Need Tax Efficiency in Taxable Account

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livesoft
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Re: Need Tax Efficiency in Taxable Account

Post by livesoft »

smartinvestor2020 wrote: Sat Feb 01, 2025 8:49 am You must have bought a lot stocks just before the 2008 crash in order to have that much in carry over losses. A six figure loss from the 2008 crash means you bought over $200k of VTI at or near the peak before the crash and sold at or near the bottom. That type of contribution in one year is unusual for a middle class investor. Perfectly TLHing a major crash is also unusual. So you probably contributed even more than $200k across a few years prior to the crash. This is not diligent TLHing. It requires unusual contributions in a taxable account. The shares of a similar ETF that replaced VTI should be up almost 10 fold, not to mention all the contributions you must have made after the crash. Assuming the same contribution rate after the crash would mean you’re sitting on more than huge gains today even after using the 6 figure loss to realize big gains.
I just want to note that you have a great imagination. I tax-loss harvested VTSAX on April 9, 2009 and bought VLCAX shares. I have not sold those shares and I have not reinvested the dividends since I used the dividends for other things. Even though VLCAX has outperformed BOTH VTSAX (total stock market index) and VFIAX (S&P500 index) since April 9, 2009 it HAS NOT gone up almost 10-fold (unless 7.5-fold is almost 10-fold). Morningstar.com has [with dividends reinvested]
Image

As frugal investors since 1982, yes, we bought a lot of mutual fund shares before 2009 and since.

Anyways, people have to start somewhere and sometime. I am an optimist and I don't believe in whining and thinking "Oh, you can't do that!"

Another update: Today I am selling some shares to raise cash for expenses. I have decided to sell the shares of VEU that I bought in a tax-loss-harvesting move on March 25, 2009. Can you guess how much the gains will be? 10X? 5X? 2X? Nope, the realized gain after almost 16 years of buy-and-hold is a mere 1X. LOL! I am such a terrible investor!
Last edited by livesoft on Mon Feb 03, 2025 12:13 pm, edited 1 time in total.
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smartinvestor2020
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Re: Need Tax Efficiency in Taxable Account

Post by smartinvestor2020 »

livesoft wrote: Sun Feb 02, 2025 4:09 pm
smartinvestor2020 wrote: Sat Feb 01, 2025 8:49 am You must have bought a lot stocks just before the 2008 crash in order to have that much in carry over losses. A six figure loss from the 2008 crash means you bought over $200k of VTI at or near the peak before the crash and sold at or near the bottom. That type of contribution in one year is unusual for a middle class investor. Perfectly TLHing a major crash is also unusual. So you probably contributed even more than $200k across a few years prior to the crash. This is not diligent TLHing. It requires unusual contributions in a taxable account. The shares of a similar ETF that replaced VTI should be up almost 10 fold, not to mention all the contributions you must have made after the crash. Assuming the same contribution rate after the crash would mean you’re sitting on more than huge gains today even after using the 6 figure loss to realize big gains.
I just want to note that you have a great imagination. I tax-loss harvest VTSAX on April 9, 2009 and bough VLCAX shares. I have not sold those shares and I have not reinvested the dividends since I used the dividends for other things. Even though VLCAX has outperformed BOTH VTSAX (total stock market index) and VFIAX (S&P500 index) since April 9, 2009 it HAS NOT gone up almost 10-fold (unless 7.5-fold is almost 10-fold). Morningstar.com has [with dividends reinvested]
Image

As frugal investors since 1982, yes, we bought a lot of mutual fund shares before 2009 and since.

Anyways, people have to start somewhere and sometime. I am an optimist and I don't believe in whining and thinking "Oh, you can't do that!"
If you sold a us stock market ETF like VTI at or near bottom and replaced it with a very similar ETF like ITOT and reinvested dividends, you should be up somewhere near 10 times in final balance today. Remember the S&P 500 bottomed around 670ish in march of 2009, and it is up around 6000 today without reinvesting dividends. I did not do the math precisely so I don’t know if that’s 9.5x or 10.5x or 11.5x with dividends reinvested, but my message is the same. You should be sitting on large gains.

I am not against saving a lot and I’m not discouraging frugality or high savings rates. I have lived on $25k per year for over a decade and, I’ve never been able to save $200k in one year. I am only stating that the MIDDLE class cannot and I repeat CANNOT contribute $200k of their own earned income in 1 year with an income below that, unless they are pulling from or living on some other source other than their earned income. And this doesn’t even take into account 401(k) and Roth IRAs that they should be maximizing before the taxable account.

To clarify the $200k number, I have assumed the investor started investing after 2002 and bought shares near highs before the 2008 crash. This is the only way you can mathematically realize a 6 figure loss from the 2008-09 crash. The other way as you now clarified is if you bought shares near 2000 before the tech bubble burst AND 2007 before the financial crisis crash. But then I wonder why you didn’t TLH in both crashes or maybe you did and I misunderstood the 6 figure loss.

In either case, it involves a very high contribution rate in TAXABLE accounts which many middle class investors cannot afford after maxing out tax advantaged accounts.

