Talk:Principles of Tax-Efficient Fund Placement

From Bogleheads

I don't agree with the idea that an Emerging Stock Market Index is very tax efficient. Once a country transitions between emerging to developed, all the companies in the emerging market index would have to be sold and bought in a different index. Possibility for lots of capital gains. (NYCPete)

When this happens, it will lead to a lot of capital gains. If South Korea were promoted from emerging to developed, then since it is 15% of Emerging Markets Index and probably 5% of the basis, that would mean a 10% capital gain distribution, all long-term, and a 1.5% tax bill. However, that is a fairly rare event; if it happens once every ten years, the annualized tax cost would be 0.15%. The other tax disadvantage of emerging markets is that the dividends are only 2/3 qualified, which is currently a tax cost of 0.12% in the top tax bracket. The sum of those two extra tax costs is just about equal to the tax savings from the foreign tax credit; therefore, emerging market indexes are not quite as good in a taxable account as developed or US market indexes, but the difference is small enough that emerging markets should still be placed in a taxable account in preference to anything else. Grabiner 11:54, 25 May 2008 (EDT)

Based on expected tax rates

I think there should be a comment here that this placement recommendation is making some basic (and well reasoned) assumptions about future tax law. What do you think? --Edge 20:39, 29 May 2008 (EDT)

Good idea, and I have added a sentence. Grabiner 23:19, 29 May 2008 (EDT)

I would suggest deleting the return-of-capital section; it is useful in the REIT page, but it is too large a part of this page, and it isn't the main point of the page. A correction mentioning that almost all, rather than all, of the REIT income is taxable might be useful. Grabiner 23:39, 3 June 2008 (EDT)

The table is gone now, but I would still suggest deleting the return-of-capital section as a separate section, with a wording in the main text such as, "REITs are required to distribute almost all their income, and the income is taxable at the non-qualified dividend rate except for a small portion (historically about 15%) which is non-taxable because it compensates for depreciation of the property." Grabiner 22:19, 4 June 2008 (EDT)

This article needs some introduction for the context. For example if all your accounts are tax deferred accounts, don't even worry about any of these.

Done; this also allowed me to point out that the principles are still important even if all your investments are taxable.Grabiner 23:17, 6 June 2008 (EDT)