Improve Tax Efficiency/Expense Ratios? (2025 Resolution)

[phiMD]

Happy new year BHers , I typically don't make resolutions, but this year I'm making financial ones:
-improve tax efficiency (asset placement)
-improve expense ratios

1) Do you see any egregious issues with my asset placement?
2) Is it time to convert taxable mutual funds to ETFs for lower expense ratios? (I'm thinking particularly International 0.12->0.08)
3) Is Vang Treasury Money Market the most efficient for our federal bracket? (I'm assuming 95% state is exempt)
4) Not sure what to do with I-Bonds? They fit my overall AA, expand my tax-deferred space, but I purchased 2020-22, no fixed rate, don't know anything about logistics of selling other than if I sell now I forgo last 3 months of interest, which doesn't seem like a big deal)

thank you in advance,

MFJ: 41, 37 with 3 kiddos
Federal: 35%
LTCG: 20% (+3.8% NIIT)
State: 9.9%

Total Portfolio: 4.65M (no debt, we rent) with ~120K annual expenses
Goal AA: 70/30

Taxable:
1.3M Vang Total US Market (0.04%)
1.3M Vang Total International Market (0.12%)
300K Vang Treasury Money Market (0.09%)
50K Vang Total World Market (0.10%)

Tax-Deferred (401K):
1.0M Vang Intermediate Bond (0.05%)
300K Fidelity US Bond Index (0.025%)

Roth/HSA:
300K Vang 500 Index (0.04%)

I-BONDS:
100K (0.00%)

[sycamore]

1) Do you see any egregious issues with my asset placement?
2) Is it time to convert taxable mutual funds to ETFs for lower expense ratios? (I'm thinking particularly International 0.12->0.08)
3) Is Vang Treasury Money Market the most efficient for our federal bracket? (I'm assuming 95% state is exempt)
4) Not sure what to do with I-Bonds? They fit my overall AA, expand my tax-deferred space, but I purchased 2020-22, no fixed rate, don't know anything about logistics of selling other than if I sell now I forgo last 3 months of interest, which doesn't seem like a big deal)

Happy New Years

1) I see nothing particularly egregious. Though I wouldn't bother with a separate holding of VT when you've got Total US and Total International stock funds already. Selling it and using the lower ER funds would might sense but I'm not sure I'd pay cap gains tax to do it.

2) Yes, I'd convert the Vanguard Total International Stock Market Index Fund from VTIAX to VXUS.

3) Given your Federal tax rate of 35%, I imagine the after-tax yield of Vanguard Muni Money Market Fund (VMSXX) is better than the after-tax yield of Vanguard Treasury Money Market Fund (VUSXX). I would run the numbers to confirm it.

4) I Bonds interest are taxed at Federal tax rates, though I think you can choose between paying the tax (on interest) when you redeem or pay as you go. I'd consider these as a candidate for holding on to if you intend to pay the tax when you redeem and you expect to be in a lower tax bracket at that time.

[CletusCaddy]

$100k annual expenses with 3 kids is impressive. Where do you live?

I’d stop adding to the international stocks in taxable, and instead buy them in tax-sheltered accounts. If that crowds out your bonds I’d buy muni bonds in taxable or MYGA (if you are ok with the illiquidity).

[lazylarry]

That's an impressive portfolio at your age, at this point you're just hyper-optimizing...which is a great place to be. But realistically you will not use all of this money and most will be passed to your children.

1 ) No egregious. Your international exposure is 50% which is higher than some people's exposure.
2) If it is free to convert and you don't have to sell them to convert, sure.
4) Why not keep Ibonds? It's such a small part of your portfolio and can cash when you retire at lower tax rate.

Other thoughts
-are you donating? E.g. via donor advised fund or the stocks you have in taxable.
-tax loss harvesting?
-529?
-retire early?

[phiMD]

Thank you for the encouragement.

Live in PNW, I should correct expenses are ~120K/yo.

-My international exposure is 28% (goal is 30%).

-I've never dealt with ETFs, other than losing the automatic investing option, any other reason not to proceed with a VTIAX to VXUS conversion (0.12 to 0.08 ER), that 0.04 ER is small but represents ~$500 per year. Logically, I would do the same with VTSAX to VTI (Taxable), and VFIAX to VOO (Roth account).

