Splitting Value and Growth in taxable/non-taxable

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BogleAlltheWay
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Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

Hi all,

Considering that growth funds are more tax efficient than value funds, does it make practical sense to put the value funds in tax sheltered and the growth funds in taxable?
For example, instead of owning the US Total Stock market fund in taxable and a non-taxable account, is it better to break the Total Stock Market fund down into large value, large growth, mid value, mid growth, small value, small growth and place them tax efficiently?
PFInterest
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Re: Splitting Value and Growth in taxable/non-taxable

Post by PFInterest »

my guess is no. others might say yes. i feel it might amount to a few basis points. maybe not.

mainly i dont want to pay attention to such little slice/dices.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by saltycaper »

One issue to consider is the potential for capital gains distributions if a company migrates from one classification to another.
Quod vitae sectabor iter?
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Re: Splitting Value and Growth in taxable/non-taxable

Post by triceratop »

BogleAlltheWay wrote:Hi all,

Considering that growth funds are more tax efficient than value funds, does it make practical sense to put the value funds in tax sheltered and the growth funds in taxable?
For example, instead of owning the US Total Stock market fund in taxable and a non-taxable account, is it better to break the Total Stock Market fund down into large value, large growth, mid value, mid growth, small value, small growth and place them tax efficiently?
How many basis points have you calculated that it saves you?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

triceratop wrote:
BogleAlltheWay wrote:Hi all,

Considering that growth funds are more tax efficient than value funds, does it make practical sense to put the value funds in tax sheltered and the growth funds in taxable?
For example, instead of owning the US Total Stock market fund in taxable and a non-taxable account, is it better to break the Total Stock Market fund down into large value, large growth, mid value, mid growth, small value, small growth and place them tax efficiently?
How many basis points have you calculated that it saves you?
The Vanguard tax-managed small cap came out as the most tax efficient so I would not have to split those up. For large and mid cap it would save me about 15-20 basis points. For reference my tax rate for non-qualified is about 32% and about 22% for qualified.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by triceratop »

BogleAlltheWay wrote:
triceratop wrote:
BogleAlltheWay wrote:Hi all,

Considering that growth funds are more tax efficient than value funds, does it make practical sense to put the value funds in tax sheltered and the growth funds in taxable?
For example, instead of owning the US Total Stock market fund in taxable and a non-taxable account, is it better to break the Total Stock Market fund down into large value, large growth, mid value, mid growth, small value, small growth and place them tax efficiently?
How many basis points have you calculated that it saves you?
The Vanguard tax-managed small cap came out as the most tax efficient so I would not have to split those up. For large and mid cap it would save me about 15-20 basis points. For reference my tax rate for non-qualified is about 32% and about 22% for qualified.
If you use ETFs in your taxable account you're unlikely to have capital gains distributions which overwhelm that. However, be sure that you rigorously rebalance so that your overall portfolio maintains your blend portfolio.

You may also want to consider future taxes on distributions in a taxable vs. non-taxable account, and whether you have in effect a tax-equivalent growth tilt as a result.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

triceratop wrote:
BogleAlltheWay wrote:
triceratop wrote:
BogleAlltheWay wrote:Hi all,

Considering that growth funds are more tax efficient than value funds, does it make practical sense to put the value funds in tax sheltered and the growth funds in taxable?
For example, instead of owning the US Total Stock market fund in taxable and a non-taxable account, is it better to break the Total Stock Market fund down into large value, large growth, mid value, mid growth, small value, small growth and place them tax efficiently?
How many basis points have you calculated that it saves you?
The Vanguard tax-managed small cap came out as the most tax efficient so I would not have to split those up. For large and mid cap it would save me about 15-20 basis points. For reference my tax rate for non-qualified is about 32% and about 22% for qualified.
If you use ETFs in your taxable account you're unlikely to have capital gains distributions which overwhelm that. However, be sure that you rigorously rebalance so that your overall portfolio maintains your blend portfolio.

You may also want to consider future taxes on distributions in a taxable vs. non-taxable account, and whether you have in effect a tax-equivalent growth tilt as a result.
The Morningstar Sytyle boxes for the Vanguard Total Stock Market: list 25% value, 25% Blend, and 23% growth in large cap
and 6% each box for mid cap.

