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letsgobobby
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dphilipps
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by dphilipps »

I would put VSS into taxable. It yields about 3% in dividends, some of which will be subject to foreign taxes. You'll lose the opportunity to get a foreign tax credit unless you hold such shares in a taxable account.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by livesoft »

For your situation as presented, I would suggest muni bonds in taxable and put VBR and VSS in Roth. You may also put bonds, VBR, and VSS in Roth, but it would depend on the relative-to-total-portfolio the value of the Roth. If the Roth was small, then perhaps it should have only a single fund.

We have VBR and VSS in taxable and more VSS in tax-advantaged. VBR is 13% of our portfolio and VSS is about 11% of our portfolio.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by letsgobobby »

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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by scone »

We have two Roths, and I wanted 5% domestic small cap, and 5% international small cap. So I set each Roth up with 2.5% of each, plus a small amount of Treasuries for rebalancing. The Treasuries probably aren't really necessary, since I have a wad of that stuff in the 401k, but it makes me feel better-- it's part of a bigger Treasury allocation, in any case.

The beauty of putting the two small caps together is the low correlations, which is obviously something I learned from Larry Swedroe. It's quite remarkable how "quiet" the Roths are, considering the volatility of the two stock components.

Anyway, it looks like this:

"Her" Roth:

2.5% VSS
2.5% QSMLX (AQR small cap)
+ trivial amount of Treasuries

"His" Roth:

2.5% VSS
2.5% QSMLX (AQR small cap)
+ trivial amount of Treasuries

I have another wad of cash sitting in a checking account that should be in munis, but I still haven't decided which one.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by FFFollower »

letsgobobby wrote:Would you recommend VBR (small value) and/or VSS (international small) in a Roth IRA and muni bonds (assume Vanguard tax free bond fund) in taxable; or total bond market in Roth IRA and VSS/VBR in taxable? My other tax advantaged space is all bonds, my taxable is all VTI, VXUS, and VEU. We max out I bond purchases annually but own no muni bonds now. We are in the 33% federal tax bracket with AMT, no state income tax, 18.8% investment tax rate. Portfolio is 60/40 but need to rebalance down to 55/45 which prompts this question.

I won't realize any capital gains to reorganize, but I'll direct new money over time.

Thanks!
Your portfolio is incredibly similar to mine. Although I add domestic and international REITs. I hold no bonds in my Roth IRA. The fact is that the $11k per year maximum contribution is only about 10% of my annual savings. As the only Tax-Free vehicle I have, I have prioritized growth and am willing to take the risk of 100% equities in my Roth IRA for another decade, or 2. I believe that this has a high probability of giving me more options with the Tax Man in retirement.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by livesoft »

Someone with the OP's tax rate info would pay annually about 0.7% to 0.8% of their taxable holdings in VSS and/or VBR in federal income taxes. I think that's a bit too much to have these in taxable. While I have these in taxable, I do pay quite a bit less in taxes, but it does irk me nevertheless.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by Calm Man »

Bobby, I am surprised at you !!!!! You are seriously underestimating your tax rate on investment income. (And I think livesoft may have missed this.)

You "think" it is 18.8%. Not true although that is what "they" want you to think. Th 18.8% is the qualified dividend rate plus the Obamacare bonus we now have this year. However, the dividends increase your AGI and guess what --- you lose another 2% or so in terms of phase out of your exemptions and deductions. Also, more bad news. VSS had 48% of its dividends qualified last year, so a little more than half were non-qualified. Your tax rate on that is therefore 35 + 3.8 + 2 = 40%. I am grappling greatly with this and why I am so reluctant to put international funds in my taxable account and I also have the bonus of getting the pleasure of paying another 6.37% to New Jersey.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by letsgobobby »

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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by jainn »

letsgobobby wrote:Calm Man, You could be right though in the 33% bracket I think it is possible to escape those pep/pease provisions, yes? I guess I'll know in April but your other point about half of VSS dividends being non qualified sort of seals the deal. Since I've never owned VSS in taxable I've never paid attention to those details. I don't think I'll start now, I'll keep it in my Roth. Thanks!
Considering one who does not have enough tax deferred and tax free space for bonds and needs bonds in taxable too..

I thought I read that (total international and ftse small cap international) VSS AND VBR AND MUTUAL FUND EQUIVALENTS..when considering bond location..it is more tax efficient to have $1 of VSS in taxable and $1 of int-term taxable bond in IRA, compared to $1 tax exempt int-term muni fund in taxable and $1 of VSS in IRA.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by Cuzz35 »

Calm Man wrote:Bobby, I am surprised at you !!!!! You are seriously underestimating your tax rate on investment income. (And I think livesoft may have missed this.)