-I vaguely remember there being a spreadsheet I could compare tax efficiency of money market funds, hope someone has a link.

-I would have to sell Total World (and would incur capital gains tax).

-You're right I-bond component is small, just having a 0.0% fixed rate feels suboptimal.

-Plan to retire at 50, yes 529s for all 3 kiddos, and I have TLH when the markets are down.

[Jack FFR1846]

I'd also point out that international in taxable is not optimal. However, I'd be very careful of you could pay a boatload in tax just to optimize. If you can sell any at a loss, you can re-buy a different fund/ETF in your tax advantaged account. So selling international MF in taxable and there, buy VTI is fine. Then in tax advantaged, sell whatever and buy VEA. This avoids any wash sales. You can also sell more international in taxable for gains that match the losses. That gets more out of taxable.

When it comes to tax loss harvesting, ETFs are far better. You KNOW what the price will be where with a MF, you don't. So at least in taxable, I'm 100% ETFs or stocks.

[deanmoriarty]

When it comes to tax loss harvesting, ETFs are far better. You KNOW what the price will be where with a MF, you don't. So at least in taxable, I'm 100% ETFs or stocks.

I never understood this point: TLH with Vanguard MF is such a superior experience for me. I simply put an exchange order for the lots that I want to harvest, and I’m done. I only harvest when it’s worth it, typically when a position is down 5%+, meaning that I am not worried about the position increasing a little bit by market close.

With ETFs, it’s such an anxiety inducing ordeal where I have to execute the sell+buy orders as fast as possible (typically while I’m at work, which adds to the stress), and in virtually all cases the market will have moved by 0.5% against me in those few minutes. This is with Vanguard. Is there a better workflow that I’m not aware of, when using ETFs?

[phiMD]

Thank you. Would be curious to hear of any drawbacks to converting to ETFs (I'm new to them, have only ever used MF). The 0.04 expense ratio difference between Vanguard Total International MF and ETF seems significant ($500/yr with 1.3M). I know Vanguard International is not as tax efficient compared Vanguard Total US, but why is it not suitable for taxable account (especially after the Foreign Tax Credit). I would prefer keeping all bonds in tax-deferred, the international MF option in my tax-deferred/401K is a higher expense ratio one so that's why I keep it in taxable. Directly from BH website "The Vanguard Total International Stock Index Fund is a very suitable candidate for placement in taxable accounts."

Also I will try to do a current yield before tax and after tax for each of my mutual funds (including money market), and share, I vaguely remember there is a spreadsheet where I can plug in my federal, state, and LTCG tax brackets and it yields which is the best after tax yield? My current assumptions until they are disproven:

1) ETFs are more tax efficient than MFs (thus converting to them is logical if I can understand some of the annoyances associated with)
2) Vang Total International is not the "best" for taxable, but is a very suitable one especially after foreign tax credit
3) Vang Treasury Money Market is a reasonable money market in taxable @ federal 35% and state 9.9% (though not sure how it compares to muni money market)

Thx

[RetireGood]

-I vaguely remember there being a spreadsheet I could compare tax efficiency of money market funds, hope someone has a link.

Not sure if this
https://docs.google.com/spreadsheets/d/ ... 1411540421

[retiredjg]

1) Do you see any egregious issues with my asset placement?

No. I think you have done as well as possible with your assets and your available "space".

2) Is it time to convert taxable mutual funds to ETFs for lower expense ratios? (I'm thinking particularly International 0.12->0.08)

This is entirely up to you and which you would rather work with. You could save a little money by using the ETF version, but whether it is worth it is up to you and your preferences.

Do not exchange because of tax-efficiency. The tax efficiency of a Vanguard mutual fund and its ETF counterpart are exactly the same. (Vanguard is an exception to the general statement that ETFs are more tax-efficient than mutual funds.)

3) Is Vang Treasury Money Market the most efficient for our federal bracket? (I'm assuming 95% state is exempt)

I think a small improvement could happen here if you used a tax-exempt money market. I'm not very familiar with what funds are paying what, but I think it is worth a look.

