Do I understand Grabiner's bottom line on location for TISM?

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Calm Man
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Do I understand Grabiner's bottom line on location for TISM?

Post by Calm Man »

I read the other post today where Mr. Grabiner opined on putting TISM in tax deferred because although you lose the FTC it is offset by only 70% being QDI. So am I correct that it is about a wash but that if all else is equal, even if one is in a high tax bracket, that one is better off using TISM in tax deferred and TSM in taxable to the extent the account balances permit it? I think this is a simple yes or no question which I know is difficult here :D
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Re: Do I understand Grabiner's bottom line on location for T

Post by rkhusky »

Yes..
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Re: Do I understand Grabiner's bottom line on location for T

Post by Artsdoctor »

I'm not sure there are very many simple questions on this board.

TISM has a higher dividend than TSM now. The QDI is in the 70s. For high-income earners, I think you'd have to at least be cautious.

But to put all of your TISM in a tax-DEFERRED account does have some drawbacks as well. All those capital gains decades from now . . . will be taxed at ordinary income.

I think a more interesting question might be putting TISM in a Roth. You'd forgo the FTC but the dividends grow tax-free and you'd never pay a capital gain.

You can play a bit with splits: Tax-Managed International doesn't have much in the way of small caps or emerging markets, but the dividends at slightly less and the QDIs are 100%. You could load up on Tax-Managed International in the taxable account, and put Emerging Markets with Small Cap International in a Roth, for example.

Lots of possibilities, but rarely black and white answers.

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Re: Do I understand Grabiner's bottom line on location for T

Post by grabiner »

Calm Man wrote:I read the other post today where Mr. Grabiner opined on putting TISM in tax deferred because although you lose the FTC it is offset by only 70% being QDI. So am I correct that it is about a wash but that if all else is equal, even if one is in a high tax bracket, that one is better off using TISM in tax deferred and TSM in taxable to the extent the account balances permit it? I think this is a simple yes or no question which I know is difficult here :D
My post was on a different issue: is it worth putting an international fund in taxable even if you have tax-deferred room? I concluded that the tax deferral is still better, even if you are in a 15% tax bracket and thus would pay tax only on the non-qualified dividends.

If the choice is between holding US or foreign stocks in a taxable account, it's close. If the dividend yields are equal, then foreign stocks will have a lower tax cost; you get 7% of the dividend back as foreign tax credit, and even if 30% of the dividend is non-qualified, 30% times the difference between qualified and non-qualified dividend yields is less than 7%.

However, in the last five years, international yields have been higher, and that makes it better to hold most US stock funds in a taxable account. One exception is Tax-Managed International: with 100% qualified dividends eligible for the foreign tax credit, you will pay only 8% net tax on the dividends (unless you are in a very high bracket and pay the Affordable Care Act surtax), versus 15% for Total Stock Market, so Tax-Managed International is the best fund for a taxable account as long as US yields are more than half of foreign yields. As Artsdoctor suggested, you could split your international portfolio, holding TM International in taxable and Emerging Markets Index and FTSE Small-Cap ETF in an IRA, with Total Stock Market the rest of your taxable portfolio.

But all of these funds are very tax-efficient and fine in a taxable account. I would tend to prefer Total International in taxable just because I don't see any reason that US yields should stay lower than foreign yields, but any difference is a few basis points. For most investors, the more important criterion is the quality of the US and foreign funds in your 401(k); most 401(k)s have better US than foreign options, which is a reason to put international funds in taxable.
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Re: Do I understand Grabiner's bottom line on location for T

Post by livesoft »

^ But some folks somehow have a problem with tax forms and in particular Form 1116. For those folks, putting int'l in tax-deferred will reduce anxiety.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Artsdoctor »

Livesoft,

This is the second (or third) time you've made me laugh! You can't be suggesting that you should make financial decisions because a tax form makes you anxious!

Artsdoctor

(And I do mean this tongue-in-cheek . . . )
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Re: Do I understand Grabiner's bottom line on location for T

Post by Calm Man »

Thanks for all of the replies. Per livesoft's post, I don't have anxiety about the 1116 form but I wouldn't mind avoiding it. Turbotax would have the anxiety, not me. It sounds like there are a lot of factors and we don't know the future. I think maybe splitting half and half in both taxable and tax deferred might be a compromise that even bogleheads couldn't argue with.

