Delete Wiki [Article] on Tax-Efficient Asset Location

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assumer
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by assumer » Sun Nov 17, 2013 12:47 pm

Could we word it such that we talk about the "expected tax cost"? So that takes into account relative yields and changing tax brackets.

We could discuss putting funds with the "highest expected tax cost" in the most tax efficient accounts. So for example, you have $20k to invest, and you want $10k in stocks with qualified dividends and $10k in bonds with no qualified dividends. The expected yield can be 1% for bonds at 9% for stocks (just as an example though - this will depend on each person!). You are in 33% tax bracket now and expect to be in 25% bracket in the future when you withdraw. The options are you have $10k available in a tax-efficient vehicle, and the excess goes in taxable. So you calculate the total tax cost of each option (bonds in taxable or stocks in taxable).

We could do something along those lines to show how to decide where funds should go? I agree that as it stands the wiki may lead one to believe (although it does not state) that you should always put fund A in account Z, etc.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Kevin M » Sun Nov 17, 2013 2:16 pm

I nominate less to become a Wiki editor, if not one already, and contribute to the Criticisms section. It may require contributions from others to help make it understandable to more readers.

Doc and livesoft both make excellent points.

One of my conclusions is that for many people asset location might not make much difference with today's low rates, and even if it might, it can be quite complex to figure out the optimal asset location. One reason for the complexity is that it depends not only on tax law but also on returns, which are uncertain.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by marcos123 » Sun Nov 17, 2013 4:53 pm

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but this opportunity is lost in tax-advantaged accounts. It is worth doing this, although it is not a large amount.

As an avid reader, but less frequent poster, I would just like to say that this wiki should definitely not be deleted, as it does provide a helpful, general framework particularly for someone new to the game, but should be tweaked. My comment: the clause highlighted should not read as a blanket statement.

It may well not be worth doing this, depending on the the % of the foreign source income component, the foreign tax rate, % of the foreign dividends that are qualified, the US marginal tax bracket of the fundholder, etc. Given the cited factors, for the net tax savings, I have often, but not always, placed international/emerging markets stock funds in Traditional and Roth IRAs.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by archbish99 » Sun Nov 17, 2013 5:14 pm

MindBogler wrote:I think a fundamental problem with this page is it is geared towards the investor who can fill tax advantaged space and is looking to invest more. In this respect, I think it is a good document. However, there have been many threads started by novice investors, particularly those just starting their portfolios, who are unable to fill all this space. This makes the page very confusing and possibly counterproductive if someone is buying equities in taxable without filling tax advantaged all in order to get the foreign tax credit.

I suggest this page be split into two sections: one for tax adv. space filled and the other for tax adv. space unfilled.
This issue, but I'd advocate a different split -- we should make it clear that there's a difference between deciding what account to put money in and deciding what investments to hold in each account once the money is there. There are good arguments for holding equities in taxable if you have a taxable account already. That doesn't mean that, when you want to buy stocks, you should bypass a tax-advantaged contribution in favor of taxable.

The tax-advantaged space unfilled case is already covered by the second paragraph, once you know that you don't have a taxable account and don't need one yet.
I'm not a financial advisor, I just play one on the Internet.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by docneil88 » Sun Nov 17, 2013 7:18 pm

Ketawa wrote:
jimbojones wrote:Only if those returns aren't significantly different. I think the whole point is that one general rule does not hold for all circumstances.

I was providing a counter-example to demonstrate that your "self-evident" statement is false. For example, there's no benefit in putting bonds earning 1% in tax-advantaged while putting equities earning 20% in taxable.
True, the general rule doesn't hold for all circumstances. However, bonds earning 1% while equities earn 20% is not a good example. The difference in expected returns is never that large, and you can't know ex ante what it will be.
Hi jimbojones and Ketawa, Interesting debate. In my opinion, the best decision is the one with the best results, not the one with the best expected results. So, if you have equal $ amounts of equities and bonds and you end up earning 20% in equities and 1% in bonds, then the best decision (for that time period) would have been to put the equities into a tax-advantaged account and the bonds into taxable (not vice versa). That's the decision that clearly would have minimized tax cost in dollars. Best, Neil
Last edited by docneil88 on Sun Nov 17, 2013 7:24 pm, edited 1 time in total.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by cfpyne » Sun Nov 17, 2013 7:23 pm

This post encouraged me to read the wiki article for the first time. It is very well written and makes some great points. The problem of asset location is complex and dependent on many personal circumstances not subject to "proofs" as claimed in the Reed article. Perhaps some more caveats and footnotes could be added, but it really shouldn't be deleted. It provides great food for thought.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Barry Barnitz » Sun Nov 17, 2013 7:36 pm

Hi:

I have made a few edits in the Userpage playpen;

1. I removed an obsolete statement regarding fund of funds and the foreign tax credit.
2. I added stylistic emphasis to the second introductory paragragh.

See User:Lady Geek/ Principles of tax efficient fund placement - Bogleheads.

regards,
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by grok87 » Sun Nov 17, 2013 7:43 pm

cfpyne wrote:This post encouraged me to read the wiki article for the first time. It is very well written and makes some great points. The problem of asset location is complex and dependent on many personal circumstances not subject to "proofs" as claimed in the Reed article. Perhaps some more caveats and footnotes could be added, but it really shouldn't be deleted. It provides great food for thought.
agree.
to be honest this whole thread seems a little weird.
I think maybe I'll start a thread called- delete wiki on "Index fund investing"
:)
just kidding
cheers,
Keep calm and Boglehead on. KCBO.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by dratkinson » Sun Nov 17, 2013 7:47 pm

When I made my funds placement changes (early 2008), I generally followed the Wiki advice, but modified it to suit my situation (retired, 15% fed, 5% state, little TA space and no more to come).

