NonQual Dividends

[2beachcombers]

For 2012, I calculated the ratio of qualified to total dividends for each of my taxable assets. I was surprised at the amount of non-qual dividends I had this yr.
My situation: All assets to heirs, Bernstein IDA AA, 40% taxable, 30% IRA, 30% Roth, 250K carryover loss, Don't need the dividends(pensions, SS cover expences)

Qualified to Total
FSTVX--99%
FSEVX--71%
FSIVX--85%
VSS----49%
VWO-- 57%

I have just rebalanced and have moved VSS to my Deferred Roth. 3 reasons motivated this move(reduce current taxes-25% marginal tax bracket; Bernstein recommendation from Manifesto; and carryover cap gains to cover VSS cap gains).

Replaced VSS $$ in taxable with additional VWO and FSIVX to maintain foreign tax credit.

edit to clarify ratios. Non qualified would be 1-above ratios

Opinions on my move ??

TIA

jerry

[Grasshopper]

Could be that the new benchmarks have something to do with it. Big rebalance of some funds

https://personal.vanguard.com/us/insigh ... 2-10112012

[livesoft]

FSTVX--99%
FSEVX--71%
...

It appears that you have listed the percentage of qualified dividends for these funds and not the ratio of qualifed:non-qualified dividends. That's confusing because you are writing about non-qualified dividends. Can you please clarfiy?

I was surprised of the amount of dividends I had this year in taxable accounts (which have not changed significantly in terms of holdings or number of shares). From my tax returns, dividends in 2012 were about 8% higher than 2011. In 2011, 74% of dividends were qualified for my taxable account which consists mostly of small-cap value (VBR), small-cap int'l (VSS), large-cap int'l (VEU), and a bit of large-cap index (VLCAX). I don't have 1099DIV yet for 2012, so I can't say if 2012 will have a different percentage, but I doubt it will be much different.

[TNG]

I have just rebalanced and have moved VSS to my Deferred Roth. 3 reasons motivated this move(reduce current taxes-25% marginal tax bracket; Bernstein recommendation from Manifesto; and carryover cap gains to cover VSS cap gains).

Replaced VSS $$ in taxable with additional VWO and FSIVX to maintain foreign tax credit.

First, I'm not sure what a "deferred roth" is, so that may affect the analysis.

As to your question, assuming 1) VSS continues to yield more than VWO AND 2) the ratio of qualified/total dividend remains same or constant, you've positioned yourself appropriately.

But given the VWO index transition, I think it's likely that #2 moves unfavorably. According to the link below (undated, so maybe I'm using stale info), South Korea is among the countries with which we have a tax treaty allowing for qualified dividends. Since FTSE index will have proportionately more in all other countries, it is certain that VWO's qualified dividend% cannot improve since South Korea's 15% will be spread among a handful of other countries, some of which likely will not have qualified dividends. Of course the US may negotiate tax treaties with those countries, but that's beyond this analysis.

So in sum, it's likely to be a toss-up going forward. To improve tax efficiency you may be better off transitioning any new money into the Vanguard equivalents of your other holdings (compare your Spartan funds to Vanguard's via M*'s tax tool--you might be surprised how much a difference the shared ETF/Mutual Fund platform makes, especially between the Extended Market funds. Hint: more than makes up for the cost difference between FSEVX over VEXAX)

http://secfilings.nyse.com/filing.php?ipage=8522947&DSEQ=&SEQ=114&SQDESC=SECTION_PAGE

[2beachcombers]

FSTVX--99%
FSEVX--71%
...

It appears that you have listed the percentage of qualified dividends for these funds and not the ratio of qualifed:non-qualified dividends. That's confusing because you are writing about non-qualified dividends. Can you please clarfiy?

Yes, you are correct. I did the ratio of qualified to total dividends as my objective is to max the qualified dividens. Will amend original to clarify. Non qual dividens would be 1- above ratio.

