Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
halbschatten
Posts: 7
Joined: Thu Aug 01, 2019 6:11 pm

Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by halbschatten » Sat May 09, 2020 8:54 pm

All right, top-editing this post so that it's appropriate for portfolio review!

The gist:

- Emergency funds: yep
- Debt: none
- Tax filing: single
- Tax rate: 24% fed, 8.5% California
- Age: early 30s
- Desired asset allocation: 80% stocks, 20% bonds
- Current portfolio: low 7 figures
- Risk tolerance: high-ish, my goals are long-term.

All the funds!

In Taxable:

- ISHARES CORE MSCI EMERGING MARKETS ETF IEMG 3.07% (0.13% ER) (-2.8k CL)
- ISHARES NATIONAL MUNI BOND ETF MUB 3.43% (0.07% ER)
- SCHWAB U S BROAD MARKET ETF SCHB 25.09% (0.03% ER) (22k CG)
- SCHWAB INTL EQUITY ETF SCHF 17.21% (0.06% ER) (-13k CL)
- SPDR NUVEEN BLOOMBERG BARCLAYS MUN BOND ETF TFI 2.71% (0.30% ER) (1k CG)
- VANGUARD TOTAL INTL BOND INDEX ETF BNDX 6.70% (0.08% ER) (2k CG)
- VANGUARD SHORT TERM INFLATION PROTECTED SECURITIES ETF VTIP 1.33% (0.05% ER)
- VANGUARD FTSE EMERGING MARKETS ETF VWO 0.89% (0.10% ER)
- VANGUARD SMALL CAP VALUE ETF VBR 4.56% (0.07% ER) (-8k CL)
- VANGUARD VALUE ETF VTV 6.98% (0.04% ER) (4k CG)
- VANGUARD FTSE DEVELOPED MKTS ETF VEA 3.27% (0.05% ER) (1k CL)
- VANGUARD TOTAL STOCK MARKET ETF VTI 7.78% (0.03% ER) (14k CG)
- VANGUARD MID CAP VALUE ETF VOE 6.78% (0.07% ER) (-7k CL)

(CL/CG= losses, gains, assume that vast majority of either is long-term, very small amounts not included)
(ER= expense ratio)

In Trad IRA:

- VANGUARD TOTAL BOND MARKET ETF BND 5.88% (0.035% ER)

In Roth IRA:

- VANGUARD FTSE EMERGING MARKETS ETF VWO 4.29% (0.1% ER)

---

I moved my entire portfolio from Betterment to Vanguard, and have been simplifying the positions where Betterment had a tiny account in a secondary index for tax-loss harvesting.

I'd like to simplify the portfolio further. Right now the taxable portion is 13 funds, with a few of them which - I think - are redundant. For example: IEMG and VWO for an emerging markets fund. I probably just want VWO. MUB, TFI, and BNDX for bond exposure. I probably just want BNDX and maybe BND. And then the bigger ones - SCHB and VTI for the total stock market exposure.

I'm not trying to do tax-loss harvesting anymore: Betterment harvested enough losses in 2018 to have the 3k carryover running for a long time. I'm not trying to change my allocations - it's about 80/20 equities/bonds right now. Mostly I just want to simplify and so so without triggering a huge tax bill or otherwise just costing a lot in performance.

- I'm wondering: is this the right time to do it, when markets are down?
- And given these combinations, as far as I can tell Betterment was trying to engineer these to avoid wash-sale rules in conversions. Holding for 30 days is not out of the question if I want to be paranoid about wash sales, but is that necessary?
- Am I missing some sort of important diversification from the (relatively small, as far as I can tell) differences between these funds?

Add-on question: wash sales are only for losses, right? The biggest position in this portfolio - SCHB - I'd like to be in VTI for simplicity, but it has $22k in unrealized long-term gains, which is enough to bump up my tax bracket. Am I just stuck with it in perpetuity?

Thanks all!
Last edited by halbschatten on Mon May 18, 2020 12:27 pm, edited 4 times in total.

Chip
Posts: 2929
Joined: Wed Feb 21, 2007 4:57 am

Re: Simplifying a portfolio in this downturn?

Post by Chip » Sun May 10, 2020 6:21 am

halbschatten wrote:
Sat May 09, 2020 8:54 pm
- I'm wondering: is this the right time to do it, when markets are down?
- And given these combinations, as far as I can tell Betterment was trying to engineer these to avoid wash-sale rules in conversions. Holding for 30 days is not out of the question if I want to be paranoid about wash sales, but is that necessary?
- Am I missing some sort of important diversification from the (relatively small, as far as I can tell) differences between these funds?

Add-on question: wash sales are only for losses, right? The biggest position in this portfolio - SCHB - I'd like to be in VTI for simplicity, but it has $22k in unrealized long-term gains, which is enough to bump up my tax bracket. Am I just stuck with it in perpetuity?
Hi, and congrats on your first post!

Yes, simplifying in a down market makes sense as the tax cost is lower. But I would note that as of today the market isn't down THAT much. It's important to understand your exact situation with regard to each position.

I don't believe there is a significant diversification benefit that you have to worry about losing.

You don't have to be paranoid about wash sales. They aren't illegal but they do reduce the tax benefit of the harvesting that's been done.

Do you need bonds in your taxable account? Could you put taxable bonds in your 401k/IRA and maintain your asset allocation?

I believe strongly that you should hold on to SCHB. Its returns are basically indistinguishable from VTI, so it's a fine place to be "stuck". Try comparing them at Morningstar.

HomeStretch
Posts: 4397
Joined: Thu Dec 27, 2018 3:06 pm

Re: Simplifying a portfolio in this downturn?

Post by HomeStretch » Sun May 10, 2020 9:43 am

While you decide how to divest most tax effectively, consider turning off reinvestment of dividends if you haven’t already so you don’t buy more.

retired@50
Posts: 2659
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Simplifying a portfolio in this downturn?