I did not feel the Wiki advice excluded me as I understood it to be general advice... and that I must analysis this topic for my situation.
  • I immediately simplified my equities holdings and switched to using only TE bonds. (Lucky for me, 2008 was a good year for TLHing.) This violated the general BH/Wiki advice to only consider TE bonds after you enter the 25% fed bracket, but it did follow the BH/Wiki advice to do the TEY computation before making bond choice decisions.

    I later added I bonds to taxable space to get that advantage lost when I kicked VIPSX out of TA. (Result of forum I bond inflation-protection topics, but related to tax-efficiency.)

    I've recently switched (last year) and now use 100% equities in my limited TA space... to shoot for the moon. This action violates this topic's advice to place bonds in TA, but does follow the advice given elsewhere in the Wiki that some do choose this role for TA space.
So my tax-efficient funds placement decisions were made based on the groundbreaking information in this Wiki article (if memory serves, the germ coming from tfb)... as modified by information in linked referenced topics... based on my desire for reward and need/ability to accept risk... and after asking clarifying questions in a forum topic for my particular situation.
  • OP does remember that everyone asking for BH analysis of their personal situation automatically gets tax-efficient funds placement consideration? (RQ) And clarification is provided if asked.
After above, no course of action, for my situation, could have been clearer.

And I am continually aware of opportunities for improvements... as noted by the fact that not all of my current changes for tax efficiency/growth were made immediately in 2008.



I see nothing wrong with a simple statement of the general principle, followed by clarifying information for some specific income/tax situations... if it teaches readers to independently analyze changing situations for themselves. (But if the additional clarifying information does not teach independence, then it does not seem to be worth the effort.)

General principles. ...
1. (clarification)
2. (clarification)
2A. (clarification)
2B. (clarification)

But after all is done, not every situation can be covered, future tax changes can make the best advice obsolete, and nothing absolves the readers of their responsibility to continually analysis this topic for their particular situation.

Bottom line. I don't get to say, "My funds/placement decisions were suboptimal because the Wiki didn't consider changing tax consequences on my exact financial situation!" Seem to recall it says something to this affect at the bottom of each forum/Wiki screen. :)
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by MindBogler » Sun Nov 17, 2013 7:49 pm

Barry Barnitz wrote:Hi:

I have made a few edits in the Userpage playpen;

1. I removed an obsolete statement regarding fund of funds and the foreign tax credit.
2. I added stylistic emphasis to the second introductory paragragh.

See User:Lady Geek/ Principles of tax efficient fund placement - Bogleheads.

regards,
I think the stylistic emphasis box is fantastic. It really emphasizes who the article pertains to.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by abuss368 » Sun Nov 17, 2013 8:04 pm

We follow an equal location approach with low cost, diversified index funds rather than asset location location. Rick Ferri and his firm recommend equal location. Perhaps Rick will provide advise here.

Over a lifetime of investing this may be the most tax efficient. It certainly makes re-balancing easy and our otherwise all equity accounts do not get crushed in a downturn forcing us to make irrational decisions that we would later regret.

Tax rates and the tax code change all the time. An investor must find what works best for them.

We intend to stay the course.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by letsgobobby » Sun Nov 17, 2013 8:21 pm

MindBogler wrote:
Barry Barnitz wrote:Hi:

I have made a few edits in the Userpage playpen;

1. I removed an obsolete statement regarding fund of funds and the foreign tax credit.
2. I added stylistic emphasis to the second introductory paragragh.

See User:Lady Geek/ Principles of tax efficient fund placement - Bogleheads.

regards,
I think the stylistic emphasis box is fantastic. It really emphasizes who the article pertains to.
I like it, too.

Whenever posters ask if they should keep stocks in taxable and bonds in tax-deferred, I respond along the lines of, "Yes that is generally the consensus, however, note that the analysis may be different at present because of very low nominal bond yields. For more on that perspective see..." and then I usually refer to The Finance Buff's blog posting about the same.

A wiki page can't be correct for everyone, and it isn't meant to be. However it's worth mentioning that there are different perspectives especially given current conditions, and then to elaborate on that as needed.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by BrandonBogle » Sun Nov 17, 2013 8:27 pm

LadyGeek's version has the following
If your investments are all in tax-advantaged accounts, fund placement will not have a large impact on your returns. Tax-advantaged accounts include tax-deferred accounts, such as 401(k) and 403b, and tax-free accounts such as Roth IRA. If you have a taxable account, you need to consider tax efficiency when choosing your funds. Investors should always establish an emergency fund first, and then fund their deductible retirement account or Roth IRA before their taxable accounts. Tax-advantaged retirement accounts are the most tax-efficient accounts, which should not be overlooked.
I would suggest adjusting it to say Traditional 401k and then include Roth 401ks with Roth IRAs.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sun Nov 17, 2013 8:37 pm

letsgobobby wrote:
MindBogler wrote:
Barry Barnitz wrote:Hi:

I have made a few edits in the Userpage playpen;

1. I removed an obsolete statement regarding fund of funds and the foreign tax credit.
2. I added stylistic emphasis to the second introductory paragragh.

