Talk:Tax-efficient fund placement

Content from developmental page (November 2013)
This table of tax efficiency lists low-yielding bonds as a 3% yield. In the current environment, I'd categorize low-yielding bonds at something <2%. --Assumer 03:46, 21 November 2013 (CST)

Propose this change to the ranking:

Very Efficient

Money market and short-term bond funds Tax-managed stock funds Large-cap and total-market stock index funds Muni bond funds

Efficient

Balanced funds Small-cap or mid-cap index funds Value index funds

Moderately inefficient

Total-market bond funds Active stock funds

Very inefficient

Real estate or REIT funds High-turnover active funds High-yield bonds Tfb 19:59, 19 November 2013 (CST)

If you hold munis, they should be in taxable accounts, but putting them at the top of the list creates the incorrect impression that munis are good choices for your taxable account; usually, holding munis in taxable leads to about the same cost as holding corporate bonds of comparable risk.

And the real distinction is not short-term versus total-market bond funds, but the actual yields. When I first started thinking about asset location, short-term bonds yielded 5%, and even though stock dividends were taxed at your full tax rate (28% for me at the time), that was only on 2% yields with capital gains taxed well in the future at 20%. How about:

Very efficient: bond funds with extremely low yields Efficient: bond funds with an after-tax yield less than stock yields Moderately inefficient: bond funds with an after-tax yield higher than stock yields Very inefficient: high-yield bonds Grabiner 20:09, 19 November 2013 (CST)

It's not just the yield. The eventual capital gains matter too unless we all only invest for charity and heirs. Tfb 20:23, 19 November 2013 (CST)

I know that the capital gains matter; it turns out that the capital gains tend to approximately cancel out the fact that bond yields are non-qualified. The estimates in the article give about the same total tax cost for munis yielding 2% (2.67% taxable equivalent) as for stocks yielding 2% qualified held for 30 years.Grabiner 20:51, 19 November 2013 (CST)


 * Cash is missing.

Efficient

Balanced funds Small-cap or mid-cap index funds Value index funds Cash --LadyGeek 20:27, 19 November 2013 (CST)

Proposed tax efficiency ranking
Table is located in Template:Tax efficiency ranking of major asset classes. Insert the proposed changes in the table below.

I assume "High-yield bonds" means High-yield bonds and not a bond with a high yield?

--LadyGeek 20:37, 19 November 2013 (CST)

Wiki already said the exact ordering within the categories, and between "Efficient" and "Very Efficient" are unclear. Maybe we should use just three buckets or even only two buckets and not worry about small differences which drift by person and over time.

Tfb 20:41, 19 November 2013 (CST)


 * Cash is entered twice, first as money market funds and then as cash.--Blbarnitz 20:52, 19 November 2013 (CST)

I missed that. To help new investors who may not realize cash and money markets are similar, I kept cash alongside money markets.

I created 2 tables side-by-side to visualize how 4 (original) vs. 3 buckets would look. I prefer the 3 buckets, as the subsequent examples (steps) in the main article only draw from the top or middle of the table. I don't think 2 buckets would work as it implies that the top is "good" and the bottom is "bad". You need a middle choice (neutral), which I think helps from a behavioral perspective. --LadyGeek 21:07, 19 November 2013 (CST)

Is there any significance to the order within each bucket? The arrow implies an ordered sequence (best to worst); do the fund rankings align in a similar fashion? --LadyGeek 21:51, 19 November 2013 (CST)
 * For the most part, the ordering is roughly correct. (The tables are sortable, set the tables from highest tax cost to lowest tax cost to get an idea of tax costs, and remember to include the range of eventual capital gains taxes that the stock funds incur upon sale). The major adjustment in the ordering is in the fixed income segment where current money market and bond yields are substantially lower than those assumed in the table; thus the elevation of money markets and short term bond funds in the hierarchy. One quibble is the position of balanced funds; active balanced funds are likely to be less tax efficient than indexed balanced funds. I tweaked the descriptions in the charts.--Blbarnitz 05:10, 20 November 2013 (CST)

The proposed tax efficiency table is in the main article for forum review. Replace Template:Tax efficiency ranking of major asset classes with the updated contents when complete. The example figures will need to be updated. --LadyGeek 20:04, 20 November 2013 (CST)

Balanced index funds
Taylor Larimore (via PM) is proposing to change the order:

The wiki's excellent colored list of "Approximate Tax Efficiency Ranking for Major Asset Classes" has three broad categories: Efficient, Moderately Inefficient, and Inefficient. "Balanced Index Funds" is in the Efficient category. I think this is a significant mistake for these reasons:


 * Nearly all "Balanced Index Funds" are NOT tax-efficient. Morningstar provides these 10-year Tax-Cost Ratios :

1.30 Wellesley VWINX

1.05 Wellington VWELX

0.71 Balanced Index VBINX (More than twice the inefficiency of TSM)

0.52 Life Strategy Growth

1.15 Life Strategy Income

0.31 Total Stock Market VTSMX


 * Balanced funds are normally a mixture of tax-efficient stocks and inefficient taxable bonds. The in-between category is logical.


 * Already in the wiki (underline mine):
 * Balanced funds (stocks and bonds) are very popular among individual investors. These funds hold a variety of asset classes in one simple fund instead of several. They have a variety of names such as balanced, lifestyle, or target retirement funds. Since these funds include both stocks and bonds their tax efficiency sits somewhere between stocks and bonds.

Suggestion:

Remove "Balanced Index Funds" from the "Tax-Efficient" category. Add: "Balanced Funds" to the "Moderately Inefficient" category. --LadyGeek 19:25, 18 December 2013 (CST)

Reader feedback: It would be good if examples...
108.24.110.183 posted this comment on 1 June 2014 (view all feedback).

"It would be good if examples of tax efficient funds (non-retirement) were provided or ways to find/look for them. But great info"

Take a look in Tax-managed fund comparison. LadyGeek 21:17, 1 June 2014 (CDT)

Reader feedback: Very poor graphics to show p...
24.8.179.180 posted this comment on 22 September 2014 (view all feedback).

"Very poor graphics to show placement. Also poor coverage of reits and mlps"

Any thoughts?

Blbarnitz 14:38, 22 September 2014 (CDT)

MLPs are overly complex investments held by a minority of investors and are not appropriate for the introductory level of coverage intended here. REITs are discussed under equities, but not in any great level of detail - it's sufficient for the intended audience.

As for graphics, I don't see how the presentation can be improved. The ranking was discussed in the forum and wiki, which represents a consensus. I don't think anything needs to be changed. --LadyGeek 20:27, 23 September 2014 (CDT)

Reader feedback: No, but how can I e-mail this to a friend?
24.176.132.71 posted this comment on 1 January 2015 (view all feedback).

"No, but how can I e-mail this to a friend?"

The bottom left-side menu of every wiki page has an entry "Print/export". Select "Download as PDF" then email it to your friend. LadyGeek 15:40, 1 January 2015 (CST)

Reader feedback: Please explain pretax cost i...
98.117.58.18 posted this comment on 27 March 2015 (view all feedback).

"Please explain pretax cost is this increase in mutual fund price only or does it include distributions as well as how are total tax liabilities determined and what formula did you use to annualize them Do an an example for one mutual fund. I have spent a few hours and I can't figure it out. Other than that problem well done article but lack of explanation of tax liabilities at sale is a major shortcoming."

Any thoughts?

LadyGeek 19:51, 27 March 2015 (CDT)