Taxable Portfolio Advice Required

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quanuec
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Taxable Portfolio Advice Required

Post by quanuec » Sat Jun 29, 2013 1:03 pm

<EDITED THE POST AND CHANGED TITLE FROM "VTIVX for Taxable - What are tax implications?" to "Taxable Portfolio Advice Requested">
I am in the process of consolidating my portfolio. I have figured my asset allocation and I am in the process of charting out a plan to achive that in the next few months.

(1): In my 401k, I use a 3 fund approach (although my 401k is company managed and not by Vanguard).
(2): For my IRA's, I am sticking to a single fund - VTIVX.
(3): For taxable accounts, I have decided to periodically invest in VTIVX. [Edit - I am dropping this idea now and seeking alternative advice here]
(4): Emergency money is in Ally CDs, cash in alliant savings, and I-bonds.
(5): The rest of the money will be in VWAHX (high yield munis) and a few other S/T funds. At some point, I will simplify this and use three T/E muni funds with long, medium, and short term durations.
(6): I am in 33% Federal Bracket and 6.65% State bracket.

My question pertains to
(a): What should be the best funds for taxable investments?
(b): Are NY Muni Bond funds safe? i.e. individual state fund versus an index muni fund?

Thank you everyone for your advice so far!
Last edited by quanuec on Sun Jun 30, 2013 3:24 pm, edited 3 times in total.

quanuec
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Re: VTIVX for Taxable - What are tax implications ?

Post by quanuec » Sat Jun 29, 2013 7:35 pm

Bumping this - Thanks!

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Kalo
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Re: VTIVX for Taxable - What are tax implications ?

Post by Kalo » Sat Jun 29, 2013 7:49 pm

VTIVX is currently 10% bonds. I wouldn't like that in a taxable account. Do you have any tax deferred accounts? If so I think it's better to put bond funds there. If not, I'm wondering if tax calculation wouldn't be a pain in a taxable account. If I had to hold bonds in a taxable account I'd want individual bonds and would therefore choose Treasuries, I-bonds, e-Bonds, TIPS, Non-Brokered CD's. I think taxes are complicated on Bond funds if I'm not mistaken.

If you have tax deferred accounts you could hit your Asset Allocation between the funds and put the stock part in the taxable accounts. Easier and also more tax efficient.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

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grabiner
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Re: VTIVX for Taxable - What are tax implications ?

Post by grabiner » Sat Jun 29, 2013 10:04 pm

quanuec wrote:I am in the process of consolidating my portfolio. I have figured my asset allocation and I am in the process of charting out a plan to achive that in the next few months.

(a): For taxable accounts, I have decided to periodically invest in VTIVX.
(b): Emergency money is in Ally CDs, cash in alliant savings, and I-bonds.
(c): The rest of the money will be in VWAHX (high yield munis) and a few other S/T funds. At some point, I will simplify this and use three T/E muni funds with long, medium, and short term durations.


Target Retirement 2045 (VTIVX) doesn't work well in a taxable account, because it makes your allocation harder to adjust; you can't sell the bonds in the target-date fund unless you sell stocks as the same time. It also doesn't simplify your portfolio management unless it is your entire portfolio; you already have to manage your allocation since you have other bond funds (and presumably an IRA). And it holds the wrong kind of bonds; if you are considering High-Yield Tax-Exempt, you are presumably in a bracket in which you don't want the corporate and Treasury bonds of Total Bond Market (which is what the target-date fund holds) in your taxable account.

Target Retirement 2045 is a fine fund in a different situation: if it is your sole fund in an IRA or 401(k).
David Grabiner

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bottomfisher
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Re: VTIVX for Taxable - What are tax implications ?

Post by bottomfisher » Sat Jun 29, 2013 10:59 pm

I suggest you look into your tax implications of holding VWAHX - Vg High Yield Tax Exempt prior to investing. Its not entirely tax exempt depending on your situation. Federal Alternative Minimal Tax considerations kicks in with this particular fund https://advisors.vanguard.com/VGApp/iip ... ndsAMT2011
Since it appears you're a long way from retirement. Vg Long Term Tax Exempt may be a consideration as well

I agree Target Retirement 2045 is not an ideal option for taxable account. Perhaps also look into one of Vanguard's tax managed funds

For emergency funds, ensure that your CD's have reasonable early withdrawal fees in case you need the funds. Also I bonds have their own early withdrawal fees if not held for a certain time frame. Be sure to understand the potential implications too

Hope that helps

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grabiner
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Re: VTIVX for Taxable - What are tax implications ?

Post by grabiner » Sat Jun 29, 2013 11:18 pm

bottomfisher wrote:I suggest you look into your tax implications of holding VWAHX - Vg High Yield Tax Exempt prior to investing. Its not entirely tax exempt depending on your situation. Federal Alternative Minimal Tax considerations kicks in with this particular fund https://advisors.vanguard.com/VGApp/iip ... ndsAMT2011
Since it appears you're a long way from retirement. Vg Long Term Tax Exempt may be a consideration as well


If you do become subject to the AMT, you can always switch; muni funds don't usually have substantial capital gains.