See User:Lady Geek/ Principles of tax efficient fund placement - Bogleheads.

regards,
I think the stylistic emphasis box is fantastic. It really emphasizes who the article pertains to.
I like it, too...
Since we have a consensus on the stylistic updates, I put the change in the "live" article: Principles of tax-efficient fund placement

I'm hitting writer's block to come up with a concise, easy-to-understand, description of the "Criticism of..." section for the draft page: Criticisms of this tax placement strategy

I tried to summarize the discussion so far, but couldn't get a handle on how to communicate this effectively. If anyone wants to give this shot, post here (or edit the wiki).

Update: I also removed the obsolete statement in the live page. Here's how the wiki shows what changed (View history tab): Difference between revisions of "Principles of tax-efficient fund placement"
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Taylor Larimore
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Vanguard Experts on "Asset Location."

Post by Taylor Larimore » Sun Nov 17, 2013 8:43 pm

Bogleheads:

Perhaps it is time to review the opinion of Vanguard Investment Counseling & Research:
Asset Location:

"For a taxable investor, the goal should be to maximize a portfolio's after-tax returns. Asset location--which refers to the decision whether or not to hold an investment in a taxable or a tax-advantaged account--is critical to this outcome.

From an asset location perspective, there is a strong preference to hold tax-efficient investments in taxable accounts and tax-inefficient investments in tax-advantaged accounts."

"The highest probability of maximizing a portfolio’s after-tax returns is provided by placing broad-market equity index funds/ETFs or tax-managed equity funds in taxable accounts and placing taxable bonds in tax-deferred accounts."
Underline mine.

Portfolio Construction for Taxable Accounts

Best wishes.
Taylor
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by ogd » Sun Nov 17, 2013 8:57 pm

Hi guys,

First off, it's great that we're willing to revisit such a long-standing article. But I think that in all of this discussion (and certainly in the Wiki article itself), one point gets missed, which IMHO underlies the results in the Reed paper and less's arguments although both present it in a very convoluted form compared to how simple the issue really is. This point is what I would add as a criticism.

Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on, despite higher tax bills in the present.

It's as simple as that. Well, the statement is, before all the calculations that the above brings into play. The Wiki assumes a static tax-advantaged vs taxable space (or doesn't consider it as a factor), then proceeds to optimize this year's taxes. There are reasons to do that, such as uncertainties about stock returns or future tax laws (in other words, "the bird in the hand"). However, I think it's a mistake to ignore the potential for expansion entirely and in fact this is slowly convincing me to allocate some equities in the tax-advantaged accounts despite my current tax bracket (around 50%). Just in case the bull market continues.

By way of proof that this is a factor, consider this extreme scenario: equities return 100% per year (I know, I know, bear with me). If you put them in tax advantaged -- assume it's Roth for now -- they will cause it to grow 100x in about a decade (more or less, depending on AA and rebalancing), meaning all of your money will be tax advantaged by then. Thereafter, you don't care about taxes anymore and you save money on both stocks and bonds. Note that it doesn't even matter what the tax rates are exactly -- you can assume perfect tax efficiency of stocks (0% taxes) and inefficiency of bonds (100% taxes) and it still pays off to take a hit now in order to grow the tax advantaged account so as to stop paying bond taxes entirely in the future. In other words, the untaxed returns of the high-growth asset come into play, not just the amounts actually taxed now or later. And I think this is independent of any Asset Allocation arguments.

As for the realistic scenarios, I've played around with less's spreadsheet and with the present low bond returns (say 3%) and fairly conservative equity assumptions (read: favorable to bonds-in-tax-advantaged), 7% returns and 5% annualized capital gains rate, you have to be in a fairly high bracket (32%+) for "bonds in tax advantaged" to win. Now it might actually be the case that most investors with a significant amount of taxable and no opportunities to pump up the tax advantaged significantly through contributions are in fact in those brackets. I'm not sure. But I think the potential for tax-advantaged expansion deserves at least a mention.

So far the arguments above (and of course the Wiki page) are focusing on the "instantaneous" tax efficiency aspects, how they've changed at low bond rates, etc. I haven't seen anything about the long-term growth aspect which I think underlies the OP.

Just my 2c. I should mention that I wasn't initially very convinced by the paper, and I still think it's quite unclear, nor a fan of less's promotion style, but it did get me thinking.
Last edited by ogd on Sun Nov 17, 2013 10:46 pm, edited 1 time in total.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by tadamsmar » Sun Nov 17, 2013 8:59 pm

The page is also geared toward the accumulation phase, I think. The page never mentions that it's not geared toward those who need income off of taxable assets. Of course, future income needs from taxable may require projection and planning, looking ahead to RMDs and all that.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sun Nov 17, 2013 9:03 pm

Let me add Rick Ferri's comment from a related thread: Subject: Problems with Reichenstein's "Asset Location Decis Revisted"
Rick Ferri wrote:The problem with asset location is that nothing is static. Tax rates change, tax brackets change, tax preferences change, and on and on. What was a logical tax location one year may turn out to be a lousy one a few years later, but you're stuck in the one you have.

Rebalancing is also a problem. You could end up with all equity in your taxable account and need to rebalance out of equity. This could creates more capital gains tax than if you had a balanced account in both taxable and your non-taxable.

