International ETF in Taxable Account?

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Topic Author
Swymer
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International ETF in Taxable Account?

Post by Swymer » Sat Feb 07, 2015 6:43 pm

Hello again. I just wanted to run this past you guys to see if I'm at least partially on the right track.

What I plan to do is open a taxable account at Fidelity (all of my investment accounts are with them) and fund it with just one Total international stock ETF. The reason: The research I've done has me convinced that ETFs are more tax efficient than most any other type of mutual fund. And the reason I'm leaning towards a Total International stock is so that I can get the foreign tax credit. Now I already have (about) 40% of my portfolio invested in FSGDX (Spartan Global Index Fund) and that's all the international stock I need for the foreign portion of my portfolio. So my plan: open the taxable account at Fido with $35k worth of International ETF and then simply rebalance in my other accounts to maintain my target asset allocation within my entire portfolio.

-Emergency funds: Yes
-Debt: No
-Tax Filing Status: Single
-Tax Rate: Federal probably 0%, State I think also 0%
-State of Residence: SC
-Age: 40
-Desired Asset allocation: 60% stocks / 40% bonds
-Desired International allocation: 34% of stocks
-Income: $14,900
-Roth: Maxed for the year
-No other investment accounts that allow contributions

If this plan sounds reasonable, which ETF would you guys choose? (I think these are the only options for international ETFs at Fidelity but I'm not 100% sure.)

- VXUS - Vanguard Total International ETF (ER .14%)
- ACWI - ISHARES MSCI ACWI (ER .33%)
- IXUS - ISHARES CORE MSCI TOTAL INTERNATIONAL STOCK (ER .14%)

If unreasonable then how about...

Plan B: Everything as mentioned above except use FSGDX instead of an ETF.

Or...

Plan C: _(fill in the blank)__________________________________________

DSInvestor
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Re: International ETF in Taxable Account?

Post by DSInvestor » Sat Feb 07, 2015 8:50 pm

I'd go with Fidelity Spartan Global ex-US FSGDX er=0.18% mutual fund. IMO, mutual funds are easier to work with than ETFs and Spartan index funds are commission free at Fidelity.

BTW, a Fidelity brokerage account would allow you to buy any ETF that trades on US exchanges. There is a list of iShares ETFs that are available commission free. Other ETFs will require a brokerage commissions to buy and sell. Vanguard has another excellent international stock index fund FTSE All World ex-US VEU
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livesoft
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Re: International ETF in Taxable Account?

Post by livesoft » Sat Feb 07, 2015 11:07 pm

FSGDX may probably be the most tax efficient of the funds you listed. I own it in my 401(k), but do own several ETFs in my taxable account including VEU and VSS. I do not own VXUS nor IXUS.

I would recommend that you investigate the ACTUAL specific tax-efficiency of FSGDX and compare to any ETF that you choose. One cannot go by what someone else says about all this. If you do not understand how to figure out tax efficiency, then I can help if you tell me the per-share foreign taxes paid by FSGDX in 2014.
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DSInvestor
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Re: International ETF in Taxable Account?

Post by DSInvestor » Sat Feb 07, 2015 11:40 pm

If you expect to remain in the 0% Fed and 0% state tax brackets, tax efficiency may not be much of a concern. However, you may still want tax efficient investments in taxable accounts if you decide to take advantage of your low income to convert Traditional assets to Roth IRA.

A single filer with 14.9K of income who takes the standard deduction and 1 exemption would not be in 0% Fed tax bracket but most likely 10% bracket. If some or all of that income was from Qualified Dividend Income, Long Term Capital Gains, tax exempt interest, the fed tax could be ZERO even while being in 10% bracket.
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Swymer
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Re: International ETF in Taxable Account?

Post by Swymer » Sun Feb 08, 2015 11:48 am

''If you expect to remain in the 0% Fed and 0% state tax brackets, tax efficiency may not be much of a concern''

Exactly what I was thinking too but wasn't sure if tax rate was determined by something in addition to taxable income; such as turnover, capitol gains etc within the fund. A reason why I was considering a fund that would be very tax inefficient but with high gains. Maybe something like FSLVX - but think I'd rather stick with the boglehead method and stick with low cost index funds.

'' However, you may still want tax efficient investments in taxable accounts if you decide to take advantage of your low income to convert Traditional assets to Roth IRA.''

The only Traditional assets I have are in a TIRA-BDA. These assets can't be converted to a Roth can they? I assume you're talking about if I had my own TIRA. Right?


''A single filer with 14.9K of income who takes the standard deduction and 1 exemption would not be in 0% Fed tax bracket but most likely 10% bracket. If some or all of that income was from Qualified Dividend Income, Long Term Capital Gains, tax exempt interest, the fed tax could be ZERO even while being in 10% bracket.''

Could you please give some examples Qualified Dividend income, Long Term Capital Gains & tax exempt interest?
Because I can tell you that my taxable income comes from my part-time job and annual RMDs from an inherited TIRA.

Topic Author
Swymer
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Re: International ETF in Taxable Account?