I was surprised of the amount of dividends I had this year in taxable accounts (which have not changed significantly in terms of holdings or number of shares). From my tax returns, dividends in 2012 were about 8% higher than 2011. In 2011, 74% of dividends were qualified for my taxable account which consists mostly of small-cap value (VBR), small-cap int'l (VSS), large-cap int'l (VEU), and a bit of large-cap index (VLCAX). I don't have 1099DIV yet for 2012, so I can't say if 2012 will have a different percentage, but I doubt it will be much different.

My taxable account was 78% qualified(2012). Have large international large cap holdings holdings in tax deferred which is one reason I may have a higher ratio. As we have discussed before, I am still working to eliminate dividends and especially non qual.

thanks again------------------ threads below are from our previous discussions on dividends
.bogleheads.org/forum/viewtopic.php?f=1&t=105714
bogleheads.org/forum/viewtopic.php?f=10&t=103139

[2beachcombers]

I have just rebalanced and have moved VSS to my Deferred Roth. 3 reasons motivated this move(reduce current taxes-25% marginal tax bracket; Bernstein recommendation from Manifesto; and carryover cap gains to cover VSS cap gains).

Replaced VSS $$ in taxable with additional VWO and FSIVX to maintain foreign tax credit.

First, I'm not sure what a "deferred roth" is, so that may affect the analysis.

Of course a Roth is tax deferred so no annual tax impact to the dividends. I got A's in physics barely managed C's in englush.

As to your question, assuming 1) VSS continues to yield more than VWO AND 2) the ratio of qualified/total dividend remains same or constant, you've positioned yourself appropriately.

Thanks for you input. My education continuues

Currently my VSS is yielding 2.5X VWO in non-quals, so Korea will have to make one heck of a difference. Good point, will monitor each quarter.


And Grasshopper--thanks for the Korea thread; fits well with this discussion.
But given the VWO index transition, I think it's likely that #2 moves unfavorably. According to the link below (undated, so maybe I'm using stale info), South Korea is among the countries with which we have a tax treaty allowing for qualified dividends. Since FTSE index will have proportionately more in all other countries, it is certain that VWO's qualified dividend% cannot improve since South Korea's 15% will be spread among a handful of other countries, some of which likely will not have qualified dividends. Of course the US may negotiate tax treaties with those countries, but that's beyond this analysis.

So in sum, it's likely to be a toss-up going forward. To improve tax efficiency you may be better off transitioning any new money into the Vanguard equivalents of your other holdings (compare your Spartan funds to Vanguard's via M*'s tax tool--you might be surprised how much a difference the shared ETF/Mutual Fund platform makes, especially between the Extended Market funds. Hint: more than makes up for the cost difference between FSEVX over VEXAX)

Will educate myself on your recommendation. My motivation to stay with the spartan funds as 95% of the dividends are at the end of the year and many years I simply sell and repurchase around the EX-dividend date. (have beacoup loss carryovers). Will take a closer look at the extended market fund tax efficiencies.

http://secfilings.nyse.com/filing.php?ipage=8522947&DSEQ=&SEQ=114&SQDESC=SECTION_PAGE

Copied the M* comparison as you recommended. Impressive.
Tax-adjusted Return for the past few years *
VEXAX 6.76 11.24 16.63 6.76 17.26 16.91 6.69
FSEVX 6.19 10.49 15.64 6.19 16.18 16.01 6.12
The only significant difference that I see between these two compositions is the FIDO fund is 22% vs 17'% in financials. VEXAX and VXF appear identical?

