Trying to balance simplicity with tax-efficiency

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Topic Author
damnford
Posts: 6
Joined: Mon Mar 28, 2011 2:25 pm
Location: Seattle, WA

Trying to balance simplicity with tax-efficiency

Post by damnford » Mon Feb 11, 2019 2:25 pm

Looking for some general advice on keeping my portfolio simple and hands-off, and thoughts on how savings/emergency-fund should be considered in my overall asset allocation.

Emergency funds: I have 30k in my taxable Vanguard account earmarked for a emergency fund (see below for more details). In a real emergency we'd also have access to a 100k HELOC if necessary.
Debt: Only debt is a mortgage, we owe ~190k (monthly payment is $2100, original loan balance 330k, house is probably worth ~800k)
Tax Filing Status: MFJ, two dependent children (ages 1 and 4)
Tax Rate: In 2018, we were in the 35% federal bracket (no state income tax)
State of Residence: Washington
Age: 33
Total assets: ~530k

I keep roughly ~10-15k in a checking account at a nation-wide brick-and-mortar bank for monthly expenses, etc. Aside from that, we have the following assets (all at Vanguard):

Taxable
105k VWIUX (Vanguard Intermediate-Term Tax-Exempt Fund)
53k VFORX (Vanguard Target Retirement 2040 Fund)

My Roth IRA
64k VFORX (Vanguard Target Retirement 2040 Fund)

Wife's Roth IRA
81k VFORX (Vanguard Target Retirement 2040 Fund)

My 401k
184k VFORX (Vanguard Target Retirement 2040 Fund)

529 for kid #1
22k Vanguard Aggressive Age-Based Option

529 for kid #2
22k Vanguard Aggressive Age-Based Option


We treat our VWIUX holding in our taxable account as our "savings" (since we don't have a traditional savings account anymore). We use YNAB (You Need a Budget) and we treat that money as part of our budget, meaning it is just a big pool of money virtually divided into many different "sub-accounts" for different purposes (e.g., 30k in an "emergency fund", a bunch set aside for home maintenance, various medium-term spending goals, etc.).

Up until about a month ago, I had a somewhat more complex allocation. I had all our tax-advantaged retirement accounts invested in a mix of Total Stock Market, Total Bond Market, and Total International Stock Market funds, and I had a spreadsheet where I kept track of all the balances and tried to maintain a ~70/30 stock/bond split (but I ignored the VWIUX holding, treating it as non-retirement savings). Recently I got fed up with this and decided to just throw everything into the 2040 Target Retirement fund across all of our accounts. Now I'm sorta wondering if that was a mistake.

For some context, we are planning to relocate to Europe in mid-2019 for roughly 2-5 years (on the lower end if we don't like it, on the higher end or even longer if we end up really enjoying it). I have a job lined up and I will be getting paid in Euros, so I don't exactly know how we'll keep investing in our US portfolio (not sure if I'll be eligible for a 401k, may not have earned income to contribute to Roth IRAs, etc). I also want it to be pretty hands-off so that we can focus on raising our kids in a new and exciting place, traveling, etc. Even though looking at account balances once a quarter and rebalancing is pretty easy, it's also one extra thing I have to think about and it's an opportunity to meddle and make changes when they're probably unnecessary.

Questions:
  • How big of a problem is it that I'm holding a Target Retirement fund in my taxable Vanguard account? I know it's not very tax-efficient for someone in my tax bracket, but I don't know how to weigh that against the simplicity of just having one fund to throw money into (not worrying about rebalancing, fighting the temptation to "tweak" things). One option I thought of is I could just throw it all into a more tax-efficient Total Stock Market fund or similar, but then I'm at 100% stocks in there (seems a bit risky?). Unless I should consider my VWIUX holding to count as a "bonds" holding? Up until now, I've been ignoring that holding as part of my AA since I was treating it basically as a savings account and not part of my normal retirement savings.
  • Am I making a mistake by not having a traditional savings account? The goal with VWIUX was to try to keep pace with inflation without too much risk (though we can easily tolerate some loss of principal in there). I know there are online savings accounts that pay more than the 0.04% my brick-and-mortar bank will offer, or also CDs and such. But I also like keeping our financial life as simple as possible, and I don't want to have yet another account I have to login to periodically.
  • How can I continue to invest while we're living in Europe? I know that might be hard to answer since it might depend on a lot of specifics, but I'm curious if others have been in this situation and what they did. Should/can we open EU investment accounts and invest there? Or periodically transfer money from EUR back into USD and invest in my Vanguard taxable account? Are we eligible to continue making Roth IRA contributions if we don't have any earned income in the US?
Any other advice or perspective from others would be welcome. Thanks!

livesoft
Posts: 68162
Joined: Thu Mar 01, 2007 8:00 pm

Re: Trying to balance simplicity with tax-efficiency

Post by livesoft » Mon Feb 11, 2019 2:39 pm

I think you should get over the idea that you need a target date fund in every account. You can still have one fund in every account and not worry about a thing.

