Asset allocation + tax exposure question

[tuixiu]

Advice needed.

Over the past couple years we've evolved to a relatively simple asset allocation that has four primary components of pretty much equal values:

S&P 500 Index fund
Total Intl Stock fund
Small Cap Index fund
Total Bond Index fund

We're still in accumulation phase so we invest every month both tax-deferred and taxable, so of course the stash is partly tax-deferred and partly not.

I'm nowhere near as investment savvy as most of you folks but I've figured out that the bond portion belongs in the tax-deferred side. My question is: is there a better type among the equities classes to have tax-deferred compared to the others?

The funds are all large low-expense types, bond fund being the exception it's got some funniness but that's for a different thread.

Thanks in advance for kind advice.

 

[MasterBlaster]

My question is: is there a better type among the equities classes to have tax-deferred compared to the others?

I would consider replacing the S&P 500 and small cap funds with a total market index fund. The S&P 500 and small cap funds alone miss the midcap stocks. In that case you would have something kind of like Scott Burn's margarita portfolio.

http://www.thekirkreport.com/2007/02/scott_burns_laz.html

Also as companies rise and fall in value they shuffle in and out of the S&P 500 causing churnage (and associated taxes due). The total market index would help with that.

 

[LOL!]

Looks very good. You are missing small cap stocks from foreign countries. This latter asset class is a less correlated to your other equity funds, so it may be worthwhile to pick some shares up in a Roth or taxable account. Some tickers to look at: VFSVX, VSS, SCZ, GWX, DGS.

It is better to have foreign funds in taxable first as long as they are tax-efficient (i.e. index funds, only qualified dividends, no capital gains distributions). This way you can claim the foreign tax credit on the foreign taxes that the fund pays. If held in a tax-deferred account, the funds pays those taxes anyways, but you would not be able to get a credit for them.

After foreign funds, then a total US stock market fund would be next best for your taxable account.

 

[trirod]

Generally it's better to have foreign holdings than domestic holdings in your taxable accounts, since you can take advantage of the foreign tax credit then. Be careful though since "funds of funds" do not qualify for the foreign tax credit so you need to know where you stand with your foreign investments.

 

[Gotadimple]

I would keep index funds in your taxable account, as they are tax efficient. In the tax deferred, you could use an equity index fund that produces dividends, just like your bonds. But whatever you do, make sure you divide your investments according to your asset allocation.

-- Rita

 

[walkinwood]

In addition to the excellent points above.. look at the past distribution history of your equity funds and put the one that generates more distributions into your tax deferred accounts.

 

[clifp]

Vanguard offers Tax Managed funds for several asset class, that while not pure index funds are close. They are certainly worth investigating.

 

[LOL!]

The problem with those tax-managed funds are the 1% early redemption fee that does not go away for 5 years, so if you are going to rebalance or tax-loss harvest, it costs you.

The Vanguard tax-managed funds were better in the days before low-cost index funds with ETF share classes which are extremely tax-efficient in their own right. Nowadays, the tax-managed funds really do not have much to offer over these other tax-efficient funds.

 

[tuixiu]

Thanks all, exactly what I needed.