What's the real-world tax drag of VT in a taxable account?

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Claudia Whitten
Posts: 356
Joined: Wed Jul 05, 2023 12:56 pm

What's the real-world tax drag of VT in a taxable account?

Post by Claudia Whitten »

I'm lured by the simplicity of VT (Vanguard Total World Stock Index Fund ETF) as a one-fund solution in taxable. Many/some prefer VTI (Vanguard Total Stock Market Index Fund ETF) + VXUS (Vanguard Total International Stock Index Fund) for tax reasons. For those who hold VT in taxable, what's been the real-world tax implications of this in percentage or dollar terms? Now that tax filing deadlines are fast approaching, this might be a good time to discuss this. Thanks.
Dude2
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Re: What's the real-world tax drag of VT in a taxable account?

Post by Dude2 »

I agree with you. A one fund approach is good without the need to tinker with things. You can still modulate your overall US/International percentage by holding VTI separately in taxable. The only issue here is that there is a rule regarding the foreign tax credit only being applied to funds that hold greater than 50% international, so VT in taxable does not get the foreign tax credit. Instead it will have higher dividends (than VTI alone) and probably less qualified dividends. Therefore, there is slightly greater tax drag here than if you were to hold an equal ratio but split it between total US stock market and total ex-US stock market.

At the end of the day, everybody's taxes are unique and different, so there is not a lot of universal truths other than the above. You can choose to not care about it. In fact, not having to deal with the foreign tax credit may be an incentive rather than a detractor, but the bean counters would still say it isn't optimal.
Then ’tis like the breath of an unfee’d lawyer.
GXtrex
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Re: What's the real-world tax drag of VT in a taxable account?

Post by GXtrex »

Claudia Whitten wrote: Tue Apr 02, 2024 7:28 am I'm lured by the simplicity of VT (Vanguard Total World Stock Index Fund ETF) as a one-fund solution in taxable. Many/some prefer VTI (Vanguard Total Stock Market Index Fund ETF) + VXUS (Vanguard Total International Stock Index Fund) for tax reasons. For those who hold VT in taxable, what's been the real-world tax implications of this in percentage or dollar terms? Now that tax filing deadlines are fast approaching, this might be a good time to discuss this. Thanks.
According to:

https://www.morningstar.com/etfs/arcx/vt/price

The 3 year Tax cost ratio of VT is 0.65%. This is the average tax drag over the past 3 years.

Morningstar applies the appropriate historical tax rate based on the date of the distribution. The current tax rates are as follows:

35% interest income and non-qualified dividends
15% qualified dividends
35% short-term capital gains
15% long-term capital gains
VT/VTWAX until I start adding bonds
BackToSchoolDad
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Re: What's the real-world tax drag of VT in a taxable account?

Post by BackToSchoolDad »

There's been numerous threads on this. I think it boils down to basically a 10-15 basis point hit.
retiringwhen
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Location: New Jersey, USA

Re: What's the real-world tax drag of VT in a taxable account?

Post by retiringwhen »

I have a sheet that allows you to calculate your historical tax drag using your personal tax rates here. Like many things tax related, the answer is likely dependant upon your personal tax rates.

See the thread here: Vanguard Fund Tax Analysis & Efficiency (2018 to 2023)

For example, my personal tax rates have the following tax drag when held in a taxable account based upon an average of the last 6 years data:

VT = 0.56% per year
VTI = 0.43% per year

VTI also experienced over 2X growth vs. distributions in the last 10 years meaning that much more of the growth came in deferred capital gains.

The downside of VT is that in recent years, it's foreign holdings have been less than 50% so it does not allow you to take advantage of the Foreign Tax Credit.

By comparison you can get an idea of how much that is worth by looking at VEA and VWO which are combined a close approximation of the foreign component of VT,

VEA foreign tax credit = 6.97% credit against net distributions.
VWO foreign tax credit = 10.05% credit against net distributions.

how to actually evaluate the benefit is very hard in the end because there are so many variables: tax rates, priority of asset location (taxable vs. tax advantaged), expected returns, etc.

I personally do not make any serious decisions based upon this analysis, but I also do not highly value simplicity. I hold VEA and VWO for my taxable international funds and VTIAX in my tax advantage accounts for reasons unrelated to this calculation.