Post by Swymer » Sun Feb 08, 2015 11:58 am

''If you do not understand how to figure out tax efficiency, then I can help if you tell me the per-share foreign taxes paid by FSGDX in 2014.''

Yeah, I don't know how to figure out tax efficiency so I'll report back with the per-share foreign taxes paid by FSGDX in 2014.

retiredjg
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Re: International ETF in Taxable Account?

Post by retiredjg » Sun Feb 08, 2015 11:58 am

If you decide on an ETF at Fido...
  • - VXUS - Vanguard Total International ETF (ER .14%) <--no, there is a transaction fee
    - ACWI - ISHARES MSCI ACWI (ER .33%)<--no, this is both US stock and the rest of the world
    - IXUS - ISHARES CORE MSCI TOTAL INTERNATIONAL STOCK (ER .14%) <--yes if this is on the no-transaction fee list, this one follows the same index (edit) that Vanguard's Total International used to follow that has everything in it (large, mid, small, developed, emerging)
Last edited by retiredjg on Sun Feb 08, 2015 1:07 pm, edited 1 time in total.

DSInvestor
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Re: International ETF in Taxable Account?

Post by DSInvestor » Sun Feb 08, 2015 12:11 pm

Here's a link to Fairmark's Mutual Fund Tax Guide:
http://fairmark.com/mutual/index.htm
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Topic Author
Swymer
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Re: International ETF in Taxable Account?

Post by Swymer » Sun Feb 08, 2015 12:16 pm

Ok, @retiredjg, DSInvistor & livesoft. Aside from the funds I have listed... do you guys think there is a better fund or a combination of funds that would likely perform very well that you would use to fund my taxable account? If so, which asset or assets would you go with and in what ratios?

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tarnation
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Re: International ETF in Taxable Account?

Post by tarnation » Sun Feb 08, 2015 12:16 pm

retiredjg wrote:If you decide on an ETF at Fido...
  • - IXUS - ISHARES CORE MSCI TOTAL INTERNATIONAL STOCK (ER .14%) <--yes if this is on the no-transaction fee list, this one follows the same index as Vanguard's Total International
THey changed index on VG total international (VXUS), so they are not the same. Also the VG fund (VXUS) has almost twice as many holdings as IXUS. That is how they "price match" VG. May not make a difference, but for the same money I would rather have more.
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DSInvestor
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Re: International ETF in Taxable Account?

Post by DSInvestor » Sun Feb 08, 2015 12:20 pm

Swymer wrote:Ok, @retiredjg, DSInvistor & livesoft. Aside from the funds I have listed... do you guys think there is a better fund or a combination of funds that would likely perform very well that you would use to fund my taxable account? If so, which asset or assets would you go with and in what ratios?
It is hard to make suggestions for the taxable account without any information about what you hold in your other accounts and your desired asset allocation. To see what information is helpful and how to format portfolio questions, see Asking Portfolio Questions:
http://www.bogleheads.org/forum/viewtopic.php?t=6212

Investment Planning:
http://www.bogleheads.org/forum/viewtopic.php?t=6211
Last edited by DSInvestor on Sun Feb 08, 2015 12:24 pm, edited 1 time in total.
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livesoft
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Re: International ETF in Taxable Account?

Post by livesoft » Sun Feb 08, 2015 12:22 pm

Core funds from Fidelity would be
FSTVX
FSGDX

in any ratios suitable for your asset allocation.

If you wanted to overweight mid/small cap US, then add FSEVX, too.

That's it.
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retiredjg
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Re: International ETF in Taxable Account?

Post by retiredjg » Sun Feb 08, 2015 1:12 pm

tarnation wrote:THey changed index on VG total international (VXUS), so they are not the same. Also the VG fund (VXUS) has almost twice as many holdings as IXUS. That is how they "price match" VG. May not make a difference, but for the same money I would rather have more.
Thanks, you're right. Edited above. I'm having trouble letting go of the old indexes. :!:

But I still recommend it anyway because the Vanguard ETF has a transaction fee and this one does not.

retiredjg
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Re: International ETF in Taxable Account?

Post by retiredjg » Sun Feb 08, 2015 1:16 pm

Swymer wrote:Ok, @retiredjg, DSInvistor & livesoft. Aside from the funds I have listed... do you guys think there is a better fund or a combination of funds that would likely perform very well that you would use to fund my taxable account? If so, which asset or assets would you go with and in what ratios?
I'd use one fund/ETF that has everything if I could get it with no transaction fee (large, mid, small, developed, emerging). If not, I'd use the Spartan Global mutual fund because it tracks the ones that have everything very closely.

If you want to use Fido, use FSGDX Spartan Global if you want a mutual fund and IXUS if you want to use an ETF. It really is that simple.

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tarnation
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Re: International ETF in Taxable Account?

Post by tarnation » Sun Feb 08, 2015 1:20 pm

retiredjg wrote:
tarnation wrote:THey changed index on VG total international (VXUS), so they are not the same. Also the VG fund (VXUS) has almost twice as many holdings as IXUS. That is how they "price match" VG. May not make a difference, but for the same money I would rather have more.
Thanks, you're right. Edited above. I'm having trouble letting go of the old indexes. :!:

But I still recommend it anyway because the Vanguard ETF has a transaction fee and this one does not.
Agreed, but Not if you put your money at vanguard. (Or tdam)
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retiredjg
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Re: International ETF in Taxable Account?

