Tax Efficient Portfolio Help

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Topic Author
pacificredhawk
Posts: 16
Joined: Fri Feb 14, 2014 3:03 pm

Tax Efficient Portfolio Help

Post by pacificredhawk »

Hi everyone,

Need some serious help with my portfolio. I believe I can be much more tax efficient in my current situation. Here is my situation:

I take home about 20K, before taxes, each month. This is non-earned income and does not qualify for an investment account (trust me, I've talked to some great professionals about it). It is reported to the IRS through a 1099.

I am open to any ideas of how I can change my portfolio to be more tax efficient. I have been looking at these Vanguard funds lately (they are tax managed).

Vanguard Tax-Managed International Fund Admiral Shares (VTMGX)
Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX)
Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX)

I am at a 33% tax bracket federally. Texas has no income tax.

Here is my current portfolio:

VEMAX
Vanguard Emerging Markets Stock Index Fund Admiral Shares
$52,924.96

VWIUX
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares
$55,698.41

VMVAX
Vanguard Mid-Cap Value Index Fund Admiral
$91,801.24

VSIAX
Vanguard Small-Cap Value Index Fund Admiral
$91,733.27

VTIAX
Vanguard Total International Stock Index Fund Admiral Shares
$60,634.36

VVIAX
Vanguard Value Index Fund Admiral Shares
$89,675.29

Thanks everyone!
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grabiner
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Re: Tax Efficient Portfolio Help

Post by grabiner »

Welcome to the forum!
pacificredhawk wrote: I have been looking at these Vanguard funds lately (they are tax managed).

Vanguard Tax-Managed International Fund Admiral Shares (VTMGX)
Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX)
Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX)

I am at a 33% tax bracket federally. Texas has no income tax.
Wiki article link: Tax-managed fund comparison

Tax-Managed International is going away; the most tax-efficient way to hold international is likely with Total International. (You can choose to overweight emerging markets and hold Emerging Markets Index separately, which it appears that you do.)

80% Tax-Managed Capital Appreciation and 20% Tax-Managed Small-Cap is approximately equivalent to Total Stock Market, but the tax savings are about equal to the extra expenses.
VEMAX
Vanguard Emerging Markets Stock Index Fund Admiral Shares
$52,924.96
VWIUX
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares
$55,698.41
VTIAX
Vanguard Total International Stock Index Fund Admiral Shares
$60,634.36
These three are excellent, if they fit your asset allocation. (In particular, you seem to have only 10% bonds; I would recommend raising that to 20% unless you already know how you will react to a bear market because you had a stock-heavy portfolio in 2007-2009.)
VMVAX
Vanguard Mid-Cap Value Index Fund Admiral
$91,801.24
VSIAX
Vanguard Small-Cap Value Index Fund Admiral
$91,733.27
VVIAX
Vanguard Value Index Fund Admiral Shares
$89,675.29
These three are somewhat less tax-efficient, because value stocks pay higher dividends. In addition, Mid-Cap Value overlaps Value Index; the CRSP large-cap indexes include the mid-cap indexes.

But they aren't wrong, as long as you are deliberately overweighting small-cap and value stocks; it's fine to pay a small tax cost to get the portfolio right. I would still advise against 100% value; your additional investments should be in blend funds such as Total Stock Market.

All of the funds that you have are good enough in a taxable account that you shouldn't sell them for a significant gain to restructure your portfolio. If you want to get rid of your value overweight, keep the value funds that you have (or use them for charitable contributions later) and buy growth index funds to balance them out.

I would probably do something like what you are doing if my portfolio were 100% taxable. Since mine is about half tax-deferred, I can hold bonds in my employer plan and value stocks in my Roth IRA, so I don't need to hold either in my taxable account. I would like to overweight value a bit more, but I don't believe the benefit is worth the extra tax cost.
Wiki David Grabiner
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BolderBoy
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Re: Tax Efficient Portfolio Help

Post by BolderBoy »

pacificredhawk wrote:I take home about 20K, before taxes, each month. This is non-earned income and does not qualify for an investment account (trust me, I've talked to some great professionals about it). It is reported to the IRS through a 1099.
Pardon my ignorance, but what does this mean? Are you prohibited from investing this money in any way? Is there a law with your name on it that prohibits same?