The long-term tax benefits are just not clear-cut, so do what is most convenient.

Rick Ferri
I hope I'm not taking this out of context, but I think it applies here.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by assumer » Sun Nov 17, 2013 9:05 pm

ogd wrote:Hi guys,

First off, it's great that we're willing to revisit such a long-standing article. But I think that in all of this discussion (and certainly in the Wiki article itself), one point gets missed, which IMHO underlies the results in the Reed paper and less's arguments although both present it in a very convoluted form compared to how simple the issue really is. This point is what I would add as a criticism.

Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on, despite higher tax bills in the present.
Hmm interesting perspective. That perhaps lends a bit of credence to what I believe is Rick Ferri's stated style of keeping the same asset allocation in each account.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by pkcrafter » Sun Nov 17, 2013 9:10 pm

Don't we have a process for suggested Wiki changes? Less and any others who believe the Wiki page is wrong should write a new page, or at least write suggested changes/additions and post them in the Editors Lounge for peer review.

Paul
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sun Nov 17, 2013 9:15 pm

tadamsmar wrote:The page is also geared toward the accumulation phase, I think. The page never mentions that it's not geared toward those who need income off of taxable assets. Of course, future income needs from taxable may require projection and planning, looking ahead to RMDs and all that.
This is a good point for the "Criticisms of..." section.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sun Nov 17, 2013 9:27 pm

pkcrafter wrote:Don't we have a process for suggested Wiki changes? Less and any others who believe the Wiki page is wrong should write a new page, or at least write suggested changes/additions and post them in the Editors Lounge for peer review.

Paul
There is no formal process for suggested wiki changes. To those who may not be familiar with the forum's configuration, wiki editors have their own sub-forum which is not visible to the general membership. This allows for collaboration among the editors, or to ask for editing help.

We have comments from the general membership, which I need to be involved in the collaboration and peer review.

It's not a problem to create more than one draft wiki page, or to put different versions in the same draft page for comparison.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by JamesSFO » Sun Nov 17, 2013 10:34 pm

Maybe I'm just thick but I've followed both of less' threads about this and I'm just not seeing the issue here... Doc has come closest to explaining some of the issues, but I feel like I'm still missing the issue/rabbit at stake.

Ogd's post is somewhat clarifying, and perhaps the closest I've seen to a clear explanation and I'm still not convinced that the result is that the rules of thumb are particularly bad.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by JamesSFO » Sun Nov 17, 2013 10:36 pm

assumer wrote:
ogd wrote:Hi guys,

First off, it's great that we're willing to revisit such a long-standing article. But I think that in all of this discussion (and certainly in the Wiki article itself), one point gets missed, which IMHO underlies the results in the Reed paper and less's arguments although both present it in a very convoluted form compared to how simple the issue really is. This point is what I would add as a criticism.

Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on, despite higher tax bills in the present.
Hmm interesting perspective. That perhaps lends a bit of credence to what I believe is Rick Ferri's stated style of keeping the same asset allocation in each account.
BTW, ogd thanks for the clearest explanation of what might have been the point of the Reed paper/less' argument. I'm still not convinced that it invalidates the rules of thumb. I do like the reference to Rick Ferri's thought and that has some logic to it too and could be another reasonable approach.

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Re: Vanguard Experts on "Asset Location."

Post by grabiner » Sun Nov 17, 2013 10:48 pm

Taylor Larimore wrote:Bogleheads:

Perhaps it is time to review the opinion of Vanguard Investment Counseling & Research:
Asset Location:

"For a taxable investor, the goal should be to maximize a portfolio's after-tax returns. Asset location--which refers to the decision whether or not to hold an investment in a taxable or a tax-advantaged account--is critical to this outcome.

From an asset location perspective, there is a strong preference to hold tax-efficient investments in taxable accounts and tax-inefficient investments in tax-advantaged accounts."

"The highest probability of maximizing a portfolio’s after-tax returns is provided by placing broad-market equity index funds/ETFs or tax-managed equity funds in taxable accounts and placing taxable bonds in tax-deferred accounts."
Underline mine.

Portfolio Construction for Taxable Accounts
This article was published in 2007; the numbers would be different (and much closer) using 2013 yields. With current yields, I would recommend placing bonds in taxable if they are short-term bonds, TIPS in a high state tax bracket, or munis from your own state in a high state tax bracket; intermediate-term bonds are probably better in tax-deferred. (It also depends on your options; Federal employees with the TSP G fund, or 403(b) investors with TIAA-CREF's traditional annuity, are probably better off with bonds in tax-deferred because these funds are better than retail funds.)
Wiki David Grabiner

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by grabiner » Sun Nov 17, 2013 10:50 pm

ogd wrote:Hi guys,

First off, it's great that we're willing to revisit such a long-standing article. But I think that in all of this discussion (and certainly in the Wiki article itself), one point gets missed, which IMHO underlies the results in the Reed paper and less's arguments although both present it in a very convoluted form compared to how simple the issue really is. This point is what I would add as a criticism.

Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on, despite higher tax bills in the present.
This has been worked out a few times; usually, the higher growth in tax-deferred only gives higher after-tax returns after a time period longer than an investor's time horizon. (And an investor with a 50-year time horizon actually has a lower tax rate on taxable stocks than would be predicted from the calculations, as he presumably expects to leave some of those stocks to heirs.)
Wiki David Grabiner

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by grok87 » Sun Nov 17, 2013 10:53 pm

pkcrafter wrote:Don't we have a process for suggested Wiki changes? Less and any others who believe the Wiki page is wrong should write a new page, or at least write suggested changes/additions and post them in the Editors Lounge for peer review.

Paul
agree completely.
Keep calm and Boglehead on. KCBO.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by dbr » Sun Nov 17, 2013 11:37 pm

If it is reasonably possible for some investors under some combinations of lifetime investment results and lifetime individual tax situation to be better off doing the opposite of the strategy outlined in the Wiki, then the article should say so.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Kevin M » Mon Nov 18, 2013 5:03 am

dbr wrote:If it is reasonably possible for some investors under some combinations of lifetime investment results and lifetime individual tax situation to be better off doing the opposite of the strategy outlined in the Wiki, then the article should say so.
:thumbsup

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Kevin M » Mon Nov 18, 2013 5:08 am

grok87 wrote:
pkcrafter wrote:Don't we have a process for suggested Wiki changes? Less and any others who believe the Wiki page is wrong should write a new page, or at least write suggested changes/additions and post them in the Editors Lounge for peer review.

Paul
agree completely.
Or just edit the existing page. That's the way it works on Wikipedia. As long as there's a reasonable source for what's being written, it can go right in. Our standard on citing sources in our Wiki is pretty weak; so that's not a very high hurdle to clear.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by longinvest » Mon Nov 18, 2013 9:02 am

abuss368 wrote:We follow an equal location approach with low cost, diversified index funds rather than asset location location. Rick Ferri and his firm recommend equal location. Perhaps Rick will provide advise here.

Over a lifetime of investing this may be the most tax efficient. It certainly makes re-balancing easy and our otherwise all equity accounts do not get crushed in a downturn forcing us to make irrational decisions that we would later regret.

Tax rates and the tax code change all the time. An investor must find what works best for them.

We intend to stay the course.
We use an equal location for the same reasons.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by abuss368 » Mon Nov 18, 2013 10:05 am

longinvest wrote:
abuss368 wrote:We follow an equal location approach with low cost, diversified index funds rather than asset location location. Rick Ferri and his firm recommend equal location. Perhaps Rick will provide advise here.

Over a lifetime of investing this may be the most tax efficient. It certainly makes re-balancing easy and our otherwise all equity accounts do not get crushed in a downturn forcing us to make irrational decisions that we would later regret.

Tax rates and the tax code change all the time. An investor must find what works best for them.

We intend to stay the course.
We use an equal location for the same reasons.
Great to hear.

I do like the update to the wiki to detail possible negative aspects of the asset location approach.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by BanditKing » Mon Nov 18, 2013 10:52 am

LadyGeek wrote:To the new investors: Other than the points of contention mentioned by the OP, is there anything else that you would like to see changed? Is the wording clear, or does something need to be changed to help you understand the concepts better?
As a newbie working up his own AA plan, this is well-timed for me.

There ARE pages relating to some of these, but it can be difficult to find if you are just surfing around. I think directly forking to a more-advanced conversation covering common scenarios that involves divergence from the general norm (below are just a few that have come to mind that I've struggled with understanding):
  • Poor selections in 401k (usually leading to filling it with a low-cost S&P fund), and how to balance that elsewhere
    General low bond or equity yields (which may be a more temporary situation over the lifetime of one's portfolio)
    Explaining in more detail (with examples) why REIT and Internationals should go in certain spaces
    The role/placement of international bonds, TIPS and Cash in various spaces
    Talking more about municipals and tax-managed funds in taxable space, with example numbers.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Barry Barnitz » Mon Nov 18, 2013 11:56 am

Hi:

Editors have been making some adjustments on the User page. You can follow these individual edits on the Recent changes - Bogleheads listing (for November 17 and November 18).

In addition to the edits of substance, I have made a stylistic change in redesignating the references in the page to footnotes. See User:LadyGeek/Principles of tax-efficient fund placement - Bogleheads for the updates.

regards
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Kevin21 » Mon Nov 18, 2013 1:06 pm

I have frequently posted about this issue. I have always felt that as a young investor, it would be better to hold equities in retirement accounts -- especially Roth IRA. My personal solution, was to purchase I-bonds for both Emergency AND Bond allocation. This creates a kind of third space for my bond portion of retirement holdings (with my wife and tax returns, the amount of space grows quickly).

I also noted this as an example of potential "Group Think" under that thread a while back... and also when discussing Jack Bogle's personal portfolio, which I think is due to his longer time horizon for his heirs. For shorter time horizon, tax efficient placement probably does make sense, and I don't think a deletion is warranted. There are certain situations where tax efficient placement can be VERY important.

I haven't really done the math, but I assume that the difference becomes especially apparent after 30+ years. Any math/chart people want to do some comparisons with model average returns?

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by ogd » Mon Nov 18, 2013 1:17 pm

grabiner wrote:
ogd wrote:Hi guys,

First off, it's great that we're willing to revisit such a long-standing article. But I think that in all of this discussion (and certainly in the Wiki article itself), one point gets missed, which IMHO underlies the results in the Reed paper and less's arguments although both present it in a very convoluted form compared to how simple the issue really is. This point is what I would add as a criticism.

Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on, despite higher tax bills in the present.
This has been worked out a few times; usually, the higher growth in tax-deferred only gives higher after-tax returns after a time period longer than an investor's time horizon. (And an investor with a 50-year time horizon actually has a lower tax rate on taxable stocks than would be predicted from the calculations, as he presumably expects to leave some of those stocks to heirs.)
David: has the calculation been revisited lately? It seems to be very sensitive to bond yields, i.e. the tax savings that you're foregoing now to grow tax-advantaged space. At 3%, the version in the spreadsheet comes out borderline at best for 30 year horizons, even if I reduce effective cap gains taxes to as little as 5% annualized (donations etc).

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by marcos123 » Mon Nov 18, 2013 3:19 pm

Barry: Thanks for the update. I now recognize that my post below was unclear. It is specifically referring to the text right below Step 3. I believe that this is an important point and should be corrected. For the reasons cited below, it is not a foregone conclusion that it is always worth claiming the foreign tax credit for international/emerging markets stock funds, and fundholders therefore may well be better off in placing them in Traditional and Roth IRAs for the overall net tax savings.

marcos123 wrote:"It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but this opportunity is lost in tax-advantaged accounts. It is worth doing this, although it is not a large amount."

As an avid reader, but less frequent poster, I would just like to say that this wiki should definitely not be deleted, as it does provide a helpful, general framework particularly for someone new to the game, but should be tweaked. My comment: the clause highlighted should not read as a blanket statement.

It may well not be worth doing this, depending on the the % of the foreign source income component, the foreign tax rate, % of the foreign dividends that are qualified, the US marginal tax bracket of the fundholder, etc. Given the cited factors, for the net tax savings, I have often, but not always, placed international/emerging markets stock funds in Traditional and Roth IRAs.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Barry Barnitz » Mon Nov 18, 2013 4:36 pm

marcos123 wrote:Barry: Thanks for the update. I now recognize that my post below was unclear. It is specifically referring to the text right below Step 3. I believe that this is an important point and should be corrected. For the reasons cited below, it is not a foregone conclusion that it is always worth claiming the foreign tax credit for international/emerging markets stock funds, and fundholders therefore may well be better off in placing them in Traditional and Roth IRAs for the overall net tax savings.

marcos123 wrote:"It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but this opportunity is lost in tax-advantaged accounts. It is worth doing this, although it is not a large amount."

As an avid reader, but less frequent poster, I would just like to say that this wiki should definitely not be deleted, as it does provide a helpful, general framework particularly for someone new to the game, but should be tweaked. My comment: the clause highlighted should not read as a blanket statement.

It may well not be worth doing this, depending on the the % of the foreign source income component, the foreign tax rate, % of the foreign dividends that are qualified, the US marginal tax bracket of the fundholder, etc. Given the cited factors, for the net tax savings, I have often, but not always, placed international/emerging markets stock funds in Traditional and Roth IRAs.
Hi Marcos:

I have incorporated the qualifiers into the section. See User:LadyGeek/Principles of tax-efficient fund placement - Bogleheads for the emendation.

regards,
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by JamesSFO » Mon Nov 18, 2013 5:02 pm

Kevin21 wrote:I have frequently posted about this issue. I have always felt that as a young investor, it would be better to hold equities in retirement accounts -- especially Roth IRA. My personal solution, was to purchase I-bonds for both Emergency AND Bond allocation. This creates a kind of third space for my bond portion of retirement holdings (with my wife and tax returns, the amount of space grows quickly).

I also noted this as an example of potential "Group Think" under that thread a while back... and also when discussing Jack Bogle's personal portfolio, which I think is due to his longer time horizon for his heirs. For shorter time horizon, tax efficient placement probably does make sense, and I don't think a deletion is warranted. There are certain situations where tax efficient placement can be VERY important.

I haven't really done the math, but I assume that the difference becomes especially apparent after 30+ years. Any math/chart people want to do some comparisons with model average returns?
Kevin - Potentially you have a valid approach if the quantity of Series I/E bonds you purchase is sufficient for your bond allocation. I Bonds are not necessarily easily acquired in large enough units/quantities for many portfolios. For early in life, if you are a low bond position person and/or a small portfolio, then by all means use I Bonds in taxable as your bond position. What if you need more than $10K of I Bonds/year? Where would you put the 10,001st dollar that needs to be in bonds?

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Fund placement from the Bogleheads' Guide to Investing.

Post by Taylor Larimore » Mon Nov 18, 2013 5:19 pm

Lady Geek:
In our Bogleheads' Guide to Investing (page 141) we provide Tables showing the after-tax returns when we place stocks in taxable accounts and bonds in tax-deferred accounts vs. the opposite fund placement:
We can demonstrate the importance of fund placement with a simple illustration (Tables 11.2 and 11.3). Suppose you had a $100,000 portfolio of two funds--a $50,000 stock fund and a $50,000 bond fund. However, your tax-deferred retirement account can only accommodate $50,000. --You put the bond fund in your retirement account and what's left (your stock fund) in your taxable account. Now let's look at Table 11.2 to see what happens at the end of 30 years.

We see that the after-tax value after 30 years is more than one million dollars: $1,005.451 to be exact. Now let's look at Table 11.3 to see what happens when you do the reverse--you put the bonds in your taxable account and the stocks in your tax-deferred account--your portfolio would amount to $866,078. a $119,021 difference (more than your original portfolio).

