International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

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cck
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International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by cck »

Assuming there are identical fund offerings in each account, is it better to hold international stock funds in a pre-tax IRA or a Roth IRA? I have both from Fidelity and was thus looking into adding the Fidelity Total International Index Fund (FTIHX) to one of my IRAs. I’m planning on putting some international into my taxable, but I also want to hold some international in a tax-advantaged account, so I’m trying to decide between the Roth and the pre-tax IRA for that portion. Does it matter which one I hold it in?

For the portion I’m putting into my taxable account, is there any big difference between choosing FTIHX (Fidelity Total International Index Fund) and VTIAX (Vanguard Total International Stock Index Fund)? Which one is better? It looks like FTIHX throws off less dividends and has a higher QDI percentage than VTIAX, so it may be more tax-efficient to hold FTIHX in taxable than VTIAX. Also, FTIHX has a lower ER, 0.06%, while VTIAX has an ER of 0.11%. Then again, FTIHX has only been around since 2016 and only has $2.8B in assets compared to VTIAX which has been around since 2010 and has $376.6B in assets – should this be of any concern at all? It also looks like they track two different indexes (FTIHX tracks the MSCI ACWI ex USA Index, VTIAX tracks the FTSE Global All Cap ex US Index), but it doesn’t look like that makes much of a difference. For reference, I already have both a Fidelity and a Vanguard taxable account.

Thanks for any help and advice!
Whakamole
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by Whakamole »

I think stock is better held in a Roth, since it will (hopefully) grow - meaning you'll have a larger amount of money that will be available tax-free, and without RMDs. There are arguments here that you should take this into account when determining your asset allocation, but the RMD advantage is huge.

VTIAX will be more tax-efficient than FTIHX because of Vanguard's patent which effectively has allowed it to not pay capital gains in some time. You might also look at IXUS, which is iShares's "total international" ETF and shares the tax efficiency benefit of VTIAX. However, for ease of investing (specifically wash sale rules), I wouldn't own the same fund in taxable and tax-deferred. So VTIAX/IXUS in taxable, and FTIHX/FZILX in an IRA would work, since they all track different indices.
Last edited by Whakamole on Sat Sep 14, 2019 6:44 pm, edited 1 time in total.
Ferdinand2014
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by Ferdinand2014 »

FTIHX has the usual blended large cap developed and emerging market, but has the addition of 11% developed small cap.
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codedude
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by codedude »

For the taxable account at Fidelity, you can use IXUS instead of FTIHX.
HMdocinPA
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by HMdocinPA »

codedude wrote: Sat Sep 14, 2019 6:22 pm For the taxable account at Fidelity, you can use IXUS instead of FTIHX.
I use IXUS and IEFA as international tax loss harvesting partners. ITOT and IVV for US stock for TLH as well. I keep the zero funds in my fidelity IRAs to avoid any wash sales.
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cck
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by cck »

Thanks for all the input! I have a personal preference for mutual funds, and my Fidelity taxable account is actually kind of like an old remnant that doesn't have anything in it anymore, though it does still exist in case I ever want to invest in any commission free Fidelity funds in taxable again. I mostly use Fidelity to hold all my tax-advantaged stuff and Vanguard for all my taxable stuff.
Whakamole wrote: Sat Sep 14, 2019 6:15 pm I think stock is better held in a Roth, since it will (hopefully) grow - meaning you'll have a larger amount of money that will be available tax-free, and without RMDs. There are arguments here that you should take this into account when determining your asset allocation, but the RMD advantage is huge.

VTIAX will be more tax-efficient than FTIHX because of Vanguard's patent which effectively has allowed it to not pay capital gains in some time. You might also look at IXUS, which is iShares's "total international" ETF and shares the tax efficiency benefit of VTIAX. However, for ease of investing (specifically wash sale rules), I wouldn't own the same fund in taxable and tax-deferred. So VTIAX/IXUS in taxable, and FTIHX/FZILX in an IRA would work, since they all track different indices.
Between total US and total international stock funds, is there a better one to keep in Roth? I'm at a 100% stock allocation, so I don't have any bond funds competing for space in any tax-advantaged accounts.

