Best placement for Small Cap Value? Taxable, Roth or 403b7?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
vpotus
Posts: 112
Joined: Sat May 04, 2013 4:08 pm
Location: Behind you...

Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by vpotus » Sun Aug 12, 2018 10:37 pm

Hi all! I recently read at the wiki that "The Vanguard Small Value Index Fund is a suitable candidate for placement in taxable accounts." https://www.bogleheads.org/wiki/Vanguar ... tributions. That surprised me. In my situation I have a taxable account but I also have a 403b7 tax-deferred account (I teach) and I also have a Roth. Although taxable is "suitable", wouldn't my Roth or 403b7 would be better choices for the SCV? Thank you in advance for your advice. VP

Cop51
Posts: 99
Joined: Sun Jul 09, 2017 12:42 am
Location: NJ

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Cop51 » Mon Aug 13, 2018 1:07 am

Most advice you get here is you probably shouldn’t even have a taxable account unless you’re maxing out the 18,500 in 403b and the ROTH 5500 for both you and spouse if married. That being said ROTH would be the best place to put them vs 403b.

HEDGEFUNDIE
Posts: 252
Joined: Sun Oct 22, 2017 2:06 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by HEDGEFUNDIE » Mon Aug 13, 2018 3:14 am

Tax deferred accounts (including Roth) are always better for all investments from a tax perspective.

But if you have maxed out your contributions to tax deferred accounts and you still want to save in a taxable account, SCV funds are some of the most tax efficient funds available.

Check out Triceratops’s annual tax efficiency fund comparison spreadsheet here:
viewtopic.php?t=242137

retiredjg
Posts: 33245
Joined: Thu Jan 10, 2008 12:56 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by retiredjg » Mon Aug 13, 2018 8:16 am

This isn't really a yes or no/better or best question. It depends on many other things.

It depends on what space you have available and done properly it assumes you fill your 403b and a Roth IRA or two before putting retirement money into taxable.

It also depends on the cost of the SCV fund and the overall cost of the portfolio if you put SCV in one place vs another place.

Another factor is which accounts you have SCV fund available and which SCV fund that is (just because the Vanguard fund is usually OK in taxable does not mean all the other ones are).

My first choice would be to put SCV in a tax-advantaged account if I have the space and can find a fund in that account that has low costs. If that is not possible and if I am going to have money in taxable anyway, I would put Vanguard's SCV in taxable if I needed to, realizing that there might be a bit of a hiccup once in awhile.

User avatar
vpotus
Posts: 112
Joined: Sat May 04, 2013 4:08 pm
Location: Behind you...

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by vpotus » Mon Aug 13, 2018 8:31 am

Thank you all very much for your advice. Based on your comments, I think the wiki should be edited to read that small cap value should first go into tax-advantaged before taxable (Roth, then 403b/401k and lastly taxable.) As it currently reads, stating that taxable is "suitable" could lead one to think that taxable is "preferable". Thanks again.

Call_Me_Op
Posts: 6918
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Call_Me_Op » Mon Aug 13, 2018 8:57 am

HEDGEFUNDIE wrote:
Mon Aug 13, 2018 3:14 am
Tax deferred accounts (including Roth) are always better for all investments from a tax perspective.
Really? So instead of paying taxes at capital gains rates (for stocks), I should pay tax at my marginal income tax rate when I take the money put?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Jags4186
Posts: 2257
Joined: Wed Jun 18, 2014 7:12 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Jags4186 » Mon Aug 13, 2018 9:05 am

Call_Me_Op wrote:
Mon Aug 13, 2018 8:57 am
HEDGEFUNDIE wrote:
Mon Aug 13, 2018 3:14 am
Tax deferred accounts (including Roth) are always better for all investments from a tax perspective.
Really? So instead of paying taxes at capital gains rates (for stocks), I should pay tax at my marginal income tax rate when I take the money put?
Assuming you are in the same tax bracket or lower or even slightly higher when you withdraw as you were when you put the money in, yes. Even if you are in a higher tax bracket when you withdraw than when you put the money in, a tax defferred account might be better. 15% cap gain tax might be worse than say depositing at 22% and withdrawing at 24% depending on the size of the gain.

