VBIAX- balanced fund 60/40.

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cowboy737
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VBIAX- balanced fund 60/40.

Post by cowboy737 » Wed Aug 08, 2018 8:26 pm

Is it good option to have it in taxable brokerage accoung? Thoughts

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wjo
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Re: VBIAX- balanced fund 60/40.

Post by wjo » Wed Aug 08, 2018 8:38 pm

While not terrible, you'd probably be better of with the tax managed balanced index fund from Vanguard, VTMFX.

In general, multi-asset, self-balancing funds are better for tax-sheltered accounts as their internal rebalancing can be tax inefficient. It is usually better to hold separate clases of funds (e.g., domestic stock, international stock, bonds...) in a taxable account so you can better control the tax impact of each fund. Have a look at the wiki here for information on tax-efficient investing.

AerialWombat
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Re: VBIAX- balanced fund 60/40.

Post by AerialWombat » Wed Aug 08, 2018 8:40 pm

The GABHA (Generally Accepted Boglehead Advice) that I've found on the forum here is to replicate something like the Vanguard Balanced Index Fund Admiral Shares (VBIAX) by holding equivalent individual funds yourself at the same ratio. So, Vanguard Total Bond and Total Stock at the same ratio, for example. The rationale of this is for tax loss harvesting, since you're talking taxable account.

PFInterest
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Re: VBIAX- balanced fund 60/40.

Post by PFInterest » Wed Aug 08, 2018 9:00 pm

cowboy737 wrote:
Wed Aug 08, 2018 8:26 pm
Is it good option to have it in taxable brokerage accoung? Thoughts
Yes, but you offer no information about alternatives.
Also please edit your post to spell accounts correctly.

PFInterest
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Re: VBIAX- balanced fund 60/40.

Post by PFInterest » Wed Aug 08, 2018 9:01 pm

AerialWombat wrote:
Wed Aug 08, 2018 8:40 pm
The GABHA (Generally Accepted Boglehead Advice) that I've found on the forum here is to replicate something like the Vanguard Balanced Index Fund Admiral Shares (VBIAX) by holding equivalent individual funds yourself at the same ratio. So, Vanguard Total Bond and Total Stock at the same ratio, for example. The rationale of this is for tax loss harvesting, since you're talking taxable account.
You didn't read the part about taxes did you?

cowboy737
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Re: VBIAX- balanced fund 60/40.

Post by cowboy737 » Wed Aug 08, 2018 9:35 pm

I am new to forum and learning as i am going through forum so please bear with me if my questions sound dumb. So its better to go with total stock and total bomd funds. If sombody can answer why so? Whats the disadvantage of balance fund?

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grabiner
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Re: VBIAX- balanced fund 60/40.

Post by grabiner » Wed Aug 08, 2018 9:56 pm

wjo wrote:
Wed Aug 08, 2018 8:38 pm
While not terrible, you'd probably be better of with the tax managed balanced index fund from Vanguard, VTMFX.
That depends on your tax bracket. If you want to hold only one fund in taxable, Tax-Managed Balanced might be better in a 24% or higher bracket. (In addition, the allocations are not the same; Tax-Managed Balanced is 49% stock and has no small-caps.)

However, it is usually better not to use any balanced fund in a taxable account. If you have a balanced fund and want to sell bonds (to hold fewer bonds, or bonds in a different account, or a different type of bonds), you must sell stocks at the same time, paying an unnecessary capital-gains tax. Thus, if you like Balanced Index, you could hold Total Stock Market and Total Bond Market, and then, if you move to New York, sell Total Bond Market for little capital gain to buy New York Long-Term Tax-Exempt.
Wiki David Grabiner

cowboy737
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Re: VBIAX- balanced fund 60/40.

Post by cowboy737 » Wed Aug 08, 2018 10:12 pm

Yes i will be in 24% or higher tax bracket. I am in texas and dont have any plan to move. My understanding was to have balance fund and put it on auto every month so i dont have to balance it myself. Seems like its better to have total stock and total bond fund rather.