Post by retired@50 » Sun May 10, 2020 9:51 am

halbschatten wrote:
Sat May 09, 2020 8:54 pm
...
I'm not trying to do tax-loss harvesting anymore: Betterment harvested enough losses in 2018 to have the 3k carryover running for a long time.
...
Add-on question: wash sales are only for losses, right? The biggest position in this portfolio - SCHB - I'd like to be in VTI for simplicity, but it has $22k in unrealized long-term gains, which is enough to bump up my tax bracket. Am I just stuck with it in perpetuity?

Thanks all!
Welcome to the forum.

I'm not certain about the tax implications here...
But, it would appear to me that if you have enough carry-over losses from 2018 that those could be used to absorb the $22k capital gain you fear from selling SCHB.

Regards,
This is one person's opinion. Nothing more.

Topic Author
halbschatten
Posts: 7
Joined: Thu Aug 01, 2019 6:11 pm

Re: Simplifying a portfolio in this downturn?

Post by halbschatten » Sun May 10, 2020 12:29 pm

Thanks all!
Do you need bonds in your taxable account? Could you put taxable bonds in your 401k/IRA and maintain your asset allocation?
I've only briefly had work-affiliated 401ks, so my portfolio is heavily tilted toward taxable - ~1M taxable, ~40k in a Trad IRA, and ~60k in a Roth IRA. The Roth is all VWO and the Trad is all BND, but they aren't large enough accounts to completely contain my allocation to bonds, as far as I can tell. And I'm back at a non-401k-supporting job, so only the trad account is growing at 6k/year, so that's not likely to change anytime soon. Should have worked for big companies, maybe :)

mega317
Posts: 4325
Joined: Tue Apr 19, 2016 10:55 am

Re: Simplifying a portfolio in this downturn?

Post by mega317 » Sun May 10, 2020 1:04 pm

What's your tax bracket? That's one big piece. Seems unconscionable to me for them to have you in munis and BNDX.

I would not realize a dollar in capital gains for "simplicity". In short yes you are stuck with SCHB unless you want to donate or die.

You don't need multiple similar funds for diversity. One broad index fund is plenty in each allocation (US stock, international stock, bonds).
https://www.bogleheads.org/forum/viewtopic.php?t=6212

Topic Author
halbschatten
Posts: 7
Joined: Thu Aug 01, 2019 6:11 pm

Re: Simplifying a portfolio in this downturn?

Post by halbschatten » Sun May 10, 2020 1:24 pm

I'm in the 24% tax bracket, and in CA. Is BNDX bad because of taxes or performance?

Robert20
Posts: 118
Joined: Fri Apr 10, 2020 10:51 pm

Re: Simplifying a portfolio in this downturn?

Post by Robert20 » Sun May 10, 2020 4:59 pm

halbschatten wrote:
Sun May 10, 2020 12:29 pm
Thanks all!
Do you need bonds in your taxable account? Could you put taxable bonds in your 401k/IRA and maintain your asset allocation?
I've only briefly had work-affiliated 401ks, so my portfolio is heavily tilted toward taxable - ~1M taxable, ~40k in a Trad IRA, and ~60k in a Roth IRA. The Roth is all VWO and the Trad is all BND, but they aren't large enough accounts to completely contain my allocation to bonds, as far as I can tell. And I'm back at a non-401k-supporting job, so only the trad account is growing at 6k/year, so that's not likely to change anytime soon. Should have worked for big companies, maybe :)
Why every investment in Trad IRA is BND?.

User avatar
dratkinson
Posts: 4901
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Simplifying a portfolio in this downturn?

Post by dratkinson » Sun May 10, 2020 5:39 pm

retired@50 wrote:
Sun May 10, 2020 9:51 am
halbschatten wrote:
Sat May 09, 2020 8:54 pm
...
I'm not trying to do tax-loss harvesting anymore: Betterment harvested enough losses in 2018 to have the 3k carryover running for a long time.
...
Add-on question: wash sales are only for losses, right? The biggest position in this portfolio - SCHB - I'd like to be in VTI for simplicity, but it has $22k in unrealized long-term gains, which is enough to bump up my tax bracket. Am I just stuck with it in perpetuity?

Thanks all!
Welcome to the forum.

I'm not certain about the tax implications here...
But, it would appear to me that if you have enough carry-over losses from 2018 that those could be used to absorb the $22k capital gain you fear from selling SCHB.

Regards,
IRS netting rules.

Losses.
--In the year recognized, capital losses offset capital gains dollar-for-dollar.
--In subsequent years, carryover losses can be used to offset $3K of ordinary income.

Tax efficiency. At $3K/yr, it would require many years to sell SCHB by using up the carryover loss. The carryover loss would also be wasted if used to offset SCHB LTCGs (lower tax rate applies), instead of ordinary income (higher tax rate applies).


OP (original post, original poster), try not to be too OCD. VTI and SCHB are both acceptable funds. Forum members often own more than one fund covering the same market segment. Why? Same as you, we TLHed and the market recovered while we owned the TLH partner. It can take several years before we have a loss in the TLH partner so we can sell it. Until then, it’s “good enough” so we continue to own it.

So don't sell SCHB and owe taxes to scratch a mental itch. For now, it’s more tax efficient to redirect SCHB's distributions to your settlement account, and use them to rebalance as needed. Wait until you have a loss (in SCHB, or somewhere else) to sell SCHB.

Ditto for all of your other funds. Only simplify/sell if you have an offsetting loss. Don’t simplify/sell if you will owe tax to do so.

From my offline notes reminding me how to do this. wrote:
RS netting rules for ST and LT capital gains/losses. (From review of IRS QDI and CGs worksheet.)

From grabiner: viewtopic.php?p=2770994#p2770994

"You can net either way.

1. Net short-term gains and losses.
2. Net long-term gains and losses.
3. Net any remaining short-term gains against long-term losses, or vice versa.

If the result is positive, pay tax at short-term or long-term rates depending on the type of gain.
If the result is negative, can use $3K to offset current-year income (if both then short-term loss used first).
Any excess loss is carried over and remains short-term or long-term."