Ahh, good to know about the tax-efficiency part. Thanks!
Ferdinand2014 wrote: Sat Sep 14, 2019 6:19 pm FTIHX has the usual blended large cap developed and emerging market, but has the addition of 11% developed small cap.
Ahh gotcha, so in a way FTIHX is more "complete"?
Whakamole
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by Whakamole »

cck wrote: Sat Sep 14, 2019 6:58 pm Between total US and total international stock funds, is there a better one to keep in Roth? I'm at a 100% stock allocation, so I don't have any bond funds competing for space in any tax-advantaged accounts.
International stocks are eligible for the foreign tax credit if held in taxable. You lose that credit if they are in a Roth. On the other hand, at least recently, dividends are higher for international stocks, so it might be somewhat of a wash.

I'd hold international in both since that way you can rebalance in your IRAs and not have tax implications.

Nearly all of my international is held in taxable, though. Another benefit: tax loss harvesting! :oops:
livesoft
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by livesoft »

Here's my take: tax-efficient broad-market international index funds can go in any account. There is not anything significant about such funds to make any distinction. HOWEVER, ...

... WHAT YOU HAVE to REMOVE from the account in order to make room for the international fund probably is what should drive the decision, especially if you have to put whatever you remove into another account.
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Topic Author
cck
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by cck »

Whakamole wrote: Sat Sep 14, 2019 7:06 pm
cck wrote: Sat Sep 14, 2019 6:58 pm Between total US and total international stock funds, is there a better one to keep in Roth? I'm at a 100% stock allocation, so I don't have any bond funds competing for space in any tax-advantaged accounts.
International stocks are eligible for the foreign tax credit if held in taxable. You lose that credit if they are in a Roth. On the other hand, at least recently, dividends are higher for international stocks, so it might be somewhat of a wash.

I'd hold international in both since that way you can rebalance in your IRAs and not have tax implications.

Nearly all of my international is held in taxable, though. Another benefit: tax loss harvesting! :oops:
Yup, those are my intentions with holding international in both taxable and tax-advantaged. From plugging my tax bracket numbers into triceratops's tax efficiency spreadsheets, across 2015-2017 numbers, it's either a wash or the slightly disadvantageous to hold VXUS/VTIAX over VTI/VTSAX in taxable, so the foreign tax credit doesn't seem to be much of a benefit to me.

livesoft wrote: Sat Sep 14, 2019 7:06 pm Here's my take: tax-efficient broad-market international index funds can go in any account. There is not anything significant about such funds to make any distinction. HOWEVER, ...

... WHAT YOU HAVE to REMOVE from the account in order to make room for the international fund probably is what should drive the decision, especially if you have to put whatever you remove into another account.
I currently only hold total US stock funds (FSKAX in Fidelity and VTSAX in Vanguard), so I'd essentially be displacing the same thing no matter what account I put the international funds in. I'm pretty new to investing and haven't really thought about adding anything else to the mix until very recently.
Ferdinand2014
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by Ferdinand2014 »

cck wrote: Sat Sep 14, 2019 7:22 pm
Whakamole wrote: Sat Sep 14, 2019 7:06 pm
cck wrote: Sat Sep 14, 2019 6:58 pm Between total US and total international stock funds, is there a better one to keep in Roth? I'm at a 100% stock allocation, so I don't have any bond funds competing for space in any tax-advantaged accounts.
International stocks are eligible for the foreign tax credit if held in taxable. You lose that credit if they are in a Roth. On the other hand, at least recently, dividends are higher for international stocks, so it might be somewhat of a wash.

I'd hold international in both since that way you can rebalance in your IRAs and not have tax implications.

Nearly all of my international is held in taxable, though. Another benefit: tax loss harvesting! :oops:
Yup, those are my intentions with holding international in both taxable and tax-advantaged. From plugging my tax bracket numbers into triceratops's tax efficiency spreadsheets, across 2015-2017 numbers, it's either a wash or the slightly disadvantageous to hold VXUS/VTIAX over VTI/VTSAX in taxable, so the foreign tax credit doesn't seem to be much of a benefit to me.

livesoft wrote: Sat Sep 14, 2019 7:06 pm Here's my take: tax-efficient broad-market international index funds can go in any account. There is not anything significant about such funds to make any distinction. HOWEVER, ...

