Delete Wiki [Article] on Tax-Efficient Asset Location

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less
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Delete Wiki [Article] on Tax-Efficient Asset Location

Post by less » Sat Nov 16, 2013 1:00 pm

I think the Wiki page Principles of tax-efficient fund placement should be taken down in total. The decision metric used there is called 'tax-efficiency'. They do not say what that is, but it has been confirmed by others that it is the 'Difference between the nominal return and the after tax return', which is also equal to the "Multiple of the rate of return and the tax rate".

Reed http://papers.ssrn.com/sol3/papers.cfm? ... id=2317970 proves the 'tax-efficiency' metric is only valid for year 1 of an account, and then fails to maximize the accounts' benefits. Proved using both an assumption of never rebalancing, and an assumption of yearly rebalancing. Participants on this site have been repeatedly challenged to find errors with the proof (e.g. viewtopic.php?f=10&t=125392&p=1838520#p1838520 ). There have been a number of threads in the past months on Asset Location, yet in none is there even one post justifying the decision-metric used by the Wiki to decide which asset-type should be given priority in tax-shelter accounts.The silence has been deafening.

* Reichenstein http://www.fpanet.org/journal/TheAssetL ... Revisited/ obviously does not agree because he uses AL to further the objectives most people feel satisfied by Asset Allocation. He uses no metric for AL because he ignores the tax benefits of the accounts. He uses MVO Mean Variance Optimization for AA, and the fall out from that process for AL.
* Grabiner ( viewtopic.php?f=10&t=126195 ) also disagrees with the metric (without stating his alternate) even though his objective, like Reichenstein, is not to maximize the benefits of the tax shelter accounts. So obviously he is not responsible for the Wiki's definition of the objective, or the metric to use.
* Lady Geek (same thread) doesn't feel qualified to have an opinion.
* R Ferri (same thread) won't say what metric he uses for a 'logical' AL, and thinks the issue is a waste of time. I tend to agree, but if advice is being given it had better be correct. And the advice should not be used as a selling tool for advisors and their industry that pushes the MVO process.
* Doc (same thread) disputes the details of the application of the 'tax-efficiency' metric in the Wiki, thereby seeming to support its use. But does not argue why/how it is valid - and seems to dismiss Reed's proof it is wrong.
* My position viewtopic.php?f=1&t=123572&p=1811366#p1810509 is from Reed's conclusion with added pictures.

I believe the Wiki should be taken down completely because
a) The authors responsible for the decision-metric used cannot/refuse to justify it.
b) The metric used is proven wrong

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by leonard » Sat Nov 16, 2013 1:50 pm

Seems pretty self evident to me that you place the investment with the highest tax rate where it gets the best tax treatment.

I have a feeling I am going to get paragraphs back, but I guess I did knock that chip off.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sat Nov 16, 2013 2:23 pm

I disagree with the deletion, as it is still valid to put the highest tax rate investments where they get the best tax treatment (like leonard says).

Principles of tax-efficient fund placement is one of our highest viewed articles, so we don't want to disturb the content until we have a clear consensus.

I created a temporary page in the wiki. Let's work on this together: User:LadyGeek/Principles of tax-efficient fund placement

The "User:LadyGeek/" prefix indicates that it's in my temporary work area. All wiki editors are free to modify the content directly.

Others can post suggestions here, which can then be put in any wiki editor (not just me).
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by jimbojones » Sat Nov 16, 2013 2:31 pm

leonard wrote:Seems pretty self evident to me that you place the investment with the highest tax rate where it gets the best tax treatment.

I have a feeling I am going to get paragraphs back, but I guess I did knock that chip off.


Taking your logic to an extreme, you'd put your [imaginary] 0.01% return asset in your tax-deferred account if it's tax rate was 100%. The problem with your logic is that the goal isn't to minimize effective tax rates, it's to minimize tax dollars paid.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by ruralavalon » Sat Nov 16, 2013 2:34 pm

I disagree about deletion, its a very useful wiki article.

"Metrics"???? Please don't make it so compex or math-laden that the novice investor can't understand or use the wiki article.
Last edited by ruralavalon on Sat Nov 16, 2013 2:43 pm, edited 1 time in total.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by leonard » Sat Nov 16, 2013 2:43 pm

jimbojones wrote:
leonard wrote:Seems pretty self evident to me that you place the investment with the highest tax rate where it gets the best tax treatment.

I have a feeling I am going to get paragraphs back, but I guess I did knock that chip off.


Taking your logic to an extreme, you'd put your [imaginary] 0.01% return asset in your tax-deferred account if it's tax rate was 100%. The problem with your logic is that the goal isn't to minimize effective tax rates, it's to minimize tax dollars paid.


You are the only one that seems to be taking anything to extreme.

