Difference between ETFs/MFs that throw off income and those which recapitalize

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TomatoKetchup
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Difference between ETFs/MFs that throw off income and those which recapitalize

Post by TomatoKetchup » Thu Mar 14, 2019 9:12 am

Greetings, all,

I am very new to investing, and find myself in the fortunate position that I can max my retirement accounts and also invest. I have a salary large enough to live on, and I would prefer to recapitalize any dividends currently on my funds.

I do not know the difference between funds. I have, for instance, access to VINIX through my employer 401k, and I’m making my contribution to it while I can. (VINIX has a min 5mil initial investment and is popular with 401ks, apparently)

I’m personally bought into VIGAX, VEMAX, VGX, VTSAX, etc.

I understand the basics of expense ratios, but I don’t know which of these funds will throw off income, and I do not want taxable income from any of my investments right now. I need to minimize my taxable income.

I am happy to RTM if someone can point me to a good resource.

Thank you, and you all have created a wonderful community I hope to contribute to.

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Earl Lemongrab
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Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by Earl Lemongrab » Thu Mar 14, 2019 8:41 pm

All US broad market mutual funds distribute dividends at a minimum. The law requires that any dividends or capital gains in taxable accounts be distributed. If you really can't have any income, you'd have to look for stocks with no dividends. There might be specialty mutual funds that invest that way as well, but you won't have the kind of diversification as the funds you've mentioned.

What exactly is the reason for all this? Your 401(k) doesn't matter of course as the distributions aren't taxable now. Some products in those plans, called CITs, don't have separate dividends but reflect that in the share price.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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TomatoKetchup
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Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by TomatoKetchup » Thu Mar 14, 2019 11:04 pm

Interesting. So no matter what, all the ETFs and MFs our of Vanguard, etc, will have dividends? This will be the first year I have had investments so I’m not sure what the tax consequences are but know I want to reduce my taxable income as much as possible.

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Earl Lemongrab
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Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by Earl Lemongrab » Thu Mar 14, 2019 11:30 pm

TomatoKetchup wrote:
Thu Mar 14, 2019 11:04 pm
Interesting. So no matter what, all the ETFs and MFs our of Vanguard, etc, will have dividends? This will be the first year I have had investments so I’m not sure what the tax consequences are but know I want to reduce my taxable income as much as possible.
In the US it's the law. Broad US funds will have around 2% dividends per year. Now, those are almost all qualified dividends, and somewhere between 15%-20% rate. Most people will be in the 15% bracket.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

not4me
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Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by not4me » Fri Mar 15, 2019 6:01 am

TomatoKetchup wrote:
Thu Mar 14, 2019 11:04 pm
Interesting. So no matter what, all the ETFs and MFs our of Vanguard, etc, will have dividends? This will be the first year I have had investments so I’m not sure what the tax consequences are but know I want to reduce my taxable income as much as possible.
OP, just wanted to stress a point that the other poster mentioned. But since you are unfamiliar with this, I thought the terminology might not be clear. Separate from the difference in income/recapitalize, be sure you understand the difference in investing in tax deferred accounts (401k, IRA, etc) & currently taxable accounts. The tax treatment & when those taxes are applied is different in those cases.

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oldcomputerguy
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Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by oldcomputerguy » Fri Mar 15, 2019 6:14 am

TomatoKetchup wrote:
Thu Mar 14, 2019 9:12 am
I am happy to RTM if someone can point me to a good resource.
Welcome to the forum.

Given your statement that you "do not know the difference between funds", I'd suggest some very basic reading on the idea of asset classes and why you would want to invest in particular classes (and how much to invest in each one). I recommend "The Bogleheads' Guide to Investing" to get a good grasp of the basics. Then take a look at Mr. Bogle's "Little Book of Common-Sense Investing".

To get an idea of the best way to minimize taxes, you might check out the wiki's page on tax-efficient fund placement.

Feel free to come back here and ask questions. The people here are very smart and very willing to help new investors.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

3-20Characters
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Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by 3-20Characters » Fri Mar 15, 2019 6:35 am

There are people here much more expert than me. They will chime in to correct me if I’m wrong. My approach over the years (which may be of use to you) has been to do the following:

- Maximize available tax deffered contributions (401k, SEP, IRA, HSA, etc). For other than Roth, this reduces income/taxes (and maximizes ACA subsidies— if they apply).

- Use the least tax efficient funds in tax deffered accounts and most tax efficient funds in taxable. Least tax efficient tend to be fixed asset funds but also REITs, and some stock funds (too many to go over). If you go with the 3-fund portfolio, I believe that bogleheads consider these funds tax efficient and suitable for holding in taxable:

Code: Select all

VTSAX	Vanguard Total Stock Market Index Fund Admiral Shares
VTIAX	Vanguard Total International Stock Index Fund Admiral Shares
Having the above funds in taxable also makes for possible tax loss harvesting and tax gain harvesting opportunities.

- If you use non-Vanguard funds, ETFs may be better in taxable, but I use Vanguard funds so I’ve never properly researched this part.

- If you are in a high tax bracket and wish to hold lots of fixed in taxable, it may be tax efficient to hold muni bonds.

Tax-efficient fund placement - Bogleheads
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Topic Author
TomatoKetchup
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Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by TomatoKetchup » Fri Mar 15, 2019 8:12 am

I recommend "The Bogleheads' Guide to Investing" to get a good grasp of the basics. Then take a look at Mr. Bogle's "Little Book of Common-Sense Investing".

To get an idea of the best way to minimize taxes, you might check out the wiki's page on tax-efficient fund placement.

Feel free to come back here and ask questions. The people here are very smart and very willing to help new investors.
Thank you so much; I’ve just gotten the book and am beginning it now.

Topic Author
TomatoKetchup
Posts: 6
Joined: Thu Mar 14, 2019 9:00 am

Re: Difference between ETFs/MFs that throw off income and those which recapitalize

Post by TomatoKetchup » Sat Mar 16, 2019 2:39 pm

[/quote]
I recommend "The Bogleheads' Guide to Investing" to get a good grasp of the basics. Then take a look at Mr. Bogle's "Little Book of Common-Sense Investing".

To get an idea of the best way to minimize taxes, you might check out the wiki's page on tax-efficient fund placement.
[/quote]

Thanks for this. I just bought and read the Bogleheads Guide; it was incredibly helpful. Then I read the tax-efficient fund placement and asset allocation articles here.

This helps me understand this element, but now I have new questions (which is probably good!) I'll thank you all for this and start a new thread for the other questions.

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