Notes.
--CL (current, carryover, ST, LT) can only offset ordinary income (QDI) $3K/yr.
--In year harvested, CL offsets CG dollar-for-dollar---$3K/yr limit on carryover loss does NOT apply.
--STCGs are taxed most, so CL netted against STCG provides most tax benefit.
--LTCGs are taxed least, so CL netted against LTCG, not ordinary income, wastes tax benefit.


Hence the general advice:
--Harvest CL while ST.
--Don't harvest LTCG with a CL (carryover, current, ST, LT), wastes tax benefit.
--Can harvest CL to offset published year-end CGs distribution dollar-for-dollar.


Bonds in taxable. If you are in a higher tax bracket, the standard answer is to use VWITX (Vanguard intermediate-term national tax-exempt bond fund).

But if we are now looking at your total financial situation, then it’s much better for you to edit your OP to provide all of the information requested in the sticky “Asking Portfolio Questions” so you can receive a complete forum review. It’ll take you a few days to gather/provide all of the information, but you’ll get a much better answer.

Include in your descriptions, the CG/CL in each fund in taxable, so we can see if there is any wiggle room to sell and make your desired changes.

Should also change title in your OP to show you are requesting a forum review---will attract a different audience.



Welcome.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

retired@50
Posts: 2659
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Simplifying a portfolio in this downturn?

Post by retired@50 » Sun May 10, 2020 7:02 pm

Thanks dratkinson,
I was hoping someone would come along to clear up the question about capital gains/losses and carry-over rules.

Regards,
This is one person's opinion. Nothing more.

User avatar
billthecat
Posts: 495
Joined: Tue Jan 24, 2017 2:50 pm

Re: Simplifying a portfolio in this downturn?

Post by billthecat » Sun May 10, 2020 7:08 pm

Robert20 wrote:
Sun May 10, 2020 4:59 pm
halbschatten wrote:
Sun May 10, 2020 12:29 pm
Thanks all!
Do you need bonds in your taxable account? Could you put taxable bonds in your 401k/IRA and maintain your asset allocation?
I've only briefly had work-affiliated 401ks, so my portfolio is heavily tilted toward taxable - ~1M taxable, ~40k in a Trad IRA, and ~60k in a Roth IRA. The Roth is all VWO and the Trad is all BND, but they aren't large enough accounts to completely contain my allocation to bonds, as far as I can tell. And I'm back at a non-401k-supporting job, so only the trad account is growing at 6k/year, so that's not likely to change anytime soon. Should have worked for big companies, maybe :)
Why every investment in Trad IRA is BND?.
No the OP but my trad. 401k is total bond, my Roth 401K is total market. During early retirement, I plan to fully convert my trad. 401K bonds to Roth 401K stock, and by having it be bonds now it should, in theory, grow more slowly than the equity I've instead put in my taxable accounts. In other words, if I'm going to have the bonds somewhere I figure I might as well have them in the place where they're expected to grow more slowly and have the stock where i expect it to grow more quickly.

That said, like the OP, my 401K is small compared to my taxable account, and so I have bonds in my taxable account too.
We cannot direct the winds but we can adjust our sails.

Topic Author
halbschatten
Posts: 7
Joined: Thu Aug 01, 2019 6:11 pm

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by halbschatten » Mon May 11, 2020 1:31 am

Thanks so much folks! Starting to make a lot of sense. I've edited the top-post as well to add more details to make this a proper portfolio review.

User avatar
dratkinson
Posts: 4901
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by dratkinson » Mon May 11, 2020 8:28 pm

BH Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

halbschatten wrote:
Sat May 09, 2020 8:54 pm
All right, top-editing this post so that it's appropriate for portfolio review!

The gist:

- Emergency funds: yep
- Debt: none
- Tax filing: single
- Tax rate: 24% fed, 8.5% California (Opportunity for CA muni funds.)
- Age: 33
- Desired asset allocation: 80% stocks, 20% bonds
- International allocation: 20-30% is generally used. 0-50% is allowed. Your choice.
- Current portfolio: low 7 figures
- Risk tolerance: high-ish, my goals are long-term.

All the funds!

In Taxable: (* Consider selling.).


- ISHARES CORE MSCI EMERGING MARKETS ETF IEMG 3.07% (0.13% ER) (-2.8k CL) *
- ISHARES NATIONAL MUNI BOND ETF MUB 3.43% (0.07% ER)
- SCHWAB U S BROAD MARKET ETF SCHB 25.09% (0.03% ER) (22k CG)
- SCHWAB INTL EQUITY ETF SCHF 17.21% (0.06% ER) (-13k CL) *
- SPDR NUVEEN BLOOMBERG BARCLAYS MUN BOND ETF TFI 2.71% (0.30% ER) (1k CG) *
- VANGUARD TOTAL INTL BOND INDEX ETF BNDX 6.70% (0.08% ER) (2k CG) *
- VANGUARD SHORT TERM INFLATION PROTECTED SECURITIES ETF VTIP 1.33% (0.05% ER) *
- VANGUARD FTSE EMERGING MARKETS ETF VWO 0.89% (0.10% ER) *
- VANGUARD SMALL CAP VALUE ETF VBR 4.56% (0.07% ER) (-8k CL) *
- VANGUARD VALUE ETF VTV 6.98% (0.04% ER) (4k CG) * to simplify
- VANGUARD FTSE DEVELOPED MKTS ETF VEA 3.27% (0.05% ER) (1k CL)
- VANGUARD TOTAL STOCK MARKET ETF VTI 7.78% (0.03% ER) (14k CG)
- VANGUARD MID CAP VALUE ETF VOE 6.78% (0.07% ER) (-7k CL) *

(CL/CG= losses, gains, assume that vast majority of either is long-term, very small amounts not included)
(ER= expense ratio)

In Trad IRA: (Good idea, low growth until time you can convert to Roth in retirement.)