For instance, you could have a Total US Stock Market Index fund in your taxable account and that would be more tax-efficient than the target date fund there. You would not have to rebalance or worry about the TSM fund at all.

If you were worried about being equity heavy, then you could change the target date fund in another account to be less equity heavy. That other account could still have one single fund in it.

Anyways, I would (and I do this) use tax-efficient broad market index funds in taxable, put a single bond fund in my spouse's tax-deferred accounts, and put stock (equity) funds in Roth IRAs. Basically, almost every account has one single fund in it. I make an exception for my 401(k) which has one of each asset class in it, so that I can do rebalancing if I want to without any tax consequences.

We don't have a traditional savings account since about 1981.
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fsh71
Posts: 68
Joined: Mon Jun 04, 2018 3:03 pm

Re: Trying to balance simplicity with tax-efficiency

Post by fsh71 » Mon Feb 11, 2019 3:03 pm

damnford wrote:
Mon Feb 11, 2019 2:25 pm

Questions:
  • How big of a problem is it that I'm holding a Target Retirement fund in my taxable Vanguard account? I know it's not very tax-efficient for someone in my tax bracket, but I don't know how to weigh that against the simplicity of just having one fund to throw money into (not worrying about rebalancing, fighting the temptation to "tweak" things). One option I thought of is I could just throw it all into a more tax-efficient Total Stock Market fund or similar, but then I'm at 100% stocks in there (seems a bit risky?). Unless I should consider my VWIUX holding to count as a "bonds" holding? Up until now, I've been ignoring that holding as part of my AA since I was treating it basically as a savings account and not part of my normal retirement savings.
  • Am I making a mistake by not having a traditional savings account? The goal with VWIUX was to try to keep pace with inflation without too much risk (though we can easily tolerate some loss of principal in there). I know there are online savings accounts that pay more than the 0.04% my brick-and-mortar bank will offer, or also CDs and such. But I also like keeping our financial life as simple as possible, and I don't want to have yet another account I have to login to periodically.
  • How can I continue to invest while we're living in Europe? I know that might be hard to answer since it might depend on a lot of specifics, but I'm curious if others have been in this situation and what they did. Should/can we open EU investment accounts and invest there? Or periodically transfer money from EUR back into USD and invest in my Vanguard taxable account? Are we eligible to continue making Roth IRA contributions if we don't have any earned income in the US?
Any other advice or perspective from others would be welcome. Thanks!

1. That target-date fund in taxable will get less tax-efficient as you get nearer retirement, as it adds more and more taxable bonds. If you want to prioritize simplicity (a good idea imo) without sacrificing on tax efficiency, you could use VT (Vanguard Total World Stock), which holds 100% global equities at market weights. If you desire a similar stock / bond ratio in your taxable account as you currently have, you could buy some more VWIUX in addition to the VT.

I actually do this in my own portfolio. In taxable, I hold 2 funds (VT and a little bit of tax-efficient bonds as a 2nd tier e-fund). Then in all of our IRAs & my wife's 401k, we hold a single target-risk fund (Lifestrategy Growth). Finally, in my 401k I hold 3 funds, Total US Stock, Total Int'l Stock, and Total Bond. Then I do all our our rebalancing in my 401k, since it hold 3 funds and there are no tax consequences from selling.

yogesh
Posts: 356
Joined: Thu Oct 11, 2012 6:20 pm

Re: Trying to balance simplicity with tax-efficiency

Post by yogesh » Mon Feb 11, 2019 3:17 pm

damnford wrote:
Mon Feb 11, 2019 2:25 pm
Looking for some general advice on keeping my portfolio simple and hands-off, and thoughts on how savings/emergency-fund should be considered in my overall asset allocation.