The reality is - if I put returns that are taxed at a higher rate in tax advantaged - I will be better off.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Ketawa » Sat Nov 16, 2013 2:53 pm

I disagree. Perhaps there could be an addition to the page that describes some reasons to diverge from the rules of thumb, e.g. low bond yields. For anyone holding mostly "Total" type funds, the rules of thumb work. We do advocate simplicity here, right?

Implicit in the way the Reed paper tries to make AL decisions is its assumptions about how to do AA. The OP has been defending the Reed paper by saying that criticisms of it relate to AA decisions, not AL. The OP has continued to arrogantly assert that everything in the paper is proven, that nobody has found any errors in the spreadsheet, that AL is a completely different process from AA, etc. Frankly, his tone in these threads has been utterly dismissive and fail to address the very reasonable objections that people like grabiner, Calm Man, and myself have voiced. I have already demonstrated one way that the spreadsheet's treatment of the difference between Roth and Traditional accounts is incorrect. See here: http://www.bogleheads.org/forum/viewtopic.php?f=10&t=126195#p1856635.

Before we use the Reed paper to blow up one of the most popular Wiki pages that agrees with the conventional wisdom, maybe we should wait until the Reed paper is peer-reviewed and published in a journal?
Last edited by Ketawa on Sat Nov 16, 2013 6:26 pm, edited 2 times in total.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by jimbojones » Sat Nov 16, 2013 2:53 pm

leonard wrote:
jimbojones wrote:
leonard wrote:Seems pretty self evident to me that you place the investment with the highest tax rate where it gets the best tax treatment.

I have a feeling I am going to get paragraphs back, but I guess I did knock that chip off.


Taking your logic to an extreme, you'd put your [imaginary] 0.01% return asset in your tax-deferred account if it's tax rate was 100%. The problem with your logic is that the goal isn't to minimize effective tax rates, it's to minimize tax dollars paid.


You are the only one that seems to be taking anything to extreme.

The reality is - if I put returns that are taxed at a higher rate in tax advantaged - I will be better off.


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.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by MoonOrb » Sat Nov 16, 2013 3:01 pm

less, one of the advantages that the Tax-Efficient Asset Location fund wiki page has is that I can actually understand it. I can't understand the argument you make. Are you able to break your argument down into terms and guidance that wiki users like me could actually comprehend? I promise you that I'm a well-educated, well-intentioned person who is genuinely interested in both understanding what you have to say and minimizing the taxes I pay on my investments. But while I realize there are many others here who are both smarter and more financially literate than I am, I thought it might be a useful data point for you to know that I just don't get what you're trying to say.

Also, since one of the advantages of the page as it currently exists is its simplicity, would you be able to put in context what the potential costs would be to investors with varying degrees of assets if they follow the wiki's plan instead of a different proposal? There's a lot to be said for having a clear, simple plan. Because I'm more likely to follow a plan I actually understand, I'd prefer the current wiki page stay up unless it could be shown that the difference between the two plans is so significant it's worth the added complication.

One thing that might help me is if you were to point out the specific statements on the wiki page that you contend are inaccurate, or that provide very poor guidance? And then you could explain what the inaccuracy is, what alternative advice you'd give, and the reasons for that advice?

I realize that might be a tall order since you've made this, or similar, arguments in other posts on this forum before. But if your proposal is to replace that very popular wiki page in its entirety, I'd propose you do something like:

[Statement from current wiki]
(reason why it is wrong)
{Proposed replacement language}
(reason why the proposed replacement language is more accurate).

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Ketawa » Sat Nov 16, 2013 3:02 pm

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.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by stan1 » Sat Nov 16, 2013 3:08 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.


Right, we are discussing this because over the past year TSM is up 28.74% and TBM is down 1.29%

If TSM was up 7% and TBM was up 4% the conversation wouldn't be very interesting.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Calm Man » Sat Nov 16, 2013 3:14 pm

I rethink what I should do as frequently as I choose to think about it. There are exactly opposite views and middle split-the-difference views from respected people. And it is dependent on future tax rates and other variables. Remember that Ronald Reagan changed it all up by discontinuing treatment of preferential capital gains suddenly. If that happens all of this great planning goes down the drain in a hurry (I think). What about splitting the difference and taking the Rick Ferri approach? I am leaning towards that but still confused.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Ketawa » Sat Nov 16, 2013 3:22 pm

stan1 wrote:Right, we are discussing this because over the past year TSM is up 28.74% and TBM is down 1.29%

If TSM was up 7% and TBM was up 4% the conversation wouldn't be very interesting.