Therefore taxable accounts are likely to be smaller for the middle class. So even with diligent TLHing, the average middle class investor is likely sitting on big gains. So a big purchase will come with big taxes.
livesoft
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Re: Need Tax Efficiency in Taxable Account

Post by livesoft »

Hmmm, maybe we were still nursing our losses from 2000? After all, we could only use up $3,000 a year to offset ordinary income and 9 x $3,000 is a mere $27,000. All that NT, JDSU, WCOM, and so on can hurt. :twisted:

I never made close to $200K in compensation in any year I was working. My spouse and I combined occasionally had AGI a little above $200K. But we lived off her income and invested my income. And yes, we had kids, so were not DINKs. Ask me how I saved money on taxes. ;)
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bloom2708
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Re: Need Tax Efficiency in Taxable Account

Post by bloom2708 »

livesoft wrote: Fri Jan 31, 2025 5:04 pm
bloom2708 wrote: Fri Jan 31, 2025 4:55 pmFine. You have $200k in taxable. It drops to $100k. You need to spend $150k for a house purchase.

Where do you get $50k? 401k loan? Roth IRA contribution? .
I like the contrived scenario, but many people would re-think a house purchase if stock markets dropped 50%. Even so the Bogleheads.org wiki article discusses the scenario.
Here is another scenario. I have 3 daughters. All of marrying age.

Each wedding will cost $30k (3 x $30k = $90k). By the "all stocks in taxable" logic I should keep ~$100k in all stock indexes to pay for the weddings?

There is virtually no chance that the stock market drops. I would just tell them to delay their weddings as the money will come back if I wait long enough. :D

I'm fine with losing this one. Everybody do what they think is best. Over optimizing can happen.
livesoft
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Re: Need Tax Efficiency in Taxable Account

Post by livesoft »

bloom2708 wrote: Mon Feb 03, 2025 12:05 pm
livesoft wrote: Fri Jan 31, 2025 5:04 pm
I like the contrived scenario, but many people would re-think a house purchase if stock markets dropped 50%. Even so the Bogleheads.org wiki article discusses the scenario.
Here is another scenario. I have 3 daughters. All of marrying age.

Each wedding will cost $30k (3 x $30k = $90k). By the "all stocks in taxable" logic I should keep ~$100k in all stock indexes to pay for the weddings?

There is virtually no chance that the stock market drops. I would just tell them to delay their weddings as the money will come back if I wait long enough. :D

I'm fine with losing this one. Everybody do what they think is best. Over optimizing can happen.
OK, I'll contrive a wedding scenario: I have 3 daughters. Each wedding will cost $30K. I have a million dollars in a taxable account all in equities. Paying for weddings is not an issue if the stock market drops 50%.
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bloom2708
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Re: Need Tax Efficiency in Taxable Account

Post by bloom2708 »

livesoft wrote: Mon Feb 03, 2025 12:25 pm
bloom2708 wrote: Mon Feb 03, 2025 12:05 pm

Here is another scenario. I have 3 daughters. All of marrying age.

Each wedding will cost $30k (3 x $30k = $90k). By the "all stocks in taxable" logic I should keep ~$100k in all stock indexes to pay for the weddings?

There is virtually no chance that the stock market drops. I would just tell them to delay their weddings as the money will come back if I wait long enough. :D

I'm fine with losing this one. Everybody do what they think is best. Over optimizing can happen.
OK, I'll contrive a wedding scenario: I have 3 daughters. Each wedding will cost $30K. I have a million dollars in a taxable account all in equities. Paying for weddings is not an issue if the stock market drops 50%.
Yes. 1. Get $1 million dollars in taxable. 2. Only need to spend 10-20% ever. I had added that to my Investment Policy Statement. :moneybag
livesoft
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Re: Need Tax Efficiency in Taxable Account

Post by livesoft »

Steve Martin talked about this many years ago:
https://www.youtube.com/watch?v=zXmQW_aqBks
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GaryA505
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Re: Need Tax Efficiency in Taxable Account

Post by GaryA505 »

I have a related question. I have a considerable amount of cash sitting in FZEXX (municipal MM) in a taxable account at Fidelity. I want to keep this in short-term investments because it's probably going to be used for purchasing SPIA contracta, major home improvements, and stuff like that over the next 2-5 years or so. And, for this year and maybe next year, I am also trying to stay under IRMAA income limits and Roth income limits. I do not need any income from these assets for at least 5 years or so. Muni income from FZEXX gets added back into API for IRMAA MAGI so I'm considering BOXX (I know the controversy and risks).

Any other ideas?
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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dratkinson
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Post by dratkinson »

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.
Last edited by dratkinson on Mon Feb 10, 2025 4:47 am, edited 1 time in total.
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.
VanGar+Goyle
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Re: Need Tax Efficiency in Taxable Account

Post by VanGar+Goyle »

livesoft wrote: Fri Jan 31, 2025 5:40 am The most tax efficient option for fixed income in a taxable account is absolutely no fixed income in a taxable account.

Put your cash in a tax-deferred account: https://www.bogleheads.org/wiki/Placing ... ed_account
You may have to explain this again, as if I am a 5 year old who has not learned to divide zero by zero. :oops:
Is not a 100% tax free Muni more tax efficient than paying ordinary income taxes on a tax-deferred account?
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