More tax efficient for new cash?

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More tax efficient for new cash?

Post by bunny187 » Mon Jul 01, 2013 6:14 pm

I'm looking to place 10k of new cash into a taxable account, and I've narrowed my choices to the Vanguard tax-managed balanced fund (which holds bonds that are conventionally tax-inefficient) or the Vanguard total stock market index fund admiral shares...which one would be more tax-efficient? Thanks in advance!

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Kevin M
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Re: More tax efficient for new cash?

Post by Kevin M » Mon Jul 01, 2013 7:16 pm

I think you are asking the wrong question. I think your first question should be what is your current asset allocation between stocks and fixed income (bonds, CDs, etc.) compared to your target allocation. Putting 100% into stocks vs. putting 50% into stocks and 50% in bonds (the balanced fund) will affect your AA quite differently, especially if your portfolio is not very large.

Once you have determined how to allocate the $10K between stocks and fixed income, to end up with an AA that is at or close to target, then you can consider tax efficiency, among other things, to achieve that.

If you have tax-advantaged space, then it could make more sense to swap some things around in TA and put the entire $10K into a stock fund in taxable.

Depending on your marginal tax rate, the munis held by the tax-managed fund may or may not make sense.

I also would consider CDs instead of or at least in addition to bond funds for your fixed income.

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Re: More tax efficient for new cash?

Post by retiredjg » Mon Jul 01, 2013 9:43 pm

Welcome to the forum!

I too think you are asking the wrong question. It does not matter which is most tax-efficient. What matters is what you need to achieve your desired portfolio.

If you need stocks, use a stock fund. If you need both stocks and bonds, the Tax managed fund might be a good idea, but we don't know enough about the rest of your portfolio to tell.

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