Fidelity Taxable Account - investment options?

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Topic Author
bonglehead
Posts: 56
Joined: Thu Mar 15, 2012 7:45 am

Fidelity Taxable Account - investment options?

Post by bonglehead »

Hello Bogleheads - looking for your sage advise here.
I am trying to set up automated investing (twice a month from my paycheck) for my taxable account at Fidelity.
For various reasons, an account with Vanguard in not an option for me right now.

I would like to stick to mutual funds only as Fidelity doesnt (yet) allow automated ETF purchases. I have unsuccessfully tried to manually purchase ETFs twice a month - its too much work (2 transactions every two weeks) and i end up waiting for the right time to place the orders.

I have read the wiki and am aware of the Fidelity counterparts of VTSAX and VTIAX but i also read that the Fidelity mutual funds are not as tax efficient as Vanguard funds. Is there any article/post that quantifies the tax drag from using FIDO funds instead of Vanguard funds in taxable? Just trying to understand how big the impact of the tax drag can be. Thank You
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anon_investor
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Re: Fidelity Taxable Account - investment options?

Post by anon_investor »

bonglehead wrote: Mon May 03, 2021 10:33 am Hello Bogleheads - looking for your sage advise here.
I am trying to set up automated investing (twice a month from my paycheck) for my taxable account at Fidelity.
For various reasons, an account with Vanguard in not an option for me right now.

I would like to stick to mutual funds only as Fidelity doesnt (yet) allow automated ETF purchases. I have unsuccessfully tried to manually purchase ETFs twice a month - its too much work (2 transactions every two weeks) and i end up waiting for the right time to place the orders.

I have read the wiki and am aware of the Fidelity counterparts of VTSAX and VTIAX but i also read that the Fidelity mutual funds are not as tax efficient as Vanguard funds. Is there any article/post that quantifies the tax drag from using FIDO funds instead of Vanguard funds in taxable? Just trying to understand how big the impact of the tax drag can be. Thank You
The tax drag will depend on your tax brackets (Fed + state). What are your tax brackets?
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ipdiddly
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Location: MA

Re: Fidelity Taxable Account - investment options?

Post by ipdiddly »

There are a great many variables in investing. In my opinion, tax drag is probably the least important - with the exception that you want to avoid STCG. Consistent saving and time in the market are the most important factors to a successful outcome.
Chip
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Re: Fidelity Taxable Account - investment options?

Post by Chip »

I believe if you want automated investing at Fidelity the only reasonable option for US stocks is FSKAX. Tax efficiency, while generally not as good as VTSAX, is still better than MANY other funds. You might want to quantify the actual tax cost before worrying excessively about it.

Some may suggest FZROX but I wouldn't use this in a taxable account as it isn't portable. You may not want to stay with Fidelity forever.
Topic Author
bonglehead
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Re: Fidelity Taxable Account - investment options?

Post by bonglehead »

anon_investor wrote: Mon May 03, 2021 10:40 am
bonglehead wrote: Mon May 03, 2021 10:33 am Hello Bogleheads - looking for your sage advise here.
I am trying to set up automated investing (twice a month from my paycheck) for my taxable account at Fidelity.
For various reasons, an account with Vanguard in not an option for me right now.

I would like to stick to mutual funds only as Fidelity doesnt (yet) allow automated ETF purchases. I have unsuccessfully tried to manually purchase ETFs twice a month - its too much work (2 transactions every two weeks) and i end up waiting for the right time to place the orders.

I have read the wiki and am aware of the Fidelity counterparts of VTSAX and VTIAX but i also read that the Fidelity mutual funds are not as tax efficient as Vanguard funds. Is there any article/post that quantifies the tax drag from using FIDO funds instead of Vanguard funds in taxable? Just trying to understand how big the impact of the tax drag can be. Thank You
The tax drag will depend on your tax brackets (Fed + state). What are your tax brackets?
My tax bracket is expected to be 24% Fed and 6% State.
MrJedi
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Re: Fidelity Taxable Account - investment options?

Post by MrJedi »

The tax efficiency difference is in the capital gains the fund can realize. ETFs and the Vanguard mutual funds can generally avoid realizing these gains. Other mutual funds may have to realize these gains occasionally, but for index funds it is generally quite low (there is not a lot of trading in a passive index fund compared to an active fund, so less turnover and realized gains by nature).