(Another consideration is your state tax; if Vanguard has a muni fund for your state, that is likely to be better than the national funds.)
David Grabiner

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bottomfisher
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Re: VTIVX for Taxable - What are tax implications ?

Post by bottomfisher » Sat Jun 29, 2013 11:28 pm

Page 2 of PDF with chart of tax-exempt interest dividends by state for 2012

http://www.vanguard.com/pdf/inbst_2012.pdf

quanuec
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Re: VTIVX for Taxable - What are tax implications ?

Post by quanuec » Sun Jun 30, 2013 7:54 am

Thanks - I edited the post question.

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bottomfisher
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Re: Taxable Portfolio Advice Required

Post by bottomfisher » Sun Jun 30, 2013 10:45 am

For simplicity consider this one fund Vg Tax Managed Balanced fund VTMFX. It contains approx. 50% stocks and 50% federal tax-exempt bonds with an average intermediate duration. An intermediate duration is the effect you would have rec'd from your initial consideration of long, medium, and short durations. I would just hold off on NY muni's until your long-term plans are more clear.

quanuec
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Re: Taxable Portfolio Advice Required

Post by quanuec » Sun Jun 30, 2013 11:06 am

VTMFX sounds like a great suggestion. Any other suggestions?

(a): VTMFX is 50% stocks and no international exposure. I would need other securities to maintain my asset allocation.
(b): Should I resort to Total Stock Market, TSIM, and muni funds for taxable? What about dividends from TSM and TSIM? Are they qualified?

Look forward to more advice here. Thanks!

Bob's not my name
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Re: Taxable Portfolio Advice Required

Post by Bob's not my name » Sun Jun 30, 2013 11:24 am

quanuec wrote:I am in 33% Federal Bracket and 6.85% State bracket.
  • Since you're in Manhattan you have a local tax too.
  • To be in the 33% federal and 6.85% NY brackets you must have gross income over about $225,000, which means you're also paying the 0.9% ACA tax on wages and the 3.8% ACA tax on investment income.
  • If your AGI is over $250,000, then you're also paying the 1% ATRA tax due to exemption phaseout, and, if you itemize, the 1% ATRA tax due to deduction phaseout.
  • So your marginal rate on interest and STCG might be over 45%. Makes munis pretty attractive.
  • Or your marginal rate might be set by the AMT, in which case your marginal rate on LTCG would be about 36% and your rate on interest and STCG would be about 49%.

quanuec
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Re: Taxable Portfolio Advice Required

Post by quanuec » Sun Jun 30, 2013 11:47 am

@Bob

(1): Yes - I have a NYC city tax.
(2): Note - my filing status is "married filing jointly". Does that change anything?
(3): Could you kindly elucidate each of those tax terms you just mentioned - a bit more pointers about them and I can begin researching them.
(4): One of my original question - "is investing in NYC munis safe? is there an additional risk as compared to investing in other T/E muni funds?"

Bob's not my name
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Re: Taxable Portfolio Advice Required

Post by Bob's not my name » Sun Jun 30, 2013 2:30 pm

Ah, then let's revisit all the numbers:
  • To be in the NY 6.85% bracket your gross income must be over about $320,000. You could be in the federal 33% bracket with gross income could be lower than that, but still at least over $265,000.
  • Assuming the first holds true, you are subject to the ACA and ATRA taxes. The ACA is the Affordable Care Act. The ATRA is the American Taxpayer Relief Act.
  • I think your NYC rate is 3.65%, so your state + city rate is 10.5%.
  • The ATRA phases out your personal exemptions and itemized deductions above AGI $300,000. That works out to about 1% for the latter and about 1% per dependent for the former, so if you have no kids the ATRA adds 3% to your marginal rate.
  • The ACA puts a 0.9% tax on your wages and a 3.8% tax on your investment income.
  • So if your marginal rate is NOT set by the AMT (Alternative Minimum Tax) your marginal rate on wages would be 33% + [.67*10.5%=7%] + 3% ATRA + 0.9% ACA = 44% and your marginal rate on interest and STCG would be 33% + 7% + 3% ATRA + 3.8% ACA = 47% and your marginal rate on LTCG and QD would be 15% + 7% + 3% ATRA + 3.8% ACA = 29%.
  • If your marginal rate is set by the AMT then that washes out the ATRA taxes and your marginal rate on wages would be 35% + 10.5% + 0.9% = 44% (so the same), on interest and STCG 35% + 10.5% + 3.8% = 49%, on LTCG 22% + 10.5% + 3.8% = 36%.
  • The rates on wages don't include Medicare tax, so you're really losing 45% of marginal wages to taxes.
Stand by for comments on NY munis.

