Need help picking investments for taxable accout

[MontaniTrout]

I have a CD that is maturing next month. Due to the low rates I'm not interested in renewing it. Since this money will be used for retirement, 15 years away, I would like to open up a brokerage account.
I've spent some time researching the subject and I'm still clueless on what investments make the most sense. The MMM community always delivers sound advice. I would appreciate opinions.

Current Asset Allocation:
401k; US total 60, International total 30, Bond 10
IRA me; US total 100 (will be adding international total in 2018)
IRA spouse; US total 100 (will be adding international total in 2018)

All tax advantage accounts will be maxed out by the end of the year.

Thanks in advance,

[tarheeldan]

401k; US total 60, International total 30, Bond 10
IRA me; US total 100 (will be adding international total in 2018)
IRA spouse; US total 100 (will be adding international total in 2018)

What is the composite allocation? What is your target allocation? Do they match? Why aren't you fitting your taxable to this target?

[MontaniTrout]

My current composite allocation is 75 US total, 20 international total, and 5 bond.

My target allocation is 60 US total, 30 international total, 10 bond.

I plan to adjust my IRA's with 2018 contributions to meet my target allocation.

From what I've read it's not wise to invest in bonds with at taxable account.

FWIW, my 401k and IRA's are with Vanguard.

[tarheeldan]

Gotcha! Yes, you may have already read though, sorry if you have:
https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

[MontaniTrout]

Thanks for the link tarheeldan. It was very helpful.
To simplify here are my thoughts. Should I:
 1) Open up a taxable account with VTIAX, 100%.
 2) Open up a taxable account with VTSAX, 100%.
 3) you're a rookie MontaniTrout - Use these investments instead........

Like I said, I will use my 2018 IRA contributions to meet my target allocation.

[AdrianC]

My current composite allocation is 75 US total, 20 international total, and 5 bond.

My target allocation is 60 US total, 30 international total, 10 bond.

I plan to adjust my IRA's with 2018 contributions to meet my target allocation.

From what I've read it's not wise to invest in bonds with at taxable account.

FWIW, my 401k and IRA's are with Vanguard.

Open up a taxable account with VTIAX, 34%, VTSAX, 66%. Add a bit more to bonds in 401k & IRA to compensate.

[MontaniTrout]

Thanks for the suggestion AdrianC.

[tarheeldan]

That's what I would do too, buy VTIAX and VTSAX in the taxable and adjust the tax-sheltered accounts bond-wise to be consistent with the overall target allocation.

My main point was that, I aim to meet my target asset allocation in the most tax-efficient way - and not the converse. It sounded a little bit (maybe I understood wrong) that you were thinking that you would treat this taxable account differently/separately from the rest.

[DavidAnnArbor]

Just so you know when you have VTIAX in your taxable account, you're going to be paying foreign tax. That foreign tax that is paid will need to be credited back on your tax form. It's just an added extra bit of tax preparation to do. That foreign tax will be listed on your 1099-DIV that you will get from Vanguard every year.  So maybe it's not a big deal.

[SeattleCPA]

Just so you know when you have VTIAX in your taxable account, you're going to be paying foreign tax. That foreign tax that is paid will need to be credited back on your tax form. It's just an added extra bit of tax preparation to do. That foreign tax will be listed on your 1099-DIV that you will get from Vanguard every year.  So maybe it's not a big deal.

This may not be what others like to do, but I intentionally put some of my international stock index allocation into my taxable. I don't have enough space in my tax-deferred account for everything. And i like that not only are the capital gains and dividends mostly preferentially taxed but I also get to use the foreign tax credit which would get lost inside something like an IRA, Roth or 401(k). (BTW, i know this isn't a big money-saving deal. But it does save a little bit of extra tax.)

David? Do you try to avoid the foreign tax credit? I know it's not a big benefit. And it is a little extra hassle to deal with Form 1116.

[AdrianC]

This may not be what others like to do, but I intentionally put some of my international stock index allocation into my taxable. I don't have enough space in my tax-deferred account for everything. And i like that not only are the capital gains and dividends mostly preferentially taxed but I also get to use the foreign tax credit which would get lost inside something like an IRA, Roth or 401(k). (BTW, i know this isn't a big money-saving deal. But it does save a little bit of extra tax.)

I do the same. VXUS in taxable (and Berkshire, but that's another story).

[DavidAnnArbor]

No I don't try to avoid the foreign tax credit. In my Vanguard taxable I have total international index, and also emerging market index, and total developed index.
I hadn't thought about it before as a way to save on taxes.  a Good portion of the dividends from these international index funds are not qualified dividends so i think that portion that isn't is treated as ordinary income. So do you really come out ahead with dividends like that?

[tarheeldan]

I'm also putting international in my taxable. From the Bogleheads article (anyone done the math? I should):

"Step 3: Placing international stock funds in the taxable account

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but this opportunity is lost in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is sufficient depends on such factors as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and the the US marginal tax bracket of the fundholder."

[SpareChange]

I have VT in my taxable account. It's roughly half foreign. I claim the FTC...very easy. If the foreign taxes are less than $300 you don't have to file a 1116 (looking forward to the day I do :). I'm in the 25% federal bracket, and in my case the FTC basically covers the taxes on STG that VT throws off...$1,286 total div ($1068.41 qualified), 49.28 FTC. A true foreign fund would be more tax efficient.

[MustacheAndaHalf]

I decide by comparing after-tax yield. 

Vanguard has tax-exempt bond funds with yield fairly close to that of Total Bond Market.  At a tax bracket of 25% or higher it could make sense to put bonds in taxable, but use a tax-exempt bond fund.  For those not at Vanguard, Vanguard Tax-Exempt Bond ETF ("VTEB") can be purchased like it's common stock.

Many people don't look closely at dividends.  Right now, international has higher dividends than the US.  Looking on morningstar's website shows VTSAX as having 1.89% TTM yield, while VTIAX has 2.82% yield.  Meaning total international is generating almost 1% more in dividends on which you'll be taxed.  So before any credits, the situation starts off worse for international.  The foreign tax credit has to offset that additional tax (on the higher dividend) first before it can be a benefit.  The level of additional tax paperwork can vary with your tax situation.  Overall I've decided not to emphasize putting international in my taxable account, but others in different tax situations may feel differently.

Take a second look at tax-exempt bonds, and a closer look at how international's higher yields could cause higher taxes.