Does that mean for mid-cap I need to hold 50% growth and 50% value and for large cap I would need 51% large value and 49% large growth?
Then I will have to adjust the percentages based upon the account ie. if I was splitting between 401k and taxable, I would have have to add more to the 401k because that will be taxed at 32% when I withdraw as opposed to only 22% for the taxable?

What do you mean by considering future tax on distributions?
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Re: Splitting Value and Growth in taxable/non-taxable

Post by triceratop »

I would do 50/50 Growth/Value, for simplicity. 51/49 is needless complexity. :wink:

Here is an example of what I mean: http://remarque.org/~grabiner/assetalloc.html
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

triceratop wrote:I would do 50/50 Growth/Value, for simplicity. 51/49 is needless complexity. :wink:

Here is an example of what I mean: http://remarque.org/~grabiner/assetalloc.html
What if one likes complexity? lol

Thanks for the sheet. That is helpful. Where would mid caps go? I can always add columns for them.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by TropikThunder »

BogleAlltheWay wrote: Then I will have to adjust the percentages based upon the account ie. if I was splitting between 401k and taxable, I would have have to add more to the 401k because that will be taxed at 32% when I withdraw as opposed to only 22% for the taxable?

What do you mean by considering future tax on distributions?
Where are you getting these tax rates? Non-qualified dividends are taxed as ordinary income but there is no 32% tax bracket, while qualified dividends are taxed at lower rates but there's no 22% bracket for that either (max is 20%). Also, I think you are confusing several issues.
  • - 401k withdrawals are always taxed as regular income, not capital gains or dividends.
    - The vast majority of domestic dividends are qualified, for example for VTSAX Vanguard Total Stock Market Admiral shares it was 92.75% for year-end 2016, compared to Vanguard Growth Fund (VWUAX) and Value Fund (VVIAX) Admiral shares respectively at 100%. All this means is that the 7.25% of the VTSAX dividends that are non-qualified are taxed as ordinary income in a taxable account, but the drag I think is trivial. Especially since the SEC yield on VTSAX is lower than on VVIAX.
    - Once you decided on an allocation between Growth and Value, how would you rebalance from Value in 401k to Growth in taxable?
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Re: Splitting Value and Growth in taxable/non-taxable

Post by amphora »

I think it makes sense to hold different funds in taxable compared to non-taxable so you don't have to worry about wash sales when you tax loss harvest. You could try dividing it up with value v. growth or large cap v. small/mid cap -- whatever you prefer. But first decide on an overall asset allocation.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by siamond »

Not too sure it's worth the effort. Do consider the fact that you'll have to rebalance every now and then, and if you specialize funds too much between tax-deferred and taxable accounts, you might get in troubles (e.g. can't rebalance without triggering capital gains in the taxable account). A proper dose of TSM in each type of account goes a long way in navigating rebalancing events. At least, this has been my experience over the years.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by House Blend »

Certainly if you have a Large Value tilt, you'd rather have that tilt in tax-advantaged.

Breaking Total Stock into 6 pieces is overkill IMO, but I could see breaking US Large into Value + Growth if squeezing out a few more basis points is worth the extra hassle.

And you could still get killed if you have to rebalance out of growth in taxable. Best case would be that you've built up a bank of carryover losses, or that the space devoted to US Large in taxable is so small relative to tax-advantaged that you can put growth in taxable and expect to be able to do all rebalancing in tax-advantaged.

Consider using Vanguard Large Value and Large Growth to approximate VG Large Blend. All three Admiral ERs are the same. They all have an ETF share class, so the dangers of cap gains distributions are minimal. I did a quick once-over at portfolio visualizer, comparing 50:50 Value + Growth vs. Large Cap Index, with annual rebalancing, from inception of Admiral shares (2005) to present. Value+Growth won by 6 basis points/yr. It wins by 3 bp/yr over TSM. (The charts are indistinguishable.)

Current SEC yields are 1.30% (Growth), 2.50% (Value), 1.92% (Blend).

So if you pay 15% Federal and 5% state on (qualified) dividends, and assume away any potential for higher cap gains taxes, you're saving 12 basis points in taxable on the difference in yields between Blend and Growth.