I am not familiar with the "shared ETF/MF platforms".
I did some quick calculations comparing the er's and dividends and taxes for last year for VXF, FSEVX , and VEXAX with a 120K investment and difference was less than 100$. Am I missing something?
TIA
jerry

[2beachcombers]

TNG

NEW QUESTION ON TAX RATIOS

ISHARES S&P SMALLCAP 600 VALUE VANGUARD SMALL CAP VALUE ETF
Tax Cost Ratio
IJS 0.47%
VBR 0.89%

Is the following calculation correct? Multiplying the above ratios by 150K$ shows :
VBR costs 1335$ subtract off(.29-.21) er * 150K yields 1215$
IJS costs 675$

Does this mean IJS is less expensive?

jerry

[livesoft]

Quick comment: I would not use a reported "tax cost ratio" from any place on line to make decisions. I think one has to do the calculations from the dividends themselves.

[2beachcombers]

Quick comment: I would not use a reported "tax cost ratio" from any place on line to make decisions. I think one has to do the calculations from the dividends themselves.

please educate me--could not find a good definition or how to calculate the tax ratio. I just compared several funds on FIDO web?

[livesoft]

I thought you just calculate the taxes YOU would pay on each of those invesments based on their dividends, qualified and non-qualified. You use your tax rates and look up the historical dividends.

[2beachcombers]

I thought you just calculate the taxes YOU would pay on each of those invesments based on their dividends, qualified and non-qualified. You use your tax rates and look up the historical dividends.

Thanks. Just realized I don't even care what the tax ratio is----my IJS holdings are in my Roths.

I'll have FIDO explain their numbers

[TNG]

Does this mean IJS is less expensive?

2beachcombers:

Your math appears correct, though as Livesoft says, don't get too invested in M*'s numbers. The important thing with thinking about taxes is "all else equal." As in, both FSEVX and VEXAX are extended market index funds, so they are approximately identical except for fund family-related management differences (yeah, technically they track different indexes, but that's small beans). Where all else is not equal, then you're letting taxes dictate when maybe other factors (allocation, placement, etc) are far more important. So as to your question of ishares vs vbr, you're not comparing exactly apples to apples in the same way as FSEVX to VEXAX, so I am agnostic.

The point I intended to make with the comparison between the Spartan and VG equivalents via M*'s tax analysis could also be proven by looking at the each fund's distribution history. VEXAX hasn't had a capital gain distribution in at least 3 years. FSEVX, on the other hand, distributed about 3% capital gains in 2012 and about 2.2% in 2011--that's on top of the 1.8% dividend in 2012 and 1.2% in 2011.

So regardless of the exact numbers M* gives for tax cost ratio, it's common sense that the fund that distributed 3% capital gains plus 1.8% dividend will cost more in taxes than the one which only distributes 1.8% dividend. Will this persist? Who knows, but I'm guessing one reason for the difference in distributions between otherwise nearly-identical funds is that VEXAX dumps a lot of its highly-appreciated shares via in-kind redemption of etfs. VG's fund thus is likely to continue to be more tax efficient than Fidelity's. This is why I suggested you might consider redirecting new money into the VG product--that way you incur no additional tax burden from selling (although you have some large loss-carryforwards) and new money becomes more (likely) tax-efficient. Adding in new funds complicates things beyond my ken.

[2beachcombers]

Does this mean IJS is less expensive?

2beachcombers:

Your math appears correct, though as Livesoft says, don't get too invested in M*'s numbers.
Livesoft has always steared me straight--this last tax comparison was actually from FIDO and I will have them explain.
The important thing with thinking about taxes is "all else equal." As in, both FSEVX and VEXAX are extended market index funds, so they are approximately identical except for fund family-related management differences (yeah, technically they track different indexes, but that's small beans). Where all else is not equal, then you're letting taxes dictate when maybe other factors (allocation, placement, etc) are far more important. So as to your question of ishares vs vbr, you're not comparing exactly apples to apples in the same way as FSEVX to VEXAX, so I am agnostic.

The point I intended to make with the comparison between the Spartan and VG equivalents via M*'s tax analysis could also be proven by looking at the each fund's distribution history. VEXAX hasn't had a capital gain distribution in at least 3 years. FSEVX, on the other hand, distributed about 3% capital gains in 2012 and about 2.2% in 2011--that's on top of the 1.8% dividend in 2012 and 1.2% in 2011.