I looked at Mr Grabiner's idea of Tax managed international. It seems to not have emerging markets in it though.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Artsdoctor »

Calm Man,

That's correct: Tax-Managed International is not meant to be a substitute for Total International. The former is a large-cap developed market fund and you're missing out on both small caps and emerging markets. "Splitting the difference," as you suggested, could be done by holding the Tax-Managed International fund in your taxable account (because the fund is so very tax-efficient), and Emerging Markets in a tax-advantaged account (because it's not nearly as "efficient" as the Tax-Managed fund, maybe only 65% QDI, and a somewhat higher dividend, for now). The ratio, you can decide. But Total International holds roughly 25% Emerging Markets.

If assets are relatively small, you're not in a particular high tax bracket, and you want to keep it simple, then Total International in a taxable account is just fine, in my opinion.

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Re: Do I understand Grabiner's bottom line on location for T

Post by rkhusky »

livesoft wrote:^ But some folks somehow have a problem with tax forms and in particular Form 1116. For those folks, putting int'l in tax-deferred will reduce anxiety.
I seem to recall that you would need on the order of $300K in int'l in a taxable account before you need to worry about Form 1116.
Artsdoctor wrote: But to put all of your TISM in a tax-DEFERRED account does have some drawbacks as well. All those capital gains decades from now . . . will be taxed at ordinary income.
All the capital gains from TSM in a tax-deferred account will also be taxed as ordinary income when withdrawn.
Calm Man wrote:I think maybe splitting half and half in both taxable and tax deferred might be a compromise that even bogleheads couldn't argue with.
Apart from the added complexity of having more accounts to keep track of, you get the advantage of a simpler rebalancing mechanism between US and int'l.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Doc »

rkhusky wrote:Artsdoctor wrote:
But to put all of your TISM in a tax-DEFERRED account does have some drawbacks as well. All those capital gains decades from now . . . will be taxed at ordinary income.
All the capital gains from TSM in a tax-deferred account will also be taxed as ordinary income when withdrawn.
No the capital gains that belong to you will not be taxed at all. The only tax that is paid is that on that amount of your account balance which is the tax that you didn't pay when you made your contribution in the first place plus any gains either ordinary or capital on those "deferred taxes" which has always belonged to the government not you.

This myth that deductible tax deferred accounts - tIRA's - turn capital gains into ordinary income has been debunked many times on this and other forums but keeps rearing its head. Forget the term "tax deferred" and "tax exempt" for a tIRA and a ROTH and calculate how much you have left after you pay all the taxes. Your after tax return is all that matters. The amount you give to the government should only concern you political affiliation not your investment plan.

Simple example:

Roth: Invest $1000 pretax in a ROTH in the 25% tax bracket and take it out when it doubles in size.

Future After Tax Value ROTH = $1000 x (1-.25) x 2 = $1500

tIRA: Invest $1000 pretax in a tIRA, take it out when it doubles and pay taxes at 25%

Future After Tax Value tIRA = $1000 x 2 x (1-.25) = $1500

Its the same equation with the terms in a different order. There is no difference between the After Tax Future Value of a ROTH and a tIRA unless the tax rate changes.
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Re: Do I understand Grabiner's bottom line on location for T

Post by richard »

Doc wrote:Your after tax return is all that matters. The amount you give to the government should only concern you political affiliation not your investment plan.
Yep. Too many people are focused on reducing taxes as an end in itself. The goal is after tax return.
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Re: Do I understand Grabiner's bottom line on location for T

Post by BrandonBogle »

As Doc is trying to point out are two key factors

1 - If taxed at the same rate now vs later, then Roth vs Traditional makes no difference as long as one invests the same effective amount. The same would apply with Taxable in the mix.

2 - In Roth vs Traditional, given the scenario of #1 (same tax rates), the only difference you would see are a) how much effective capital you put in and b) the growth of his capital.

This is where Roth can "grow bigger" than Traditional. Aside from the investment growth, the biggest factor is that with a Roth, you have a higher maximum of "effective capital" you can put in, i.e., on an after tax basis, you can deposit more in Roth.

