
$0.13
Net Total Annual Operating Expense Ratio
0.01%
Net Total Annual Operating Expense ‐ $ per $1,000
$0.13
Portfolio Turnover
3.68%


As far as FUSVX and FSEVX - I didn't really know what I was doing and was thinking "diversify" even though after I did all that I realized both those are pretty much the same as FSTVX. So it sounds like I should shift over to FSTVX all the way where I can? It seems FSTVX doesn't pay out dividends whereas FUSVX/FSEVX do though - is that a downside to rebalancing purely to FSTVX?

My ETFs and intl funds are explicitly in the taxable accounts so I think I'm good there. I just have to make a decision on the total market & S&P500 funds as well as rebalancing to include bonds into the equation. I'll check out that spreadsheet/link - thanks for that!