So regardless of the exact numbers M* gives for tax cost ratio, it's common sense that the fund that distributed 3% capital gains plus 1.8% dividend will cost more in taxes than the one which only distributes 1.8% dividend. Will this persist? Who knows, but I'm guessing one reason for the difference in distributions between otherwise nearly-identical funds is that VEXAX dumps a lot of its highly-appreciated shares via in-kind redemption of etfs. VG's fund thus is likely to continue to be more tax efficient than Fidelity's. This is why I suggested you might consider redirecting new money into the VG product--that way you incur no additional tax burden from selling (although you have some large loss-carryforwards) and new money becomes more (likely) tax-efficient. Adding in new funds complicates things beyond my ken.

TNG

Thanks for your very clear explanations. And you gave me a good understanding of this blended fund.
I apologize for confusing my questions by switching between Mid cap blend to small cap value.
During the time this thread started, thru thread searches,and rereading the Manifesto, I have come to realize that in fact my portfolio needs to get more small cap blend.
I think, I was so focused on er's that I slid to blended midcaps instead of blended small caps.

So I have posted a new thread to clear the air.

VB or IJR or what for my taxable account ?

TNG and livesoft:

At the same time as above, again thru researching thru threads, I will keep my IJS in Tax deferred as this also leans more to small cap.
This is a great site, I've enjoyed the education over the years.

jerry

[TNG]

Upon some reflection, if you're talking about $120K worth of FSEVX, the 2012 tax impact of a 3% capital gain distribution is about $540 (assuming all long-term gains and 15% rate). If you have $250K worth of loss carry forward, then $540 is a rounding error and would seem to not be worth your time switching if your sole motivation is tax efficiency.

As between IJR and VB, you could flip a coin. IJR's supposed strength is its fidelity to small cap style. VB (under the old benchmark) has had a much deeper roster, so spilled more into mid-cap. Will small cap beat mid cap? Your intention to tilt to small suggests you've drawn a conclusion. My take: it doesn't really matter--maybe the tiebreaker is that if you're with Fidelity then you can trade IJR commission free.


Cheers!

[2beachcombers]

Upon some reflection, if you're talking about $120K worth of FSEVX, the 2012 tax impact of a 3% capital gain distribution is about $540 (assuming all long-term gains and 15% rate). If you have $250K worth of loss carry forward, then $540 is a rounding error and would seem to not be worth your time switching if your sole motivation is tax efficiency.

As between IJR and VB, you could flip a coin. IJR's supposed strength is its fidelity to small cap style. VB (under the old benchmark) has had a much deeper roster, so spilled more into mid-cap. Will small cap beat mid cap? Your intention to tilt to small suggests you've drawn a conclusion. My take: it doesn't really matter--maybe the tiebreaker is that if you're with Fidelity then you can trade IJR commission free.


Cheers!

Great--and thanks again for all the help BACK to YA

[grabiner]

Quick comment: I would not use a reported "tax cost ratio" from any place on line to make decisions. I think one has to do the calculations from the dividends themselves.

please educate me--could not find a good definition or how to calculate the tax ratio. I just compared several funds on FIDO web?

Check the fund company's own data. Morningstar doesn't always know about qualified dividends, so it may report a higher tax cost than the correct cost. And most fund companies use data from sources such as Morningstar for funds from other providers. Thus Vanguard will have the correct tax costs for Vanguard funds, but not for Fidelity funds.

The official data will give you a good estimate of relative tax costs, but you may also want to consider your own situation. Most official data assumes that you are in the highest federal tax bracket but pay no state tax. Your own tax rates may be different if you are in a lower federal bracket but pay state taxes, particularly since all states impose the same tax rate on qualified and non-qualified dividends, and most states tax long-term and short-term gains at the same rate.

[2beachcombers]

Thanks David.

Glad someone clears the air. The financial industry sure has a thick veil over things that should be simple math.

jerry