Given the above, if you do NOT max out your tax-advantaged space AND feel you will be in the same tax rates at retirement, then Traditional vs Roth is a mute discussion. If you ARE maxing out your tax-advantaged space though, Roth gives you more tax-advantaged space per year.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Artsdoctor »

Doc,

You are so very right. Using your calculations, in absolute terms and in a vacuum, the numbers are identical and I apologize for the oversight.

When I think about a Roth, I subconsciously put away the taxes that I've paid to get that money into the Roth. For example, you're saying that my $1000 will generate $250 in taxes so that I would only be "allowed" to put $750 into the Roth, and that is absolutely correct. In my mind, I'm paying the taxes "from elsewhere" and at the end of the day, I will have $1000 in my Roth to accumulate what it's going to accumulate. That is faulty logic, of course.

It is a little along the same lines as converting a tIRA to a Roth. It only makes sense, usually, to do it if you can afford to pay the taxes out of "a different account" and would probably not make sense to pay it out of the IRA proceeds. But those taxes have to come from somewhere.

For some reason, and this is certainly not correct, I always assume that it's easier to pay taxes during your working years, and that minimizing taxes once you have no more salary is "easier on the pocket book." But I definitely see your point.

Thanks.

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Re: Do I understand Grabiner's bottom line on location for T

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Doc wrote: This myth that deductible tax deferred accounts - tIRA's - turn capital gains into ordinary income has been debunked many times on this and other forums but keeps rearing its head.
Wait. Are not capital gains generated in a tIRA taxed as ordinary income when withdrawn? It seems that would be relevant when determining whether to invest in a taxable account vs. a tIRA.

I thought the question was whether to put TSM in a Roth vs. tIRA, as opposed to putting TISM there (or TBM). The answer would depend on which had the greater expected gains. It is not clear to me which one that would be.
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Re: Do I understand Grabiner's bottom line on location for T

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rkhusky wrote:
Doc wrote: This myth that deductible tax deferred accounts - tIRA's - turn capital gains into ordinary income has been debunked many times on this and other forums but keeps rearing its head.
Wait. Are not capital gains generated in a tIRA taxed as ordinary income when withdrawn? It seems that would be relevant when determining whether to invest in a taxable account vs. a tIRA.

I thought the question was whether to put TSM in a Roth vs. tIRA, as opposed to putting TISM there (or TBM). The answer would depend on which had the greater expected gains. It is not clear to me which one that would be.
Capital gains generated in a tIRA are not taxed as ordinary income. The reason is that you already had to pay taxes on ordinary income to invest in a taxable account. Traditional, tax-deferred ALWAYS beats taxable. As Doc wrote earlier, the difference between a Roth and Traditional account is just the order of operations of multiplication. When you compare Roth vs. taxable, we would never prefer a taxable account. A Traditional/tax-deferred account hides the benefit a little since it looks like capital gains are being taxed as ordinary income, but once you account for the tax deduction, it equals a Roth.

The question in this thread was mainly about whether to place TSM or TISM in a taxable account, assuming one was investing in taxable ONLY because there is no more available tax-advantaged space.
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Re: Do I understand Grabiner's bottom line on location for T

Post by rkhusky »

Ketawa wrote: Capital gains generated in a tIRA are not taxed as ordinary income.
So, I have to keep track of capital gains and dividends in my 401K?
Ketawa wrote: Traditional, tax-deferred ALWAYS beats taxable.
Even if the CG tax rate is zero? Edit: OK, if CG and Div rates are zero, taxable=Roth.
Last edited by rkhusky on Wed Mar 13, 2013 11:35 am, edited 1 time in total.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Doc »

Ketawa wrote: The question in this thread was mainly about whether to place TSM or TISM in a taxable account, assuming one was investing in taxable ONLY because there is no more available tax-advantaged space.
Right. The reason I brought up the tIRA/ROTH situation is that people were letting "the reduce taxes" vs "maximize after tax returns" confuse the issue in the OP.