Post by retiredjg » Sun Feb 08, 2015 1:23 pm

tarnation wrote:Agreed, but Not if you put your money at vanguard. (Or tdam)
Agreed. I just meant for this poster.

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Re: International ETF in Taxable Account?

Post by Northern Flicker » Thu Mar 03, 2016 1:58 pm

tarnation wrote: THey changed index on VG total international (VXUS), so they are not the same. Also the VG fund (VXUS) has almost twice as many holdings as IXUS. That is how they "price match" VG. May not make a difference, but for the same money I would rather have more.
It is unclear how much of any extra cost Vanguard might incur to maintain a larger security sample size is administrative cost that is accounted for in ER, and how much is transaction cost charged to the fund outside of ER.

IXUS theoretically may have more index tracking risk than VXUS from a smaller security selection sample size, but it is also more tax efficient if held in a taxable account-- about 85% of IXUS dividend distributions have been qualified dividends compared to about 69% for VXUS:

https://personal.vanguard.com/us/insigh ... -2015?Sc=1

https://www.ishares.com/us/literature/t ... ummary.pdf

I suspect the ishares portfolio optimizer has tighter constraints on qualified dividends than the Vanguard optimizer for tax efficiency, leading to a smaller sample size. Perhaps the best choices would be IXUS in a taxable account, VXUS/VTIAX in a tax-qualified account.

fctu
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Re: International ETF in Taxable Account?

Post by fctu » Wed Feb 07, 2018 12:41 pm

I have been trying to figure this out and figure out if foreign tax is significant.

The ishares website shows that IXUS paid 0% in foreign taxes. Is that correct? Maybe the foreign taxes are irrelevant?

I was thinking foreign etf might be good for tax deferred since it will grow less than US stocks and then there will be less taxes in retirement due to less growth of money. US index will grow in taxable and be taxed at lower capital gains rate.

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Re: International ETF in Taxable Account?

Post by livesoft » Wed Feb 07, 2018 12:46 pm

fctu wrote:
Wed Feb 07, 2018 12:41 pm
I have been trying to figure this out and figure out if foreign tax is significant.

The ishares website shows that IXUS paid 0% in foreign taxes. Is that correct? Maybe the foreign taxes are irrelevant?
Here is the iShares 2017 report:
https://www.ishares.com/us/literature/t ... 364627.pdf that shows that IXUS paid foreign taxes in 2017.

The link is the PDF that will be used to fill out the information in triceratop's tax-efficiency spreadsheet. Also you will need it for Form 1116 because not all of its dividends were foreign-sourced.
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Re: International ETF in Taxable Account?

Post by triceratop » Wed Feb 07, 2018 1:05 pm

livesoft wrote:
Wed Feb 07, 2018 12:46 pm
fctu wrote:
Wed Feb 07, 2018 12:41 pm
I have been trying to figure this out and figure out if foreign tax is significant.

The ishares website shows that IXUS paid 0% in foreign taxes. Is that correct? Maybe the foreign taxes are irrelevant?
Here is the iShares 2017 report:
https://www.ishares.com/us/literature/t ... 364627.pdf that shows that IXUS paid foreign taxes in 2017.

The link is the PDF that will be used to fill out the information in triceratop's tax-efficiency spreadsheet. Also you will need it for Form 1116 because not all of its dividends were foreign-sourced.
Thanks! I was missing iShares' document. I'll release the new spreadsheet soonish.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

FIby45
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Re: International ETF in Taxable Account?

Post by FIby45 » Sat Nov 02, 2019 1:34 pm

How significant is the tax advantage for foreign investments in taxable accounts when having a fed+state+NII marginal at 50.1%?

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Re: International ETF in Taxable Account?

Post by grabiner » Sat Nov 02, 2019 3:14 pm

FIby45 wrote:
Sat Nov 02, 2019 1:34 pm
How significant is the tax advantage for foreign investments in taxable accounts when having a fed+state+NII marginal at 50.1%?
At that tax rate, the higher yields on foreign stocks make US stocks in a taxable account more attractive.

My standard example, which is close to the behavior of typical total-market indexes:

US stock fund yields 2%, all qualified.
Foreign stock fund yields 3%, 2/3 qualified, but has 8% of the dividend withheld as foreign tax (so the dividend paid to you is 2.76%).

In this situation, the tax you pay on the 2% qualified dividend for both funds is the same. The foreign stock fund has a 1% dividend taxed at your non-qualified rate, but also a 0.24% foreign tax credit. Thus, if your tax rate on non-qualified dividends is 24%, the two funds have equal tax cost. If your tax rate is higher, every 1% in additional tax rate is an extra tax cost of one basis point. In your example of a 50.1% tax rate (30.5% on qualified dividends), you would have a 0.71% tax cost on the US fund, and a 0.97% tax cost on the foreign fund.
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