I think we're also discussing this because the OP, less, has been coy about his identity. I'm pretty sure he is C. Reed, the author of the paper he constantly links. He has in the past responded to "you" as if he was the author and neglected to correct posters who address him as such. Maybe he's trying to get some support from a well-respected site like Bogleheads for his paper to be published in a journal. He might be trying to get more traffic to the web site linked in the Reed paper. I have no idea. The writing style on the web site is similar to less', here is an example:

For all people wedded to a wrong understanding, you are challenged to develop your own math to explain the RRSP benefit in the way YOU think is correct. If you think you are correct, prove it. All the industry players have been challenged to disprove this spreadsheet and provide their own math. This list includes the big banks, the Investor Education Fund, the Get Smart About Money website, the Financial Consumer Agency of Canada, Investopedia, the Competition Bureau of Canada, the issuers of the CFP designation, the CAs, the Canadian Bankers Association. None have attempted the challenge. They simply stonewall.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by stan1 » Sat Nov 16, 2013 3:26 pm

Calm Man wrote:What about splitting the difference and taking the Rick Ferri approach? I am leaning towards that but still confused.


I do use municipal bonds in my taxable account in addition to treasury and corporate bonds in my tax deferred accounts -- but a 10% allocation to single state munis is the maximum I'm comfortable. Given California's 9.3% marginal tax rate for most taxpayers I would not consider nationwide muni funds or corporate bonds in a taxable account. This is nothing against CA -- I happen to like it here -- I wouldn't feel comfortable with more than 10% of my assets in municipal bonds from ANY state.
Last edited by stan1 on Sat Nov 16, 2013 3:28 pm, edited 1 time in total.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by MoonOrb » Sat Nov 16, 2013 3:26 pm

That's a good point. We should know that if that's the case.

less, are you C. Reed?

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by BillyG » Sat Nov 16, 2013 3:34 pm

For me the Wiki is a guide, not the last word. From it I learn the issues so I can apply what I've learned to my specific situation.

The Wiki on Tax Efficient Asset Allocation turned on a light for me, although it all seems so obvious in retrospect. This Wiki was immensely helpful to me. Most advisors and investment books spend little or no time on this topic and it is one of the jewels on the website.

But what do I know, maybe I'm wrong about this, because I pay taxes like most everyone else. I just try to not pay more than what is absolutely required.

Billy

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by grok87 » Sat Nov 16, 2013 3:38 pm

LadyGeek wrote:I disagree with the deletion, as it is still valid to put the highest tax rate investments where they get the best tax treatment (like leonard says).

Principles of tax-efficient fund placement is one of our highest viewed articles, so we don't want to disturb the content until we have a clear consensus.

I created a temporary page in the wiki. Let's work on this together: User:LadyGeek/Principles of tax-efficient fund placement

The "User:LadyGeek/" prefix indicates that it's in my temporary work area. All wiki editors are free to modify the content directly.

Others can post suggestions here, which can then be put in any wiki editor (not just me).

agree.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by grabiner » Sat Nov 16, 2013 4:26 pm

My overriding point is that we should not delete the page; we should have a page which reflects the best advice we can give, as it is an important investing principle.

LadyGeek wrote:I disagree with the deletion, as it is still valid to put the highest tax rate investments where they get the best tax treatment (like leonard says).


I believe the correct understanding is that the investments with the highest tax cost should be tax-advantaged; this is a better understanding of leonard's point. It is already reflected in the Wiki article, with "low-yielding bonds or cash" in the "efficient" category.

The tables also illustrate this effect. Taxable bonds yielding 3% have a tax cost of 0.75% in a 25% bracket, and munis yielding 2.25% have an effective tax cost of 0.75% in any tax bracket assuming that the break-even tax rate is 25%. This is about the same as the tax cost of most tax-efficient stock funds after including the tax due on sale (adding values from both tables). Given more typical bond yields, most bonds are tax-inefficient.

I recognize that the rules in the article are not perfect; we call it an "estimated order". The exact tax cost of any investment depends on future yields, tax rates, and returns. And the importance of that tax cost to an individual investor may also depend on relative returns; if the stock market performs badly, the loss due to taxes will have a more significant effect on a risk-averse investor.

However, an imperfect but reasonable rule is superior to no rule at all, particularly if you can understand the basis behind the rule and adjust it when you believe the rule is wrong in your situation. For example, you might hold munis in taxable because you can hold munis from your state and are in a high state tax bracket, or because the current yields on munis are low and you intend to switch when rates rise, or because your 401(k) has a low-cost stock fund but no low-cost bond fund. (It might make sense to have a paragraph of additional considerations.)
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sat Nov 16, 2013 4:30 pm

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?
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by ruralavalon » Sat Nov 16, 2013 4:30 pm

MoonOrb wrote:
[Statement from current wiki]
(reason why it is wrong)
{Proposed replacement language}
(reason why the proposed replacement language is more accurate).

I too can actually understand the current wiki article, and would need to see the above re any disagreement with it.

