Tax Efficiency of Mutual Funds

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dflaher
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Tax Efficiency of Mutual Funds

Post by dflaher » Tue Mar 27, 2018 10:13 am

Hi,

I'm trying to make the taxable portion of our portfolio more tax-efficient. For stock mutual funds, is there a relationship between capital gains distributions (which are tax inefficient) to non-qualified dividends (also tax inefficient)?

In other words, are funds which have NQ dividends also likely to throw off large CG distributions?

Thanks.

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Doc
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Re: Tax Efficiency of Mutual Funds

Post by Doc » Tue Mar 27, 2018 10:18 am

dflaher wrote:
Tue Mar 27, 2018 10:13 am
Hi,

I'm trying to make the taxable portion of our portfolio more tax-efficient. For stock mutual funds, is there a relationship between capital gains distributions (which are tax inefficient) to non-qualified dividends (also tax inefficient)?

In other words, are funds which have NQ dividends also likely to throw off large CG distributions?

Thanks.
Capital gains distributions can be both short term and long term. The tax efficiency is different.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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oldzey
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Re: Tax Efficiency of Mutual Funds

Post by oldzey » Tue Mar 27, 2018 10:43 am

"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

rkhusky
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Re: Tax Efficiency of Mutual Funds

Post by rkhusky » Tue Mar 27, 2018 2:36 pm

dflaher wrote:
Tue Mar 27, 2018 10:13 am
Hi,

I'm trying to make the taxable portion of our portfolio more tax-efficient. For stock mutual funds, is there a relationship between capital gains distributions (which are tax inefficient) to non-qualified dividends (also tax inefficient)?

In other words, are funds which have NQ dividends also likely to throw off large CG distributions?

Thanks.
Many of Vanguard's index funds have not produced cap gains for years, including the popular Total Stock and Total Int'l, which I believe has something to do with their proprietary linkage to ETF's.

So, I don't think there is a specific link, but it is likely that active funds that do not care about tax efficiency will have both large cap gains and large non-qualified dividends. Index funds will likely have smaller distributions.

You may be interested in this post about the tax efficiency of various funds, including the incorporation of the foreign tax credit:
viewtopic.php?t=208818

And there is the Wiki article about tax efficient placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

alex_686
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Re: Tax Efficiency of Mutual Funds

Post by alex_686 » Tue Mar 27, 2018 2:50 pm

dflaher wrote:
Tue Mar 27, 2018 10:13 am
For stock mutual funds, is there a relationship between capital gains distributions (which are tax inefficient) to non-qualified dividends (also tax inefficient)?

In other words, are funds which have NQ dividends also likely to throw off large CG distributions?
No. Or maybe a slight negative correlation. ETFs are the most tax efficient. Vanguard has dual class funds, with both ETF and mutual fund shares, so the mutual fund gets the ETF advantage. Index funds tend to be more tax efficient than actively manged funds.

You can check the fund's annual report - or is it prospectus? - for undisturbed capital gains and losses. This is the best indicator but only a vague one.

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Toons
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Re: Tax Efficiency of Mutual Funds

Post by Toons » Tue Mar 27, 2018 2:51 pm

It is practically impossible to predict managed fund capital gains from year to year.
If minimizing tax bite is your goal look into Total Market Index Fund.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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TD2626
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Re: Tax Efficiency of Mutual Funds

Post by TD2626 » Tue Mar 27, 2018 3:15 pm

One thing that index funds, particularly at Vanguard (due to their index/etf structure) do is generally have lower capital gain distributions compared to active funds that trade a lot. Indeed, active funds can sometimes have truly enormous capital gain distributions.

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triceratop
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Re: Tax Efficiency of Mutual Funds

Post by triceratop » Tue Mar 27, 2018 3:52 pm

rkhusky wrote:
Tue Mar 27, 2018 2:36 pm

You may be interested in this post about the tax efficiency of various funds, including the incorporation of the foreign tax credit:
viewtopic.php?t=208818
Don't forget the 2017 update: viewtopic.php?t=242137
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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