- VANGUARD TOTAL BOND MARKET ETF BND 5.88% (0.035% ER)

In Roth IRA: (The FTC is lost on international funds in tax-advantaged accounts.)

- VANGUARD FTSE EMERGING MARKETS ETF VWO 4.29% (0.1% ER)

---

I moved my entire portfolio from Betterment to Vanguard, and have been simplifying the positions where Betterment had a tiny account in a secondary index for tax-loss harvesting.

I'd like to simplify the portfolio further. Right now the taxable portion is 13 funds, with a few of them which - I think - are redundant. For example: IEMG and VWO for an emerging markets fund. I probably just want VWO. MUB, TFI, and BNDX for bond exposure. I probably just want BNDX and maybe BND. And then the bigger ones - SCHB and VTI for the total stock market exposure.

I'm not trying to do tax-loss harvesting anymore: Betterment harvested enough losses in 2018 to have the 3k carryover running for a long time. I'm not trying to change my allocations - it's about 80/20 equities/bonds right now. Mostly I just want to simplify and so so without triggering a huge tax bill or otherwise just costing a lot in performance.

- I'm wondering: is this the right time to do it, when markets are down? Now is a good time.
- And given these combinations, as far as I can tell Betterment was trying to engineer these to avoid wash-sale rules in conversions. Holding for 30 days is not out of the question if I want to be paranoid about wash sales, but is that necessary? Holding for 30days is not the issue, it’s not buying replacement shares *OF* the sold fund, for 30days, either before or after the TLH date. See below.
- Am I missing some sort of important diversification from the (relatively small, as far as I can tell) differences between these funds? Probably not, just needed for Betterment to TLH. But more pieces for you to manage.

Add-on question: wash sales are only for losses, right? Correct. Wash sales only apply to losses, not gains. The biggest position in this portfolio - SCHB - I'd like to be in VTI for simplicity, but it has $22k in unrealized long-term gains, which is enough to bump up my tax bracket. Am I just stuck with it in perpetuity? See below, and use excess losses, to sell SCHB to buy VTI.

Thanks all!

The short answer. I believe you have enough wiggle room in your losing positions to clean up your taxable account and make it more tax efficient at the same time.



The long answer.

Sidebar. See TLH: https://www.bogleheads.org/wiki/Tax_loss_harvesting

You’ll need to set your funds up to use specific ID cost basis to TLH. See: https://www.bogleheads.org/wiki/Specifi ... _of_shares



Tax efficiency

Besides taking this opportunity to simplify your investments (fewer funds afterwards), you should also take this time to look at the tax efficiency of all your taxable investments. To avoid your investment dividends being taxed as ordinary income, your taxable investments should receive offsetting tax benefits for:
--QDI (qualified dividend income), applies to stock funds, currently taxed like LTCGs.
--FTC (foreign tax credit), applies to international funds, credit applied to tax return.
--TE (tax-exempt) dividends, applies to muni bond funds.

To that end:

Read: https://www.bogleheads.org/wiki/Princip ... et_classes

Link takes you to an overview table of the tax-efficiency of different investments. But you’ll want to read the full topic.


Total markets It’s generally advised to own total market index funds. Period. If you don’t know which market segments will do better than others, then don’t second-guess the market, just own the total market. This advice is generally implemented in taxable as a 3-fund portfolio:
--TSM, total us stock market index fund
--TISM, total international stock market index fund
--appropriate bond fund.

Read 3-fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio



QDI. You’ll want to compute the percentage of QDI income received from each of your stock investments. Look at your tax documents from last year.
--QDI% = 1099DIV box 1b / 1099DIV box 1a

Vanguard’s TSM is ~90% QDI, the rest is ordinary income.
Vanguard’s TISM is ~60% QDI, the rest is ordinary income. It also receives ~10% FTC.

Keep. You’ll want to keep the total-market investments receiving the highest percentage of QDI income.

Consider discarding. Investments with:
--Low QDI percentage, or representing only partial markets (SCV index, V index,…).
--Dividends taxed as ordinary income (taxable bonds).



Taxable bonds. BNDX (and BND). Dividends are 100% fed + state taxable.



IPS (inflation protected securities). VTIP. Recommended for those nearing retirement, so bond principal keeps up with inflation. Before then equities are reported to do a better job of offsetting inflation.

Dividends are 100% fed taxable.



Current capital losses. Sum your total capital losses. If you sell losers, then you have wiggle room to sell your least tax-efficient funds.



Suggested new funds. Since you live in CA, and if you plan to stay there for awhile, you could consider the CA muni bond funds.
--VCAIX, intermediate term TE muni
--VCITX, long-term TE muni
--VCTXX, TE mmkt fund. If a TE mmkt fund would help.

If you wanted to reach for more risk/reward, but avoid taxes, could add the CA LT muni fund. If you pair it 50/50 with your existing national muni funds, you’d reduce your single-state default risk, but shelter more of your muni dividends from CA.

The muni answer you select today will work better when the tax code sunsets and your fed tax bracket rises.



Existing muni funds. You have two existing national muni bond funds:
--Ishares MUB
--SPDR TFI (0.30% ER) (1k CG)

I recall reading forum recommendations for MUB. Don’t recall reading anything about TFI.

Option. You could use $1K of your CL to sell TFI, and buy VCITX, to shelter more of your dividends from CA.



Student exercise
--Determine the tax efficiency of all of your taxable investments (keep high QDI, sell ordinary income).
--Determine the total losses you can harvest.
--Use your losses to simplify and increase the tax efficiency of your taxable investments.

Don’t believe you will generate any wash sales, but it’s not the end of the world if you do. But just to be sure, post your plan before you execute it and we’ll double-check it for you.
--What you plan to sell.
--What you plan to buy.

Shoot for owning in your taxable account.
--Tax efficient TSM
--Tax efficient TISM
--Tax efficient bonds.

Use your tax-advantaged accounts to hold tax-inefficient investments you must own (SCV, BND, BNDX, REIT,…).

