PNWpilot wrote: Fri Jan 31, 2025 4:59 am
I currently own two funds in a Vanguard taxable brokerage:
-Vanguard Federal Money Market Fund (VMFXX) - consists of EF plus major expenses anticipated in the 3-5 years (new car, home repairs, etc.)
-Vanguard Total World Index Fund - (VTWAX)
VTSAX might be a little more tax-efficient. Why?
--VTWAX is ~88% QDI; search: https://www.google.com/search?&q=What+i ... +dividends
--VTSAX is ~95% QDI: https://www.google.com/search?q=What+is ... +dividends
-Portfolio compositions: 60/40 (VMFXX/VTWAX) - I do not pay state income tax (Washington)
Without increasing my exposure to equities, I want to explore more tax-efficient options for fixed-income. Here are my thoughts:
Vanguard High-Yield Tax Exempt Fund Investor Shares (VWAHX) - The taxable equivalent yield makes this advantageous BUT it introduces more risk than VMFXX.
Recall VWAHX may exposure you to 20% AMT issues. Would it be a problem if tax effect caused its yield to drop 20%?
--VWAHX (HY muni) SEC yield: 4.08%: 4.08 x (1 -.20)=3.26% (?); see: https://investor.vanguard.com/investmen ... file/vwahx
Vanguard Tax-Exempt Bond Fund Admiral Shares (VTEAX) - Again, the taxable equivalent yield is favorable but with more risk.
Risk, when it appears, can be TLHed.
VWLTX should produce more after-tax income than VTEAX. Why? Its SEC yield and risk are slightly higher. Risk, when it appears, can be TLHed.
--VWAHX (HY muni) SEC yield, less 25% AMT exposure: 3.26% (?)
--VWITX (IT muni) SEC yield: 3.40%; see: https://investor.vanguard.com/investmen ... file/vwitx
--VTEAX (IT index muni) SEC yield: 3.50%; see: https://investor.vanguard.com/investmen ... file/vteax
--VWLTX (LT muni) SEC yield: 3.78%; see: https://investor.vanguard.com/investmen ... file/vwltx
--VMFXX SEC yield (your anchor): 4.27%: https://investor.vanguard.com/investmen ... file/vmfxx
--VBTLX SEC yield (my anchor): 4.55%; see: https://investor.vanguard.com/investmen ... file/vbtlx
To compare after-tax income of munis vs taxable bonds, can either/both:
--Compare muni TEY (taxable-equivalent yield) to taxable SEC yield. Muni TEY = SEC yield/(1 -fed tax bracket -NIIT*). (* If applicable.)
--Create sample tax return for each bond candidate.
Assume annual bond dividends = assumed bond principal x SEC yield.
Tax s/w handles tax code effects.
After-tax income = fed taxable income + muni dividends (not included in fed taxable income) -fed tax owed.
Alpha Architect 1-3 Month Box ETF (BOXX) - Takes interest and converts it to LTCG....allegedly. This forum has identified possible tax problems with the strategy. Plus, I do not understand box spreads or the "straddle" methodology this ETF uses.
Not knowledgeable, can't advise.
I am tentatively considering moving my EF to BOXX and splitting the remainder of my fixed income allocation to VTEAX, VWAHX, and VMFXX. Using VMFXX as an anchor, I could get significantly more tax efficiency with the other funds.
Thoughts?
See inline comments in above.
Idea: this works for me.
--1st-tier EFs. Keep 1yr of livings expenses here. Be aware that all short term investments will return less when inverted yields return to normal. Meaning: you can't expect VMFXX's yield to remain high, so you may need to consider other safe investments to maintain yield (5yr CD ladder,...). Or get your money from another source. How?
FOMO (fear of missing out). I worried about cash in ~0% bank accounts, until I set up my creditors' ABP (automatic bill payments) plans to be paid by 2% cashback CC where I can, and from checking where I must. So now my 1yr of 1st-tier money gets a ~2%/yr boost* from CC cashback. (* CC cashback is tax-free since it's considered to be a price reduction, not income: no 1099 issued.)
--Extended-tier EFs, for planned expenses. Since bonds can lose 5-15% during a crash, increase allocation to ~120% (=1/(1-.15)) of planned need and stop worrying. Worse case, the money should be there when needed, but maybe with a CL.
I keep 3yrs of livings expenses in VWIUX: safer than VWLUX, approximately the same after-tax income as TBM in my 22% fed tax bracket, planned for new car/roof/.... I started with VWITX before VTEAX existed; never worried me enough to TLH/change.
--Major bonds in taxable. I compare all bonds to TBM. Why? TBM is the 3fund portfolio's chosen bonds. Based on TEY, I look for the most normally-expected after-tax income (after inverted-yield environment returns to normal), with only slightly more risk then TBM (risk can be TLH'd).
To account for tax code effects (the right hand giveth, the left hand taketh away), create a sample tax return for each bond candidates. Why? It should answer your tax questions: are you affected by AMT/other tax code issues, how much is the expected tax hit?
Recall ACA tax credit and SS IRMAA are handled external to fed tax refund.
Edit. Second thoughts, clarity.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned. | AA: 50/50; taxable: 3fund w/munis; Roth: recommended stock funds for expected higher growth.