Or, if you just want market weights and less hassle, you could use Tax-Managed Capital Appreciation, another US Large Cap fund, quasi-indexed.

None of this is enough to get me to change my asset location priorities. I'll still use TSM in taxable, and use US Large Cap Index or Tax-Managed as a TLH partner for it. YMMV.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

Thanks for the responses.

@ TropikThunder
The tax rates are the taxes I pay including state and local.

I would save about 15-20 basis points a year. Capital gains tax is a valid point brought up my multiple posters. My tax advantaged space will be growing at a faster than my taxable space. What about tilting toward value in my tax advantaged? If value does great, I buy growth. If growth does great, I will be fine with a 50/50 split. After reading the many posts on here, I don't have a firm opinion of the value premium.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by TropikThunder »

BogleAlltheWay wrote: @ TropikThunder
The tax rates are the taxes I pay including state and local.
:oops: I always forget about the state taxes, always having lived in a state with no income tax (TX, WA).
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Re: Splitting Value and Growth in taxable/non-taxable

Post by grabiner »

I have done this computation previously, and concluded that the extra expenses of splitting weren't worth it. But now, if you have Admiral shares, the style indexes have costs so low that you might save a few basis points.

Growth Index has 0.06% expenses, and a 0.20% tax cost with its 1.30% Admiral yield; the cost is 0.26% in taxable, and 0.06% for Value Index in your IRA, an average cost of 0.16%.

500 Index has 0.04% expenses, and a 0.30% tax cost with its 1.97% Admiral yield; the cost is 0.34% in taxable, and 0.19% if you have half in taxable and half in your IRA. (This is not a perfect comparison; Large-Cap Index is identical to 50% Growth Index and 50% Value Index, but it is more expensive than the similar 500 Index.)

This isn't all gain, though; you will pay a larger capital-gains tax when you sell Growth Index, because less of the gain comes from reinvested dividends. In addition, if growth outperforms value, you might need to rebalance for a tax cost. Thus, I still don't think the split is worthwhile.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

grabiner wrote:I have done this computation previously, and concluded that the extra expenses of splitting weren't worth it. But now, if you have Admiral shares, the style indexes have costs so low that you might save a few basis points.

Growth Index has 0.06% expenses, and a 0.20% tax cost with its 1.30% Admiral yield; the cost is 0.26% in taxable, and 0.06% for Value Index in your IRA, an average cost of 0.16%.

500 Index has 0.04% expenses, and a 0.30% tax cost with its 1.97% Admiral yield; the cost is 0.34% in taxable, and 0.19% if you have half in taxable and half in your IRA. (This is not a perfect comparison; Large-Cap Index is identical to 50% Growth Index and 50% Value Index, but it is more expensive than the similar 500 Index.)

This isn't all gain, though; you will pay a larger capital-gains tax when you sell Growth Index, because less of the gain comes from reinvested dividends. In addition, if growth outperforms value, you might need to rebalance for a tax cost. Thus, I still don't think the split is worthwhile.
Thanks for the response. Good point about the extra capital gains of selling the growth fund. I am really just putting off some of the taxes for later.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by grabiner »

grabiner wrote:I have done this computation previously, and concluded that the extra expenses of splitting weren't worth it. But now, if you have Admiral shares, the style indexes have costs so low that you might save a few basis points.

Growth Index has 0.06% expenses, and a 0.20% tax cost with its 1.30% Admiral yield; the cost is 0.26% in taxable, and 0.06% for Value Index in your IRA, an average cost of 0.16%.

500 Index has 0.04% expenses, and a 0.30% tax cost with its 1.97% Admiral yield; the cost is 0.34% in taxable, and 0.19% if you have half in taxable and half in your IRA. (This is not a perfect comparison; Large-Cap Index is identical to 50% Growth Index and 50% Value Index, but it is more expensive than the similar 500 Index.)

This isn't all gain, though; you will pay a larger capital-gains tax when you sell Growth Index, because less of the gain comes from reinvested dividends. In addition, if growth outperforms value, you might need to rebalance for a tax cost. Thus, I still don't think the split is worthwhile.
I worked out this part of the numbers. I am assuming an 8% growth for the stock market, a 30-year investment horizon, and reinvestment of all dividends after taxes.