You "think" it is 18.8%. Not true although that is what "they" want you to think. Th 18.8% is the qualified dividend rate plus the Obamacare bonus we now have this year. However, the dividends increase your AGI and guess what --- you lose another 2% or so in terms of phase out of your exemptions and deductions. Also, more bad news. VSS had 48% of its dividends qualified last year, so a little more than half were non-qualified. Your tax rate on that is therefore 35 + 3.8 + 2 = 40%. I am grappling greatly with this and why I am so reluctant to put international funds in my taxable account and I also have the bonus of getting the pleasure of paying another 6.37% to New Jersey.
And it is 20% for qualified dividends/LTCG + 3.8% medicare. So 23.8% + any additional tax due to reduced itemized deductions,exemptions, etc. I'm really wondering if it makes more sense to hold munis in taxable under these circumstances.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by grabiner »

My recommendation would be VBR in the IRA and VSS in taxable, as I would expect VBR (which holds value stocks) to have a higher dividend yield than VSS, and VSS is also eligible for the foreign tax credit, reducing its tax rate by about 7%.

If you are in the AMT and not in the phase-out range for exemptions, your tax rate on non-qualified dividends is 28% (plus any other taxes), not 33%.

If you do decide to hold munis in taxable, make sure your fund doesn't have AMT bonds in it; Vanguard High-Yield Tax-Exempt, for example, holds some AMT bonds.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by pingo »

What about CDs in taxable? Short-term bonds? ST Treasuries even?

3 or 4 years ago Taylor Larimore linked to a paper that confirmed traditional Boglehead advice on tax-efficient fund location, but also found that placing short-term bonds in taxable (I think they were treasuries) was acceptable. Perhaps someone else recalls the paper? I cannot find it, but I did find the following in case they're helpful:

http://whitecoatinvestor.com/rethinking ... n-taxable/

http://thefinancebuff.com/tax-efficienc ... olute.html

http://www.bogleheads.org/forum/viewtop ... 0&t=104241

Perhaps the added stability of ST Treasuries would diminish the need to increase the overall bond allocation, as well?

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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by livesoft »

grabiner wrote:My recommendation would be VBR in the IRA and VSS in taxable, as I would expect VBR (which holds value stocks) to have a higher dividend yield than VSS, and VSS is also eligible for the foreign tax credit, reducing its tax rate by about 7%.
Presently, I would prefer VSS in tax-advantaged because it has a much lower percentage of qualified dividends (49% in 2012 versus 72% for VBR).

Also I want to mention that international might be split into components with different tax-efficiency for folks who are quite sensitive to tax issues.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by letsgobobby »

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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by Calm Man »

letsgobobby wrote:Calm Man, You could be right though in the 33% bracket I think it is possible to escape those pep/pease provisions, yes? I guess I'll know in April but your other point about half of VSS dividends being non qualified sort of seals the deal. Since I've never owned VSS in taxable I've never paid attention to those details. I don't think I'll start now, I'll keep it in my Roth. Thanks!
Bobby, I wish but no as I am in the 33& bracket. If you go to turbotax taxcaster for 2013, which is now up, you can do some simple modeling. Get yourself into the 33% bracket with wages. Ignore all the withholding etc. Slowly add anything even dividends (which they treat as QDI) or if you want to model non-qualified dividends you need to call it interest or STCG. Either way you get a sick feeling in your stomach as you add 10K increments and see a few things happening: slowly the exemptions and deductions drop down towards zero. The AMT increases. The "additional taxes "Obamacare" increase. You even see increases in "additional taxes" if you add in earned income because there is a new Obamacare 0.9% Medicare tax over 200K single/250K married earned income. It can make you ill but it is necessary if one wants to try to plan. We have not had these phaseouts or 29.6% bracket since Clinton left office and the 2nd Bush put in the tax laws that were just overturned. And the Obamacare Medicare taxes on earnings and investment income are of course new.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by Calm Man »

Cuzz35 wrote:
Calm Man wrote:Bobby, I am surprised at you !!!!! You are seriously underestimating your tax rate on investment income. (And I think livesoft may have missed this.)