For example, lets say you are in the 22% bracket and deferred $10,000 of income avoiding $2200 in federal income tax. You invest the $12,200 and it doubles in money by the time you retire. You now have $20,000 in a tax deferred account and $4400 in your taxable account. You also are now in the 24% bracket. You decide to cash out. You'd pay $4,800 in income tax on the $20,000 and you'd pay $330 in LTCG on the taxable account leaving you with $19,270.

Now let's say you didn't defer anything. You put $10,000 into a taxable account and it doubles to $20,000. You cash out and pay 15% LTCG taxes on the appreciation. You are left with $18,500.

Of course there are always exceptions, but in this case for most people, yes, tax deferred is better than taxable.
Last edited by Jags4186 on Mon Aug 13, 2018 9:13 am, edited 2 times in total.

retiredjg
Posts: 33245
Joined: Thu Jan 10, 2008 12:56 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by retiredjg » Mon Aug 13, 2018 9:09 am

Vpotus, your title just asks about SCV, not specifically Vanguard's SCV. Perhaps you were only thinking Vanguard's fund but did not think to say that. Some of the answers you got (mine included) may be in response to the title - just SCV - not specifically about Vanguard's SCV fund.

It seems to me that the statement in the Wiki is accurate. The Vanguard fund is a "suitable candidate". Being a suitable candidate is not the same thing as being the best candidate.

I think most here would think that broader funds (such as a total stock or a total international) might be a slightly better choice than a narrower fund representing SCV. That does not mean that SCV is not suitable.

Call_Me_Op
Posts: 6918
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Call_Me_Op » Mon Aug 13, 2018 10:36 am

Jags4186 wrote:
Mon Aug 13, 2018 9:05 am
Call_Me_Op wrote:
Mon Aug 13, 2018 8:57 am
HEDGEFUNDIE wrote:
Mon Aug 13, 2018 3:14 am
Tax deferred accounts (including Roth) are always better for all investments from a tax perspective.
Really? So instead of paying taxes at capital gains rates (for stocks), I should pay tax at my marginal income tax rate when I take the money put?
Assuming you are in the same tax bracket or lower or even slightly higher when you withdraw as you were when you put the money in, yes. Even if you are in a higher tax bracket when you withdraw than when you put the money in, a tax defferred account might be better. 15% cap gain tax might be worse than say depositing at 22% and withdrawing at 24% depending on the size of the gain.

For example, lets say you are in the 22% bracket and deferred $10,000 of income avoiding $2200 in federal income tax. You invest the $12,200 and it doubles in money by the time you retire. You now have $20,000 in a tax deferred account and $4400 in your taxable account. You also are now in the 24% bracket. You decide to cash out. You'd pay $4,800 in income tax on the $20,000 and you'd pay $330 in LTCG on the taxable account leaving you with $19,270.

Now let's say you didn't defer anything. You put $10,000 into a taxable account and it doubles to $20,000. You cash out and pay 15% LTCG taxes on the appreciation. You are left with $18,500.

Of course there are always exceptions, but in this case for most people, yes, tax deferred is better than taxable.
That does not make sense to me. Stocks allow you to defer gains. I would rather sell a taxable investment after 20 years and pay 15% capital gains tax rate rather than sell a tax-deferred investment after 20 years and pay a 33% income tax rate (my current rate).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

HEDGEFUNDIE
Posts: 252
Joined: Sun Oct 22, 2017 2:06 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by HEDGEFUNDIE » Mon Aug 13, 2018 10:52 am

Call_Me_Op wrote:
Mon Aug 13, 2018 10:36 am
Jags4186 wrote:
Mon Aug 13, 2018 9:05 am
Call_Me_Op wrote:
Mon Aug 13, 2018 8:57 am
HEDGEFUNDIE wrote:
Mon Aug 13, 2018 3:14 am
Tax deferred accounts (including Roth) are always better for all investments from a tax perspective.
Really? So instead of paying taxes at capital gains rates (for stocks), I should pay tax at my marginal income tax rate when I take the money put?
Assuming you are in the same tax bracket or lower or even slightly higher when you withdraw as you were when you put the money in, yes. Even if you are in a higher tax bracket when you withdraw than when you put the money in, a tax defferred account might be better. 15% cap gain tax might be worse than say depositing at 22% and withdrawing at 24% depending on the size of the gain.