Without proposed improved language, there is nothing much to discuss.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by assumer » Sat Nov 16, 2013 4:45 pm

We can discuss more about this: http://thefinancebuff.com/tax-efficienc ... olute.html which outlines situations where the tax rate / efficiency itself does not necessarily justify putting funds in tax-efficient vehicles.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Doc » Sat Nov 16, 2013 4:52 pm

less wrote:Reed http://papers.ssrn.com/sol3/papers.cfm? ... id=2317970 proves the 'tax-efficiency' metric is only valid for year 1 of an account, and then fails to maximize the accounts' benefits.


I don't agree with Grabiner's risk definition not because it is wrong but because it can be misleading and may have limited application. But he is very capable of doing his sums correctly.

In the referenced Wiki article there is another reference to the spread sheet used to calculate the "efficiency metric".

https://docs.google.com/spreadsheet/ccc ... xN2c#gid=0

Here's a recap of the numbers in the first column. (I'm ignoring the e/r aspect.)

Pretax growth rate 8.0 %
Final Growth Rate 7.21%

Initial Value 10000
Pretax Growth Rate
Final value AT 80707.22
After tax Growth Rate 7.21% (Checksum 1.0721^30=8.0734 )

My calculation of the Effective Annualized tax rate from David's numbers -> 1-7.21/8=0.0988

The effective annualized tax rate is 9.88% not the 15% that Reed is using in the example you quoted. It is this effective annualized tax rate that should be used in the efficiency metric.

Reed is correctly pointing out that if you use statutory rates and continue them for more than one year you get erroneous results. This is because of the lack of re-balancing. And he is also correct in the implication that this is an error that people often make when doing this calculation. But David did not make this mistake.

My disagreement with Grabiner comes from the risk definition which leads one to use future statutory rates instead of current rates. In either case one has to use these statutory rates to calculate the effective average annualized rate over the period of the investment. The number in the Wiki in effect uses these rates to calculate the tax loss. David actually skips the step or rather I put in an extra step to back calculate the effective rate which I find easier to use in similar but not identical circumstances.

Aside to David: If you Goggle Harvard Business School the first link you get is Sloan. And what is even weirder the third is SIU Edwardsville. (OK they are advertisments but I thought it funny.) :sharebeer
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by MindBogler » Sat Nov 16, 2013 4:55 pm

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.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by JamesSFO » Sat Nov 16, 2013 5:09 pm

I'm still not seeing the problem with the wiki article, I do wonder about the OP's identity/relationship to the paper's author since the OP keeps pushing it and doesn't ever really explain it.

The wiki article provides a useful rule of thumb that's a starting point for a basic way of making these decisions for people who do have the problem/decision.

I will add that a vast majority of investors have almost all of their investments in various tax sheltered vehicles (traditional, Roth, etc) and so there are minimal choices in terms of asset location anyhow.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LowER » Sat Nov 16, 2013 5:12 pm

It's interesting to compare the Wiki page with the tenets of that article published on the Morningstar website entitled "Real real returns." In fact, it caused such cognitive dissonance for me that I pasted the main table on my homepage then made it my avatar. :shock:

I do love the Wiki page though; there are lots of complex notions that helped me as a total newbie make some sense of the overall concepts, and I've referred to it multiple times over the last couple of years.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by YDNAL » Sat Nov 16, 2013 5:33 pm

Ketawa wrote:I think we're also discussing this because the OP, less, has been coy about his identity.

Agree.
viewtopic.php?f=10&t=125392
YDNAL » Mon Nov 04, 2013 8:21 am wrote:
grabiner wrote:In a thread on tax-adjusted asset allocation, and another thread on how some spreadsheets make the adjustment, a paper by C. Reed, "Rethinking Asset Location," http://papers.ssrn.com/sol3/papers.cfm? ... id=2317970, is cited.

A few thoughts in no particular order.
    1. We know our marginal tax rate today but can ONLY guess what it will be tomorrow - the further away tomorrow, the more difficult a guess. We don't know what changes to tax code await.
    2. Many (most?) folks save for retirement in work plans (401K, 403B, etc.), perhaps have traditional and Roth IRAs. Some may have insignificant (to matter) Taxable accounts. It would be interesting to know if anyone has seen statistics on this.
    3. The difference between a work plan (or traditional IRA) and a Roth IRA is deferred tax which we keep and save until withdrawal. With the latter, that tax is gone and doesn't grow/compound for us any longer.
    4. A Taxable account, unlike a Roth IRA, is taxed as accumulation moves forward (dividend & capital gains distributed), and then at withdrawal above the basis.
    5. Since interest rates are low, it seems *in vogue* to question asset placement - until interest rates are no longer low.
    6. Who is Mr. Reed anyways?

I have no serious objection to the Boglehead Wiki page. As with everything else, generalizations don't necessarily apply to specific situations. We ALL should consider our personal circumstances in making investing decisions.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sat Nov 16, 2013 5:41 pm

Until we get additional references (more than the single SSRN paper), let's focus on some other points brought up in this thread such as:

assumer wrote:We can discuss more about this: http://thefinancebuff.com/tax-efficienc ... olute.html which outlines situations where the tax rate / efficiency itself does not necessarily justify putting funds in tax-efficient vehicles.

