Practically speaking, how important is international fund placement?

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Topic Author
breakfastinbed
Posts: 21
Joined: Sat Dec 02, 2023 7:01 pm

Practically speaking, how important is international fund placement?

Post by breakfastinbed »

Hi all,

Relatively new to the game, and have a decent understanding of tax-conscious fund placement, but have been reading articles about the benefits of keeping international funds in tax-advantaged accounts (e.g. https://www.physicianonfire.com/international-stock/). I tried running my own numbers and it does seem to make sense to redirect my new money towards international funds toward tax-advantaged accounts.

Right now, for new money, I allocate approximately like this:
Taxable
-TSM: 35% (which will go down as my taxable account overshoots my 403B, which will happen this year)
-INT: 21% (which will go up, as above)
-Other (Avantis funds, which I can't put in tax-advantaged): 44%

IRA
-TSM: 70%
-INT: 30%

HSA
-TSM: 100%

403B
-TSM: 75%
-INT: 25%

To give me an AA of 52% TSM, 25% INT, 23% other

I am instead thinking of going for the same AA with different new money distributions (not selling anything):
Taxable
-TSM: 56%
-INT: 0%
-Other (can't go in tax-advantaged): 44%

IRA
-TSM: 0%
-INT: 100%

HSA
-TSM: 100%

403B
-TSM: 50%
-INT: 50%

With small amounts going into the taxable INT fund to help for rebalancing as needed.

However, I also have seen a lot of anecdotal advice to keep a good amount of total US in tax-advantaged accounts because, at least recently, it has had the best growth, and thus theoretically the best benefit from avoiding taxes. So I am wondering, practically speaking, how much thought people here put into minimizing tax burden of relatively less tax-efficient international funds vs keeping a more even distribution.

If it matters, my marginal tax rate is 35%. Thanks.
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nps
Posts: 1699
Joined: Thu Dec 04, 2014 9:18 am

Re: Practically speaking, how important is international fund placement?

Post by nps »

breakfastinbed wrote: Wed Jul 10, 2024 1:19 am However, I also have seen a lot of anecdotal advice to keep a good amount of total US in tax-advantaged accounts because, at least recently, it has had the best growth, and thus theoretically the best benefit from avoiding taxes. So I am wondering, practically speaking, how much thought people here put into minimizing tax burden of relatively less tax-efficient international funds vs keeping a more even distribution.
If you have strong basis for believing that US-only will have the best growth going forward then you probably shouldn't invest in international at all.

However - if you don't have strong basis for believing that, then it shouldn't really factor into your placement decision.
tonyclifton
Posts: 1077
Joined: Sat Feb 08, 2020 4:25 pm

Re: Practically speaking, how important is international fund placement?

Post by tonyclifton »

I have my HSA at 100% International. I figure at least I get the tax deduction and if it overperforms (har har) I can spend it on anything down the road and only pay income tax on the distributions or as my self funded long term care plan.

Your 44% in taxable “other” seems like the biggest red flag in your overall plan. Hopefully it is a big pile of beanie babies or Pokémon cards and not something too risky :)
NYCaviator
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Location: NYC

Re: Practically speaking, how important is international fund placement?

Post by NYCaviator »

I read that PoF article and it makes some good points. I think, at least recently though, Vanguard Developed Intl. has had more qualified dividends, and is thus more tax efficient, than total international. But that article also says that there's no right answer. I don't think you can go wrong either way. I'm slowly tax loss harvesting VXUS to VEA in taxable because we are getting hit with lots of taxes and anything I can do to make it more efficient is worth it. But I also have some international in my 401k since you never know what will be more tax efficient. I don't think its an all or nothing proposition.

White Coat Investor had a good article back on this back in June. I can't find it at the moment, but if you search his site it should come up.
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: Practically speaking, how important is international fund placement?

Post by HomeStretch »

I hold my international allocation in tax deferred.

If you now want to hold international in tax deferred rather than taxable, turn off automatic reinvestment in your taxable account’s international holding in addition to your current plan to direct new international contributions to tax deferred.
jimkinny
Posts: 1932
Joined: Sun Mar 14, 2010 1:51 pm

Re: Practically speaking, how important is international fund placement?