A $10,000 investment in Growth Index grows at 7.74% after tax, which is 6.64% unrealized gains and 1.10% after-tax dividends. After 30 years, it is worth $93,607. The tax on the $71,725 capital gain (1.10/7.64 of the total gain) is $10,759, leaving you with $82,848, an overall growth rate of 7.30%. The other half of your portfolio grows at 7.94%, the pre-tax rate on Value Index. The average rate is 7.62%. (Averaging is appropriate here, even though your IRA will grow faster than your taxable account; you will rebalance appropriately, probably with new money.)

A $10,000 investment in 500 Index grows at 7.66% after tax, which is 5.99% unrealized gains and 1.66% after-tax dividends. After 30 years, it is worth $91,544. The tax on the $63,766 capital gain is $9565, leaving you with $81,879, an overall growth rate of 7.26%. The other half of your portfolio grows at 7.96%, the pre-tax rate on 500 Index. The average rate is 7.61%.

So splitting into growth and value saves you one basis point, $2 per year on the $20,000 investment; I don't think this is worth the trouble of keeping track of two separate funds.

I don't consider this myself for an unrelated reason. I overweight value, and have enough room in my Roth IRA to hold 50% of my US stock (so that I can split evenly between value and blend) but not 75% (which is what I would have to do in order to hold a growth fund in my taxable account).
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

grabiner wrote:
grabiner wrote:I have done this computation previously, and concluded that the extra expenses of splitting weren't worth it. But now, if you have Admiral shares, the style indexes have costs so low that you might save a few basis points.

Growth Index has 0.06% expenses, and a 0.20% tax cost with its 1.30% Admiral yield; the cost is 0.26% in taxable, and 0.06% for Value Index in your IRA, an average cost of 0.16%.

500 Index has 0.04% expenses, and a 0.30% tax cost with its 1.97% Admiral yield; the cost is 0.34% in taxable, and 0.19% if you have half in taxable and half in your IRA. (This is not a perfect comparison; Large-Cap Index is identical to 50% Growth Index and 50% Value Index, but it is more expensive than the similar 500 Index.)

This isn't all gain, though; you will pay a larger capital-gains tax when you sell Growth Index, because less of the gain comes from reinvested dividends. In addition, if growth outperforms value, you might need to rebalance for a tax cost. Thus, I still don't think the split is worthwhile.
I worked out this part of the numbers. I am assuming an 8% growth for the stock market, a 30-year investment horizon, and reinvestment of all dividends after taxes.

A $10,000 investment in Growth Index grows at 7.74% after tax, which is 6.64% unrealized gains and 1.10% after-tax dividends. After 30 years, it is worth $93,607. The tax on the $71,725 capital gain (1.10/7.64 of the total gain) is $10,759, leaving you with $82,848, an overall growth rate of 7.30%. The other half of your portfolio grows at 7.94%, the pre-tax rate on Value Index. The average rate is 7.62%. (Averaging is appropriate here, even though your IRA will grow faster than your taxable account; you will rebalance appropriately, probably with new money.)

A $10,000 investment in 500 Index grows at 7.66% after tax, which is 5.99% unrealized gains and 1.66% after-tax dividends. After 30 years, it is worth $91,544. The tax on the $63,766 capital gain is $9565, leaving you with $81,879, an overall growth rate of 7.26%. The other half of your portfolio grows at 7.96%, the pre-tax rate on 500 Index. The average rate is 7.61%.

So splitting into growth and value saves you one basis point, $2 per year on the $20,000 investment; I don't think this is worth the trouble of keeping track of two separate funds.

I don't consider this myself for an unrelated reason. I overweight value, and have enough room in my Roth IRA to hold 50% of my US stock (so that I can split evenly between value and blend) but not 75% (which is what I would have to do in order to hold a growth fund in my taxable account).
Thanks for doing more math. While I will be paying more capital gains tax on the growth fund over the value fund, isn't there a benefit of delaying the tax?