Regarding David Grabiner's thoughts: David and I both suffer from "bias of the familiar". We both look at things from our own viewpoint. David has the QDI and foreign tax concepts correct. I am not however sure his result has universal application. It may depend on what your own tax situation is. As a retiree on SS I have to worry about SS taxation phaseout and reached a different conclusion than David. But I am sure my situation has limited applicability to others so I do not challenge David's analysis.
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Re: Do I understand Grabiner's bottom line on location for T

Post by rkhusky »

Ketawa wrote: The question in this thread was mainly about whether to place TSM or TISM in a taxable account, assuming one was investing in taxable ONLY because there is no more available tax-advantaged space.
You are right. It was a subsequent response that brought up the Roth vs. tIRA issue.
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Re: Do I understand Grabiner's bottom line on location for T

Post by rkhusky »

A variation on Doc's example:

$1000 income available for investing, 25% tax bracket. If placed in a tIRA, you save $250 in taxes, allowing you to invest $1250 in the tIRA versus $1000 in Roth. Assume 100% gain in a given amount of time and then remove. You would have $1875 in the tIRA after paying the taxes vs. $2000 in the Roth. Edit: As noted below, one should consider $1333 invested in the tIRA. (The extra $250 invested will produce more tax savings, which would allow more investment, etc.)

Another variation. Same as above but instead of investing the extra $250 in the tIRA, it is just an extra $250 in a taxable account invested in the same fund (suppose $1000 is the max that can go into an IRA). Then one has $1500 from the tIRA withdrawal after taxes and $437.50 in the taxable account after paying taxes on the $250 gain (assumed to be taxed at 25% rate), for a total of $1937.50 (would approach $2000 as CG/Div rates -> 0).
Last edited by rkhusky on Wed Mar 13, 2013 12:25 pm, edited 2 times in total.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Ketawa »

rkhusky wrote:A variation on Doc's example:

$1000 income available for investing, 25% tax bracket. If placed in a tIRA, you save $250 in taxes, allowing you to invest $1250 in the tIRA versus $1000 in Roth. Assume 100% gain in a given amount of time and then remove. You would have $1875 in the tIRA after paying the taxes vs. $2000 in the Roth.
You should actually compare investing $1333 in the Traditional IRA vs $1000 in a Roth IRA. Let's say you have $1333 of income. You can either invest $1333 in a Traditional IRA, or you can pay 25% tax on that income and invest $1000 in a Roth IRA. Then the final after-tax values are the same.
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Re: Do I understand Grabiner's bottom line on location for T

Post by rkhusky »

Ketawa wrote:
rkhusky wrote:A variation on Doc's example:

$1000 income available for investing, 25% tax bracket. If placed in a tIRA, you save $250 in taxes, allowing you to invest $1250 in the tIRA versus $1000 in Roth. Assume 100% gain in a given amount of time and then remove. You would have $1875 in the tIRA after paying the taxes vs. $2000 in the Roth.
You should actually compare investing $1333 in the Traditional IRA vs $1000 in a Roth IRA. Let's say you have $1333 of income. You can either invest $1333 in a Traditional IRA, or you can pay 25% tax on that income and invest $1000 in a Roth IRA. Then the final after-tax values are the same.
You're right. I thought of that later when considering what happens if you've reached the IRA limits and so added a second variation above. So, suppose you have $1333.33 in gross income and $1000 is the IRA limit. Paying 25% on the full amount, leaves $1000 for a Roth and nothing else. Alternatively, one puts $1000 in a tIRA, leaving $333.33 in taxable income, resulting in $250 after taxes, which is placed in a taxable account. As the calculations above show, one is left with less money total with the tIRA than with the Roth.
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Re: Do I understand Grabiner's bottom line on location for T

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rkhusky wrote:
Doc wrote: This myth that deductible tax deferred accounts - tIRA's - turn capital gains into ordinary income has been debunked many times on this and other forums but keeps rearing its head.
Wait. Are not capital gains generated in a tIRA taxed as ordinary income when withdrawn? It seems that would be relevant when determining whether to invest in a taxable account vs. a tIRA.
The way I view this is that the IRS owns 25% of your traditional IRA if you are in a 25% tax bracket. If you have $750 to invest, you can put $1000 in an IRA because you get $250 back in taxes, but the IRS will take 25% of any withdrawals. You own $750 of the account, which can grow tax free.