The link in human readable form: Tax Efficiency: Relative or Absolute? (by forum member tfb)

And:
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.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by grabiner » Sat Nov 16, 2013 5:44 pm

MindBogler wrote:I suggest this page be split into two sections: one for tax adv. space filled and the other for tax adv. space unfilled.

If you don't have taxable investments, asset location isn't a tax issue.

Here is the second paragraph of the page:
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.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by MindBogler » Sat Nov 16, 2013 5:48 pm

grabiner wrote:
MindBogler wrote:I suggest this page be split into two sections: one for tax adv. space filled and the other for tax adv. space unfilled.

If you don't have taxable investments, asset location isn't a tax issue. Perhaps this could be stated more concisely at the beginning of the page?

Here is the second paragraph of the page:
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 feel like I've fallen into some kind of trap for not noticing the latter portion of the 2nd paragraph but I don't think I'm the only one...

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by dratkinson » Sat Nov 16, 2013 6:19 pm

I disagree with deletion. Why? The Wiki article was my first exposure to this eye-opening concept. I have since used it to minimize uncle sugar's take from my efforts.

In early 2008 I asked the forum for help with a small problem. *My investments were throwing off so much in dividends that I was being forced into a higher tax bracket (2007 tax return). The forum advised that I restructure my holdings to follow the principles of tax-efficient funds placement. I did. Result: the dividends kept coming and have increased over the years, but now they are more tax-sheltered/efficient so less goes to uncle sugar.

    *In 2005, before I followed the Vanguard Diehards/BHs, I found the lazy portfolio concept and copied the Aronson Family Taxable Portfolio.

The principle of tax-efficient funds placement works. Therefore it is valid to keep/teach. The rest is just semantics. *If the semantics can not be fixed to the satisfaction of all, then so be it.

    *I too wished the topic were better and provided a clearer explanation of where to put some funds, but realized that better funds placement decisions today depend upon future funds' distribution information and tax law changes. So barring the ability to predict the future, the current article is probably close enough.

We all know the expected result of flipping coins, but no one can know the result of flipping the next coin. I can live with a little coin-flipping uncertainty/ambiguity to understand the larger principle taught. I believe the same holds true for this Wiki topic.

If OP likes, can draft proposed Wiki replacement article correcting perceived ambiguities and submit it for critique. That is how the site is improved.

I have submitted small suggested changes for the Wiki. Some suggestions have been accepted and the site was made better by my clarifying effort. Some suggestions have been rejected and I was made better when it was explained why the existing information should remain unchanged. (I can be a little dense sometimes and the words/meaning don't sink in .)
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Epsilon Delta » Sat Nov 16, 2013 6:50 pm

If you're editing the page, could you fix this:

Step 3: Place international stock funds in taxable account

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. Even when held in a taxable account, some funds do not qualify for this foreign tax credit if they are a "fund of funds".

Apparently the fund of fund restriction changed in 2010.
http://www.bogleheads.org/wiki/Fund_of_funds

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by grabiner » Sat Nov 16, 2013 6:51 pm

Epsilon Delta wrote:If you're editing the page, could you fix this:

Step 3: Place international stock funds in taxable account

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. Even when held in a taxable account, some funds do not qualify for this foreign tax credit if they are a "fund of funds".

Apparently the fund of fund restriction changed in 2010.
http://www.bogleheads.org/wiki/Fund_of_funds


I will wait for this thread to settle down and then make this and some other changes which were suggested. Thanks for catching the error.
David Grabiner

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Doc » Sat Nov 16, 2013 6:53 pm

MoonOrb wrote: Also, since one of the advantages of the page as it currently exists is its simplicity, would you be able to put in context what the potential costs would be to investors with varying degrees of assets if they follow the wiki's plan instead of a different proposal? There's a lot to be said for having a clear, simple plan.


I'm sorry to be jumping around but people keep coming up with extraneous notions.

To paraphrase "[S]ince one of the [dis]advantages of the page as it currently exists is its simplicity ..."

This is not a simple problem. The number one biggest complexity is that we all have different time frames, different tax structures and different amounts of tax-advantaged/taxable account ratios.

One size just does not fit all. I have reason to believe that David Grabiner is the major author of the Wiki page. David is a highly educated and highly paid person at the height of his earnings power and therefore tax rate. He is biased by his circumstances. I an also a highly educated but retired person at the nadir of his earnings power and tax rate and I am biased by my circumstances. What is right for David in not right for me. The biggest problem with the Wiki article is that it addresses only the Davids and not the Docs.