4) Not sure what to do with I-Bonds? They fit my overall AA, expand my tax-deferred space, but I purchased 2020-22, no fixed rate, don't know anything about logistics of selling other than if I sell now I forgo last 3 months of interest, which doesn't seem like a big deal)

I see no reason to do anything with the I Bonds. They are increasing your tax-deferred space which is pretty limited. They diversify your bond allocation. And they are costing you nothing. I'd leave them alone.

My international exposure is 28% (goal is 30%).

There could be a misunderstanding here about what the number means. Generally when talking about international, it is expressed as a percentage of your stocks, not a percentage of your portfolio. A quick look shows that your international stock are almost half of your stocks....which is a pretty high number (but not a ridiculous number). The market weight would be near 40% of stocks (although this number varies some). Not very many people or institutions are using numbers higher than 40% of stocks.

If you actually want 30% of stocks in international, you have too much international. Not suggesting you should sell (unless you have losses), but you can let that allocation drop over time.

I know Vanguard International is not as tax efficient compared Vanguard Total US, but why is it not suitable for taxable account (especially after the Foreign Tax Credit).

There has been a lot of discussion about this recently and opinions vary. Some people are trying to avoid International in taxable because it is less tax-efficient than total stock.

I would prefer keeping all bonds in tax-deferred, the international MF option in my tax-deferred/401K is a higher expense ratio one so that's why I keep it in taxable. Directly from BH website "The Vanguard Total International Stock Index Fund is a very suitable candidate for placement in taxable accounts."

In my opinion, this is the "right" approach for a number of reasons.

One reason is that it would riskier to have all or almost all of your bonds in tax-exempt bonds. Even though you must hold some of your bond allocation in taxable, it is best to have the diversification of some taxable bonds in the portfolio.

A second reason is how the earnings of whatever is in the tax-deferred account are taxed. If you put stocks there, the earnings from the stocks will eventually be taxed at someone's ordinary tax rate. If the stocks are left in taxable, the earnings are taxed at the lower cap gains rate (or not taxed at all if inherited).

For these reasons (as well as the cost of international in your 401k) keeping the bonds in the tax-deferred accounts would be important (to me).

1) ETFs are more tax efficient than MFs (thus converting to them is logical if I can understand some of the annoyances associated with)

Not for Vanguard funds that have both a mutual fund and ETF as asset classes.

[phiMD]

Thank you retiredjg, super helpful! I should clarify I would like International to be 40% of my stock allocation (60% US), you're correct I'm a little up on international: 43.74%, I've gravitated towards it because of it's improved P/E ratio compared to US stocks.

Thank you for the spreadsheet. We're in OR, so 9.9%, and federal 35% + NIIT so 38.8%, does this look correct, winner is Municipal MM Fund @ 3.17% after tax yield vs 2.70% for what I have now (Treasury MM).

After Tax Yield Tax Equivalent Yield Compound TEY Published SEC 7-day Yields Ticker Vanguard Fund Name

2.51% 4.90% 5.01% 4.39% VMFXX Vanguard Federal MM
2.55% 4.97% 5.08% 4.42% VMRXX Vanguard Cash Reserves Federal MM
2.70% 5.26% 5.39% 4.41% VUSXX Vanguard Treasury MM
3.17% 6.18% 6.36% 3.52% VMSXX Vanguard Municipal MM

[retired@50]

Thank you. Would be curious to hear of any drawbacks to converting to ETFs

While the published expense ratios are lower for ETFs, that lower cost doesn't necessarily translate to better fund performance. If you really like the convenience of using mutual funds, then you can stick with them.

See this thread by Bill Bernstein, Boglehead and author of several excellent books adored by forum members. He compares Admiral shares to ETF shares. viewtopic.php?t=368277

Bill's wiki page: https://www.bogleheads.org/wiki/William_Bernstein

Regards,

[phiMD]

thank you retired50, will check it out! In that thread, VTIAX/VXUS was 17 bp over 10 years, now the spread is 4bp/yr, so over 10 years, closer to 40bp, curious if that changes anything?

Separately, do you agree with the analysis favoring muni MM, you have advised me previously, always learn from you.

[retired@50]

Separately, do you agree with the analysis favoring muni MM, you have advised me previously, always learn from you.

Yes. With the marginal rates you mentioned above, it does indeed appear that you should be using the municipal money market fund.