Assumptions: Stock return 10%; Dividend yield 1.5%; Dividend and Capital Gain tax 15%; Bond return 7%; Income tax 25%
Best wishes.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Kevin21 » Mon Nov 18, 2013 5:23 pm

JamesSFO wrote:
Kevin21 wrote:I have frequently posted about this issue. I have always felt that as a young investor, it would be better to hold equities in retirement accounts -- especially Roth IRA. My personal solution, was to purchase I-bonds for both Emergency AND Bond allocation. This creates a kind of third space for my bond portion of retirement holdings (with my wife and tax returns, the amount of space grows quickly).

I also noted this as an example of potential "Group Think" under that thread a while back... and also when discussing Jack Bogle's personal portfolio, which I think is due to his longer time horizon for his heirs. For shorter time horizon, tax efficient placement probably does make sense, and I don't think a deletion is warranted. There are certain situations where tax efficient placement can be VERY important.

I haven't really done the math, but I assume that the difference becomes especially apparent after 30+ years. Any math/chart people want to do some comparisons with model average returns?
Kevin - Potentially you have a valid approach if the quantity of Series I/E bonds you purchase is sufficient for your bond allocation. I Bonds are not necessarily easily acquired in large enough units/quantities for many portfolios. For early in life, if you are a low bond position person and/or a small portfolio, then by all means use I Bonds in taxable as your bond position. What if you need more than $10K of I Bonds/year? Where would you put the 10,001st dollar that needs to be in bonds?
Granted, this is only a short term fix, but I am hoping to get the equities compounding inside my Retirement accounts as early as possible. As I get older and time horizon shortens, I will place bonds inside my retirement account (unless I am passing down to heirs.)

Until then, with my wife's TD account and our tax returns in Ibonds, I am planning to build a good amount of them. (20k+ per year) If I need more than that in the short-term, then that is a good problem to have, and I will be way ahead of schedule. BUT--- municipal bonds sure look good for that kind of situation. I haven't gotten that far in the game yet.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Mon Nov 18, 2013 5:30 pm

BanditKing wrote:
LadyGeek wrote:To the new investors: Other than the points of contention mentioned by the OP, is there anything else that you would like to see changed? Is the wording clear, or does something need to be changed to help you understand the concepts better?
As a newbie working up his own AA plan, this is well-timed for me.

There ARE pages relating to some of these, but it can be difficult to find if you are just surfing around. I think directly forking to a more-advanced conversation covering common scenarios that involves divergence from the general norm (below are just a few that have come to mind that I've struggled with understanding):
  • Poor selections in 401k (usually leading to filling it with a low-cost S&P fund), and how to balance that elsewhere
  • General low bond or equity yields (which may be a more temporary situation over the lifetime of one's portfolio)
  • Explaining in more detail (with examples) why REIT and Internationals should go in certain spaces
  • The role/placement of international bonds, TIPS and Cash in various spaces
  • Talking more about municipals and tax-managed funds in taxable space, with example numbers.
(I formatted your list) Bandit - Those are all good points, let me take a crack at it:

*Poor selections in 401k (usually leading to filling it with a low-cost S&P fund), and how to balance that elsewhere
This is a common situation, but the best approach is to choose your allocation without regard to taxes and is the first priority listed. By changing your allocation based on taxes (no good funds available), you will probably be worse off than by ignoring taxes. See the disclaimer I put at the top of this wiki article, which was based on a comment by Rick Ferri: Tax-adjusted asset allocation. Perhaps something to that effect should be inserted here.

*General low bond or equity yields (which may be a more temporary situation over the lifetime of one's portfolio)
I believe this is a situation in which you should "stay the course" - a temporary situation as you state. Doing otherwise is market timing, which is not a recommended approach.

*The role/placement of international bonds, TIPS and Cash in various spaces
International bonds are not discussed in the article - should they be added? (general question)
TIPS are inflation protected bonds, and cash can be in the form of a CD in taxable or tax-deferred space (IRA CD) - should they be added? (general question)

*Explaining in more detail (with examples) why REIT and Internationals should go in certain spaces
*Talking more about municipals and tax-managed funds in taxable space, with example numbers.
(general question) - should more details be provided? The wiki needs to balance authoritative information while avoiding specific advice. "Why" an asset would go in a certain space may be "why not" for someone else. Many scenarios are unique to a situation, so we want to be sure that we don't steer anyone in the wrong direction.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Mon Nov 18, 2013 8:58 pm

I updated the draft page to make another "stylistic" change, in that I think it's critically important to understand that asset allocation decisions come before taxes. I made no change in the wording, but put the key statements inside an attention-getting box.

Next, I took a stab at the criticisms section. My intent was to make this concise, easy-to-understand, and avoid getting into details which can then become discussions in their own right.

See: User:LadyGeek/Principles of tax-efficient fund placement

I hope that I didn't take anything out of context or missed an important concept. If I did, this is why it's a draft page. Please review carefully, then correct what's needed.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by archbish99 » Mon Nov 18, 2013 9:18 pm

I don't think the point about not using this to decide where to contribute belongs in the criticism section. It might do better in the "consider your whole portfolio" section, or as a "scope" bit at the beginning. It's a question of communicating what the article intends to cover (where to hold the investments you've selected across the accounts you've contributed to) versus what it doesn't (what investments to select, what accounts to contribute to).