I don't know how to reconcile the different viewpoints in a simple and concise presentation. I don't think it is possible. Perhaps the only way is to write a Wiki article with part A for the Davids and part B for the Docs.

I am not volunteering.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by letsgobobby » Sat Nov 16, 2013 6:57 pm

YDNAL wrote:
Ketawa wrote:I think we're also discussing this because the OP, less, has been coy about his identity.

Agree.
viewtopic.php?f=10&t=125392
YDNAL » Mon Nov 04, 2013 8:21 am wrote:
grabiner wrote:In a thread on tax-adjusted asset allocation, and another thread on how some spreadsheets make the adjustment, a paper by C. Reed, "Rethinking Asset Location," http://papers.ssrn.com/sol3/papers.cfm? ... id=2317970, is cited.

A few thoughts in no particular order.
    1. We know our marginal tax rate today but can ONLY guess what it will be tomorrow - the further away tomorrow, the more difficult a guess. We don't know what changes to tax code await.
    2. Many (most?) folks save for retirement in work plans (401K, 403B, etc.), perhaps have traditional and Roth IRAs. Some may have insignificant (to matter) Taxable accounts. It would be interesting to know if anyone has seen statistics on this.
    3. The difference between a work plan (or traditional IRA) and a Roth IRA is deferred tax which we keep and save until withdrawal. With the latter, that tax is gone and doesn't grow/compound for us any longer.
    4. A Taxable account, unlike a Roth IRA, is taxed as accumulation moves forward (dividend & capital gains distributed), and then at withdrawal above the basis.
    5. Since interest rates are low, it seems *in vogue* to question asset placement - until interest rates are no longer low.
    6. Who is Mr. Reed anyways?

I have no serious objection to the Boglehead Wiki page. As with everything else, generalizations don't necessarily apply to specific situations. We ALL should consider our personal circumstances in making investing decisions.

+1

The furthest I'd go re: the Wiki page is to make it clearer that some of the general rules of thumb can be wrong depending on your own individual tax situation, and environmental factors such as bond and stock yields. That can be expanded upon by less, Doc, or anyone else.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by MoonOrb » Sat Nov 16, 2013 7:03 pm

Doc,

Maybe I could put it this way. The page, as it exists, is simple enough that I, and presumably other readers, can understand it. "Simple" here is a relative measure compared to the page as it would exist after an overhaul to make it conform to OP's viewpoint. If the proposed changes make the wiki page more complex, what is the value we get in exchange for the changes?

If the changes would actually make things even more simple, great! But I'm waiting to see the OP's proposed changes put into any form that would be easier to understand than what currently exists.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Doc » Sat Nov 16, 2013 7:47 pm

MoonOrb wrote: If the proposed changes make the wiki page more complex, what is the value we get in exchange for the changes?

Because as stated they are wrong for many people.

If you are one of the people that fit in the "right" group you are happy. If you are one of the people in the wrong group you are "disadvantage".

(I usually don't use the term "disadvantaged" but Ladygeek deletes my more emphatic expletives even if I use less emphatic expressions like fxxx and even strike thorough that." I actually use the x's".)

Question: What is the matter with the word "fouled up"? :D

(Ladygeek: I have no problem with you.)
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by MoonOrb » Sat Nov 16, 2013 9:36 pm

Doc--specifically, which parts of the wiki are wrong for many people?

Also, I suppose it bears considering how many people, relatively, are likely to fall in the "right" and "wrong" groups, as you call them. After all, the wiki page is for "principles" not a manual that must be followed by every person regardless of their situation. If the principles are valuable guidance for most people, and it's only a small subset of people who would be disadvantaged by following them blindly, I'd suggest there's still little merit in altering them, but there might be value in creating yet another wiki page for those who could benefit from it.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sat Nov 16, 2013 10:03 pm

Feel free to use my temporary page to draft a modified format: User:LadyGeek/Principles of tax-efficient fund placement

Post here and I (or another wiki editor) will make the update. Any wiki editor is welcome to edit the page directly (as usual).
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by JamesSFO » Sat Nov 16, 2013 10:05 pm

MoonOrb wrote:Doc--specifically, which parts of the wiki are wrong for many people?

Also, I suppose it bears considering how many people, relatively, are likely to fall in the "right" and "wrong" groups, as you call them. After all, the wiki page is for "principles" not a manual that must be followed by every person regardless of their situation. If the principles are valuable guidance for most people, and it's only a small subset of people who would be disadvantaged by following them blindly, I'd suggest there's still little merit in altering them, but there might be value in creating yet another wiki page for those who could benefit from it.