You "think" it is 18.8%. Not true although that is what "they" want you to think. Th 18.8% is the qualified dividend rate plus the Obamacare bonus we now have this year. However, the dividends increase your AGI and guess what --- you lose another 2% or so in terms of phase out of your exemptions and deductions. Also, more bad news. VSS had 48% of its dividends qualified last year, so a little more than half were non-qualified. Your tax rate on that is therefore 35 + 3.8 + 2 = 40%. I am grappling greatly with this and why I am so reluctant to put international funds in my taxable account and I also have the bonus of getting the pleasure of paying another 6.37% to New Jersey.
And it is 20% for qualified dividends/LTCG + 3.8% medicare. So 23.8% + any additional tax due to reduced itemized deductions,exemptions, etc. I'm really wondering if it makes more sense to hold munis in taxable under these circumstances.
Cuzz, I sure do. I love my NJ long term even though it took a rather big hit a few months ago.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by grabiner »

letsgobobby wrote:
grabiner wrote:My recommendation would be VBR in the IRA and VSS in taxable, as I would expect VBR (which holds value stocks) to have a higher dividend yield than VSS, and VSS is also eligible for the foreign tax credit, reducing its tax rate by about 7%. I think for now I can keep both VBR and VSS in tax-advantaged, which would be best overall, right (depsite giving up the foreign tax credit, for the reasons livesoft describes)?
If you have room without pushing something less tax-efficient into taxable, this is right. If you do have to push VSS into taxable, it's probably good there.
If you are in the AMT and not in the phase-out range for exemptions, your tax rate on non-qualified dividends is 28% (plus any other taxes), not 33%. Can you explain why this is? Thats a 9.7% difference from my 18.8% base tax rate for investment income, and if VSS gets 7% of that 9.7% back by virtue of the foreign tax credit then it almost seems like it's a wash to keep VSS in taxable as opposed to tax-advantaged.

If you pay AMT, then you use the AMT rules to determine your income tax, and the marginal tax rates under the AMT is 28% for most taxpayers. (However, the personal exemptions phase out under the AMT, so if you are in that range, your marginal AMT rate is 35%.)

You do still owe the 3.8% Affordable Care Act surtax on investment income if appropriate. And you may or may not be hit by the phase-out of itemized deductions increasing your marginal tax rate; this depends on what your deductions are, as deductions which are lost under the AMT cannot get phased out.
If you do decide to hold munis in taxable, make sure your fund doesn't have AMT bonds in it; Vanguard High-Yield Tax-Exempt, for example, holds some AMT bonds. Thanks, I had thought Vanguard's was AMT bond free. Need to do more research.
Most of Vanguard's funds are AMT-free; I listed this one as an exception.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by sharke »

Wow, the decision on whether to place International funds in taxable or tax-advantaged accounts seems to be much more complex than I was led to believe by reading this: http://www.bogleheads.org/wiki/Principl ... le_account

I actually recently shifted my international allocation completely to taxable based on this rule of thumb, and now I feel a little silly for not doing more research first.

It seems that the decision is actually highly dependent on the percentage of qualified dividends in the fund, together with the investor's marginal tax bracket? If there is consensus that this is the case, it would be great if the wiki explanation could be updated to include relevant caveats and details. I know that I would benefit from a step by step procedure for doing this analysis, and it appears that others would as well.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by FillorKill »

I put my money on VIOV's tax efficiency over either VSS or VBR. We’ll see how that goes.

Food for thought. All of my VBR is in my ROTH. When the inevitable time came to consider placing domestic SV in taxable I added VIOV because it is more tax efficient and I like that it only pays an annual distribution. I add to it once a year on the ex date for rebalancing as needed. Eventually I’ll end up with my domestic SV split around 50/50 between the two which is fine although their exposure to SmB/HmL differs. If/when you find yourself, as I did, deciding between a) holding less SV than your IPS calls for and b) adding SV to a taxable account, you may consider this option.

The Russell 2000 still gets front-run. I try to avoid VTWV on principle for that reason. However, if you find yourself with VIOV (or VTWV) in taxable then you naturally want a pre-identified TLH partner and VIOV/VTWH track each other well enough for that purpose and you could always TLH to VBR in a wash-sale-avoidance second effort into a continuing decline of magnitude providing multiple opportunities.