Important note! Don’t buy anything in your tIRA or rIRA for 31days after you sell in taxable. That may be one sure way (my knowledge is faulty here) to shoot yourself in the foot with TLHing---to sell in taxable, and then buy replacement shares of a “substantially identical fund” in a TA (tax-advantaged) account, within 30days.

Important note! If SCHB and VTI track the same index, then selling SCHB to buy VTI within 30days of the SCHB sale would also be considered to be a wash sale. So you’ll need to research the index tracked by each. Okay if different indexes. (If Betterment was TLHing between them, then you’re probably okay. But double-check to be sure.)



Other opportunities to tax shelter money. You can increase your TA space.

Backdoor Roth IRA: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

After-tax 401k: https://www.bogleheads.org/wiki/After_tax_401k

Mega backdoor Roth IRA: http://www.google.com/search?q=mega+bac ... rg%2Fforum

The higher tax cost paid now to use these options is recovered by the tax-free growth until retirement.


You don’t mention an employer’s retirement plan, so assume you may be self-employed. In which case you can use a self-employed retirement plan.

Self employed retirement plans: http://www.google.com/search?q=self+emp ... rg%2Fforum

If set up correctly, the mega backdoor Roth can be used with a self-employed retirement plan.



I may be forgetting some things.



Suggested library books.
--The Only Investment Guide You’ll Every Need, Tobias. General personal finance topics.
--The Bogleheads’ Guide to Investing. A structured overview of wise retirement investing.
--Date… or Soul Mate, Warren. Priceless if it helps avoid bad relationship/marriage/divorce.

Can also search Wiki for list of recommended “books” to continue your investor education.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
halbschatten
Posts: 7
Joined: Thu Aug 01, 2019 6:11 pm

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by halbschatten » Tue May 12, 2020 1:19 pm

Thanks so much! I'll start pulling together some plans. Some additional details: yep, don't currently have a work 401k plan, so I've been doing Trad IRA contributions yearly. And re: CA bonds - it's unlikely that I'm here for the long run, and probably will have moved out within 5-10 years.

User avatar
dratkinson
Posts: 4901
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by dratkinson » Tue May 12, 2020 4:40 pm

halbschatten wrote:
Tue May 12, 2020 1:19 pm
Thanks so much! I'll start pulling together some plans. Some additional details: yep, don't currently have a work 401k plan, so I've been doing Trad IRA contributions yearly. And re: CA bonds - it's unlikely that I'm here for the long run, and probably will have moved out within 5-10 years.

During a crash:
--Stocks can lose 50-90% of their value.
--Bonds can lose 5-15% of their value.

Current forum reading suggests the government is propping up bonds, so instead of crashing with stocks, they’ve risen. If so, expect situation to reverse when current crisis passes.



CA muni fund. My muni funds are currently higher than they were last year. Assume CA may also be higher, but you’ll need to check. Meaning, muni funds may return to normal after this crisis passes and they may lose ~15% of their value.

Idea,
--You could buy a CA muni today.
--Enjoy its TE dividends and tax benefits for 5-10yrs,
--and get a tax deduction when you sell for a 15% NAV loss in 5-10yrs.
--Worst case, you may owe tax on LTCG when you sell.

Is it worth it to sell TFI to buy the LT CA muni?



Student exercise. Assume you buy a CA muni and it loses 15% in 5-10yrs.
--How much will you lose? How much of a tax deduction will you get?
--If CA muni’s SEC yield is higher, how much more will you earn over your national muni’s SEC yield?
--How much will a CA muni save you in taxes?
--How much better/worse will your “after-tax income” be from using a CA muni for 5-10yrs.

If the math suggests it’s worth it to own a CA muni, your involvement is to: buy today, and record higher TE dividends and tax deductions, until you sell for a LTCL/LTCG.

It would seem to me that if going in, you already know the outcome is beneficial, then it’s okay to accept the risk/reward of owning a CA muni fund.

If on the other hand, you know the outcome it NOT beneficial, then you know to avoid the risk/reward.



Depending upon the tax s/w you use, it could help you perform above student exercise.

I use Excel1040.com for tax return exercises because it faster than my tax s/w.

Excel1040.com. Download this free utility and populate it with your last tax return data to create a duplicate tax return baseline. Then modify your baseline for each candidate bond fund. (Excel1040 only does fed tax return, so you’ll need another tool to wag your state tax return. My state uses a flat-tax system so it’s easy to implement in Excel.)

Wag your annual bond candidate dividends = total bond fund principal x SEC yield.

Compute after-tax income = 1040 taxable income + muni dividends (not included in 1040 taxable income) - fed tax owed - state tax owed.

To save myself some time, here are previous posts where I’ve described how I’ve used Excel1040, and the simplifying assumptions I’ve made to reach a decision.

viewtopic.php?p=4919082#p4919082
viewtopic.php?p=4401980#p4401980
viewtopic.php?p=3513427#p3513427
viewtopic.php?p=4568558#p4568558
viewtopic.php?p=4873265#p4873265
viewtopic.php?p=4919082#p4919082



Sch C. Do you have any income for a side job? Do you file IRS Sch C?
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
halbschatten
Posts: 7
Joined: Thu Aug 01, 2019 6:11 pm

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by halbschatten » Mon May 18, 2020 10:58 am

Okay, thanks! Here's my immediate plan:

Slices of the market
  • Selling IEMG - low QDI ratio (48%)
  • Selling VWO - subset of market
  • Buying VTIAX - total market, better QDI ratio
  • Resulting CG/CL: $3k CL
Improving bond tax efficiency
  • Selling VTIP
  • Selling BNDX
  • Buying VCLAX (admiral of VCITX) - unlike both, dividends aren't fed/state taxable
  • Resulting CG/CL: $2k CG
Fixing Roth IRA purpose

(This being driven by the idea that it's best to have Roth IRAs be 'things that grow', and also trying not to waste the FTC)
  • Selling VWO
  • Buying VTSAX
  • Resulting CG/CL: it doesn't matter, afaict, because it's in a Roth IRA?
And - Trad IRA, I've just (today) put the usual yearly $6k into another chunk of BND there.