Well it seems we have three big groups:

Group 1: People who basically only have tax sheltered investments [page is completely irrelevant; aside: this is probably the largest group of American households but may be smaller as percentage of BHs]

Group 2: People who have both tax sheltered and taxable accounts of meaningful sizes who:

Group 2A: are in the earning/accumulation phase, generally characterized with high incomes/high tax rates [I think Doc is saying the page is too focused here, but I'm not sure I understand why the rules of thumb are inapplicable to group 2B]

Group 2B: are in the draw down phase, generally characterized with lower incomes/more varied tax rates

I am not seeing why the advice doesn't provide useful rules of thumb to Group 2B, but it seems like one approach might be to segment the page into these major groups.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by gkaplan » Sat Nov 16, 2013 10:12 pm

I think I fall in all those groups, James, which is why I usually ignore these types of discussions.
Gordon

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by JamesSFO » Sat Nov 16, 2013 10:46 pm

gkaplan wrote:I think I fall in all those groups, James, which is why I usually ignore these types of discussions.


Groups 1 and 2 are pretty much mutually exclusive, can you explain how you are in all three groups?

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Kevin M » Sat Nov 16, 2013 10:51 pm

I agree that there have been some pretty convincing arguments that challenge the conventional asset location wisdom, especially considering current historically low interest rates. Yes, there is token acknowledgement of this in the Wiki article in mentioning cash and low-yielding bonds as tax efficient, but this is somewhat contradicted by then classifying "most bonds" as tax inefficient.

How about adding a section that addresses the concerns about the conventional wisdom? This is how it's addressed in some Wikipedia articles. For example, in the Wikipedia article on MPT, there is a "Criticisms" section. Of course the Wikipedia article includes reliable sources for both the main topics and the criticisms. The BH Wiki article includes a "Bibliography", which I assume are actual references that support the material in the article; these should be listed as references if that's the case.

As to the simplicity of the Wiki article, simplicity is worthless if the information is wrong. It is the accuracy of the information that's being challenged, and like Doc says, tax-efficient asset location is not a simple topic.

Kevin
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by stlutz » Sat Nov 16, 2013 11:46 pm

As someone who disagrees with conclusions of the wiki page, I like Kevin's approach of just adding a criticisms section.

In part, the question does come to down to whether one believes that today's low-to-no inflation/low interest rate world represents a "new normal" or is an aberration, with higher inflation/rates sure to return soon. I lean toward the former view (i.e. "low-yielding bonds" is redundant).

One thing that should also be noted: It is usually possible to go from bonds in taxable to bonds in tax-advantaged with little, no, or negative tax cost. This is usually not the case with stocks--once you build up gains on holdings in taxable accounts, you're stuck unless you want a large tax bill. (My assumption being that one expects stocks to beat bonds by at decent margin).

This means that one could add new money to bonds in taxable in today's low interest rate environment. If rates increase significantly, one could sell the bonds in taxable, take the tax loss, and reinvest in stocks. The reverse can then be done in one's tax-advantaged accounts.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by HurdyGurdy » Sun Nov 17, 2013 12:43 am

As Mr. Less seems to be a knowledgeable person, and seems to even have a whole philosophy on these financial topics. Instead of giving it piecemeal here and there, I would request that he would make a more explicit description of what such approach is.

For instance, you sent me a link to this website some days ago in a Private Message.
http://www.retailinvestor.org/activeVSpassive.html
Is this a site that you contribute to?
Last edited by HurdyGurdy on Sun Nov 17, 2013 12:55 am, edited 1 time in total.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by steve_14 » Sun Nov 17, 2013 12:50 am

less wrote:I think the Wiki page Principles of tax-efficient fund placement should be taken down in total


To make such a statement, you'll need a realistic model showing it's wrong...which you're not even close to having. For it to have any general validity, include at a minimum:

1) Young investor starts with mostly stocks, mostly in an IRA/401k, beginning to invest in a taxable account in year 10 or so (you could start the model here)
2) Investor contributes new money each year, rebalancing with it. No selling down stocks in the taxable account to rebalance
3) Investor makes his asset allocation more conservative over time
4) Investor can tax loss harvest with stocks in a taxable account only. Probably best to include stock volatility in the model. I'll accept the assumption of a normal distribution.

If you create this model, you'll see bonds in tax deferred win over your 30 year scenario. Heck, a mere $5/year TLH bonus and your Fig. 1 model fails. Anyway, come up with a spreadsheet and post it publicly, so that it may be verified.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by BrandonBogle » Sun Nov 17, 2013 1:30 am

I would disagree with deleting the page altogether. As other have said, it's easy to read and a great rough-draft roadmap to get you started. Before taking such principles to heart earlier this year, I had REITs and Corporate Bonds in my taxable account. I am much better served by TSM and Tint in my taxable than REITs and non-muni bonds.

For reference, I am in the 25% + 7.75 (state) tax bracket.