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wjo
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Re: VBIAX- balanced fund 60/40.

Post by wjo » Wed Aug 08, 2018 11:49 pm

cowboy737 wrote:
Wed Aug 08, 2018 10:12 pm
Yes i will be in 24% or higher tax bracket. I am in texas and dont have any plan to move. My understanding was to have balance fund and put it on auto every month so i dont have to balance it myself. Seems like its better to have total stock and total bond fund rather.
Yes, as Grabiner wrote, it depends a bit on your marginal tax bracket. Since you will be at 24%, tax managed balanced would be the one fund if you want one. It is not a bad choice at all.

However, the point about why to use separate funds is a bit more complicated. Grabiner gives a good basic example for flexibility, but if you are staying in Texas, here's a more pertinent example. Suppose you have $100k in the fund and stocks go up by 10%. Your fund, let's say 50/50 stock to bond, would have the stock portion go up by $5k. To maintain a 50/50 ratio, the fund would have to sell $2.5k in stocks so the fund would be still be at $105k, but with $52.5k in stocks and $52.5k in bonds. The $2.5k sale would be a taxable event the fund would pass on to you.

If instead of holding the balanced fund and you invested $50k in a stock fund and $50k in a bond fund, the stocks would also go up by 10% or $5k. You have the choice to rebalance by selling stocks, and if so would incur the same taxable event. However, you also have the choice of not rebalancing, keeping the stock gain, and not incurring the taxes. This has value to you - you could delay selling the stocks until a year when you have offsetting losses, limiting the tax cost. More likely, you could just rebalance back to 50/50 by directing new investments in bonds. For example, you have $5k to invest - rather than splitting between stocks and bonds, you would buy $5k in bonds, holding $55k in stocks (with the $5k gain) and $55k in bonds to keep your 50/50 ratio.

In this way, keeping classes of funds separate in a taxable account is generally seen as superior to holding a fund-of-funds - you have more control of events that cause taxes. This can reduce the total cost of owning the funds and increase long-term returns by reducing the drag of paying taxes.

Welcome to the forum and keep learning!

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BL
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Re: VBIAX- balanced fund 60/40.

Post by BL » Thu Aug 09, 2018 12:23 am

The answers you are getting deal with the "best" choice vs. an "ok" choice.

Having taxable bonds (such as in a Balanced fund or individually) means you will be taxed on the dividends each year at your tax rate, 24%. Contrast that with Total Stock Market, where you probably would have 0% Capital Gains and most of the approximately 2% dividends would be Qualified, thus taxed at the lower Capital Gains rate. So if you could figure out a way to have your bonds in a 401k or trad. IRA, or even a Roth, there would be no bond taxes until you withdraw in retirement.

As an example, if you had Total Stock Market in taxable, Total International in Roth IRA, and bonds + some of both of the other 2 in your 401k (where you could rebalance either by selling or when you add money), you would have a tax-efficient portfolio that would have either one or two funds in two of the accounts.

On the other hand, what you would like to do is better that many retirement portfolios that have shown up here done by "professionals" (salesmen/saleswomen).

Miriam2
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Re: VBIAX- balanced fund 60/40.

Post by Miriam2 » Thu Aug 09, 2018 1:02 am

wjo wrote: Yes, as Grabiner wrote, it depends a bit on your marginal tax bracket. Since you will be at 24%, tax managed balanced would be the one fund if you want one. It is not a bad choice at all.

However, the point about why to use separate funds is a bit more complicated. Grabiner gives a good basic example for flexibility, but if you are staying in Texas, here's a more pertinent example. Suppose you have $100k in the fund and stocks go up by 10%. Your fund, let's say 50/50 stock to bond, would have the stock portion go up by $5k. To maintain a 50/50 ratio, the fund would have to sell $2.5k in stocks so the fund would be still be at $105k, but with $52.5k in stocks and $52.5k in bonds. The $2.5k sale would be a taxable event the fund would pass on to you.