For example, lets say you are in the 22% bracket and deferred $10,000 of income avoiding $2200 in federal income tax. You invest the $12,200 and it doubles in money by the time you retire. You now have $20,000 in a tax deferred account and $4400 in your taxable account. You also are now in the 24% bracket. You decide to cash out. You'd pay $4,800 in income tax on the $20,000 and you'd pay $330 in LTCG on the taxable account leaving you with $19,270.

Now let's say you didn't defer anything. You put $10,000 into a taxable account and it doubles to $20,000. You cash out and pay 15% LTCG taxes on the appreciation. You are left with $18,500.

Of course there are always exceptions, but in this case for most people, yes, tax deferred is better than taxable.
That does not make sense to me. Stocks allow you to defer gains. I would rather sell a taxable investment after 20 years and pay 15% capital gains tax rate rather than sell a tax-deferred investment after 20 years and pay a 33% income tax rate (my current rate).
You have already paid your 33% income tax to fund the taxable account, and then you will pay 15% capital gains tax when you sell.

The proper comparison is between a taxable account and a Roth IRA. In which case the Roth IRA wins because you are not taxed on the fund’s internal distributions and capital gains (can be as high as 1%/year).

Call_Me_Op
Posts: 6918
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Call_Me_Op » Mon Aug 13, 2018 10:58 am

HEDGEFUNDIE wrote:
Mon Aug 13, 2018 10:52 am
Call_Me_Op wrote:
Mon Aug 13, 2018 10:36 am
Jags4186 wrote:
Mon Aug 13, 2018 9:05 am
Call_Me_Op wrote:
Mon Aug 13, 2018 8:57 am
HEDGEFUNDIE wrote:
Mon Aug 13, 2018 3:14 am
Tax deferred accounts (including Roth) are always better for all investments from a tax perspective.
Really? So instead of paying taxes at capital gains rates (for stocks), I should pay tax at my marginal income tax rate when I take the money put?
Assuming you are in the same tax bracket or lower or even slightly higher when you withdraw as you were when you put the money in, yes. Even if you are in a higher tax bracket when you withdraw than when you put the money in, a tax defferred account might be better. 15% cap gain tax might be worse than say depositing at 22% and withdrawing at 24% depending on the size of the gain.

For example, lets say you are in the 22% bracket and deferred $10,000 of income avoiding $2200 in federal income tax. You invest the $12,200 and it doubles in money by the time you retire. You now have $20,000 in a tax deferred account and $4400 in your taxable account. You also are now in the 24% bracket. You decide to cash out. You'd pay $4,800 in income tax on the $20,000 and you'd pay $330 in LTCG on the taxable account leaving you with $19,270.

Now let's say you didn't defer anything. You put $10,000 into a taxable account and it doubles to $20,000. You cash out and pay 15% LTCG taxes on the appreciation. You are left with $18,500.

Of course there are always exceptions, but in this case for most people, yes, tax deferred is better than taxable.
That does not make sense to me. Stocks allow you to defer gains. I would rather sell a taxable investment after 20 years and pay 15% capital gains tax rate rather than sell a tax-deferred investment after 20 years and pay a 33% income tax rate (my current rate).
You have already paid your 33% income tax to fund the taxable account, and then you will pay 15% capital gains tax when you sell.

The proper comparison is between a taxable account and a Roth IRA. In which case the Roth IRA wins because you are not taxed on the fund’s internal distributions and capital gains (can be as high as 1%/year).
There is no comparison if you are talking about a Roth. But a non-deuctible IRA (or variable annuity), for example, would be a case that matches my example.

In the case of a 401k, let's say I start with 10,000 pre-tax and it grows at 5% for 10 years - versus taking a tax hit of 33% up front. In that case, with the 401k, I will end-up with 10,913 after tax, but with the taxable account I will end-up with 10,281 paying 33% before investing and 15% on the gain after 10 years. So yes, it's harder to beat the 401k because the entire amount grows (no up-front tax).

So, of course, always take advantage of tax deductible plans and any employer matching before considering other options.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

HEDGEFUNDIE
Posts: 252
Joined: Sun Oct 22, 2017 2:06 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by HEDGEFUNDIE » Mon Aug 13, 2018 11:02 am

retiredjg wrote:
Mon Aug 13, 2018 9:09 am
I think most here would think that broader funds (such as a total stock or a total international) might be a slightly better choice than a narrower fund representing SCV. That does not mean that SCV is not suitable.
Actually OP has a point. Triceratops’s study on tax efficiency has busted some long time rules of thumb on tax efficient fund placement.