For FSKAX (Fidelity equivalent of VTSAX), you can view the latest distributions here:
https://fundresearch.fidelity.com/mutua ... /315911693

For 2020, it seems FSKAX did not have to distribute any capital gains, so I would say there probably isn't any real tax efficiency difference.

In 2019 there was 0.127 distributed per share of 82.34. So if you had $10,000 invested, you would have received a distribution of $15.42. I don't see here if these were long term or short term (this can probably be dug up somewhere), but if we assume long term and your tax rate is 15%, then you will have an extra tax bill of $2.31 whereas VTSAX would have been able to simply leave those funds invested without a distribution. So about 2.3 basis points difference.

Same exercise in 2018, 0.338 distributions per share at 69.97 per share. $10,000 invested would have received approx capital gains of $48.31. Assumed capital gains rate of 15% would have an extra tax bill of $7.25. So about 7.3 basis points difference.


The capital gains realized by the fund is going to be unpredictable on a year to year basis, but as you can see for index funds stays relatively small.
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anon_investor
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Re: Fidelity Taxable Account - investment options?

Post by anon_investor »

bonglehead wrote: Mon May 03, 2021 12:24 pm
anon_investor wrote: Mon May 03, 2021 10:40 am
bonglehead wrote: Mon May 03, 2021 10:33 am Hello Bogleheads - looking for your sage advise here.
I am trying to set up automated investing (twice a month from my paycheck) for my taxable account at Fidelity.
For various reasons, an account with Vanguard in not an option for me right now.

I would like to stick to mutual funds only as Fidelity doesnt (yet) allow automated ETF purchases. I have unsuccessfully tried to manually purchase ETFs twice a month - its too much work (2 transactions every two weeks) and i end up waiting for the right time to place the orders.

I have read the wiki and am aware of the Fidelity counterparts of VTSAX and VTIAX but i also read that the Fidelity mutual funds are not as tax efficient as Vanguard funds. Is there any article/post that quantifies the tax drag from using FIDO funds instead of Vanguard funds in taxable? Just trying to understand how big the impact of the tax drag can be. Thank You
The tax drag will depend on your tax brackets (Fed + state). What are your tax brackets?
My tax bracket is expected to be 24% Fed and 6% State.
Are you subject to the NII tax (https://www.bogleheads.org/wiki/ACA_net ... income_tax)?
Topic Author
bonglehead
Posts: 56
Joined: Thu Mar 15, 2012 7:45 am

Re: Fidelity Taxable Account - investment options?

Post by bonglehead »

MrJedi wrote: Mon May 03, 2021 12:49 pm The tax efficiency difference is in the capital gains the fund can realize. ETFs and the Vanguard mutual funds can generally avoid realizing these gains. Other mutual funds may have to realize these gains occasionally, but for index funds it is generally quite low (there is not a lot of trading in a passive index fund compared to an active fund, so less turnover and realized gains by nature).

For FSKAX (Fidelity equivalent of VTSAX), you can view the latest distributions here:
https://fundresearch.fidelity.com/mutua ... /315911693

For 2020, it seems FSKAX did not have to distribute any capital gains, so I would say there probably isn't any real tax efficiency difference.

In 2019 there was 0.127 distributed per share of 82.34. So if you had $10,000 invested, you would have received a distribution of $15.42. I don't see here if these were long term or short term (this can probably be dug up somewhere), but if we assume long term and your tax rate is 15%, then you will have an extra tax bill of $2.31 whereas VTSAX would have been able to simply leave those funds invested without a distribution. So about 2.3 basis points difference.

Same exercise in 2018, 0.338 distributions per share at 69.97 per share. $10,000 invested would have received approx capital gains of $48.31. Assumed capital gains rate of 15% would have an extra tax bill of $7.25. So about 7.3 basis points difference.


