Tax efficiency question

[Whatyear?]

Hi all,

I have a hypothetical question - let's say that for total AA purposes I HAVE to have some portion of my taxable account in bonds. Which is better from a pure tax standpoint - to hold a mix of Wellington and Wellesley to get to my desired AA, or a mix of TSM and TBM? I am thinking it is the latter . . .

Thanks,

[livesoft]

Since Well and Well are actively-managed, you would lose all control about when the managers sold and realized gains. Also since they are balanced funds, you would have less chances of tax-loss-harvesting. Thus, TSM and TBM would be better from a tax-management standpoint.

If you want to be more like Well and Well, use Value Index and an Extended Duration bond fund instead of TSM/TBM, but also bail out of extended duration bond fund before it drops in value due to rise in interest rates.

You may have noticed that Well and Well will trail the performance of a small-cap and value-tilted slice-and-dice portfolio this year. This is because international equities have come on strong here the past 2 months while US equities have floundered. So if you are performance chasing, you would not go with Well and Well.

[DSInvestor]

Wellesley Income and Wellington hold taxable bonds. If you're in a low tax bracket Fed and State, it may be fine to hold taxable bonds (or Wellesley/Wellington) in taxable. Using separate funds like TSM, TISM and bond funds would give you the flexibility to choose the type of bonds that fit best with your tax situation. For example an investor who lives in California in a high tax bracket may find it advantageous to hold a mix of California Intermediate Term Tax Exempt Bond and Intermediate Term Tax Exempt Bond (National fund) for the bond allocation in the taxable account. An retiree in the 10% tax bracket who resides in Texas, which has no state income tax, may be just fine with Wellesley Income or Wellington in a taxable account.

[retiredjg]

Are you not considering tax-exempt bonds at all?

[grabiner]

Wellesley Income and Wellington hold taxable bonds. If you're in a low tax bracket Fed and State, it may be fine to hold taxable bonds (or Wellesley/Wellington) in taxable. Using separate funds like TSM, TISM and bond funds would give you the flexibility to choose the type of bonds that fit best with your tax situation. For example an investor who lives in California in a high tax bracket may find it advantageous to hold a mix of California Intermediate Term Tax Exempt Bond and Intermediate Term Tax Exempt Bond (National fund) for the bond allocation in the taxable account. An retiree in the 10% tax bracket who resides in Texas, which has no state income tax, may be just fine with Wellesley Income or Wellington in a taxable account.

And an investor in a high state but low federal bracket should probably hold Treasury bonds or TIPS in the taxable account, and balance that with corporate bonds in the tax-deferred account.

[Bob's not my name]

Hmm. A quick scan of your prior posts indicates 1) You live in MA, which taxes STCG at a whopping 12% and has an exemption for MA bank interest, doesn't it? 2) This question of what to hold in taxable is a well trod path; and 3) Three years ago taxable comprised only one quarter of your assets, and your plan was to grow taxable and tax-advantaged at about the same dollar rate per year.

So I'm wondering why not munis in taxable when your combined tax rate is about 33% and will go up next year? And why can't you fit all your bonds in tax-advantaged (not that I think that's necessary)? Also, can't you hold about $20,000 of your bond allocation in a MA bank CD and escape state tax on the interest?

Here's a recent thread that may be of interest (but note that it ignores the peculiarities of the MA tax code, which I think slightly amplify the advantages of bonds in taxable): viewtopic.php?f=10&t=106053

[Whatyear?]

Thanks to everyone for the responses. I will definitely use this as I decide what to do for 2013. After reading these I am looking into Value Index (as well as 500 Index) and tax exempt bonds.

Thanks again and Happy New Year!

[grabiner]

Thanks to everyone for the responses. I will definitely use this as I decide what to do for 2013. After reading these I am looking into Value Index (as well as 500 Index) and tax exempt bonds.

I would advise against buying Value Index until you are sure the tax break on qualified dividends will be extended. Value Index has a higher dividend yield than most other index funds, and if that is taxed at 33%, the tax cost could be fairly high.

[Whatyear?]

Thanks again, all. I am now leaning towards selling Wellington and Wellesley and reinvesting in VG 500 Index and Mass tax exempt bonds. My unrealized gains in W & W are substantially all long-term and I have enough tax loss carryforwards to cover them anyway. With that, does it matter whether I do this now (in 2012) or wait until 2013?

[livesoft]

If you sell in 2012, there will be no uncertainty. If you wait until 2013, maybe they will drop more and you will not have to use up as many losses, but that is far from certain.

Why S&P500 and not a TotalMarketIndex fund?

[sscritic]

let's say that for total AA purposes I HAVE to have some portion of my taxable account in bonds. Which is better from a pure tax standpoint - to hold a mix of Wellington and Wellesley to get to my desired AA, or a mix of TSM and TBM?

Neither. Whatever you like plus munis.

P.S. I understand the word "better," but my preference was not to answer your question.

[Whatyear?]

Why S&P500 and not a TotalMarketIndex fund?

I may in fact go with TSM Index. When I first joined this site a few years back the 10-year annualized growth rate for TSM was something like 0.1% which caused me to shun it. But I've see it "catch up" to my managed funds and I realize now that it waxes and wanes. We'll see.