I am just learning all about this and I see considerable debate on this forum about the value premium. I am unsure if I want to tilt toward value. It makes logical sense to me because people will overpay for potential. It goes back to my days of collecting sports cards where younger players' cards were higher priced than older players who were a lock for the hall of fame.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by grabiner »

BogleAlltheWay wrote:
grabiner wrote:So splitting into growth and value saves you one basis point, $2 per year on the $20,000 investment; I don't think this is worth the trouble of keeping track of two separate funds.
Thanks for doing more math. While I will be paying more capital gains tax on the growth fund over the value fund, isn't there a benefit of delaying the tax?
I took that benefit into account, because I computed the compound growth rate after the tax was paid. The total taxes paid are actually more with the growth fund than the blend fund, because the gains not paid in deferred taxes have more time to grow.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:So splitting into growth and value saves you one basis point, $2 per year on the $20,000 investment; I don't think this is worth the trouble of keeping track of two separate funds.
Thanks for doing more math. While I will be paying more capital gains tax on the growth fund over the value fund, isn't there a benefit of delaying the tax?
I took that benefit into account, because I computed the compound growth rate after the tax was paid. The total taxes paid are actually more with the growth fund than the blend fund, because the gains not paid in deferred taxes have more time to grow.
If they have more time to grow, doesn't mean I am paying more taxes but I earned more ?
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Re: Splitting Value and Growth in taxable/non-taxable

Post by grabiner »

BogleAlltheWay wrote:
grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:So splitting into growth and value saves you one basis point, $2 per year on the $20,000 investment; I don't think this is worth the trouble of keeping track of two separate funds.
Thanks for doing more math. While I will be paying more capital gains tax on the growth fund over the value fund, isn't there a benefit of delaying the tax?
I took that benefit into account, because I computed the compound growth rate after the tax was paid. The total taxes paid are actually more with the growth fund than the blend fund, because the gains not paid in deferred taxes have more time to grow.
If they have more time to grow, doesn't mean I am paying more taxes but I earned more ?
Yes, and that is why splitting between growth and value came out ahead in my model. Putting growth in taxable means more taxes only because those taxes are obtained on higher gains.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:So splitting into growth and value saves you one basis point, $2 per year on the $20,000 investment; I don't think this is worth the trouble of keeping track of two separate funds.
Thanks for doing more math. While I will be paying more capital gains tax on the growth fund over the value fund, isn't there a benefit of delaying the tax?
I took that benefit into account, because I computed the compound growth rate after the tax was paid. The total taxes paid are actually more with the growth fund than the blend fund, because the gains not paid in deferred taxes have more time to grow.
If they have more time to grow, doesn't mean I am paying more taxes but I earned more ?
Yes, and that is why splitting between growth and value came out ahead in my model. Putting growth in taxable means more taxes only because those taxes are obtained on higher gains.
How did it only come out ahead by 1 basis point a year?
For reference, I looked the Vanguard Growth ETF (VUG) and the 500 ETF (VOO). VUG for the 25% tax bracket was about 10 basis points less in taxes. With the added expense, it really only saved 5 basis points a year. $5 at 8% for 30 years would be about $660 and about $500 after capital gain tax.
What am I missing?
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Re: Splitting Value and Growth in taxable/non-taxable

Post by grabiner »

BogleAlltheWay wrote:
grabiner wrote:
BogleAlltheWay wrote:If they have more time to grow, doesn't mean I am paying more taxes but I earned more ?
Yes, and that is why splitting between growth and value came out ahead in my model. Putting growth in taxable means more taxes only because those taxes are obtained on higher gains.
How did it only come out ahead by 1 basis point a year?
For reference, I looked the Vanguard Growth ETF (VUG) and the 500 ETF (VOO). VUG for the 25% tax bracket was about 10 basis points less in taxes. With the added expense, it really only saved 5 basis points a year. $5 at 8% for 30 years would be about $660 and about $500 after capital gain tax.
What am I missing?
The 1 basis point was based on putting half your assets in Growth Index in taxable, and half in Value Index in an IRA; see the math I worked out above. Value Index in the IRA is two basis points worse than 500 Index there because of higher expenses. Growth Index in taxable is four basis points better because the tax benefits outweigh the higher expenses. Averaging +4 and -2 gives an overall gain of one basis point.

