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Please critique my Taxable Schwab Acct for tax efficiency
Old 09-30-2015, 12:26 AM   #1
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Please critique my Taxable Schwab Acct for tax efficiency

My boyfriend and I are going to end our business relationship with his financial adviser soon, and I would be taking over the management of his accounts. I have a decent grip on many areas of financial planning, but my knowledge of what funds are good for tax efficiency in a taxable account is lacking. I have read that most bond funds and REIT's are bad to hold in a taxable account due to taxes, and that mutual funds & ETF's that distribute qualified dividends and hold off on capital gains until you sell them are good for taxable accounts.

Here are the funds he owns that I am wondering about with respect to tax efficiency:

VOE: mid cap value ETF. Tax Efficient?
VBK: small cap growth ETF. Tax Efficient?
VTV: large cap value ETF. Tax Efficient?
VFINX: large US blend mutual fund. Good or bad?
SWPPX: large US blend mutual fund. Good or bad?
IVIQX: foreign small/mid cap value mutual fund? Good or bad?
FINSX: large growth US mutual fund. Good or bad?
TOLIX: large blend all world mutual fund. Good or bad?
ANJIX: large foreign value mutual fund. Good or bad?
OSTIX: high yield bond fund. NOT tax efficient, right?
SWQXX: Neutral? cash reserve account that makes no money anymore

I want to have mutual funds and ETF's that do not produce a lot of unqualified dividends and/or a lot of short term capital gains, right? I am in the 15% tax bracket. What do you keep in your taxable accounts?

Also, I am all for learning how to "intentionally" cause and harvest capital gains and losses, but I am still a newbie, and it would be nice if I don't have to do that quite yet. I worry that I could really screw up and regret something come tax time, so good, tax efficient funds would be best for me at this time.

Finally, some of the mutual funds above have pretty high expenses, so I plan to sell them and buy funds with much lower expenses in the near future if that means anything in the bigger tax picture.

Thanks for the help!
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Old 09-30-2015, 01:15 AM   #2
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Oh, congratulations on your plans to dump the financial advisor. Welcome to the Big Leagues! The cost of a typical advisor would have delayed my ER by at least 5 years and would probably extended my ignorance even longer.

I'll let the tax and fund experts here do the heavy lifting in terms of advice, but here are my key impressions & caveats.

Seems like you have a large number of overlapping funds. Probably too complicated for most folks unless you have fun playing around and/or have a massive taxable account (millions??). A handful (at most) rather than a dozen, would best serve most.

Watch out for tax consequences of large sell-offs in taxable accnt.

Most importantly, how many years are you from your target retirement date? Does this date allow for full access (no penalty on withdrawal of principle) to tax advantaged accounts like IRA/401K? Folks like me who retire before 59 and a half years old often use taxable accounts to "bridge" to when tax advantaged accounts are cleanly accessible. As I approached ER, I transitioned my taxable account from 0% bonds & cash to 50%+ bonds and cash. Yes, this is less tax efficient and provides lower yield long term, but the main goal is to survive an unfriendly bear market during the first 5-10 year of retirement (sequence of return risk). We keep a couples of years of expenses in cash & bonds in taxable accounts, enough to get us to our tax advantaged accounts, which also have several additional year's worth of bonds.

So, it's critical to understand the context of anyone's advice and determine how/if it applies to your specific situation.
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Old 09-30-2015, 02:08 AM   #3
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I am guessing my boyfriend may retire in 12 to 18 months at age 58, and I may partially retire in 18 months at age 41. We will be able to access about 50% of our funds when we retire via taxable accounts (money market, checking, brokerage), Roth contributions, and my 457 plan. My boyfriend may also be able to access his 401K, but we are not sure. We seem to naturally keep 2.5 to 3 years of expenses in checking & money market accounts, with an AA of 70% equities & 30% cash & bonds. I am still so young that you can bet I will work doing something, anything if the market tanks for several years &/or inflation goes nuts. Honestly, I will probably keep working part time for several years, but I kind of want a second, different career and/or consulting work. On the flip side, I worry about working too long & missing the good years left with my much older boyfriend (future husband in retirement).

Racing for the FIRE finish line, but I don't know where it is.
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Old 09-30-2015, 10:34 AM   #4
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My gut feeling is that all those funds could be replaced with about three funds: Total Market domestic, Total Market foreign, and Total market bond. All very tax efficient. You pick the asset allocation that works best.
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Old 09-30-2015, 11:30 AM   #5
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Quote:
Originally Posted by Dreaming of Freedom View Post
My boyfriend and I are going to end our business relationship with his financial adviser soon, and I would be taking over the management of his accounts. I have a decent grip on many areas of financial planning, but my knowledge of what funds are good for tax efficiency in a taxable account is lacking. I have read that most bond funds and REIT's are bad to hold in a taxable account due to taxes, and that mutual funds & ETF's that distribute qualified dividends and hold off on capital gains until you sell them are good for taxable accounts.