Note: The ER is higher for both VIOV/VTWV than VBR.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by livesoft »

sharke wrote: I know that I would benefit from a step by step procedure for doing this analysis, and it appears that others would as well.
Here are the facts that I gather to help make a decision with info based on share price on the last day of previous year:
1. Ticker symbol
2. Share price on 12/31
3. Dividends and distributions paid per share for the previous year
4. Percent foreign source income
5. Percent qualified dividend income
6. Foreign tax paid per share

In addition to the above for each investment, one needs to know

7. Tax rate on non-qualified dividends
8. Tax rate on qualified dividends

The above might be the first 8 columns of a spread sheet that is used for the calculations. Then one calculates the following (say for $10,000 position):

a. Number of shares in $10,000
b. Total dividend amount
c. Non-qualified dividend amount
d. Qualified dividend amount
e. Tax on (c)
f. Tax on (d)
g. Total Tax
h. Foreign tax paid
i. Total tax after foreign tax credit
j. Tax cost ratio (say taxes on $10,000 investment divided by $10,000)
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by sharke »

That's very helpful, livesoft. Thanks!
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by pingo »

sharke wrote:I actually recently shifted my international allocation completely to taxable based on this rule of thumb, and now I feel a little silly for not doing more research first.
I skimmed your thread: AA when Taxable account balance exceeds Tax Deferred. You received solid advice in that thread from many posters—and from Livesoft, no less. I don't know which fund you chose to use, but either Vanguard FTSE All-Wld ex-US Idx Admiral (VFWAX) or Vanguard Total International Index Fund (VTIAX) is a good holding for a taxable account.

:beer
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by sharke »

pingo wrote:
sharke wrote:I actually recently shifted my international allocation completely to taxable based on this rule of thumb, and now I feel a little silly for not doing more research first.
I skimmed your thread: AA when Taxable account balance exceeds Tax Deferred. You received solid advice in that thread from many posters—and from Livesoft, no less. I don't know which fund you chose to use, but either Vanguard FTSE All-Wld ex-US Idx Admiral (VFWAX) or Vanguard Total International Index Fund (VTIAX) is a good holding for a taxable account.

:beer
Thanks pingo, I agree that I got great advice last year in that thread, and I chose Vanguard Total Intl Stock Idx Admiral (VTIAX) for my taxable international fund. I also have access to Vanguard Total Intl Stock Idx (VTPSX) in my 401k, and I've gone back and forth on whether to weight them equally or to prefer one over the other for tax efficiency reasons. Looks like I need to sit down and do the math... Perhaps it doesn't even matter much in the big scheme of things, but I've allowed myself to tinker a bit as long as I don't change my overall asset allocation. Call it a hobby at this point, brought on by reading so many interesting and informative postings on this site :happy
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by letsgobobby »

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Re: Portfolio rejigger? VSS, VBR, muni location?

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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by 2beachcombers »

livesoft wrote:
sharke wrote: I know that I would benefit from a step by step procedure for doing this analysis, and it appears that others would as well.
Here are the facts that I gather to help make a decision with info based on share price on the last day of previous year:
1. Ticker symbol
2. Share price on 12/31
3. Dividends and distributions paid per share for the previous year
4. Percent foreign source income
5. Percent qualified dividend income
6. Foreign tax paid per share

In addition to the above for each investment, one needs to know

7. Tax rate on non-qualified dividends
8. Tax rate on qualified dividends

The above might be the first 8 columns of a spread sheet that is used for the calculations. Then one calculates the following (say for $10,000 position):


I did an analysis similar to your quote above and found:
Marginal tax rate = 25%


Div Tax.......... Nqual.... Qual ... total..... tax......... FTC..... Net.... %tax. $invested . net gain...%gain/$invest
............................................................................................K$
fstvx............... 75 ..... 6988 ..... 7063..... 1067 ..... 0 ..... 1067..... 15..... 320...... 5996 .... 1.9
fssvx(SC)........1438 ..... 889 ..... 2327 ..... 2327 ..... 0 ....... 391..... 21..... 100...... 1834..... 1.8
fsivx ............. 784 ..... 4626..... 5410 ...... 890..... 325 ..... 565..... 10..... 180...... 4845 .... 2.7
vwo ............1299 ..... 1748 ..... 3047 ...... 587..... 183..... 4041......13..... 100 ..... 2643 ..... 2.6
fsevx..............601 ..... 1441..... 2042....... 366...,.. 0....,,. 366..... 18..... 100...... 1676 ..... 1.7
vss...............2190 ..... 2120..... 4310....... 866...... 259..... 607..... 14 .... 100 ..... 3703......3.7

Vss,Vwo, Fsivx all are below the 15% LTCG tax rate due to the FTC.