Your logic is correct for a non-deductible IRA which you cannot convert to a Roth. If you invest $1000 in a non-deductible IRA, the IRS will take 25% of the gains; if you invest $1000 in a taxable account, the IRS will take 15% of the dividends every year, and 15% of the capital gains when you sell. Therefore, it is usually better to put stocks in a taxable account rather than in a non-deductible IRA. (Conversely, if you put bonds in a non-deductible IRA, you pay tax at the same rate as in a taxable account, but you gain the benefit of tax deferral. Therefore, it is usually better to open a non-deductible IRA if you can hold bonds there.)
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Re: Do I understand Grabiner's bottom line on location for T

Post by avalpert »

grabiner wrote:
rkhusky wrote:
Doc wrote: This myth that deductible tax deferred accounts - tIRA's - turn capital gains into ordinary income has been debunked many times on this and other forums but keeps rearing its head.
Wait. Are not capital gains generated in a tIRA taxed as ordinary income when withdrawn? It seems that would be relevant when determining whether to invest in a taxable account vs. a tIRA.
The way I view this is that the IRS owns 25% of your traditional IRA if you are in a 25% tax bracket. If you have $750 to invest, you can put $1000 in an IRA because you get $250 back in taxes, but the IRS will take 25% of any withdrawals. You own $750 of the account, which can grow tax free.

Your logic is correct for a non-deductible IRA which you cannot convert to a Roth. If you invest $1000 in a non-deductible IRA, the IRS will take 25% of the gains; if you invest $1000 in a taxable account, the IRS will take 15% of the dividends every year, and 15% of the capital gains when you sell. Therefore, it is usually better to put stocks in a taxable account rather than in a non-deductible IRA. (Conversely, if you put bonds in a non-deductible IRA, you pay tax at the same rate as in a taxable account, but you gain the benefit of tax deferral. Therefore, it is usually better to open a non-deductible IRA if you can hold bonds there.)
While I understand what you are getting at, I don't think it is quite fair to think of it as if the IRS owns x% of your tIRA. For example, my marginal tax rate this year was 28% and was 25% last year - did the IRS just get 3% more of my tIRA/401k? Is that so even though I anticipate withdrawals in retirement to be mostly when my marginal tax rate is 0%?
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Re: Do I understand Grabiner's bottom line on location for T

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avalpert wrote:While I understand what you are getting at, I don't think it is quite fair to think of it as if the IRS owns x% of your tIRA. For example, my marginal tax rate this year was 28% and was 25% last year - did the IRS just get 3% more of my tIRA/401k? Is that so even though I anticipate withdrawals in retirement to be mostly when my marginal tax rate is 0%?
The fraction of your IRA that the IRS owns is your tax rate in retirement. If you are in a higher tax bracket now, then you get a subsidy on your contributions, making the traditional IRA better than a tax-free Roth IRA. Likewise, you want your traditional IRA (or other retirement income such as a pension) to be large enough to cover the lower tax brackets in retirement; again, using up the lower brackets makes a traditional IRA better than a Roth.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Artsdoctor »

Doc,

Thanks again for pointing out the arithmetic. And your term "bias of the familiar" is actually a perfect term; I've become so familiar with my financial situation that my focus may be different than some or even most. I have always maxed out every possible account wherever I've worked (except for one horrible 401k) and my breakdown in mid-life is about 60% taxable, 30% tIRAs, and 10% Roths. That may not be similar to most.

The concept of after-tax return is important. But over several decades, I have learned (for me) that tax rates are so extraordinarily variable that "tax diversification" is key as well. The thought that my marginal tax rate in retirement will be lower than when I started saving in my first 403b during medical residency is a fantasy; I cannot know the future, but I can make a reasonable guess that taxes during my retirement will be much, much greater than they were when I was 30.