Here are the funds he owns that I am wondering about with respect to tax efficiency:

VOE: mid cap value ETF. Tax Efficient?
VBK: small cap growth ETF. Tax Efficient?
VTV: large cap value ETF. Tax Efficient?
VFINX: large US blend mutual fund. Good or bad?
SWPPX: large US blend mutual fund. Good or bad?
IVIQX: foreign small/mid cap value mutual fund? Good or bad?
FINSX: large growth US mutual fund. Good or bad?
TOLIX: large blend all world mutual fund. Good or bad?
ANJIX: large foreign value mutual fund. Good or bad?
OSTIX: high yield bond fund. NOT tax efficient, right?
SWQXX: Neutral? cash reserve account that makes no money anymore

I want to have mutual funds and ETF's that do not produce a lot of unqualified dividends and/or a lot of short term capital gains, right? I am in the 15% tax bracket. What do you keep in your taxable accounts?

Also, I am all for learning how to "intentionally" cause and harvest capital gains and losses, but I am still a newbie, and it would be nice if I don't have to do that quite yet. I worry that I could really screw up and regret something come tax time, so good, tax efficient funds would be best for me at this time.

Finally, some of the mutual funds above have pretty high expenses, so I plan to sell them and buy funds with much lower expenses in the near future if that means anything in the bigger tax picture.

Thanks for the help!
For at least the mutual funds, you can go to morningstar.com and enter the ticker symbol. It will give you the yield (dividends) as well as the % of turnover. Generally, the lower the % turnover, the lower the cap gains you'll see because they're not trading underlying stocks very often.
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Old 09-30-2015, 03:22 PM   #6
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I usually don't comment on these posts where members want input. But I just couldn't resist with this mix. It's a puzzle! You have a lotta stuff here, and with several brokers. Before worrying about whether something is tax efficient, I'd worry about how these fit into an asset allocation.

But to answer your question: Index funds, by design, are tax efficient. Mutual funds may not be tax efficient. So in the long list you provided, the ETFs would be my first choice, second would be any Vangard/Schwab/Fidelity mutual fund that is an Index fund - not actively managed AND, as long as the funds fit into your Asset Allocation.

Secondly, you want to invest in ETF/Mutual Funds with low expense ratios so that more of your money is being invested, rather than paying for administrative expenses.

You didn't identify where you have these funds. I see funds/etfs from Vangard, Schwab, and Fidelity. So I assume they may be with one or more brokers. Put them with one broker, preferably a discount broker where the cost to trade is relatively small. So: Vangard, Schwab, Fidelity. Note that for some mutual funds and ETFs there is no commission to trade and you want a broker who can cover the funds you want in your asset allocation at the lowest commission possible.

As someone else said you have overlap, you also have duplication:
VFINX and SWPPX are both S&P500 Index funds. The only distinction between the two is the expense ratio - you'd have to compare that - then collapse into one provider. There are several ETFs that follow the same Index (S&P500), but I doubt their expense ratio would be lower than either Schwab or Vanguard.

IVIQX: I looked, got the same definition you did. At 1.01% Expense Ratio, I'd look to replace this mutual fund with an ETF that does the same thing at a lower ER, using whichever broker you have your other taxable investments with.
FINSX: an Fidelity institutional foreign stock fund, that has a .90% Expense ratio and might be the same thing as IVIQX. Tax efficient in that they both pass foreign taxes on to you and these are deductible on income taxes under the taxes paid section of the 1040.
ANJIX: Foreign Large Value Fund with 50% turnover ratio, and .92% expense ratio. Investing 97% of funds in non-US Stocks. Not sure this is any different from the other two, it is an institutional fund. Doesn't appear to have distributed anything but dividends. Not sure if there has been a decent return on investment. So probably tax efficient, and maybe a candidate for tax loss harvesting.

TOLIX: pretty obscure - Deutch Global Infrastructure Institutional Fund. Morningstar says a World Stock Fund with 114% turnover ratio, and 1.09% expense ratio. But! A World fund can include US investments, as opposed to a Foreign fund which excludes US investments. From it's prospectus: "at least 80% of net assets in the securities of US and non-US infrastructure-related companies." I'd say this is a specialty fund and if it fits into the Asset Allocation, OK, but it's not tax efficient because it is an actively managed mutual fund.