For example, VXUS (a broad international fund) has the same tax efficiency as BND (a bond fund). And IJS (small cap value) beats them both.

retiredjg
Posts: 33245
Joined: Thu Jan 10, 2008 12:56 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by retiredjg » Mon Aug 13, 2018 11:07 am

That is not what I see on the chart in the link above. What are you looking at?

HEDGEFUNDIE
Posts: 252
Joined: Sun Oct 22, 2017 2:06 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by HEDGEFUNDIE » Mon Aug 13, 2018 11:09 am

retiredjg wrote:
Mon Aug 13, 2018 11:07 am
That is not what I see on the chart in the link above. What are you looking at?
https://docs.google.com/spreadsheets/d/ ... Q/htmlview

Jags4186
Posts: 2257
Joined: Wed Jun 18, 2014 7:12 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Jags4186 » Mon Aug 13, 2018 12:39 pm

Call_Me_Op wrote:
Mon Aug 13, 2018 10:36 am
That does not make sense to me. Stocks allow you to defer gains. I would rather sell a taxable investment after 20 years and pay 15% capital gains tax rate rather than sell a tax-deferred investment after 20 years and pay a 33% income tax rate (my current rate).
You’re missing the point. For you to put $10,000 into a taxable account you’d need to earn $12,820 in the 22% bracket.

You’re paying both income and LTGC taxes with a taxable account, you’re only paying income taxes on a tax deferred account.

retiredjg
Posts: 33245
Joined: Thu Jan 10, 2008 12:56 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by retiredjg » Mon Aug 13, 2018 12:51 pm

The numbers were somewhat different in 2016. Maybe you should look.

And while I don't know that Triceratop did any charts for years before that, the discussion was always that the broader funds were usually more tax-efficient than the narrower funds. And I remember a time awhile back that SCV was not even considered a great candidate for taxable at all. I think it was livesoft who eventually pointed out "hey, this SCV fund is actually not that bad the last few years...."

The bottom line is I think Vanguard's SCV mutual fund/ETF is a suitable candidate for a taxable account. At least for most of the time. Others? I don't know. Maybe or maybe not. But even the Vanguard fund would not be my first choice of what to put in taxable. Not sure what happened with V's Total Int Stock in 2017 but I predict you'll see that number drop again in the future.

User avatar
Earl Lemongrab
Posts: 4949
Joined: Tue Jun 10, 2014 1:14 am

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Earl Lemongrab » Mon Aug 13, 2018 3:25 pm

My small cap value is a mix of IJS and VBR. Initially my Roth was pretty well taken up by REIT and there wasn't a SCV index fund in the 401(k). Later even the active fund was discontinued. So I bought SCV in taxable.

As time went on, I used the Mega Backdoor Roth to really increase my Roth holdings, and I started putting SCV in there as well. Now the amount in Roth is somewhat larger.
Last edited by Earl Lemongrab on Tue Aug 14, 2018 12:06 am, edited 1 time in total.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

HEDGEFUNDIE
Posts: 252
Joined: Sun Oct 22, 2017 2:06 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by HEDGEFUNDIE » Mon Aug 13, 2018 3:54 pm

retiredjg wrote:
Mon Aug 13, 2018 12:51 pm
The numbers were somewhat different in 2016. Maybe you should look.

And while I don't know that Triceratop did any charts for years before that, the discussion was always that the broader funds were usually more tax-efficient than the narrower funds. And I remember a time awhile back that SCV was not even considered a great candidate for taxable at all. I think it was livesoft who eventually pointed out "hey, this SCV fund is actually not that bad the last few years...."

The bottom line is I think Vanguard's SCV mutual fund/ETF is a suitable candidate for a taxable account. At least for most of the time. Others? I don't know. Maybe or maybe not. But even the Vanguard fund would not be my first choice of what to put in taxable. Not sure what happened with V's Total Int Stock in 2017 but I predict you'll see that number drop again in the future.
Yes the numbers do change from year to year.

If you look at the spreadsheet the difference between the most and least tax efficient Vanguard funds is well under 1%. I think the bigger point is that asset location is not a big deal in the grand scheme, and should be low on the priority list of things to tackle.