So this translates to me that all 3 of these foreign vehicles are good in the taxable account ?

jerry
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by livesoft »

2beachcombers wrote: Vss,Vwo, Fsivx all are below the 15% LTCG tax rate due to the FTC.
Sorry, but the above sentence suggests a misconception or misunderstanding. Non-qualified dividends get taxed at one's marginal income tax rate. If your marginal rate is 25%, then none of the capital gains of VSS, VWO, and FSIVX are below the 15% LTCG tax rate. At best, their LTCG will be taxed at the 15% rate, but one should not have any LT capital gains with these investments anyways because of one is using buy, hold, and rebalance.

VWO and FSIVX are OK to have in a taxable account. VSS is OK, but not as tax efficient as some other things.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by 2beachcombers »

The tax rates above are 15% for QD and 25% for NQD. I then subtracted the Foreign Tax refund to drive it below the 15%.
Did I goof ? :confused
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by Longtimelurker »

I use VSS, mix of SHM and MUB for muni bonds, and IJS (instead of VBR). My taxable account at the moment holds only: VT, VSS, IJS, SHM. I also hold VT, VSS, and IJS in tax advantaged. I did this to maintain a larger 3rd tier in my emergency fund in lower volatility instruments within my taxable account. My experience has been very positive. Using TD Ameritrade, I pay no commissions. The volatility of my taxable portfolio is very tame, and SHM (owned MUB, longer duration, up to a couple weeks ago) provides a nice income stream that i re-direct to maintain AA. I am not sure if this is "ideal" - and I bet "ideal" will "depend" on lots of unknowable stuff. But I do know that it is easy to administer and can scale up/down to your risk tolerance.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by grabiner »

2beachcombers wrote:Vss,Vwo, Fsivx all are below the 15% LTCG tax rate due to the FTC.

So this translates to me that all 3 of these foreign vehicles are good in the taxable account ?
This is right, except for the "LTCG" in the tax rate. The tax rate on the dividends for those funds is less than the 15% qualified-dividend tax rate because of the foreign tax credit (in your 25% tax bracket). VSS (FTSE small-cap) has half its dividends non-qualified, and thus has a significantly higher tax rate for taxpayers in a higher bracket. In addition, VSS might distribute taxable capital gains; it did in its first two years, and other small-cap international ETFs distributed gains in 2011.

I hold equivalents to all three of these funds in my own taxable account: VSS itself, Emerging Markets Index Admiral Shares (equivalent to VWO), and Developed Markets Index ETF (equivalent to FSIVX; I used to hold Tax-Managed International before the funds merged).
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by 2beachcombers »

grabiner wrote:
2beachcombers wrote:Vss,Vwo, Fsivx all are below the 15% LTCG tax rate due to the FTC.

So this translates to me that all 3 of these foreign vehicles are good in the taxable account ?
This is right, except for the "LTCG" in the tax rate. The tax rate on the dividends for those funds is less than the 15% qualified-dividend tax rate because of the foreign tax credit (in your 25% tax bracket). VSS (FTSE small-cap) has half its dividends non-qualified, and thus has a significantly higher tax rate for taxpayers in a higher bracket. In addition, VSS might distribute taxable capital gains; it did in its first two years, and other small-cap international ETFs distributed gains in 2011.

I hold equivalents to all three of these funds in my own taxable account: VSS itself, Emerging Markets Index Admiral Shares (equivalent to VWO), and Developed Markets Index ETF (equivalent to FSIVX; I used to hold Tax-Managed International before the funds merged).
David, thanks for your clarification.

Although Bernstein(Maiifesto pg 165) recommends LCV international in Tax deferred, I am also looking at IDV(98% QD) to put into my taxable account.
I only need to keep dividends in control to maintain MAGI less than the 170K to control Medicare costs for part B premium. Your thoughts?

FYI--I still have 200k capital loss carryover. So the small amount of distributed CG on these vehicles is absorbed by the losses. Also, the LTCG will probably not happen as all of this is for my heirs.

thanks

jerry
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by grabiner »

2beachcombers wrote:Although Bernstein(Maiifesto pg 165) recommends LCV international in Tax deferred, I am also looking at IDV(98% QD) to put into my taxable account.
I only need to keep dividends in control to maintain MAGI less than the 170K to control Medicare costs for part B premium. Your thoughts?
This suggests that you face a higher effective tax rate on all dividends than most taxpayers do, and thus that you should try to avoid dividends (even qualified dividends) in taxable. Large-cap value has the highest dividend yield of any asset class, so you might put it in tax-deferred and hold lower-yielding small-cap value in taxable. Currently, international dividend yields are higher than domestic dividend yields, which is another reason to tax-defer international stocks, but this may not last; domestic and international yields were about the same through 2007.

