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Need advice: Tax efficient funds in Taxable Brokerage Account?
Old 01-12-2016, 12:20 AM   #1
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Need advice: Tax efficient funds in Taxable Brokerage Account?

My boyfriend and I took over his retirement accounts from his financial advisor a few weeks ago, and have already made a few changes here and there. I am hoping we made the "correct" changes to his taxable brokerage account to make it more tax efficient.

1) We sold an intermediate bond fund at a loss, and also sold a managed large cap fund at a gain. The two sales almost zero out the long term capital gains, but my boyfriend should be able to stay in the 15% tax bracket, so hopefully he will pay 0% on the long term capital gains if we estimated all his income correctly. The bond fund threw off a lot of ordinary, taxable dividends, so it had to go.

2) I ended up buying the Schwab Large Cap Index ETF (SCHX) hoping that it will be fairly tax efficient. I am a little miffed that Schwab does not publish a document that shows the percentages of Qualified dividends for all of Schwab's funds and ETF's like Vanguard does (for the previous tax year). Since his account is with Schwab, I did not want to pay $9 to buy a Vanguard ETF (and then $9 to sell it).

3) Does anyone know of a way to research each fund to find out what percentage of its dividends are qualified for the previous tax year?

4) Large cap and S&P 500 index ETF's are usually the most tax efficient investments one can own in a taxable account, right? Is there anything else I should look at? Are there any decent tax-exempt bond funds that I should look at?

5) Are S&P 500 Index ETFs and Large Cap Index ETF's different enough to avoid Wash Sale rules? Are Large Cap Value index ETFs vs. Large Cap Growth Index ETF's different enough? We both regularly buy S&P 500 Index funds in our 401K/457 accounts, and the plan is to buy Large Cap Index ETF's in the taxable account in order to try to avoid wash rules when we harvest capital losses. How do other people deal with this across their different retirement accounts, especially if they are still dollar cost averaging into 401K's?


Note: The boyfriend will not have to rely solely on his taxable account in retirement as he will only have maybe 12-18 months in retirement before he can tap his IRA and 401K penalty free. We are not too concerned with diversifying the asset allocation of each retirement account individually; the overall AA is what is important to us. Most or all of the rebalancing will take place in his large IRA fund.
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Old 01-12-2016, 07:06 AM   #2
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3) Call up Schwab and ask them. They do know. Alternatively, ask on message forums and find out from folks who own the investment to report what happened in previous years. Unfortunately, many people don't pay attention and would not even know what you are talking about.

Other ETF sponsors (iShares, Wisdom Tree, etc) usually have a PDF of nice tables to look up everything. Fidelity hides theirs pretty well. Schwab is a loser on this one. Correction: Schwab has a PDF as well as posted below.

4) Yes, large-cap and S&P500 are usually most tax efficient. So are total market funds. You can also look at capturing the foreign tax credit, since if one stays under $300 in FTC and remains in the 15% marginal income tax bracket this can make foreign index funds more tax efficient (in higher tax brackets and larger FTC, then no).

Don't know about tax-exempt bonds as they are not appropriate for 15% tax bracket.

5) Yes, if it follows a different index, then it is not substantially identical.
Wash sale rules are very specific about taxable accounts interfering with IRAs, but 401(k)s are not included with that, so while some folks worry about 401(k) transactions causing a wash sale, I do not. The problem is that usually one has no choice of funds in the 401(k) since they are chosen by your employer.
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Old 01-12-2016, 07:42 AM   #3
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Get a fund with no trading fees. An S&P fund is one of the lowest expense funds, and there are no capital gains unless you sell. I use IVV at Fidelity. Also some IVW.

You should not ever have to sell, unless you need money. Specialized funds you may need to re-allocate or switch out of, so you have gains and losses.

just buy it and forget it.
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Old 01-12-2016, 08:08 AM   #4
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Originally Posted by Dreaming of Freedom View Post
2) I ended up buying the Schwab Large Cap Index ETF (SCHX) hoping that it will be fairly tax efficient. I am a little miffed that Schwab does not publish a document that shows the percentages of Qualified dividends for all of Schwab's funds and ETF's like Vanguard does (for the previous tax year).
2014 Schwab ETF QDI: http://ims.schwab.wallst.com/reposit...vIncomeSummary

Other Schwab PDFs: https://www.csimfunds.com/public/csi...sis_commentary
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Old 01-12-2016, 08:43 AM   #5
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See http://www.bogleheads.org/wiki/Princ...fund_placement

Keep equities in taxable accounts, including international. In my case, the tax benefit of foreign tax credit exceeds the tax on the unqualified portion of dividends.

I don't see that munis make sense given his low tax bracket.
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Old 01-12-2016, 04:08 PM   #6
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If bonds are part of the allocation, and 401k choices stink, I could see investing in state muni bond fund. Even in the 15% bracket. I can't recall when we started, or what bracket. But now we're in the 25% bracket, have some muni bond funds in taxable, and it makes sense.
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Need advice: Tax efficient funds in Taxable Brokerage Account?
Old 01-12-2016, 06:38 PM   #7
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Need advice: Tax efficient funds in Taxable Brokerage Account?

The most tax efficient type of investment in your taxable account for a long term holding period would be a conglomerate or holding company that chooses not to pay a dividend, has a long track record of growing shareholder value, and is well managed.

Berkshire Hathaway comes to mind ....

Holding some Berkshire Hathaway and also one of the index funds - will increase diversification. I suggest SP500 ETF or a total market ETF such as SPY or VTI respectively. Be aware that while capital gains efficient, both throw off approx 2 percent dividend and taxes need to be paid on that dividend income.


Munis are tax efficient too - and some states even offer tax free status on other states' bonds. But the yields are super low and you might be better off investing elsewhere for more return and paying taxes yet still be ahead of the yield on munis.
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Old 01-12-2016, 07:34 PM   #8
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I suggest SP500 ETF or a total market ETF such as SPY or VTI respectively. Be aware that while capital gains efficient, both throw off approx 2 percent dividend and taxes need to be paid on that dividend income.
The current tax rate for qualified dividends for someone in the 15% marginal income tax bracket is 0%.

I don't pay any income taxes on qualified dividends.
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