When I have to pony up taxes during my working years, of course it hurts. But it's "the cost of doing business." My IPS pretty much forces me to save X come hell or high water, and I'll pay whatever tax is necessary to get there. Taxes once my earned income ceases will take on a greater importance than they do now. But this thread has hammered, again, that the tax tail shouldn't wag the investment dog. However, what I'm trying to accomplish with my investment plan is flexibility. As some of my prior comments might indicate, I do invest with a certain amount of conservative pessimism; consequently, I do see my tIRAs as a tax bomb. In a perverted way, I'm not stressing out too much in this low interest rate environment now because most of my tIRA accounts are filled with bonds, bond funds, and CDs; I need those bonds to lessen the volatility of my equities (in my taxable and Roth accounts) and the lower yields ultimately will lessen my RMDs. Of course I'd rather have more income from those investments but, for now, I just have to hold my nose. Perhaps perverted logic, but true; my equities will be cashed out and I will pay capital gains (and who knows where those will be), which will hopefully be less than income tax.

For some to say that "traditional, tax-deferred ALWAYS beats taxable" is something I cannot agree with. There are 401s out there without matching contributions with administrative fees over 2.5%, and the investment options are horrible. If you don't anticipate changing jobs in the near future, you may not come out ahead by maxing out that plan. And some of those plans will not even allow you to rollover to an outside plan unless you're 55 or older. Furthermore, a non-governmental 457 plan has significant limitations which shouldn't be underestimated (you can't rollover to anything but another 457 and your funds are only as good as the financial health of your business). But the "rules of investment location prioritization" are at least a good starting point.

Interesting how the meandering nature of this thread has turned out. But you definitely have taught me to at least try and limit my "bias to the familiar."

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Re: Do I understand Grabiner's bottom line on location for T

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Artsdoctor wrote:For some to say that "traditional, tax-deferred ALWAYS beats taxable" is something I cannot agree with. There are 401s out there without matching contributions with administrative fees over 2.5%, and the investment options are horrible. If you don't anticipate changing jobs in the near future, you may not come out ahead by maxing out that plan. And some of those plans will not even allow you to rollover to an outside plan unless you're 55 or older. Furthermore, a non-governmental 457 plan has significant limitations which shouldn't be underestimated (you can't rollover to anything but another 457 and your funds are only as good as the financial health of your business). But the "rules of investment location prioritization" are at least a good starting point.
Good points. I was mainly talking about the tax implications of a traditional, tax-deferred account when comparing it to a taxable account, hence my "traditional, tax-deferred ALWAYS beats taxable". The example given had also been about a traditional IRA where investment choices are not limited. A high-fee 401k is inferior to a taxable account in some cases, and I think it is mentioned in the wiki somewhere.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Easy Rhino »

if domestic and international yields were the same, would that change the ideal location of TISM much?
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Re: Do I understand Grabiner's bottom line on location for T

Post by grabiner »

Easy Rhino wrote:if domestic and international yields were the same, would that change the ideal location of TISM much?
If the yields are equal, then a foreign index is better than a US index in taxable, because the foreign tax credit is more than the loss to non-qualified dividends.

If foreign yields are higher, then a US index may be better than a foreign index in taxable, and that is what the estimates in this thread have indicated.
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Re: Do I understand Grabiner's bottom line on location for T

Post by Doc »

grabiner wrote:
Easy Rhino wrote:if domestic and international yields were the same, would that change the ideal location of TISM much?
If the yields are equal, then a foreign index is better than a US index in taxable, because the foreign tax credit is more than the loss to non-qualified dividends.

If foreign yields are higher, then a US index may be better than a foreign index in taxable, and that is what the estimates in this thread have indicated.

Equal yields get to be a very "iffy" metric. We don't have a lot of data. And are we saying equal total returns or equal dividends? I have heard it said that foreign investments return a higher dividend than US firms but I am unclear whether that refers to percent of total return or percent of NAV. There is apparently also a big difference in qualified percent from LC to SC to EM.

I decided to assume that the total returns are equal and am using Grabiner's first "if".

I look at foreign from the point of reducing the variation or risk in my equity portfolio not as a return improvement. So I just take the foreign tax deduction as a freebie.
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Re: Do I understand Grabiner's bottom line on location for T

Post by grabiner »

Doc wrote:
grabiner wrote:If the yields are equal, then a foreign index is better than a US index in taxable, because the foreign tax credit is more than the loss to non-qualified dividends.