Maybe you mean you cannot use it to invest in retirement-type accounts?

I can - and have - taken non-earned (you mean unearned?) income, such as interest on a savings account and used it to buy more mutual fund shares in a taxable account. Why can't you?
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abuss368
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Re: Tax Efficient Portfolio Help

Post by abuss368 »

I would consider a very simple and effective Three Fund Portfolio. There is an excellent (and log) thread on the forum with the title of the same name.

* Total Stock Market
* Total International Market
* Intermediate Term Tax Exempt (in place of Total Bond Market)

There are so many positives and advantages to this portfolio.
John C. Bogle: “Simplicity is the master key to financial success."
Laura
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Joined: Mon Feb 19, 2007 7:40 pm

Re: Tax Efficient Portfolio Help

Post by Laura »

The IRS requires "earned income" or "qualified income" before someone can use retirement accounts. There is a very specific meaning to this phrase. The OP apparently has zero "earned income" but has $20k of cash inflow each month. So, they are unable to use retirement accounts but can use a taxable account for investing. You can find more information on fairmark.com

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
pacificredhawk
Posts: 16
Joined: Fri Feb 14, 2014 3:03 pm

Re: Tax Efficient Portfolio Help

Post by pacificredhawk »

Thanks for your replies, everyone.

I agree that I need to stay away from high dividend stocks, since they force me to take a tax hit. Instead, I want higher appreciation, so that I don't have to get hit with taxes until I sell and realize a gain (if any). I kind of shy away from Total Stock Index because the market seems super overvalued. All I can think about when I see the market and the effect that QE is having on it is...bubble!

And, the non-earned income is from a source I would rather not disclose. Nothing illegal about it at all (heck, I play all my taxes on it). Just for reference sake though, trust me when I say I cannot open an IRA or any other traditional retirement account with it. And, I'm not hot about annuities.

Keep the recommendations coming!
Laura
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Joined: Mon Feb 19, 2007 7:40 pm

Re: Tax Efficient Portfolio Help

Post by Laura »

If you are investing for the long term then the value today doesn't matter. If you are planning to need the money in 20, 30, 40 years will the market be higher then than today? If the answer is no then I suggest not investing at all. If the answer is yes then the value today isn't too high. If this is a bubble then you can tax loss harvest when it bursts. If it isn't a bubble, being in the market means you win. There is no way to time this. The Callan Table just shows that it is impossible to know what is going up next. And the Total Stock Market just invests in the US market. You have other money in exactly the same holdings but in funds with different names in your portfolio today. Market timing doesn't work.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
pacificredhawk
Posts: 16
Joined: Fri Feb 14, 2014 3:03 pm

Re: Tax Efficient Portfolio Help

Post by pacificredhawk »

grabiner wrote:Welcome to the forum!
pacificredhawk wrote: I have been looking at these Vanguard funds lately (they are tax managed).

Vanguard Tax-Managed International Fund Admiral Shares (VTMGX)
Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX)
Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX)

I am at a 33% tax bracket federally. Texas has no income tax.
Wiki article link: Tax-managed fund comparison

Tax-Managed International is going away; the most tax-efficient way to hold international is likely with Total International. (You can choose to overweight emerging markets and hold Emerging Markets Index separately, which it appears that you do.)

80% Tax-Managed Capital Appreciation and 20% Tax-Managed Small-Cap is approximately equivalent to Total Stock Market, but the tax savings are about equal to the extra expenses.
VEMAX
Vanguard Emerging Markets Stock Index Fund Admiral Shares
$52,924.96
VWIUX
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares
$55,698.41
VTIAX
Vanguard Total International Stock Index Fund Admiral Shares
$60,634.36
These three are excellent, if they fit your asset allocation. (In particular, you seem to have only 10% bonds; I would recommend raising that to 20% unless you already know how you will react to a bear market because you had a stock-heavy portfolio in 2007-2009.)
VMVAX
Vanguard Mid-Cap Value Index Fund Admiral
$91,801.24
VSIAX
Vanguard Small-Cap Value Index Fund Admiral
$91,733.27
VVIAX
Vanguard Value Index Fund Admiral Shares
$89,675.29
These three are somewhat less tax-efficient, because value stocks pay higher dividends. In addition, Mid-Cap Value overlaps Value Index; the CRSP large-cap indexes include the mid-cap indexes.