Regards,

[retired@50]

thank you retired50, will check it out! In that thread, VTIAX/VXUS was 17 bp over 10 years, now the spread is 4bp/yr, so over 10 years, closer to 40bp, curious if that changes anything?

You didn't read the whole thread, did you?
See this post.
viewtopic.php?p=6463433#p6463433

Regards,

[phiMD]

I missed that portion, thank you, I'll check it out now.

thank you retired50, will check it out! In that thread, VTIAX/VXUS was 17 bp over 10 years, now the spread is 4bp/yr, so over 10 years, closer to 40bp, curious if that changes anything?

You didn't read the whole thread, did you?
See this post.
viewtopic.php?p=6463433#p6463433

Regards,

[treecat]

viewtopic.php?p=6463433#p6463433

Interesting thread, thanks. To put in another plug to keep with MFs -- those posts seem to indicate the MF vs. ETF returns are kind of a wash. And their differences in return are NOT the same as their differences in expense ratio. Perhaps the ER differences are so small that other factors matter more.

Another annoying thing about ETFs is the implicit penalty you get from the bid-ask spread, which isn't explicitly listed anywhere, and I don't think will show up in the analysis at the above link. Maybe it's pretty small for these ETFs, I don't know. The fact that ETF pricing gets better or worse depending on the time of day you do the trade, and there are warnings to not trade during high-volatility times (and you have to think about when those are)... I use some ETFs but it's just more clunky and there are more things to worry about compared to MFs.

[phiMD]

Good point, I'm also curious why the spread between International Admiral MF and ETF is so large 4bps (typically it's 1-2). Yes, I do like the automation and simplicity of MFs, just don't know the impact of 4bps, will keep reading.. Based on the post (from 2022): VTIAX has advantage over VXUS 7.68/7.62 over 10 years, curious if this still remains the case in 2025, I'll post that question to that thread..

viewtopic.php?p=6463433#p6463433

Interesting thread, thanks. To put in another plug to keep with MFs -- those posts seem to indicate the MF vs. ETF returns are kind of a wash. And their differences in return are NOT the same as their differences in expense ratio. Perhaps the ER differences are so small that other factors matter more.

Another annoying thing about ETFs is the implicit penalty you get from the bid-ask spread, which isn't explicitly listed anywhere, and I don't think will show up in the analysis at the above link. Maybe it's pretty small for these ETFs, I don't know. The fact that ETF pricing gets better or worse depending on the time of day you do the trade, and there are warnings to not trade during high-volatility times (and you have to think about when those are)... I use some ETFs but it's just more clunky and there are more things to worry about compared to MFs.

[Bogle-007]

Thank you. Would be curious to hear of any drawbacks to converting to ETFs (I'm new to them, have only ever used MF). The 0.04 expense ratio difference between Vanguard Total International MF and ETF seems significant ($500/yr with 1.3M). I know Vanguard International is not as tax efficient compared Vanguard Total US, but why is it not suitable for taxable account (especially after the Foreign Tax Credit). I would prefer keeping all bonds in tax-deferred, the international MF option in my tax-deferred/401K is a higher expense ratio one so that's why I keep it in taxable. Directly from BH website "The Vanguard Total International Stock Index Fund is a very suitable candidate for placement in taxable accounts."

Also I will try to do a current yield before tax and after tax for each of my mutual funds (including money market), and share, I vaguely remember there is a spreadsheet where I can plug in my federal, state, and LTCG tax brackets and it yields which is the best after tax yield? My current assumptions until they are disproven:

1) ETFs are more tax efficient than MFs (thus converting to them is logical if I can understand some of the annoyances associated with)
2) Vang Total International is not the "best" for taxable, but is a very suitable one especially after foreign tax credit
3) Vang Treasury Money Market is a reasonable money market in taxable @ federal 35% and state 9.9% (though not sure how it compares to muni money market)

Thx

Regarding the argument for placing international stock in tax-deferred/advantaged instead of taxable, especially for high tax bracket individuals in high tax states -- I found this thread to be very helpful: viewtopic.php?t=391956
Grabiner's posts are especially eye opening.

[123]

Congratulations. You're doing well, great allocation of funds for tax efficient placement. Your portfolio is a great example of how well bogleheads' approach to investing can easily scale up. It is so easy to feel confident about what you're doing when you hold a minimum number of funds.