Author Topic: Taxable Account Allocation Tactics  (Read 3718 times)

bearkat

  • Stubble
  • **
  • Posts: 122
  • Age: 29
  • Location: California
Taxable Account Allocation Tactics
« on: March 18, 2015, 03:59:50 PM »
Hola,

Background: I'm looking to start a taxable investment account. I've narrowed it down to a Vanguard account (3 of 4 existing accounts are already with them) and I'm NOT looking to turn this into yet another thread about Bitch-erment or WealthFuck or Schwab my Balls vs. XXX account.

Below is my asset allocation for reference. The goal is keep my total AA the same, but not to completely  replicate it in my taxable  account. My thought would be to just have 1 or 2 assets in the taxable account to start. Mainly because I've only got $12k lump to invest and another $600 / month (hopefully that will continue to increase) to add.

Current AA: (between two ira's, 401k, and 403b)
Large Cap US Stock - 25%
Mid Cap US Stock - 15%
Small Cap US Stock -  15%
Developed Intl Stock -  15%
Emerging Intl Stock - 10%
REIT US - 10%
Bond US - 10%

The goal here is to win the game the fastest (ie hit FIRE number sooner) and part of that is paying less in taxes and fees (and not getting a divorce with my wife). Based on minimizing taxes, I've ruled out bonds and REIT in taxable, and based on minimizing fees across my portfolio I want to keep small cap US, mid cap US, and EM Intl in my 401k where I have some really low fees on those funds.

Large Cap US Stock and Developed Intl Stock are thus our remaining potential candidates.

Main question: Which of the funds below (or a new one) would be the optimum fund / ETF to start my new taxable account? Especially considering total return, capital gains, dividends, and something called a foreign tax credit? I'm not seeing a huge difference between these funds in each category. What should I be looking for?

Large Cap US Options (Ticker, Expense Ratio, Name)
VFIAX - 0.05% -  500 Index
VLCAX - 0.09% - Large Cap Index
VTSAX - 0.05% - Total Stock Market

Developed Intl Options (Ticker, Expense Ratio, Name)
VTIAX - 0.14% - Total International Stock Index
VTMGX - 0.09% - Developed Markets Index

Everything above is a mutual fund (admiral shares) as opposed to an ETF.

Second question: which is better Mutual Fund or ETF? Or does it even matter?

My thoughts:
Mutual Funds:
The good -  partial shares = no cash drag &  automatic investment setup
The bad -  taxes on distributions even if I don't sell & 60-day no buy back after sell & higher fees unless I'm in admiral shares
ETF's:
The good -  no capital gains unless I sell & greater flexibility to buy / sell &  lowest fees
The bad -  only whole shares & no automatic investment plan (i think)

Neither mutual funds or ETFs really jumps out at me. What am I missing?

Your thoughts and time are greatly appreciated.

jmusic

  • Bristles
  • ***
  • Posts: 465
  • Location: Somewhere...
Re: Taxable Account Allocation Tactics
« Reply #1 on: March 18, 2015, 04:36:58 PM »
Dude, you've only got $12K.  Right now your main issue is Vanguard's minimums for their funds.  For now just do 70% VTSAX and 30% VFISX (bonds for protection) and CONTRIBUTE MOAR!!! 

electriceagle

  • Bristles
  • ***
  • Posts: 485
Re: Taxable Account Allocation Tactics
« Reply #2 on: March 18, 2015, 04:48:50 PM »
International funds often pay foreign taxes. You may be able to credit these against your taxes if the international funds are in taxable.

bearkat

  • Stubble
  • **
  • Posts: 122
  • Age: 29
  • Location: California
Re: Taxable Account Allocation Tactics
« Reply #3 on: March 18, 2015, 05:16:46 PM »
Dude, you've only got $12K.  Right now your main issue is Vanguard's minimums for their funds.  For now just do 70% VTSAX and 30% VFISX (bonds for protection) and CONTRIBUTE MOAR!!!

Haha. Love the photo. $12k is what I have available for the taxable account. That's why I wanted to focus on  1 or 2 funds in the taxable. My wife and I have ~$175k currently invested and am maxing out two roth ira's, a 401k,  403b, and an HSA in my tax shelter accounts. But you're right, in that the answer is always to contribute MOAR.

skyrefuge

  • Handlebar Stache
  • *****
  • Posts: 1007
  • Location: Suburban Chicago, IL
Re: Taxable Account Allocation Tactics
« Reply #4 on: March 18, 2015, 05:44:48 PM »
Any of those funds would be a fine choice, as they should all be sufficiently tax-efficient. I currently have VTMGX as one of my two taxable funds, partly because it used to explicitly be a "tax-managed" fund, but eventually Vanguard said, "eh, this other non-tax-managed fund basically has the same tax characteristics, so we'll just merge 'em". And yes, I do get a foreign tax credit, but that's not the reason I hold it. There's probably some micro-level optimization that you can perform with that tax credit, but it can't be too big of a deal, otherwise we'd always hear "hold all your international in taxable accounts!", and we don't (nor do we hear the opposite).

No need to replicate your allocation in the taxable area, and even one fund might be enough. Tax consequences will make you less interested in moving things around in a taxable account, so for the lazy person it's easier to just hold one or two things forever in taxable, and then keep your allocation balanced by moving stuff around in your sheltered accounts.

I don't have any strong opinions on mutual fund vs. ETF. ETFs give me a vaguely icky feeling, so I only have mutual funds, but that might just be because I'm old.

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 2125
  • Age: 54
  • Location: Ann Arbor, Michigan
Re: Taxable Account Allocation Tactics
« Reply #5 on: March 18, 2015, 10:48:18 PM »
I'm NOT looking to turn this into yet another thread about Bitch-erment or WealthFuck or Schwab my Balls vs. XXX account.

Ha that is the funniest opening of a thread I've ever read on here!!!

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2261
  • Location: EastCoast
Re: Taxable Account Allocation Tactics
« Reply #6 on: March 19, 2015, 08:58:13 AM »
I'm NOT looking to turn this into yet another thread about Bitch-erment or WealthFuck or Schwab my Balls vs. XXX account.

Ha that is the funniest opening of a thread I've ever read on here!!!
I want to secure the url and start wealthfuck as a dating site for rich people..

I initially bought both mutual funds and ETFs in my taxable,  but frankly found it much easier to do automatic transfers to mutual funds for the reasons you mention. The thought of dealing with this for decades was not appealing so I ditched the ETFs while the cost was low. Maybe there's a minute cost to this, but I'm lazy.

joat

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Taxable Account Allocation Tactics
« Reply #7 on: March 20, 2015, 12:01:45 PM »
Quote
The goal is keep my total AA the same, but not to completely  replicate it in my taxable  account.
I think you're on the right track. I don't treat taxable vs tax-advantaged as separate with respect to allocation - it's all just part of my portfolio. I have a target asset allocation for my portfolio and simply try to place funds in taxable or tax-advantaged accounts based on their tax efficiency while sticking to my target allocation. There will likely be some replication but there are things (such as REITs) that are much better to avoid in a taxable account and instead hold in a tax-advantaged account.

There's a thorough discussion at http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

This graphic summarizes the idea well: http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement#Step_1:_Categorize_your_portfolio.27s_tax_efficiency