If instead of holding the balanced fund and you invested $50k in a stock fund and $50k in a bond fund, the stocks would also go up by 10% or $5k. You have the choice to rebalance by selling stocks, and if so would incur the same taxable event. However, you also have the choice of not rebalancing, keeping the stock gain, and not incurring the taxes. This has value to you - you could delay selling the stocks until a year when you have offsetting losses, limiting the tax cost. More likely, you could just rebalance back to 50/50 by directing new investments in bonds. For example, you have $5k to invest - rather than splitting between stocks and bonds, you would buy $5k in bonds, holding $55k in stocks (with the $5k gain) and $55k in bonds to keep your 50/50 ratio.

In this way, keeping classes of funds separate in a taxable account is generally seen as superior to holding a fund-of-funds - you have more control of events that cause taxes. This can reduce the total cost of owning the funds and increase long-term returns by reducing the drag of paying taxes.

Welcome to the forum and keep learning!
Nice, very helpful post, thank you WJO :happy

lifeisinmirrors
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Re: VBIAX- balanced fund 60/40.

Post by lifeisinmirrors » Thu Aug 09, 2018 5:01 am

For at least the past ten years though, VBIAX hasn't distributed any capital gains. I think it's probably the best of Vanguard's allocation funds for a taxable account. No international stocks though.

PFInterest
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Re: VBIAX- balanced fund 60/40.

Post by PFInterest » Thu Aug 09, 2018 8:13 am

lifeisinmirrors wrote:
Thu Aug 09, 2018 5:01 am
For at least the past ten years though, VBIAX hasn't distributed any capital gains. I think it's probably the best of Vanguard's allocation funds for a taxable account. No international stocks though.
taxable quarterly dividends......

cowboy737
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Re: VBIAX- balanced fund 60/40.

Post by cowboy737 » Thu Aug 09, 2018 9:42 am

Thank you guyz, it make so much sense now. I never thought about tax implication in details. Wish i could have found this forum earlier. Anyway its better late than never.

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wjo
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Re: VBIAX- balanced fund 60/40.

Post by wjo » Thu Aug 09, 2018 11:09 am

Miriam2 wrote:
Thu Aug 09, 2018 1:02 am
Nice, very helpful post, thank you WJO :happy
You're most welcome.

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grabiner
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Re: VBIAX- balanced fund 60/40.

Post by grabiner » Thu Aug 09, 2018 7:42 pm

wjo wrote:
Wed Aug 08, 2018 11:49 pm
However, the point about why to use separate funds is a bit more complicated. Grabiner gives a good basic example for flexibility, but if you are staying in Texas, here's a more pertinent example. Suppose you have $100k in the fund and stocks go up by 10%. Your fund, let's say 50/50 stock to bond, would have the stock portion go up by $5k. To maintain a 50/50 ratio, the fund would have to sell $2.5k in stocks so the fund would be still be at $105k, but with $52.5k in stocks and $52.5k in bonds. The $2.5k sale would be a taxable event the fund would pass on to you.
Actually, that's not my point. Balanced index funds can rebalance with new money, so they don't generate much in capital gains. (Target-date funds often distribute capital gains from rebalancing after their target date; more money is being withdrawn than contributed now in Target Retirement 2015.) Similarly, if you have a taxable account while you are working, you can rebalance with new money.

My point is that you are locked into the allocation of your fund. If you decide to hold more bonds in your 401(k) and IRA (say, because rising rates have increased the tax cost of holding bonds in a taxable account, or because you 401(k) has better bond than stock funds), you need to sell bonds in your taxable account to keep the right overall allocation. If your risk tolerance changes and you want to hold fewer bonds, you need to sell some bonds. If your tax bracket changes and you want to switch from munis to taxable bonds, or vice versa, you will need to sell your bonds even though you are buying other bonds. Any of these incurs a tax cost if you hold the bonds in a balanced funds.
Wiki David Grabiner

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