Emergency funds: I have 30k in my taxable Vanguard account earmarked for a emergency fund (see below for more details). In a real emergency we'd also have access to a 100k HELOC if necessary.
Debt: Only debt is a mortgage, we owe ~190k (monthly payment is $2100, original loan balance 330k, house is probably worth ~800k)
Tax Filing Status: MFJ, two dependent children (ages 1 and 4)
Tax Rate: In 2018, we were in the 35% federal bracket (no state income tax)
State of Residence: Washington
Age: 33
Total assets: ~530k

I keep roughly ~10-15k in a checking account at a nation-wide brick-and-mortar bank for monthly expenses, etc. Aside from that, we have the following assets (all at Vanguard):

Taxable
105k VWIUX (Vanguard Intermediate-Term Tax-Exempt Fund)
53k VFORX (Vanguard Target Retirement 2040 Fund) -> Change to VTWAX or VTMFX

My Roth IRA
64k VFORX (Vanguard Target Retirement 2040 Fund)

Wife's Roth IRA
81k VFORX (Vanguard Target Retirement 2040 Fund)

My 401k
184k VFORX (Vanguard Target Retirement 2040 Fund)

529 for kid #1
22k Vanguard Aggressive Age-Based Option

529 for kid #2
22k Vanguard Aggressive Age-Based Option


We treat our VWIUX holding in our taxable account as our "savings" (since we don't have a traditional savings account anymore). We use YNAB (You Need a Budget) and we treat that money as part of our budget, meaning it is just a big pool of money virtually divided into many different "sub-accounts" for different purposes (e.g., 30k in an "emergency fund", a bunch set aside for home maintenance, various medium-term spending goals, etc.).

Up until about a month ago, I had a somewhat more complex allocation. I had all our tax-advantaged retirement accounts invested in a mix of Total Stock Market, Total Bond Market, and Total International Stock Market funds, and I had a spreadsheet where I kept track of all the balances and tried to maintain a ~70/30 stock/bond split (but I ignored the VWIUX holding, treating it as non-retirement savings). Recently I got fed up with this and decided to just throw everything into the 2040 Target Retirement fund across all of our accounts. Now I'm sorta wondering if that was a mistake.

For some context, we are planning to relocate to Europe in mid-2019 for roughly 2-5 years (on the lower end if we don't like it, on the higher end or even longer if we end up really enjoying it). I have a job lined up and I will be getting paid in Euros, so I don't exactly know how we'll keep investing in our US portfolio (not sure if I'll be eligible for a 401k, may not have earned income to contribute to Roth IRAs, etc). I also want it to be pretty hands-off so that we can focus on raising our kids in a new and exciting place, traveling, etc. Even though looking at account balances once a quarter and rebalancing is pretty easy, it's also one extra thing I have to think about and it's an opportunity to meddle and make changes when they're probably unnecessary.

Questions:
  • How big of a problem is it that I'm holding a Target Retirement fund in my taxable Vanguard account? I know it's not very tax-efficient for someone in my tax bracket, but I don't know how to weigh that against the simplicity of just having one fund to throw money into (not worrying about rebalancing, fighting the temptation to "tweak" things). One option I thought of is I could just throw it all into a more tax-efficient Total Stock Market fund or similar, but then I'm at 100% stocks in there (seems a bit risky?). Unless I should consider my VWIUX holding to count as a "bonds" holding? Up until now, I've been ignoring that holding as part of my AA since I was treating it basically as a savings account and not part of my normal retirement savings.
  • Am I making a mistake by not having a traditional savings account? The goal with VWIUX was to try to keep pace with inflation without too much risk (though we can easily tolerate some loss of principal in there). I know there are online savings accounts that pay more than the 0.04% my brick-and-mortar bank will offer, or also CDs and such. But I also like keeping our financial life as simple as possible, and I don't want to have yet another account I have to login to periodically.
  • How can I continue to invest while we're living in Europe? I know that might be hard to answer since it might depend on a lot of specifics, but I'm curious if others have been in this situation and what they did. Should/can we open EU investment accounts and invest there? Or periodically transfer money from EUR back into USD and invest in my Vanguard taxable account? Are we eligible to continue making Roth IRA contributions if we don't have any earned income in the US?
Any other advice or perspective from others would be welcome. Thanks!
Seems good that everything is on auto-pilot. The only change would be to get rid of target retirement in taxable by replacing it with VTWAX (100% world stocks) or VTMFX (50% domestic + 50% municipal bonds) if you want be more conservative. Seems like I have a similar portfolio as yours. I am at Fidelity and settled into the following as auto-pilot with no re-balancing required for my spouse or custodian to continue as-is:
Checking: FDIC
Savings: Treasury Money Market (1yr expenses)
Taxable: VTWSX
IRA/401K: TR2040
529: GET-WA-PREPAID
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040

Topic Author
damnford
Posts: 6
Joined: Mon Mar 28, 2011 2:25 pm
Location: Seattle, WA

Re: Trying to balance simplicity with tax-efficiency

Post by damnford » Mon Feb 11, 2019 5:15 pm

Thanks for the advice. Maybe I was overthinking this in my head :) I like the idea of just switching my VFORX in my taxable to either VTWAX (total world) or VTMFX (tax-managed balanced).