But they aren't wrong, as long as you are deliberately overweighting small-cap and value stocks; it's fine to pay a small tax cost to get the portfolio right. I would still advise against 100% value; your additional investments should be in blend funds such as Total Stock Market.

All of the funds that you have are good enough in a taxable account that you shouldn't sell them for a significant gain to restructure your portfolio. If you want to get rid of your value overweight, keep the value funds that you have (or use them for charitable contributions later) and buy growth index funds to balance them out.

I would probably do something like what you are doing if my portfolio were 100% taxable. Since mine is about half tax-deferred, I can hold bonds in my employer plan and value stocks in my Roth IRA, so I don't need to hold either in my taxable account. I would like to overweight value a bit more, but I don't believe the benefit is worth the extra tax cost.
Can you give me some good Vanguard Admiral share funds that focus on capital appreciation, rather that dividend payout?
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BolderBoy
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Re: Tax Efficient Portfolio Help

Post by BolderBoy »

pacificredhawk wrote:I take home about 20K, before taxes, each month. This is non-earned income and does not qualify for an investment account...
This is why I challenged you. It most certainly CAN be used for an "investment account", just not for a retirement account. Words matter.

A simple, three-fund, taxable account portfolio would suit you fine.
Mazz
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Re: Tax Efficient Portfolio Help

Post by Mazz »

ETFs are most tax efficient vehicle. No cap gains distributions. For the kind of funds your looking at, tHere are plenty of ETF options.
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grabiner
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Re: Tax Efficient Portfolio Help

Post by grabiner »

pacificredhawk wrote:Can you give me some good Vanguard Admiral share funds that focus on capital appreciation, rather that dividend payout?
Almost all stock funds (exceptions: REITs and high-dividend funds) are expected to get most of their return from capital appreciation. Value stocks pay more dividends than growth stocks, so they aren't quite as tax-efficient, but as long as they are held in an ETF or an index with an ETF class, the tax bill won't be that great. You have to decide whether you want to overweight value or not, paying a small tax cost for the possible benefit that value stocks have historically had higher returns.

Tax-Managed Capital Appreciation would be the fund you are looking for, as it is a blend fund which specifically selects stocks for lower dividend yields. However, with the 15% tax rate on qualified dividends, the yield difference isn't really worth it. Total Stock Market should have about the same after-tax return as the similar allocation of 80% TM Capital Appreciation and 20% TM Small-Cap, because Total Stock Market saves as much in lower expenses as it costs in extra taxes.

But before you focus on minimizing taxes, you need to have a target asset allocation; the small amount you lose to taxes is less important to your finances than the potential gains or losses from your stock portfolio. Your current portfolio looks like about 12% bonds, 24% international, 64% US stock, which is very aggressive; is this right for you?
Wiki David Grabiner
Topic Author
pacificredhawk
Posts: 16
Joined: Fri Feb 14, 2014 3:03 pm

Re: Tax Efficient Portfolio Help

Post by pacificredhawk »

Yes, I am okay with being that aggressive right now. I am well diversified with primary residence paid off in full, rental house paid in full, and holding some precious metals as well. I am 29.
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abuss368
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Re: Tax Efficient Portfolio Help

Post by abuss368 »

pacificredhawk wrote:Yes, I am okay with being that aggressive right now. I am well diversified with primary residence paid off in full, rental house paid in full, and holding some precious metals as well. I am 29.
That is a great position to be in financially at such a young age. I would seriously consider a Three Fund Portfolio as noted earlier.