(Oh, and side-job wise: nope, I only have a full-time job. No 401k because it's a tiny company, it'll likely get one within a year.)

User avatar
dratkinson
Posts: 4901
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by dratkinson » Mon May 18, 2020 5:28 pm

Did you decide to only partially restructure your investments? I ask because you seem to have passed up some opportunities to simplify your investments.

It looks like you've decided to keep in taxable, TSM (VTI+SCHB, tax efficient ETFs), large value (presumably less tax efficient), small cap value (presumably less tax efficient), and both national muni bond funds. Is this correct?

The changes you’ve described make sense, but clarification is needed. Example: What are you selling to buy the CA LT muni fund?


For clarity and to ensure you’ve covered all the bases, please give us the big picture. Tell us the target portfolio you are shooting for, and all of the changes you plan to make to your described OP portfolio. Just so we are all on the same page.

"My target portfolio after all changes are made."

Taxable
--aa%, aaf (fund/etf name*)
--bb%, bbf (fund/etf name)
--cc%, ccf (fund/etf name)

“The tax-efficient changes I will make to my taxable account to get from my described OP portfolio to my desired target portfolio:
--
--”

If your description is all encompassing and clear enough that your grandmother could make the changes, then you are on the right track. :)


rIRA (Roth IRA)
--dd%, ddf (fund/etf name)

tIRA (traditional IRA)
--ee%, eef (fund/etf name)
--100%

* We don't have fund/etf names memorized, so providing names saves us the lookup step, so we can more quickly see how your selections fit into a total market (stocks+bonds) 3-fund portfolio.


One potential gotcha. If you have TSM (VTI) in taxable and are planning to put TSM (VTSAX) in your rIRA, then VTSAX can cause problems if you want to TLH VTI. Why? VTI is the ETF share class of VTSAX---it is the same fund.

So if VTSAX's quarterly reinvested distributions buy “replacement shares” (IRS weasel words) within +/- 30days of a VTI TLH, the replacement shares will create a wash sale.
--But the disallowed loss can not be added to the cost basis of shares in a tax-advantaged account.
--So you wasted a TLH.
--And bought something equivalent that was also presumably lower, which will cost you more tax when you later sell it.


Option. Use in your rIRA, something that has a similar growth pattern to TSM, but is not "substantially identical" (IRS weasel words) so as not to conflict with your TLHing. Other candidates I've seen used:
--VFIAX (S&P500, Adm).
--VLCAX (LC index, Adm). I use this. Why? Broader index than S&P500, but not as broad as TSM.
--VASGX* (LifeStrategy Growth, 20% bonds). See: https://www.bogleheads.org/wiki/Vanguar ... tegy_Funds
--Other** TSM ETF/fund from different fund company that tracks a different index than VTI.

* Might be acceptable with your desired AA (asset allocation) of 80/20. Less so if you are shooting for 100% stocks in your rIRA.

** SCHB might be a rIRA candidate solution, but you also own it in taxable, so you’d just move the potential TLH gotcha from VTI to SCHB.

Research Fidelity TSM index fund and learn what index it tracks. It might be a rIRA solution if it tracks a different index from both VTI and SCHB.



And this is why a review of your game plan is advised before execution:
--So we are sure you covered all the bases you said you wanted,
--or told us that you’ve changed your mind, and why*,
--and are aware of potential gotchas.

* Justifiable reason: The market’s recent rise makes it no longer tax efficient to change.



Sidebar. From my offline notes. These are old notes so the links might not work.
”TLHing, replacement shares, and wash sale treatment” wrote:
Substantially identical security. For the purpose of avoiding a wash sale, what is a substantially identical security?

From: http://www.bogleheads.org/forum/viewtop ... 1&t=109450
"The following is a list of mutual fund transactions that are generally considered to be acceptable under the wash sale rules despite the lack of a concrete definition of "substantially identical security":

1. Sell one index fund and buy another index fund, if the indexes of the two funds are not the same index (e.g., S&P 500 for the Russell 1000).
2. Sell one actively managed fund and buy a fund at another company with different portfolio managers.
3. Sell an index fund and buy an actively managed fund regardless of the fund company.
4. Sell an actively managed fund and buy an index fund regardless of the fund company."

Full article here: http://www.fpanet.org/journal/Betweenth ... ancingAct/


Wash sale tax treatment. If a wash sale exists:
--The tax loss is disallowed.
--The loss is added to the cost basis of replacement shares. (Loss permanent if replacement shares in IRA).
--Holding period (purchase date) of sold shares is inherited by replacement shares---meaning: used in another TLH, or sooner eligible for LTCG.

https://www.kitces.com/blog/the-wash-sa ... -and-etfs/


IPS (Investment Policy Statement). After you’ve done all of the work required to restructure your investments, it’s a good idea to write all of this down in an IPS. So you don’t forget.

Most of us review our IPS at least annually, or more often if the market upsets our emotions and we need to be reminded what we are doing and why.

See: https://www.bogleheads.org/wiki/Investm ... _statement
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
halbschatten
Posts: 7
Joined: Thu Aug 01, 2019 6:11 pm

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by halbschatten » Fri May 22, 2020 5:50 pm

Okay, so here's my plan:

My aim is to maintain an 80/20 equities/bonds split, simplify the portfolio, improve tax efficiency, and do it without a huge penalty.

Right now my portfolio's at 80/20, but the equities include slices of international - VWO, VEA, IEMG - and domestic - VTV VOE VBR.

In taxable, the following are getting consolidated into SCHF (Schwab Total Intl):

- VEA (Vanguard FTSE Dev Mkts): -750 CL
- IEMG (iShares MSCI Emerging Mkts): -2500 CL
- VWO (Vanguard FTSE Emerging Mkts): -250 CG

SCHF's QDI % is higher than all of these (90% vs 76, 48, and 38 respectively).