... WHAT YOU HAVE to REMOVE from the account in order to make room for the international fund probably is what should drive the decision, especially if you have to put whatever you remove into another account.
I currently only hold total US stock funds (FSKAX in Fidelity and VTSAX in Vanguard), so I'd essentially be displacing the same thing no matter what account I put the international funds in. I'm pretty new to investing and haven't really thought about adding anything else to the mix until very recently.
Maybe I’m missing something, but as there is no limit in taxable, you aren’t displacing anything.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
Ferdinand2014
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by Ferdinand2014 »

cck wrote: Sat Sep 14, 2019 6:58 pm Thanks for all the input! I have a personal preference for mutual funds, and my Fidelity taxable account is actually kind of like an old remnant that doesn't have anything in it anymore, though it does still exist in case I ever want to invest in any commission free Fidelity funds in taxable again. I mostly use Fidelity to hold all my tax-advantaged stuff and Vanguard for all my taxable stuff.
Whakamole wrote: Sat Sep 14, 2019 6:15 pm I think stock is better held in a Roth, since it will (hopefully) grow - meaning you'll have a larger amount of money that will be available tax-free, and without RMDs. There are arguments here that you should take this into account when determining your asset allocation, but the RMD advantage is huge.

VTIAX will be more tax-efficient than FTIHX because of Vanguard's patent which effectively has allowed it to not pay capital gains in some time. You might also look at IXUS, which is iShares's "total international" ETF and shares the tax efficiency benefit of VTIAX. However, for ease of investing (specifically wash sale rules), I wouldn't own the same fund in taxable and tax-deferred. So VTIAX/IXUS in taxable, and FTIHX/FZILX in an IRA would work, since they all track different indices.
Between total US and total international stock funds, is there a better one to keep in Roth? I'm at a 100% stock allocation, so I don't have any bond funds competing for space in any tax-advantaged accounts.

Ahh, good to know about the tax-efficiency part. Thanks!
Ferdinand2014 wrote: Sat Sep 14, 2019 6:19 pm FTIHX has the usual blended large cap developed and emerging market, but has the addition of 11% developed small cap.
Ahh gotcha, so in a way FTIHX is more "complete"?
In theory, yes. It has many more stocks then the other Fidelity international options. Also the addition of small cap in theory adds small market cap exposure (with its attendant risks/benefits) and will tend to also have a lower correlation to the US market because small cap companies tend to be more exposed to their home market and less multinational. Makes sense, however a disclaimer: I personally hold no international and hold exclusively FXAIX (Fidelity 500 index) for equities.
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by grabiner »

It doesn't matter whether you hold US or foreign stocks in a traditional or Roth account. If you retire in a 25% tax bracket, $4000 in stock in a traditional account and $3000 in a Roth account will have the same after-tax value if invested the same way, as you own $3000 of the traditional account and the IRS owns $1000.

The usual argument for stocks over bonds in a Roth is not relevant for US versus foreign stock. If you hold stocks in a traditional account and stock returns are high, you may have RMDs larger than you need, or pay tax in a higher bracket than expects. But this is just as likely to happen with US or foreign stock.

More often, the reason to choose one over another is the investment options; many 401(k) plans have better US than foreign options, so you would hold US stock in your 401(k) and foreign stock in your Roth IRA (because you make too much to deduct a traditional IRA).
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by retiredjg »

I agree with livesoft. An international fund can be held in any account. What matters is what you have to move out of that account in order to put international in there. For example, I probably would not move bonds from tIRA to Roth IRA in order to make room for international in the tIRA. But I would be fine doing the exact opposite.
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cck
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Re: International Fund Questions – Roth vs. Pre-Tax, FTIHX vs. VTIAX?

Post by cck »

Thanks for all the help and responses! I might've been overthinking the Roth vs. pre-tax question for US vs. international equities. I'll move forward with using VTIAX in my Vanguard taxable account and FTIHX where I have room in my tax-advantaged accounts (luckily, FTIHX is also an option in my 401k).
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