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Re: Delete Wiki on Tax-Efficient Asset Location

Post by nisiprius » Sun Nov 17, 2013 7:23 am

If this were Wikipedia we would aapply the policy of "neutral point of view" and if it seemed clear that respected sources had heterodox opinions, they would be incorporated into the article. "Criticism of" sections are common in Wikipedia. If Reed's views are widely held and authoritative they should be included. In no case should the existing material be deleted.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by LadyGeek » Sun Nov 17, 2013 11:41 am

I added a "Criticisms of this tax placement strategy" section to my draft page: User:LadyGeek/Principles of tax-efficient fund placement

Post your suggested wording here. Wiki editors should change the page directly (then post back here that it was modified).
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by Doc » Sun Nov 17, 2013 11:47 am

MoonOrb wrote:Doc--specifically, which parts of the wiki are wrong for many people?

Also, I suppose it bears considering how many people, relatively, are likely to fall in the "right" and "wrong" groups, as you call them. After all, the wiki page is for "principles" not a manual that must be followed by every person regardless of their situation. If the principles are valuable guidance for most people, and it's only a small subset of people who would be disadvantaged by following them blindly, I'd suggest there's still little merit in altering them, but there might be value in creating yet another wiki page for those who could benefit from it.


I don't know the number of people in each category and I doubt anyone can even guess but let me take license and wave my arms like so many other people are doing:

From one of the leading paragraphs of the Wiki:

Wiki wrote:If you have both taxable and tax-advantaged accounts, you generally want to hold bonds in a retirement account and stocks in a taxable account. The advantages for holding stocks in a taxable account include:
In tax-advantaged accounts, all investments are taxed equally (not at all in a tax-free account, or only on withdrawal in a tax-deferred account).
1) In taxable accounts, almost all the return on bonds are taxed at your full rate every year, but most of the return on stocks is tax-favored:

1.1) Increases in stock prices do not lead to any tax until the stocks are sold, which offers an additional means of deferring taxes.

1.2) When the stocks are sold, the tax is usually at the lower rate for long-term capital gains.

1.3) If the stocks pay dividends, they are taxed every year, but qualified dividends are taxed at a lower rate.

2) Ability to harvest losses.

3) Ability to donate appreciated shares to charity, avoiding all taxes.

4) Estate planning; there is a potential for stepped-up cost basis upon death.


All the point in 1 are valid and get accounted for in the "tax loss" spreadsheet that supports Table 1. The numbers from that Table do not support the conclusion underlined in many cases.

Points 2, 3 and 4 have limited applicability. Furthermore 2) implies either a lower return and/or a shorter time frame both of which are already accounted for in the Table 1 support spreadsheet. Double counting should be limited to politicians.

The treatment of tax efficiency of different bond segments is glossed over in the charts. Here's a more realistic comparison from the Wiki itself.

From Table 1:

Table 1 30 yr 25% bracket/top Bracket

Large cap index (S&P?) 0.33/0.52
Low yielding Taxable Bonds/MM 0.75/1.30

From Table 2:

LTCG Tax Efficient Medium Gains (S&P?) 0.37/0.66

Adding 1 & 2 per the instrucions:

Total "S&P" 0.70/1.08
Low yielding Taxable bonds/MM 0.75/1.30

These tax losses are virtually equal and I tried to pick "normal" type data points not cherry pick. The differences are on the same order as the differences in the various equity segments.

Note the "low yielding" Taxable Bond has a pretax return of 3.0% which is almost one full percentage point higher than the Vg TBM Index and 1.5% higher than the 30 years Treasury. The Wiki address the use of past FI performance. SEC yield and actual long term rates seem more prudent. It's not your father's TBM anymore.

The above numbers are based on a thirty year holding period which is the average time a 35 year old would have if he contributed until age 65 and withdrew until death at 95 without ever rebalancing. It is an unrealistically for almost all of us. (No supporting documentation cited.)

Also, I suppose it bears considering how many people, relatively, are likely to fall in the "right" and "wrong" groups, as you call them.


Based on the above presentation mostly from the WIKI itself I would say the answer is that most people are in the wrong group.
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Re: Delete Wiki on Tax-Efficient Asset Location

Post by livesoft » Sun Nov 17, 2013 11:55 am

^OK, I think one has to throw into the mix the nature of changing tax brackets, too. I used to be in the 33% marginal income tax bracket when bond funds paid a higher yield. Now I am in the 25% marginal income tax bracket. And because of loss of tax credits, I pay above 45% at the margin for non-qualified dividends and other ordinary income now even though our effective tax rate is under 10%.

But in the future, I am pretty sure I will pay no more than 15% at the margin and close to 0% overall.

So don't I want equities in taxable and bonds in tax-advantaged now for the ability to sell equities at 0% tax rate in a few years and to avoid almost 50% tax on bond income now?

Folks can wave their hands about taxes for the average person now and later, but taxes are personal. I don't think the Wiki can cover all personal situations. And to my knowledge, the Wiki is not the place for testimonials or descriptions of persional situations either.
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