These are getting consolidated into VCADX (California Intermediate Bond Fund):

- BNDX (Total Intl Bond): +2000 CG
- MUB (iShares Natl Muni Bond):+900 CG
- TFI (Muni Bond): +200 CG
- VTIP (Short term inflation protected): +250 CG

Mainly this move is about improving the tax properties of bonds: VCADX is sheltered both state & fed.

These are getting consolidated into _taxable_ VTI (Vanguard Total Market):

- VOE (mid-cap value): +3500 CG
- VBR (small-cap value): -8000 CL

VOE's on the edge - it's both relatively tax-efficient (QDI=91%) and has gains. VOE is more clear-cut with 70% QDI.

Then finally, the Roth IRA is switching from VWO (Vanguard FTSE Emerging Markets) to VTI.


The sum total of these moves would be -2000 CL, as of yesterday's values. The final portfolio would be:

Total US (Total 48%):

- VTI (Vanguard total US) (In Roth IRA): 4%
- SCHB (Schwab total US): 25%
- VTI (in Taxable): 19%

Total Intl (Total 25%):

- SCHF (Schwab total international): 25%

Slice US (Total 7%):

- VTV (vanguard total value): 7%

Bonds (total 20%):

- VCADX (California intermediate-term tax-exempt): 14%
- BND (Vanguard total bond mkt, in Traditional IRA): 6%

This brings me down from 13 funds to 7, keeping overall allocations the same. The only preserved non-total-market position is VTV (Vanguard value), which survives by being relatively tax-efficient and pretty broad in and of itself.

This leads to VTI (Total stock market) in both Roth and taxable. I'm inclined to think that this is okay because:

- I don't have any immediate plans to TLH. Per history with Betterment, I have 3k carryover that I can spread out for a long time.
- TLH between SCHB and VTI appears to be totally kosher - viewtopic.php?t=266777 - wash-sale-wise, because the two track different indexes. So I can likely TLH from VTI to SCHB for a while
Last edited by halbschatten on Sat May 23, 2020 12:39 pm, edited 1 time in total.

User avatar
dratkinson
Posts: 4901
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by dratkinson » Sat May 23, 2020 5:16 am

Your logic seems reasonable, but there is a problem with your tIRA. What? It’s not there.


A table format is the preferred method of listing accounts and funds, it’s clearer.*

Taxable (US, int’l, bonds)
- SCHB (Schwab total US): 25%
- VTI* (Vanguard total US in Taxable): 19%
- VTV (Vanguard total value): 7%
- SCHF (Schwab total international): 25%
- VCADX (California intermediate-term tax-exempt): 14%


tIRA (US, int’l, bonds)
- ???? (See Problem: tIRA.)


rIRA (US, int’l, bonds)
Option
- VTI* (Vanguard total US) (In Roth IRA): 4%
- BND (Vanguard total bond mkt, in Roth IRA): 6%
Option
- LifeStrategy Conservative Growth (40/60, see Gotcha.)


401k (US, int’l, bonds)
- ????



* Notice. A narrative description is good for understanding the details of individual changes, but it’s easy to miss important points when they are buried in the narrative. So a table listing the desired outcome (funds under accounts) is preferred for clarity---obfuscating narrative is eliminated.

But each format has its uses:
--(1) A table format is requested in your OP so your starting state (funds under accounts) is clear to us.
--(2) A narrative is better at describing the details of individual changes.
--(3) A table format is better at describing your desired ending state.

Then it’s easy to read your narrative and double-check that the changes move you from your starting state to your ending state.

The above ending state table also makes the (a) VTI potential problem clearer, (b) as is an alternate solution.



Problem: tIRA. Where is it? Above percentages add to 100% without a tIRA. Your OP said you had BND in your tIRA, but your narrative changes list:
- VCADX (California intermediate-term tax-exempt): 14%
- BND (Vanguard total bond mkt, in Roth IRA): 6% (Is this correct, or did you mean tIRA? I ask because your narrative changes do not say you are moving BND from your tIRA to your rIRA.)



Gotcha: “So I can likely TLH from VTI to SCHB for a while.”
--TLH SCHB --> VTI: no problem.
--TLH VTI --> SCHB: potential problem.

Since VTI is duplicated in taxable and in your rIRA, if you TLH VTI, and VTI in rIRA reinvests quarterly distributions within +/- 30days, the purchased “replacement shares” will create a wash sale that can never be recovered---loss can not attach to replacement shares in a rIRA---you lose the loss.

Option. Leave rIRA VTI to reinvest distributions, and keep this as a memory item. Remember to temporarily redirect rIRA VTI distributions only when you need to, before you TLH VTI. You’ll probably only forget this step one time. :oops:

Option. To avoid this being a memory item, set rIRA VTI distributions to redirect to somewhere else---to BND, or to your settlement fund---no replacement shares = no TLH problem. Of course it means you must manually rebalance your rIRA after your quarterly distributions; but this step will always remind you of this potential problem.

Option. Replace rIRA VTI by a third TSM fund that uses a third market index.

Option. Notice your rIRA allocation is 4%/6%, or 40/60 within itself. So another option would be to use an all-in-one fund that is 40/60. Recall LifeStrategy Conservative Growth is 40/60. Reinvested LS distributions can not cause replacement shares / wash sale problems for anything in taxable. (This advice is generally executed as: (1) hold only unique discrete funds in family (you+spouse) taxable accounts, and (2) hold duplicate all-in-one funds in family TA accounts.)

Bottom line. You have time to think about this later. No reason to postpone executing your plan because you are undecided about how to handle this issue. You always have the option to not TLH VTI---no VTI TLH = no VTI TLH problem.



Quibble. Risk and reward are related, you can't have one without the other. The only quibble I can see is that most senior BHs recommend pairing a single-state muni with a national muni fund 50/50, to reduce the single-state default risk. But you are using a Vanguard fund so they should have spread the risk across CA, so even if Orange County defaults, again, you should be okay. Remember that it is the fund manager who handles the accounting of defaults and their resolution, you just need to be able to accept the risk, and record the monthly distributions. (Sorry I can't help you with this decision, as I seem to need to take more risk with my muni funds. I accept the risk of doing so, and did TLH munis in 2018.)