Bob's not my name
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Re: Taxable Portfolio Advice Required

Post by Bob's not my name » Sun Jun 30, 2013 2:45 pm

Municipal bond interest is not subject to the ACA tax or federal income tax. NY municipal bond interest is also exempt from NY tax (and I think NYC tax, but I leave that as an exercise for you; I'm not a NY taxpayer).

Vanguard's national Long Term Tax-Exempt and NY Long Term Tax-Exempt funds have similar durations. Let's compare Admiral shares:

National SEC yield: 2.86%
NY SEC yield: 2.61%

After NY taxes, the national fund's yield would be over 2.66% if you aren't subject to the AMT or over 2.56% if you are subject to the AMT. I say "over" because a portion of the national fund's yield is from NY bonds and is probably exempt from NY taxes (again, I leave that as an exercise for you). For example, if 10% of the national fund's yield were from NY bonds then these numbers would adjust to 2.68% and 2.59%.

Bottom line: undiversifying and buying only NY munis gets you no additional return. So I recommend the national fund. You can alternatively buy the national intermediate-term fund, which has a slightly shorter duration (and hence lower SEC yield but also less vulnerability to rising rates).

quanuec
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Re: Taxable Portfolio Advice Required

Post by quanuec » Sun Jun 30, 2013 2:47 pm

http://www.tax-rates.org/new_york/income-tax

Isnt 40k to 300k NYC = 6.85? Where did you get the 320k figure from?

Thanks a lot for your help Bob. Look forward to your advice on Munis.

Bob's not my name
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Re: Taxable Portfolio Advice Required

Post by Bob's not my name » Sun Jun 30, 2013 2:59 pm

quanuec wrote:Isnt 40k to 300k NYC = 6.85? Where did you get the 320k figure from?
I looked at http://www.tax.ny.gov/pdf/memos/income/m12_3i.pdf and added at least $20,000 for your 401k contributions, pre-tax health, dental, and disability insurance premiums, FSA contributions, and whatever standard exemption NY allows.

quanuec
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Re: Taxable Portfolio Advice Required

Post by quanuec » Sun Jun 30, 2013 3:07 pm

@bob

Thanks - "income must be over 320k" is still wrong in my opinion. Income can very well be 175k. deducting 20k (401k, etc), will still place you in 150k to 300k bracket for a 6.85% state tax.

This excercise is turning out very useful for me. I am editing my post again - guess I figured quite a few things in the last 24 hours :)

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Re: Taxable Portfolio Advice Required

Post by Bob's not my name » Sun Jun 30, 2013 3:10 pm

I must be blind then, because I'm seeing 6.85% for $300,000 to $2,000,000. If you don't want to just say what your gross is, that's fine, but without that info I can't comment on what your true marginal rate is.

quanuec
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Re: Taxable Portfolio Advice Required

Post by quanuec » Sun Jun 30, 2013 3:24 pm

@Bob

apologies - It should have been 6.65% and not 6.85%. sorry for that.

Bob's not my name
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Re: Taxable Portfolio Advice Required

Post by Bob's not my name » Sun Jun 30, 2013 3:35 pm

No problem. So then I can't say whether you'll be subject to the ACA taxes, but you should be free of the ATRA taxes. To be in the 33% federal bracket your gross would have to be over about $270,000. That may or may not put your wages (0.9% tax) or AGI (3.8% tax) over the $250,000 ACA thresholds. It's actually possible to be in a triple witching zone in which each dollar of marginal wages effectively gets all three Medicare taxes: 1.45% + 0.9% + 3.8%.

quanuec
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Re: Taxable Portfolio Advice Required

Post by quanuec » Sun Jun 30, 2013 3:38 pm

Thanks - I am starting another thread where I am requesting a full portfolio review (i.e. planned portfolio). Would apprecaite if you could comment there as well.

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Re: Taxable Portfolio Advice Required

Post by grabiner » Sun Jun 30, 2013 6:33 pm

Bob's not my name wrote:Vanguard's national Long Term Tax-Exempt and NY Long Term Tax-Exempt funds have similar durations. Let's compare Admiral shares:

National SEC yield: 2.86%
NY SEC yield: 2.61%

After NY taxes, the national fund's yield would be over 2.66% if you aren't subject to the AMT or over 2.56% if you are subject to the AMT. I say "over" because a portion of the national fund's yield is from NY bonds and is probably exempt from NY taxes (again, I leave that as an exercise for you). For example, if 10% of the national fund's yield were from NY bonds then these numbers would adjust to 2.68% and 2.59%.


However, the difference in yields represents a difference in risk; the national fund has a slightly longer duration and more bonds with lower ratings. I would assume that the NY fund has the same risk as a national fund with the same 2.61% yield.

Therefore, holding the NY fund doesn't increase your returns, but it decreases your credit risk slightly.
David Grabiner

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