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Balanced funds in taxable?
Old 08-31-2004, 04:28 AM   #1
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Balanced funds in taxable?

Hello, all,
Ok, so let's say I take UncleMick's advice and decide to plunk most of my retirement money in a balanced fund and forget about it. This works very well in retirement accounts, but what about taxable ones?

I am in my late 20's and will be in at least a high 20-something tax bracket for a very long time (wife just graduated from law school so hopefully higher 8) ) Half of my retirement money is outside retirement accounts. I've considered Vanguard's Tax-Managed Balanced fund which is half muni's. This seems like a good strategy while I'm working but I don't know if I'll be in a high enough tax bracket when I retire to justify muni's over taxable bonds.

I would love to put 90%+ in balanced funds (with a little left over to dabble) and just forget about it but I don't know if it will work in my particular situation.

Any thoughts or suggestions?

Thanks,
Jay

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Re: Balanced funds in taxable?
Old 08-31-2004, 06:19 AM   #2
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Re: Balanced funds in taxable?

Have you answered your own question Maybe.

Do a little exercise to prevent the tail waging the dog. Pay your taxes (as a theoretical exercise of course) - with comparible stock/bond/cash balanced funds to see how bad the hit is.

There a zillion articles out there for the accumulation phase about taxable/tax deferred/Roth and directing "income hoses' to rebalance. I'm sort of out of date - except to repeat that the simplest course is often the best course.
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Re: Balanced funds in taxable?
Old 08-31-2004, 06:31 AM   #3
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Re: Balanced funds in taxable?

I expect the stock index funds held by the fund will be low turnover and probably low dividend, and therefore relatively tax efficient. I'm not sure how tax efficient the bond fund portion is, though...I suppose much of it's yield is from dividends. I'm far from an expert, though.

I hope I'm not taking the topic astray, but the Target Retirement 2025 is more and more interesting to me, but it looks like there's a 0.23% fee presumably on top of the fees in the held funds, and even though that's small I'm having a hard time thinking that's anything other than a waste of money. Is the benefit anything more than automatic efficient rebalancing?
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Re: Balanced funds in taxable?
Old 08-31-2004, 06:37 AM   #4
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Re: Balanced funds in taxable?

Quote:
I hope I'm not taking the topic astray, but the Target Retirement 2025 is more and more interesting to me, but it looks like there's a 0.23% fee presumably on top of the fees in the held funds, and even though that's small I'm having a hard time thinking that's anything other than a waste of money. Is the benefit anything more than automatic efficient rebalancing?
None of Vanuard's fund of funds carry any expenses over and above the underlying funds. The 0.23% is the average weighted ER of the funds making up TR2025.

-Jay
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Re: Balanced funds in taxable?
Old 08-31-2004, 07:47 AM   #5
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Re: Balanced funds in taxable?

There is a very easy way out of this conundrum. Put the fixed income parts of your portfiolio in the tax deferred accounts, and the equity parts in the taxable accounts. You'd have to do the rebalancing yourself, but that's a small price to pay for tax efficiency.

I would model all of this out in a spreadsheet, though. In some cases, you actually come out ahead with the equity portion in the tax-deferred accounts.
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Re: Balanced funds in taxable?
Old 08-31-2004, 09:52 AM   #6
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Re: Balanced funds in taxable?

Quote:
None of Vanuard's fund of funds carry any expenses over and above the underlying funds. The 0.23% is the average weighted ER of the funds making up TR2025.

-Jay
OOOOOOOOoooooohhhhhhhhhhhhhhh. I'm nearly sold. I'll mull it over for a few days. Thanks!
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Re: Balanced funds in taxable?
Old 08-31-2004, 10:20 AM   #7
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Re: Balanced funds in taxable?

Hi Jay,

Brewer has a good point for the accumulation phase,
but you might take a big hit with all equities in a taxable
account during the distribution phase.

Take a hard look at Vanguard's Target Retirement
series. The 2035 fund holds 80% in stock, which is
about right for your age. By the time you retire, the
fund equity % will be considerably lower and the
income distributions may be high enough to avoid
selling shares ..... thus avoiding big cap gains taxes.

Cheers,

Charlie
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Re: Balanced funds in taxable?
Old 08-31-2004, 10:29 AM   #8
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Re: Balanced funds in taxable?

Quote:
Brewer has a good point for the accumulation phase,
but you might take a big hit with all equities in a taxable
account during the distribution phase.
I've confused myself a few times since reading that and trying to start this post. Isn't this quote mistaken?

Low turnover equity funds in a taxable account should be tax efficient during accumulation and have lower taxes (due to capital gains tax as opposed to income tax for tax-deferred vehicles) during distribution, right?

EDIT: Okay, I see why I'm being confused...it's because I'm mixing points between balanced funds and manual rebalancing across vehicles and picking that quote out of context. Charlie still seems to imply that cap gains taxes are high, but I thought they were lower than income tax. I suppose it depends on the withdrawal rate, or more specifically taxable income?
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Re: Balanced funds in taxable?
Old 08-31-2004, 05:54 PM   #9
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Re: Balanced funds in taxable?

BMJ,

I may be the one who had a brain phart! The long
term capital gains rate is now 5% for filers in the 10%
or 15% brackest and the max cap gain rate is now
15% for those in higher brackets. Who knows what
the rates will be when fire5soon retires. Sorry if I
confused the issue, but I still like the TR funds.

Cheers,

Charlie
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Re: Balanced funds in taxable?
Old 08-31-2004, 07:56 PM   #10
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Re: Balanced funds in taxable?

One of the most highly regarded balanced funds, Dodge & Cox, announced it is closing to new investors effective September 10. The fund has a great track record and low expenses. Apparently success drew in too much money to effectively manage.

http://biz.yahoo.com/rf/040831/finan...alanced_2.html
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