Tax Efficient Vanguard Options?

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millenialsaver
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Joined: Tue May 05, 2020 9:59 am

Tax Efficient Vanguard Options?

Post by millenialsaver »

Hi all,

I am 28 and currently maxing out all of my tax efficient accounts (401k, IRA, HSA) and am wondering what the most tax efficient investment options there are to use in my taxable brokerage account with any surplus funds. I typically throw essentially everything into VOO (I'm fine being 100% equity), but I'm now realizing that pays a dividend (I have them auto re-invested) each quarter. Ideally, I'd want some sort of cheap, market-tracking investment option that doesn't pay out anything in regards to dividends and/or capital distributions so I can avoid any taxes on the money until I end up withdrawing it decades down the line.

As such, is VOO a fine option? Or are there better?

Thanks,

millenialsaver
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retired@50
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Re: Tax Efficient Vanguard Options?

Post by retired@50 »

millenialsaver wrote: Fri Nov 06, 2020 9:53 am Hi all,

I am 28 and currently maxing out all of my tax efficient accounts (401k, IRA, HSA) and am wondering what the most tax efficient investment options there are to use in my taxable brokerage account with any surplus funds. I typically throw essentially everything into VOO (I'm fine being 100% equity), but I'm now realizing that pays a dividend (I have them auto re-invested) each quarter. Ideally, I'd want some sort of cheap, market-tracking investment option that doesn't pay out anything in regards to dividends and/or capital distributions so I can avoid any taxes on the money until I end up withdrawing it decades down the line.

As such, is VOO a fine option? Or are there better?

Thanks,

millenialsaver
There are other mutual funds or ETFs that have lower dividend payouts, but they don't typically track the majority of the market like VOO does.

Seeking out lower dividend payout funds will likely lead you to have an over-exposure to "growth" stocks. See VUG and/or VBK.

If it were me, I'd just stick with VOO. Adding complexity at a young age usually leads to much more complexity down the line.

Regards,
This is one person's opinion. Nothing more.
stan1
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Re: Tax Efficient Vanguard Options?

Post by stan1 »

I'd just stick with VOO (or Total Stock Market VTI). You could slant to large cap growth which has lower yield but then you have to figure out how to get your asset allocation back to where you want it to be. Personally I would not make the leap that VOO and VUG are equivalent in my asset allocation but I suspect some people are doing that. There's strong recent bias towards the tech/internet stocks. That may or may not continue. At some point in the next 50 years its reasonable that these tech stocks will move from growth to value. Microsoft and Apple have been in value in the past. Then there's tech powerhouses of the past like IBM and Xerox and Polaroid and Kodak.

If it helps, current tax law gives a lot of tax advantages to taxable investments. Per Vanguard year to date dividends for VOO for 99.7% qualified so are taxed at a lower rate. Under current tax laws you could choose to hold investments in a taxable account forever and pass them onto your heirs without ever realizing any capital gains.

Goal should be to pay low taxes not to pay no taxes. Putting cash in a mattress is very tax efficient, but not a good way to invest.
Last edited by stan1 on Fri Nov 06, 2020 10:59 am, edited 1 time in total.
runninginvestor
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Re: Tax Efficient Vanguard Options?

Post by runninginvestor »

I was in a similar boat in regards to a ton of S&P exposure due to tax advantaged accounts mainly having the institutional 500 fund as the only large cap option. I decided on total stock market index in our taxable to provide the option of TLH if markets tanked and not having to worry about wash sales from automatic contributions in TA accounts. It's diversified and fairly tax [edit typo] efficient.
BV3273
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Re: Tax Efficient Vanguard Options?

Post by BV3273 »

How about tax managed balanced?
tibbitts
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Re: Tax Efficient Vanguard Options?

Post by tibbitts »

millenialsaver wrote: Fri Nov 06, 2020 9:53 am Hi all,

I am 28 and currently maxing out all of my tax efficient accounts (401k, IRA, HSA) and am wondering what the most tax efficient investment options there are to use in my taxable brokerage account with any surplus funds. I typically throw essentially everything into VOO (I'm fine being 100% equity), but I'm now realizing that pays a dividend (I have them auto re-invested) each quarter. Ideally, I'd want some sort of cheap, market-tracking investment option that doesn't pay out anything in regards to dividends and/or capital distributions so I can avoid any taxes on the money until I end up withdrawing it decades down the line.