I guess an argument for VTMFX would be that it would get me a little closer to my old AA across all my retirement accounts (70/30, whereas pure VFORX is 85/15 at the moment and going with VTWAX would be even more stock-weighted). Plus if I retire early (before I can access anything in my tax-advantaged accounts), then I'd be relying only on my taxable account, so keeping it in something less volatile seems like a good idea.

On the other hand, if I consider my "savings" in VWIUX as part of my overall AA, then I could easily go 100% stocks for the rest of my taxable.

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Duckie
Posts: 6861
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Trying to balance simplicity with tax-efficiency

Post by Duckie » Mon Feb 11, 2019 6:48 pm

damnford wrote:We treat our VWIUX holding in our taxable account as our "savings" (since we don't have a traditional savings account anymore). We use YNAB (You Need a Budget) and we treat that money as part of our budget, meaning it is just a big pool of money virtually divided into many different "sub-accounts" for different purposes (e.g., 30k in an "emergency fund", a bunch set aside for home maintenance, various medium-term spending goals, etc.).
VWIUX is not for retirement and should not be part of the retirement portfolio when figuring AA. And the 529 plans are not part of the retirement portfolio either.
Recently I got fed up with this and decided to just throw everything into the 2040 Target Retirement fund across all of our accounts. Now I'm sorta wondering if that was a mistake.
It was. You don't want a target-date fund in your taxable account because of the bonds. Also, in general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. That means putting just stocks in your Roth accounts and all your bonds in pre-tax accounts like your 401k.
____________________

The following example has an AA of 80% stocks, 20% bonds, with 30% of stocks in international. That breaks down to 56% US stocks, 24% internationals stocks, and 20% bonds. You could have something like:

Taxable at Vanguard -- $53K -- 14%
14% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

His 401k at Vanguard -- $184K -- 48%
28% US total stock or 500 index
20% US total or intermediate-term bond index

His Roth IRA at Vanguard -- $64K -- 17%
17% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- $81K -- 21%
14% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
7% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Just some possibilities.

DA200
Posts: 209
Joined: Fri Feb 06, 2015 3:47 pm

Re: Trying to balance simplicity with tax-efficiency

Post by DA200 » Mon Feb 11, 2019 8:15 pm

damnford wrote:
Mon Feb 11, 2019 5:15 pm
Thanks for the advice. Maybe I was overthinking this in my head :) I like the idea of just switching my VFORX in my taxable to either VTWAX (total world) or VTMFX (tax-managed balanced).

I guess an argument for VTMFX would be that it would get me a little closer to my old AA across all my retirement accounts (70/30, whereas pure VFORX is 85/15 at the moment and going with VTWAX would be even more stock-weighted). Plus if I retire early (before I can access anything in my tax-advantaged accounts), then I'd be relying only on my taxable account, so keeping it in something less volatile seems like a good idea.

On the other hand, if I consider my "savings" in VWIUX as part of my overall AA, then I could easily go 100% stocks for the rest of my taxable.
Holding a Total stock fund in taxable like VTSAX has more than one advantage:
1) very tax efficient (as compared to holding funds with taxable bonds)
2) opportunities to tax loss harvest due to larger swings in single asset class. (less chance of doing tax loss harvesting with a balanced fund)
3) gains generally taxed at very preferable rates (generally only 0% or 15%)
4) no concern of having more volatile stocks in taxable even during early retirement. Why? If you need to sell stocks at a market low in taxable, you just sell bonds in tax-deferred at the same time and rebuy the stocks in tax-deferred. Equivalent to selling bonds....
5) better to have bond asset alloaction in a tax-deferred account so that growth is less, creating less RMDs and lower taxes. You want maximum growth (stocks) in Roth and taxable accounts that are taxed at lower rates.

Bottom line, I would avoid target date funds and taxable bonds in taxable.

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Peter Foley
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Location: Lake Wobegon

Re: Trying to balance simplicity with tax-efficiency

Post by Peter Foley » Mon Feb 11, 2019 8:20 pm

You wrote and duckie replied:
Recently I got fed up with this and decided to just throw everything into the 2040 Target Retirement fund across all of our accounts. Now I'm sorta wondering if that was a mistake.

duckie:

It was. You don't want a target-date fund in your taxable account because of the bonds. Also, in general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. That means putting just stocks in your Roth accounts and all your bonds in pre-tax accounts like your 401k.
____________________
Agreed.

In addition, if you are looking for tax efficiency it is better to hold stock and bond funds in taxable than target retirement. It makes it easier to tax loss harvest should that situation present itself.

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