(The situation is not unique to your Medicare B rules; investors with high state taxes also prefer to avoid qualified dividends in taxable.)
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by 2beachcombers »

grabiner wrote:
2beachcombers wrote:Although Bernstein(Maiifesto pg 165) recommends LCV international in Tax deferred, I am also looking at IDV(98% QD) to put into my taxable account.
I only need to keep dividends in control to maintain MAGI less than the 170K to control Medicare costs for part B premium. Your thoughts?
This suggests that you face a higher effective tax rate on all dividends than most taxpayers do, and thus that you should try to avoid dividends (even qualified dividends) in taxable. Large-cap value has the highest dividend yield of any asset class, so you might put it in tax-deferred and hold lower-yielding small-cap value in taxable. Currently, international dividend yields are higher than domestic dividend yields, which is another reason to tax-defer international stocks, but this may not last; domestic and international yields were about the same through 2007.

(The situation is not unique to your Medicare B rules; investors with high state taxes also prefer to avoid qualified dividends in taxable.)

HaHa :oops: I got so focused on the tax rate and foreign credit sticking with the internationals, I forgot what you advised me 3 yrs ago--IJS in taxable.

below is a PM with livesoft:

Re: Fwd: Re: Portfolio rejigger? VSS, VBR, muni location?
Sent: Sun Jun 01, 2014 10:35 am
From: 2beachcombers
To: livesoft

10,000$ invested yields 566 @ 15% = 85$ tax- 0.20/shareFT(10,000/40$ per share) = 85-(250 shares*0.2) =35$ tax (assuming 100%credit for int. tax)

35/566= 6.1% tax rate :P

even with dividends at 4.5% == 450* 15% = 68-50 = 18$ tax or 18/450 = 4% tax rate


To good to be true????????????? :sharebeer

David, agree with your recommendation to keep taxable dividends low. But since the effective tax rate is below 15% for LCV int.--keeping true to tax efficiency placement, shouldnot we consider this for a taxable account?
I do see that I would be paying 4-500$ more tax per year--but still looking to free up deferred accounts. Moving IJS and IJR to taxable will be my first step(back to where I was years ago)

thanks again for your advice
jerry
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by letsgobobby »

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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by grabiner »

letsgobobby wrote:I'm thinking of buying VWITX in taxable and switching out stable value fund in 403b for total international stock. I benefit because some of total international 's dividends are not qualified and in a 403b I don't have to pay 35% taxes on those. However I do lose the foreign tax credit. What do you think?
Taxes should not dominate this decision. How good and how liquid is the stable value fund? If it is something like TIAA-CREF's traditional annuity, it is a better investment than a bond fund because it has less volatility than bond funds of comparable yield. Therefore, you should use that fund in your 403(b) in preference to holding munis in a taxable account.

If you need to decide whether to hold Total International in taxable or tax-deferred, look at the effective tax rate. If 70% of the dividends are qualified and taxed at 15%, and 30% are non-qualified and taxed at 35%, the average rate is 21%, which becomes 14% once you adjust for the 7% foreign tax credit. (Then add the 3.8% ACA Medicare surtax if you owe it.)
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by letsgobobby »

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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by grabiner »

letsgobobby wrote:My qualified tax rate is 23.8%, so that implies average tax rate of 27%, or 20% after the foreign tax credit (per your suggestion). How do I use that information to make a decision?
You said earlier that your qualified tax rate was 18.8%, which is correct in the 33% bracket with no state tax. This would give you an overall tax rate of 24.8% on Total International, reduced to 17.8% by the foreign tax credit. You would have an 18.8% tax rate on a US stock index. Thus, if you hold stocks in taxable, you can hold either stock fund there, depending on your 403(b) options; with the tax rates this close, I would prefer holding a US index in taxable if all else is equal, as international funds have had higher yields for several years. If you choose to hold bonds in taxable because the 403(b) has better stock than bond options, that is also reasonable.
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Re: Portfolio rejigger? VSS, VBR, muni location?

Post by letsgobobby »

I have institutional total bond or total international available in my 403b. So it seems like the choice comes down to after tax total returns, and those seem pretty comparable from what you're saying. Sorry, don't know why I said 23.8%, it is 18.8%.

Probably will go with VWITX in taxable just to increase my overall diversification.
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