The capital gains realized by the fund is going to be unpredictable on a year to year basis, but as you can see for index funds stays relatively small.
Thanks MrJedi - this is very helpful. It seems like the tax drag varies but is not expected to be more than 10bps in worst case scenario. I can live with that :greedy
I also read somewhere that Vanguard has some patented technique that allows them to make their mutual funds as tax efficient as the ETF equivalent. That patent is expiring soon so hopefully FIDO and others should be able to replicate that technique on their end too.
Topic Author
bonglehead
Posts: 56
Joined: Thu Mar 15, 2012 7:45 am

Re: Fidelity Taxable Account - investment options?

Post by bonglehead »

anon_investor wrote: Mon May 03, 2021 1:21 pm
bonglehead wrote: Mon May 03, 2021 12:24 pm
anon_investor wrote: Mon May 03, 2021 10:40 am
bonglehead wrote: Mon May 03, 2021 10:33 am Hello Bogleheads - looking for your sage advise here.
I am trying to set up automated investing (twice a month from my paycheck) for my taxable account at Fidelity.
For various reasons, an account with Vanguard in not an option for me right now.

I would like to stick to mutual funds only as Fidelity doesnt (yet) allow automated ETF purchases. I have unsuccessfully tried to manually purchase ETFs twice a month - its too much work (2 transactions every two weeks) and i end up waiting for the right time to place the orders.

I have read the wiki and am aware of the Fidelity counterparts of VTSAX and VTIAX but i also read that the Fidelity mutual funds are not as tax efficient as Vanguard funds. Is there any article/post that quantifies the tax drag from using FIDO funds instead of Vanguard funds in taxable? Just trying to understand how big the impact of the tax drag can be. Thank You
The tax drag will depend on your tax brackets (Fed + state). What are your tax brackets?
My tax bracket is expected to be 24% Fed and 6% State.
Are you subject to the NII tax (https://www.bogleheads.org/wiki/ACA_net ... income_tax)?
No - I am not subject to the NII tax
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anon_investor
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Re: Fidelity Taxable Account - investment options?

Post by anon_investor »

bonglehead wrote: Mon May 03, 2021 3:15 pm
anon_investor wrote: Mon May 03, 2021 1:21 pm
bonglehead wrote: Mon May 03, 2021 12:24 pm
anon_investor wrote: Mon May 03, 2021 10:40 am
bonglehead wrote: Mon May 03, 2021 10:33 am Hello Bogleheads - looking for your sage advise here.
I am trying to set up automated investing (twice a month from my paycheck) for my taxable account at Fidelity.
For various reasons, an account with Vanguard in not an option for me right now.

I would like to stick to mutual funds only as Fidelity doesnt (yet) allow automated ETF purchases. I have unsuccessfully tried to manually purchase ETFs twice a month - its too much work (2 transactions every two weeks) and i end up waiting for the right time to place the orders.

I have read the wiki and am aware of the Fidelity counterparts of VTSAX and VTIAX but i also read that the Fidelity mutual funds are not as tax efficient as Vanguard funds. Is there any article/post that quantifies the tax drag from using FIDO funds instead of Vanguard funds in taxable? Just trying to understand how big the impact of the tax drag can be. Thank You
The tax drag will depend on your tax brackets (Fed + state). What are your tax brackets?
My tax bracket is expected to be 24% Fed and 6% State.
Are you subject to the NII tax (https://www.bogleheads.org/wiki/ACA_net ... income_tax)?
No - I am not subject to the NII tax
Then you are going to be subject to about 21% (fed+state) tax on those annual capital gains distributions. So less than 10 basis points of tax drag. That is your "convenience fee" to use mutual funds at fidelity. Not a whole lot, but up to you if that cost is worth it.
lazynovice
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Re: Fidelity Taxable Account - investment options?

Post by lazynovice »

Remember any tax loss harvesting you do will offset potential capital gains distributions.

There were no capital gains distributions on FSKAX in April 2020, December 2020 or April 2021 so it may be that Fidelity has figured this issue out.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
UpperNwGuy
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Re: Fidelity Taxable Account - investment options?

Post by UpperNwGuy »

The "tax drag" of the Fidelity index funds is often mentioned here, usually by Vanguard investors, but it really is pretty small and makes negligible difference to your investment returns.
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1789
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Re: Fidelity Taxable Account - investment options?

Post by 1789 »

I would invest FXAIX - SP500 Index fund in a Fidelity taxable account.
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