Daily accrual. The CA muni fund is a "daily-accrual" fund---dividends accrue daily, paid monthly---so exempt from IRS requirement to hold shares >half a year to protect TE dividends. Meaning, you can buy shares today, sell the same shares tomorrow to pay for an emergency, and the prorated dividends those shares received will remain TE. So the fund is easy to use as an extended tier of your EFs. (CGs reporting does apply on the sale. But bond NAVs fluctuate little, so CGs are a little problem.)



Execution. The grandmother exercise is to ensure your plan of execution is clear. If your description is clear enough for your grandmother to understand it---(1) starting state table, (2) narrative changes, (3) ending state table---then your plan is good enough to execute---all of your changes are justified, and all of the pieces are accounted for.

Student exercise. Ensure your ending state table is as you want it to be, review your narrative of changes and correct the omission of your tIRA (and any other changes you missed) so you completely understand them, then execute next week. The market does seem to be trying to recover, so better to act while you still have a loss. (But nobody knows nothing about what the market will do next.)



Execution pro tip. Checklists are your friend. Saying from the checklist-driven world: “The job is so simple a monkey could do it: read a step, do a step, eat a banana.”

You would be surprised how often folks post their mistakes in submitting transactions---they sold the wrong fund, bought the wrong fund, bought/sold out of order and triggered Vanguard’s frequent trading policy, created a wash sale,…. I believe all problems could have been avoided had a “transactions” checklist been created, double-checked for errors, and then used for execution.

You are making several changes to your accounts, so I believe a transactions checklist would be beneficial in keeping you on track. But a checklist is only as good as the process that creates it.

List of requirements. The secret sauce that allows a transactions checklist to keep us out of trouble is to create a list of all requirements we must meet to protect our benefits and avoid gotchas.
--IRS: holding period requirements to protect LTCG/QDI/TE dividends, avoid wash sale,….
--Brokerage: fund minimums, funds settlement, frequent trading policy,….
--Banking: account minimums to avoid monthly fee, ACH fees, 6 withdrawals/mo limit on savings,….

Transactions checklist. Simple steps to create a transactions checklist:
--Day 1. Write a checklist of the step-by-step transactions you plan to make---your narrative of changes describes them---to get to your ending state (table). Each sell/buy transaction is one checklist step. Ensure the order and timing of each transaction complies with all requirements: IRS, brokerage, banking,….
--Day 2. A few days later, after your mind has cleared, double check that your transactions checklist is correct, and moves you from your starting state (table) to your ending state (table).
--Day 3. Follow your transactions checklist as you execute each---read a step, do a step (and check it off), eat a banana.

Above, I used the same process to identify an oversight with your tIRA: starting state, narrative changes, ending state, didn’t agree.

When you create your transactions checklist, you’ll identify your oversights when you review each transaction against all requirements, on Day 2 (after your mind has cleared for a few days). The work you do to create a double-checked transactions checklist makes Day 3 very easy---no second-guessing that you are doing things right.

It is wise to create a checklist for every transaction.


Disclosure. My first large transaction with Vanguard bought ~10 funds, without the use of a checklist. I stated each purchase in percentages, not dollars, from my mmkt. But you could only buy 5 funds at a time online, so my next transaction went against a smaller amount remaining in my mmkt fund, but my percentages were calculated based on the original 100% in my mmkt. My error was reveals when my second set of transactions didn’t buy enough to meet the fund minimum---transaction was rejected. It took Vanguard ~2wks to fix my errors and make me whole. (Thank you, Vanguard.) Lesson learned.

Since that time I’ve always used a double-checked transactions checklist and stated each transaction in dollars. Even for my simple monthly rebalancing. So far so good. (Knock wood.)



Due diligence. The work you’ve done in researching the tax efficiency of your investments, and planning to tweak them to increase your after-tax income, is part of your due diligence in assuming control of your investments.

Learning to create/use transactions checklists, so you don’t make mistakes in executing your plans, is also part of your due diligence.

Reading several Wiki-recommended investing books is also part of your due diligence to become an educated investor.



IPS. Write a draft IPS before you forget how you got here. (My IPS has been in draft >15yrs. It gets updated every time I learn/adopt a new tactic, or as my financial situation changes.)



401k. Try to insert yourself into the process of selecting your 401k provider/options. Why? So you get better options from the start---an ounce of prevention is worth a pound of cure. Why?

It costs money to offer a 401k. Employers are tempted to offset the cost by using an expensive plan provider/options, so kickbacks from the plan provider offset the cost of offering a 401k. You don't want an expensive 401k plan provider/options.

See: https://www.bogleheads.org/wiki/How_to_ ... _401k_Plan

It would benefit you (plural) if the plan allowed annual rollovers of after-tax contributions to a Roth IRA. This would let you use the mega-backdoor Roth concept.

It would benefit you (plural) if the plan accepted the rollover of tIRAs into the plan. This would help folks who want to use the backdoor Roth concept, but have a problem with an existing tIRA.

When you do get a 401k, come back and ask for a new review. Why? Since it’s a new financial situation, it’s best to start clean with a new topic/OP---would be messy to continue here, new followers will not join an old topic, because they know your original issue was resolved. So a new topic is required.



Wishing you the best of success.



Edits. Clarity and second thoughts.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

User avatar
dratkinson
Posts: 4901
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Portfolio review! A Betterment to Vanguard switcher with mostly taxable.

Post by dratkinson » Mon May 25, 2020 9:02 am

The forum only sends out "New reply received" notifications, it does not notify us when a reply is edited.


While editing my reply to add clarity and some second thoughts, I noticed you'd edited your reply to resolve the tIRA discrepancy. Now that makes sense.


You might want to reread my reply for instructions on how to create and use a "transactions checklist". They have simplified my life and kept me out of trouble... ever since the day I made a huge mistake... that Vanguard corrected.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Post Reply