If foreign yields are higher, then a US index may be better than a foreign index in taxable, and that is what the estimates in this thread have indicated.
Equal yields get to be a very "iffy" metric. We don't have a lot of data. And are we saying equal total returns or equal dividends? I have heard it said that foreign investments return a higher dividend than US firms but I am unclear whether that refers to percent of total return or percent of NAV.
I am referring to equal dividend yield (as a percent of NAV), since that determines the tax cost. If the dividend yield on Total Stock Market is 2% and the dividend yield on Total International is 3%, then the tax cost for Total International will be slightly higher this year. (The long-run tax cost will also be higher if both funds have equal returns.)
There is apparently also a big difference in qualified percent from LC to SC to EM.
The recent Vanguard numbers are 75% for large-cap developed (except 100% for Tax-Managed International, which has been true since day one), 60% for large-cap emerging, 50% for small-cap (although non-Vanguard small-cap funds were closer to 60%).
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Re: Do I understand Grabiner's bottom line on location for T

Post by gwrvmd »

When it comes to comparing taxed vs tax deferred don't forget the effect of investing and compounding the deferred taxes.
I have taken advantage of tax deferral all my life: Keogh/HR10, 403(B), 401(k), IRA, spousal IRA. I am now 75 and 80% of my assets are tax deferred. Yes, as Grabiner said, the government owns 25% of them but I have been investing and compounding the taxes I didn't pay in the 70s, the 80s, the 90s and the 00s. I figure half of my tax deferred assets are unpaid taxes which are still continuing to compound and my RMD this year was 4.8% of tax deferred assets on which I will pay 25% tax. My rough calculation is that I will be receiving RMDs from my unpaid taxes until I am 85, after that my RMDs will be from what I paid in. What is not to like?....Gordon
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Re: Do I understand Grabiner's bottom line on location for T

Post by Doc »

grabiner wrote: I am referring to equal dividend yield (as a percent of NAV), since that determines the tax cost.
No the dividend only affects the tax cost for the current year. The difference between an investment with a total return of 10% with a 3% dividend and one with an 8% return and a 2% dividend is zero before tax. With taxes the difference Is the time value of the tax on the one percent that is paid now instead of when the investment is sold. So in the 30% bracket you are looking at only the earnings on 0.35% of you investment and that's not enough to worry about. It's well within the margin of error on your return assumptions.

On the other hand if one earns 10% total return and the other 9% that is a one percent difference in earnings every year and that is important. Possibly more important than the asset placement decision.

I believe that your analysis is based on both equal total return and equal dividends and therefore is addressing only the non-qualified portion and the foreign. And that is a valid comparison for those assumptions.

The point I was trying to make is that the validity of the assumptions and the tax rates chosen for comparison may not have wide applicability.

When this subject was brought up in another thread I looked at the qualified dividends and foreign tax for some non-Vanguard funds and ETFs and there was a great amount of variation. That made me question whether the available data has enough precision to justify using the data for the asset placement decision.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Do I understand Grabiner's bottom line on location for T

Post by 2beachcombers »

Great thread.

Many of us are struggling with placement of foreign investments. I got hammered last year with VSS non qual dividends in taxable. It is now in one of my Roths. Will investigate tax managed internationals. Have FSIVX and IEMX in taxable and VSS and IDV in Roths.
And still not comfortable with the placements.

I also get concerned that someone looking at this forum may feel Roth conversions are not that great. "Cela depend" It depends. They can Be.

I retired in 2000. I looked at my IRAs. 12 years in the future, at RMD time, I was looking forward to at least a 35% tax rate on my RMDs(with the new taxes, closser to 40%). I converted every $ I could when I first retired(and before SS) to Roths.
In 2010, I made a large charatible donation and use its deduction to offset another Roth conversion.

My logic was : One, to avoid the 35% rate in retirement. Two, to reduce my Taxable holdings by paying the tax for the conversions(which I averaged 18%). Three, use the Roths for marginal tax management and also as an emergency fund, and or, roll over to wife for futher compounding, and finally tax free to the kids. Four, to use the IRA for a future LTC self insurance program if necessary(where you pay no tax after deducting the med cost). And finally to have the flexibility to use the Roths and Iras.

Today, I am 40% taxable,30%IRA, 20% Roths

jerry
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