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Mon Nov 18, 2013 9:33 pm

Thanks, I thought that looked out of place but didn't know where to put it. That statement is a copy of what I put at the top of Tax-adjusted asset allocation and thought it applied here.

It's now part of the outline box under "Preparation: Consider your entire portfolio without regard to taxes": User:LadyGeek/Principles of tax-efficient fund placement
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Doc » Tue Nov 19, 2013 10:34 am

LadyGeek in the Wiki wrote:This article states that cash and low-yielding bonds are tax efficient, but then contradicts this somewhat by then classifying "most bonds" as tax inefficient. In a low interest / low inflation rate environment, some consideration should be given if this will continue for the long term.
Having the bond issue at the bottom of the page as the last line in the criticism section when there are several large and colorful charts near the top showing the opposite is hardly adequate.

The 30 year Treasury yield is less than 1.5% as of yesterday making it more tax efficient than a large cap index fund according to the charts in the Wiki. How long do I have to live to consider 30 years as not "long term". The returns of 6% for "taxable bonds" and 3% for "Low-yielding taxable bonds or money market" used in the Tables are ridiculously high for the foreseeable future. The return for Vg's TBM fund has not seen returns of this level consistently since the last century.

See five year rolling returns chart for VBMFX.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by madbrain » Tue Nov 19, 2013 10:49 am

Doc wrote: The 30 year Treasury yield is less than 1.5% as of yesterday making it more tax efficient than a large cap index fund according to the charts in the Wiki. How long do I have to live to consider 30 years as not "long term". The returns of 6% for "taxable bonds" and 3% for "Low-yielding taxable bonds or money market" used in the Tables are ridiculously high for the foreseeable future. The return for Vg's TBM fund has not seen returns of this level consistently since the last century.
The lower 1.5% bond yield vs large cap index fund 2% yield (1.93% for S&P500 fund as of yesterday, close enough) alone is not sufficient to make the former more tax-efficient than the later.
Bond interest is taxed as ordinary income, while the index funds dividends still have some preferential tax treatment.
So, you will likely still pay more ongoing taxes if you hold the bonds even at those paltry yields, than if you hold the large cap index fund.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Doc » Tue Nov 19, 2013 11:03 am

madbrain wrote:
Doc wrote: The 30 year Treasury yield is less than 1.5% as of yesterday making it more tax efficient than a large cap index fund according to the charts in the Wiki. How long do I have to live to consider 30 years as not "long term". The returns of 6% for "taxable bonds" and 3% for "Low-yielding taxable bonds or money market" used in the Tables are ridiculously high for the foreseeable future. The return for Vg's TBM fund has not seen returns of this level consistently since the last century.
The lower 1.5% bond yield vs large cap index fund 2% yield (1.93% for S&P500 fund as of yesterday, close enough) alone is not sufficient to make the former more tax-efficient than the later.
Bond interest is taxed as ordinary income, while the index funds dividends still have some preferential tax treatment.
So, you will likely still pay more ongoing taxes if you hold the bonds even at those paltry yields, than if you hold the large cap index fund.
Absolutely true, that's what the Wiki is all about. Tax Efficiency is the amount lost to taxes per unit of investment. This can be calculated as ROI x effective tax rate or with a properly designed spreadsheet as the Wiki uses. You are equating the large cap yield to its total return and that is only going to be valid if you somehow never pay LTCG taxes.

I guess we might change the Wiki to say something like "the most effective tax reduction strategy is tax evasion" but that would not apply to most of us. :beer
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Re: Fund placement from the Bogleheads' Guide to Investing.

Post by Electron » Tue Nov 19, 2013 2:58 pm

There may be more variables involved in fund placement than we realize. I've spent quite a bit of time on this subject and come up with a list of variables.

Stock Returns Relative to Bond Returns
Tax Rate on Capital Gains and Qualified Dividends Relative to Ordinary Income
Opportunity for 0% Tax Rate on Qualified Dividends
Tax Loss Harvesting
Unknown Future Tax Rates
Stock Dividend Yield
Capital Gain Distributions
Rebalancing of Portfolios
Variability of Returns from Year to Year
Length of Investment Period
Initial Lump Sum Versus Annual Investments
End Wealth Measured Before Tax or After Tax

High Returns in a sheltered account can do very well over a long period as a result of tax deferred compounding. This can be despite a higher tax rate on ordinary income at the end of the period.

Stocks tend to do well in a taxable account if capital gains can be deferred for a long period of time. That typically requires minimal rebalancing along with limited dividends and capital gain distributions. This implies that it is best to have the return in the form of deferred capital gains with minimal dividends along the way.

One can model asset location in a spreadsheet and compare the results to the opposite placement. However, spreadsheets typically assume a constant return every year for both stocks and bonds. It might be better to use a range of positive and negative returns typical of actual markets. That would impact rebalancing and potentially result in capital losses as well as capital gains. The spreadsheet should keep track of cost basis. I've used a non-deductible IRA for the sheltered account as it simplifies the analysis. In this case cost basis is also maintained for the sheltered account.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by ogd » Tue Nov 19, 2013 3:15 pm

Doc wrote:The 30 year Treasury yield is less than 1.5% as of yesterday making it more tax efficient than a large cap index fund according to the charts in the Wiki.
Huh? It's 3.75% (having double-checked the date of your post).

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