You can be more aggressive right now if you would like by simply increasing the allocation to equity (i.e. Total Stock Index and Total International Index) and a lower allocation to Intermediate Term Tax Exempt.
John C. Bogle: “Simplicity is the master key to financial success."
Topic Author
pacificredhawk
Posts: 16
Joined: Fri Feb 14, 2014 3:03 pm

Re: Tax Efficient Portfolio Help

Post by pacificredhawk »

abuss368 wrote:
pacificredhawk wrote:Yes, I am okay with being that aggressive right now. I am well diversified with primary residence paid off in full, rental house paid in full, and holding some precious metals as well. I am 29.
That is a great position to be in financially at such a young age. I would seriously consider a Three Fund Portfolio as noted earlier.

You can be more aggressive right now if you would like by simply increasing the allocation to equity (i.e. Total Stock Index and Total International Index) and a lower allocation to Intermediate Term Tax Exempt.
Thanks.

Even more aggressive that 10% of my portfolio in bonds?
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grabiner
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Re: Tax Efficient Portfolio Help

Post by grabiner »

pacificredhawk wrote:Yes, I am okay with being that aggressive right now. I am well diversified with primary residence paid off in full, rental house paid in full, and holding some precious metals as well. I am 29.
One additional concern is whether you actually know how you will react to a bear market. Given the size of your portfolio and the amount you are investing, I don't know whether you had a lot of stock in 2007-2009. If you did, lost half your stock, and stuck with the same allocation, then you are probably right that you can handle 90% stock.
Wiki David Grabiner
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abuss368
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Re: Tax Efficient Portfolio Help

Post by abuss368 »

pacificredhawk wrote:
abuss368 wrote:
pacificredhawk wrote:Yes, I am okay with being that aggressive right now. I am well diversified with primary residence paid off in full, rental house paid in full, and holding some precious metals as well. I am 29.
That is a great position to be in financially at such a young age. I would seriously consider a Three Fund Portfolio as noted earlier.

You can be more aggressive right now if you would like by simply increasing the allocation to equity (i.e. Total Stock Index and Total International Index) and a lower allocation to Intermediate Term Tax Exempt.
Thanks.

Even more aggressive that 10% of my portfolio in bonds?
I would keep the 10% bond and possibly increase over time to 20% or so. Warren Buffett's mentor Benjamin Graham noted all investors should have at least 25% in bonds. This provides stability but also some "dry powder" to rebalance back into equities when they are down. This, along with new funds, was invaluable during the 2007 - 2009 period.
John C. Bogle: “Simplicity is the master key to financial success."
Topic Author
pacificredhawk
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Re: Tax Efficient Portfolio Help

Post by pacificredhawk »

abuss368 wrote:
pacificredhawk wrote:
abuss368 wrote:
pacificredhawk wrote:Yes, I am okay with being that aggressive right now. I am well diversified with primary residence paid off in full, rental house paid in full, and holding some precious metals as well. I am 29.
That is a great position to be in financially at such a young age. I would seriously consider a Three Fund Portfolio as noted earlier.

You can be more aggressive right now if you would like by simply increasing the allocation to equity (i.e. Total Stock Index and Total International Index) and a lower allocation to Intermediate Term Tax Exempt.
Thanks.

Even more aggressive that 10% of my portfolio in bonds?
I would keep the 10% bond and possibly increase over time to 20% or so. Warren Buffett's mentor Benjamin Graham noted all investors should have at least 25% in bonds. This provides stability but also some "dry powder" to rebalance back into equities when they are down. This, along with new funds, was invaluable during the 2007 - 2009 period.
Ah yes, I see how that could be very valuable. Will start doing that.
Topic Author
pacificredhawk
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Re: Tax Efficient Portfolio Help

Post by pacificredhawk »

By the way,

how much should I keep in my bank account (cash)? We do not have any debt (no cars loans or mortgage). We just pay monthly expenses. The only big thing each year is the property taxes on 2 properties (about 12K together). My income is fairly consistent, but related much to the economic situation (casino gaming).

Thanks
Laura
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Re: Tax Efficient Portfolio Help

Post by Laura »

I would keep a minimal amount in the checking account but keep it linked to an interest earning account where you can quickly transfer money into the checking account if needed.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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