Those reasons are long-term tax loss harvesting. I get more options for TLH when I break up the total market funds into their parts. It does add complexity, but from a tax efficiency perspective, it has been very valuable with significant tax avoidance and delay by use of Tax Loss Harvesting and donations to Donor Advised funds.

If you are a long-term buy and hold (like in potentially forever), VT is a pretty simple way to go and only potentially moderately tax inefficient.

[edited to fix Development Markets reference to VEA]
retiringwhen
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Re: What's the real-world tax drag of VT in a taxable account?

Post by retiringwhen »

BTW, Foreign Tax Credit for VXUS (Total International) which is directly analogous to the ex-US portion of VT is 7.67% foreign tax credit with a tax efficiency of 0.65%
Topic Author
Claudia Whitten
Posts: 356
Joined: Wed Jul 05, 2023 12:56 pm

Re: What's the real-world tax drag of VT in a taxable account?

Post by Claudia Whitten »

GXtrex wrote: Tue Apr 02, 2024 7:57 am
Claudia Whitten wrote: Tue Apr 02, 2024 7:28 am I'm lured by the simplicity of VT (Vanguard Total World Stock Index Fund ETF) as a one-fund solution in taxable. Many/some prefer VTI (Vanguard Total Stock Market Index Fund ETF) + VXUS (Vanguard Total International Stock Index Fund) for tax reasons. For those who hold VT in taxable, what's been the real-world tax implications of this in percentage or dollar terms? Now that tax filing deadlines are fast approaching, this might be a good time to discuss this. Thanks.
According to:

https://www.morningstar.com/etfs/arcx/vt/price

The 3 year Tax cost ratio of VT is 0.65%. This is the average tax drag over the past 3 years.

Morningstar applies the appropriate historical tax rate based on the date of the distribution. The current tax rates are as follows:

35% interest income and non-qualified dividends
15% qualified dividends
35% short-term capital gains
15% long-term capital gains
So that's 0.65% over 3 years and not per year, right? As opposed to what if one holds VTI/VXUS?
lostdog
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Joined: Thu Feb 04, 2016 1:15 pm

Re: What's the real-world tax drag of VT in a taxable account?

Post by lostdog »

I hold VTI and VXUS in taxable. VT in the IRA.

Initially set your VTI and VXUS allocation to the world market cap allocation. It will float with that allocation all year. When you reinvest your dividends, reinvest your dividends back into VTI and VXUS using the world market cap allocation at that current time.

It's that easy and simple. Plus if you have an IRA, you can use VT in your IRA and not worry about wash sales. This is maybe about 5 minutes of work every year.
World Stocks(VT)-70% || World Bonds(BNDW)-30%
GXtrex
Posts: 38
Joined: Mon Dec 06, 2021 9:30 am

Re: What's the real-world tax drag of VT in a taxable account?

Post by GXtrex »

Claudia Whitten wrote: Tue Apr 02, 2024 10:06 am
GXtrex wrote: Tue Apr 02, 2024 7:57 am
Claudia Whitten wrote: Tue Apr 02, 2024 7:28 am I'm lured by the simplicity of VT (Vanguard Total World Stock Index Fund ETF) as a one-fund solution in taxable. Many/some prefer VTI (Vanguard Total Stock Market Index Fund ETF) + VXUS (Vanguard Total International Stock Index Fund) for tax reasons. For those who hold VT in taxable, what's been the real-world tax implications of this in percentage or dollar terms? Now that tax filing deadlines are fast approaching, this might be a good time to discuss this. Thanks.
According to:

https://www.morningstar.com/etfs/arcx/vt/price

The 3 year Tax cost ratio of VT is 0.65%. This is the average tax drag over the past 3 years.

Morningstar applies the appropriate historical tax rate based on the date of the distribution. The current tax rates are as follows:

35% interest income and non-qualified dividends
15% qualified dividends
35% short-term capital gains
15% long-term capital gains
So that's 0.65% over 3 years and not per year, right? As opposed to what if one holds VTI/VXUS?

It is an average of 0.65% per year over the past 3 years. VTI has a tax cost ratio of 0.44% and VXUS is 1.10% over the same timeframe. This is very close to holding it in proportion to vti/vxus at market rate if all in taxable. If you separate the VXUS portion in a tax deferred account and VTI in taxable, you would save about half a percent as apposed to VT everywhere. Doing it this way though you would not be able to claim foreign tax credit.

Also these numbers are based on the assumed tax rates. YMMV
VT/VTWAX until I start adding bonds
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