Also, the historical numbers are based on the actual returns and historical yields, rather than the theoretical 8% and current yields I assumed. I estimated a tax difference of 8 basis points between Growth Index and 500 Index, not 10, which became 4 basis points after capital-gains tax.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by KyleAAA »

Large value shouldn't go in taxable but small value is actually quite tax efficient. Seems like far more trouble than it's worth u less you plan to tilt to small and/or value anyway.
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

grabiner wrote:
BogleAlltheWay wrote:
grabiner wrote:
BogleAlltheWay wrote:If they have more time to grow, doesn't mean I am paying more taxes but I earned more ?
Yes, and that is why splitting between growth and value came out ahead in my model. Putting growth in taxable means more taxes only because those taxes are obtained on higher gains.
How did it only come out ahead by 1 basis point a year?
For reference, I looked the Vanguard Growth ETF (VUG) and the 500 ETF (VOO). VUG for the 25% tax bracket was about 10 basis points less in taxes. With the added expense, it really only saved 5 basis points a year. $5 at 8% for 30 years would be about $660 and about $500 after capital gain tax.
What am I missing?
The 1 basis point was based on putting half your assets in Growth Index in taxable, and half in Value Index in an IRA; see the math I worked out above. Value Index in the IRA is two basis points worse than 500 Index there because of higher expenses. Growth Index in taxable is four basis points better because the tax benefits outweigh the higher expenses. Averaging +4 and -2 gives an overall gain of one basis point.

Also, the historical numbers are based on the actual returns and historical yields, rather than the theoretical 8% and current yields I assumed. I estimated a tax difference of 8 basis points between Growth Index and 500 Index, not 10, which became 4 basis points after capital-gains tax.
I forgot to account for the extra expenses of having the value fund. I added my state (NY) and local taxes (NYC) and I got a difference of 4 basis points a year. How many basis points a year would you need to save to make splitting worthwhile?
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Re: Splitting Value and Growth in taxable/non-taxable

Post by grabiner »

BogleAlltheWay wrote:I forgot to account for the extra expenses of having the value fund. I added my state (NY) and local taxes (NYC) and I got a difference of 4 basis points a year. How many basis points a year would you need to save to make splitting worthwhile?
It's not really clear; it's a matter of the cost to you of the extra transactions, and the possible cost of rebalancing transactions (which would be less if you have less than half your stock in taxable and can do rebalancing inside your IRA.)

However, if you live in NYC, there is another option: hold both growth and value stocks in a blend fund in your IRA, and hold NY municipal bonds in your taxable account. This will avoid the high NY state and city tax as well, and at current yields, it's probably more tax-efficient, even counting the hidden tax cost of munis. Admiral shares of Vanguard NY Long-Term Tax-Exempt yield 2.17%, which I estimate is the same risk as a taxable bond fund yielding 2.89% (so that it would be break-even at a 25% tax rate). Thus you lose 0.72% to avoid the taxes with the muni fund, but that is all you lose because there will be almost no capital gains.
Wiki David Grabiner
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BogleAlltheWay
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Re: Splitting Value and Growth in taxable/non-taxable

Post by BogleAlltheWay »

grabiner wrote:
BogleAlltheWay wrote:I forgot to account for the extra expenses of having the value fund. I added my state (NY) and local taxes (NYC) and I got a difference of 4 basis points a year. How many basis points a year would you need to save to make splitting worthwhile?
It's not really clear; it's a matter of the cost to you of the extra transactions, and the possible cost of rebalancing transactions (which would be less if you have less than half your stock in taxable and can do rebalancing inside your IRA.)

However, if you live in NYC, there is another option: hold both growth and value stocks in a blend fund in your IRA, and hold NY municipal bonds in your taxable account. This will avoid the high NY state and city tax as well, and at current yields, it's probably more tax-efficient, even counting the hidden tax cost of munis. Admiral shares of Vanguard NY Long-Term Tax-Exempt yield 2.17%, which I estimate is the same risk as a taxable bond fund yielding 2.89% (so that it would be break-even at a 25% tax rate). Thus you lose 0.72% to avoid the taxes with the muni fund, but that is all you lose because there will be almost no capital gains.
Thanks. I do hold NY munis. With help from here, we calculated that owning munis is a benefit for me.
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