As such, is VOO a fine option? Or are there better?

Thanks,

millenialsaver
Vanguard has its tax-managed funds - even a tax-managed balanced fund that makes zero sense to me, but I've used the other ones. The advantage is pretty marginal over their equivalent index funds.

I used to pursue paying the least amount of taxes as possible; just beware that delaying taxes doesn't always end well. You can be too good at it, and at 28 you can't really tell what will turn out to be optimal. So a little less enthusiasm for tax deferral might turn out to be healthy.
humblecoder
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Re: Tax Efficient Vanguard Options?

Post by humblecoder »

millenialsaver wrote: Fri Nov 06, 2020 9:53 am Hi all,

I am 28 and currently maxing out all of my tax efficient accounts (401k, IRA, HSA) and am wondering what the most tax efficient investment options there are to use in my taxable brokerage account with any surplus funds. I typically throw essentially everything into VOO (I'm fine being 100% equity), but I'm now realizing that pays a dividend (I have them auto re-invested) each quarter. Ideally, I'd want some sort of cheap, market-tracking investment option that doesn't pay out anything in regards to dividends and/or capital distributions so I can avoid any taxes on the money until I end up withdrawing it decades down the line.

As such, is VOO a fine option? Or are there better?

Thanks,

millenialsaver
Be careful that you aren't letting the tax tail wag the dog, so to speak. As others have pointed out, any non-dividend paying option would slant your portfolio towards a growth stock bias, which means that you would no longer be tracking the market. While this might save you on taxes, your overall risk/reward might suffer. So the question is whether it is worthwhile over optimizing your portfolio for taxes while under optimizing your portfolio for total returns (which is what really matters).

I just looked up VOO and the dividend yield is 1.23%. That means that if you are holding $100K in VOO, you are getting $1230 in dividends. Since they are qualified dividends, they are taxed at the cap gains rate. If your cap gains rate is, say, 15%, your tax bill for the year is $184.50 on your $100K investment. That's 0.18% your investment. It barely moves the needle in my opinion. So it is worth going to a growth tilt and the additional risk that this entails to avoid less than $200 in taxes per year? For me, the answer would be no, but you need to decide for yourself.
Outer Marker
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Re: Tax Efficient Vanguard Options?

Post by Outer Marker »

Not a Vanguard option, but you might consider adding BRK.B. Warren Buffet never pays dividends, and his value emphasis is a bit of a counterweight to the high flying VOO growth stocks.
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grabiner
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Re: Tax Efficient Vanguard Options?

Post by grabiner »

tibbitts wrote: Fri Nov 06, 2020 11:27 am Vanguard has its tax-managed funds - even a tax-managed balanced fund that makes zero sense to me, but I've used the other ones. The advantage is pretty marginal over their equivalent index funds.
See Tax-managed fund comparison on the wiki. The extra cost of the tax management is more than the taxes saved unless you are in a very high tax bracket.

The reason these funds are usually not necessary is that ETFs (and Vanguard mutual funds with ETF classes) are inherently tax-efficient. Most of Vanguard's stock ETFs have never distributed a capital gain, and are not likely to distribute them in the future. US and foreign broad-market indexes are both excellent holdings in a taxable account.

I prefer the total-market indexes, VTI (US) and VXUS (international), over the large-cap only VOO (US) and VEU (international). (I personally hold the mutual-fund class VTSAX of Total Stock Market; I don't hold Total International because I hold Developed and Emerging Markets Index separately.)
Wiki David Grabiner
DarkHelmetII
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Re: Tax Efficient Vanguard Options?

Post by DarkHelmetII »

VOO is fine. I personally prefer VFIAX to avoid temptation to get cute with limit orders etc... Yes, there are more tax efficient funds but the marginal complexity exceeds the marginal benefit IMHO.
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