User avatar
vpotus
Posts: 112
Joined: Sat May 04, 2013 4:08 pm
Location: Behind you...

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by vpotus » Mon Aug 13, 2018 10:04 pm

retiredjg wrote:
Mon Aug 13, 2018 9:09 am
Vpotus, your title just asks about SCV, not specifically Vanguard's SCV. Perhaps you were only thinking Vanguard's fund but did not think to say that. Some of the answers you got (mine included) may be in response to the title - just SCV - not specifically about Vanguard's SCV fund.

It seems to me that the statement in the Wiki is accurate. The Vanguard fund is a "suitable candidate". Being a suitable candidate is not the same thing as being the best candidate.

I think most here would think that broader funds (such as a total stock or a total international) might be a slightly better choice than a narrower fund representing SCV. That does not mean that SCV is not suitable.
Hi retiredg. Yes. I meant to type Vanguards SCV Index or VSIAX. I have total stock and total international and have been thinking of diversifying with about 5% Vanguard Small-Cap Value Index Fund. As I said before, I have a Roth a 403b and Taxable. The wiki's language was confusing to me and that is why I posted here for help.

retiredjg
Posts: 33245
Joined: Thu Jan 10, 2008 12:56 pm

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by retiredjg » Tue Aug 14, 2018 6:01 am

The SCV can go in any one of those accounts. Where does it seem to fit best in your opinion?

Something to keep in mind....almost any kind of fund is suitable for Roth IRA or a 403b. The only exception I can think of is muni bonds - few people would put a tax-exempt bond into a tax-advantaged account. Some people have preferences though - for example, many people prefer to but stock funds into Roth IRA instead of bond funds. That does not mean that bonds are unsuitable for a Roth IRA...only that they prefer not to put them there.

The same is not true for a taxable account. Not everything is suitable, at least within Boglehead thinking - some things just do not belong in taxable. REIT is a good example - it is terribly inefficient when it comes to taxes.

Call_Me_Op
Posts: 6918
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by Call_Me_Op » Tue Aug 14, 2018 6:16 am

Jags4186 wrote:
Mon Aug 13, 2018 12:39 pm
Call_Me_Op wrote:
Mon Aug 13, 2018 10:36 am
That does not make sense to me. Stocks allow you to defer gains. I would rather sell a taxable investment after 20 years and pay 15% capital gains tax rate rather than sell a tax-deferred investment after 20 years and pay a 33% income tax rate (my current rate).
You’re missing the point. For you to put $10,000 into a taxable account you’d need to earn $12,820 in the 22% bracket.

You’re paying both income and LTGC taxes with a taxable account, you’re only paying income taxes on a tax deferred account.
I clarified my thoughts in a subsequent post. The scenario you address is specific to the case where we compare taxable to 401k or similar. There are also tax-deferred cases where the outcome is different, such as comparing non-deductible IRA versus taxable where both hold stocks.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
grabiner
Advisory Board
Posts: 22350
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Best placement for Small Cap Value? Taxable, Roth or 403b7?

Post by grabiner » Tue Aug 14, 2018 9:01 pm

retiredjg wrote:
Mon Aug 13, 2018 12:51 pm
The numbers were somewhat different in 2016. Maybe you should look.

And while I don't know that Triceratop did any charts for years before that, the discussion was always that the broader funds were usually more tax-efficient than the narrower funds. And I remember a time awhile back that SCV was not even considered a great candidate for taxable at all. I think it was livesoft who eventually pointed out "hey, this SCV fund is actually not that bad the last few years...."
Several things have changed. The most important is that ETFs have been able to avoid capital-gains in small-cap value indexes; most Bogleheads were not confident of this for several years after ETFs started. In addition, the tax reduction on qualified dividends has been made permanent, and thus the higher dividend yields of value stocks do not result in as much in additional costs.

Still, Total Stock Market is slightly more tax-efficient than Vanguard's small-cap value index. If you want to hold both in order to overweight small-cap value, then it is better to have the small-cap value index in your IRA or 401(k). (I did this for years, but I have now switched to Vanguard Value Factor ETF in my Roth IRA to get my large-cap value and small-cap value exposure.)
Wiki David Grabiner

Post Reply