Post by jimkinny »

It likely is not very important compare to taking too much risk and bailing out of stocks when they crash. But, if you have the space in a tax protected account, sure, put international there and have your TSM index fund in a non-protected account and take advantage of its high percentage of qualified dividends.
Topic Author
breakfastinbed
Posts: 21
Joined: Sat Dec 02, 2023 7:01 pm

Re: Practically speaking, how important is international fund placement?

Post by breakfastinbed »

NYCaviator wrote: Wed Jul 10, 2024 6:43 am I read that PoF article and it makes some good points. I think, at least recently though, Vanguard Developed Intl. has had more qualified dividends, and is thus more tax efficient, than total international. But that article also says that there's no right answer. I don't think you can go wrong either way. I'm slowly tax loss harvesting VXUS to VEA in taxable because we are getting hit with lots of taxes and anything I can do to make it more efficient is worth it. But I also have some international in my 401k since you never know what will be more tax efficient. I don't think its an all or nothing proposition.

White Coat Investor had a good article back on this back in June. I can't find it at the moment, but if you search his site it should come up.
Thanks. I had previously looked for such an article and couldn't find it, but with your date suggestion was able to find this: https://www.whitecoatinvestor.com/why-s ... dividends/

It seems there is no concrete answer, and the difference in taxes is fairly minute even with my high marginal tax rate, so I may just split the difference and increase my investments in international in tax-advantaged without totally getting rid of it in taxable, especially as my long-term plan calls for gradually increasing my proportional exposure to international over time.
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retiredjg
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Re: Practically speaking, how important is international fund placement?

Post by retiredjg »

Depending on the relative size of each account, you may actually need two funds in taxable. The portfolio may not work with only US stock funds there.

So even if international is less tax efficient than total stock (I'm not yet convinced), you may need them both in taxable to make the money flow into the portfolio easily.
Alan S.
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Location: Prescott, AZ

Re: Practically speaking, how important is international fund placement?

Post by Alan S. »

A factor many consider is that the foreign tax credit is lost if international is held in a tax deferred plan.

But the credit may only approximate .4% of the total international value, and for some people it's worth passing on the credit to avoid Form 1116. Others do not find the 1116 to be that challenging.
stan1
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Re: Practically speaking, how important is international fund placement?

Post by stan1 »

I don't think this can be optimized over decades of unknown future returns and tax law changes. When I buy an asset class in taxable I intend to hold that asset class for the rest of my life, or at least well into draw down.

Tax location diversification makes sense to me. Some in taxable, some in tax advantaged. If you want to take an active role then consider market timing between Roth and Traditional accounts where you can shift allocation without tax consequence.

In the big picture over decades of unknown future events I don't think it is a major factor. How much you save and overall asset allocation is much more important.
Topic Author
breakfastinbed
Posts: 21
Joined: Sat Dec 02, 2023 7:01 pm

Re: Practically speaking, how important is international fund placement?

Post by breakfastinbed »

Alan S. wrote: Wed Jul 10, 2024 10:54 am A factor many consider is that the foreign tax credit is lost if international is held in a tax deferred plan.

But the credit may only approximate .4% of the total international value, and for some people it's worth passing on the credit to avoid Form 1116. Others do not find the 1116 to be that challenging.
Yeah, this was my original thinking, but the article I linked in my original post changed my thinking.

It's hard to find the relevant data on every fund, but using the two funds I hold in 403B as a theoretical example, for me, the cost in taxes on dividends for VIIIX is about 0.28% on the dollar; for VTSNX it's 0.71%, which is reduced to 0.64% after a theoretical foreign tax credit.

To what extent this matters is debatable, but if the goal is to utilize low-cost funds I think most people here would shy away from funds with expense ratios this high.

I do value having some international in my taxable and my weight in international is only going to increase, but I think for now I am going to shift my allocation of new money into international from 60:40 tax-advantaged/taxable to 95:5 tax-advantaged/taxable or so, using taxable primary for rebalancing, which will be nice as I will only have to buy new international lots in taxable annually or so.
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