OSTIX - correct doesn't belong in taxable account
SWQXX - money market account for the Schwab account. You still need a place to stash the cash, looks like this one goes with the Advisor account with Schwab. If you close this account and leave everything with Schwab you'll just get a different fund. Their usual money market fund for the brokerage account is a tax-exempt MMF.

So, first thing, do a little reading about Asset Allocation and decide what yours should be. Try Rick Ferri's "All About Asset Allocation," available at your local library. He also has two books about index fund investing. "All About Index Funds," and "The Power of Passive Investing." The last one is new and I have not read it, but I use the Asset Allocation book like a road map. Very helpful.

Rita
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Old 10-02-2015, 12:34 AM   #7
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Thanks for all the advice! I had not thought all that much about portfolio turnover and credit for foreign taxes paid, and how those would negatively or positively affect my taxes. As for asset allocation and picking decent funds, I plan on working on that, though with over 100 mutual funds and ETF's between the two of us, I will be taking things a little slowly, one account at a time.

I do have a couple more questions. I am not sure if I should post them here, or start a new thread. Would this be a good year to reallocated the funds in the taxable account since all the funds have taken a beating so much and theoretically, capital gains would be minimized or cancelled out by all the losses? Is there anything tricky about selling off the bond funds and putting that money into equity ETF's? Are there any bond funds that would be good in a taxable brokerage account? Thanks for the advice.
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Old 10-02-2015, 01:31 AM   #8
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* Put foreign equity in taxable so that you can get the foreign tax credit.

* The following are from best to worst in terms of tax efficiency: growth, blend, value. Treat dividend focused stocks/funds like value.

* You want to avoid putting bond funds and REITs in taxable. Best thing to do is fill your 401k up with bonds, put REITs in your Roth IRA, and put stocks in taxable. Treat preferred stocks like bonds. REITs in a Roth IRA have zero corporate and personal taxes.

* If you have to put bonds in taxable then use muni bonds if you want to avoid federal tax or treasury bonds if you want to avoid state tax.

* MLPs are very tax efficient if you want to increase your income. BDCs are another high income asset but they need to go in 401k or Roth IRA. Same deal with private equity.

* Keep cash in taxable.

* Be sure to do "tax loss harvesting" in your taxable account when you have a large capital loss.

* Individual stocks can be passed onto heirs at stepped up cost basis. This can be particularly beneficial with MLPs and other assets which do a lot of "return of capital" to shareholders.
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Old 10-02-2015, 10:21 AM   #9
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Quote:
Originally Posted by Dreaming of Freedom View Post
. As for asset allocation and picking decent funds, I plan on working on that, though with over 100 mutual funds and ETF's between the two of us, I will be taking things a little slowly, one account at a time.
With that many mutual funds between the two of you, I think you may have already created what amounts to a global index fund. Except that instead of doing it simply with 3-5 funds, you did it with 100. Just my 2 cents. Good Luck.
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Old 10-02-2015, 12:35 PM   #10
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Would this be a good year to reallocated the funds in the taxable account since all the funds have taken a beating so much and theoretically, capital gains would be minimized or cancelled out by all the losses?
If you feel strongly that you want to reduce the number of holding in your taxable account then reallocation is the only way to do that.

If you have 'losers' and want to tax loss harvest, then selling is the only way to do that. Just be sure you have good records on the cost basis for tax purposes. Especially if this year is the year you straighten out one of the accounts and are looking at tax gains, tax losses are important, and they do carry over year-to-year. Once you sell, you have cash, then what?

I would urge you to take a week and read about Asset Allocation, rather than saving it for later - before you do anything. It will become your road map for what gets sold and what gets bought.

As always, Internet advice is free, and you get what you pay for. I realize you've been with Schwab and an advisor at Schwab who had control of the accounts. You probably have enough assets that you can get some help from the Vice President assigned to your account (see your statement for your non-advisor accounts). They are all CFP, but are there to be used as a sounding board (he/she earns a small commission on the value of your accounts that comes from the administrative fees you pay for Schwab funds, or trading commissions - he/she does not earn directly on any transactions you make).

I have been with Schwab for over 20 years, I generally don't even talk the the VP assigned to my account as I have been doing it by myself for so long. For a new person, they are good for sounding boards and generally don't have any vested interest other than keeping your investments with Schwab (see above about compensation).

If you have $1000-1500, it might be good to meet with a fee-based planner who can help you decide how best to make the changes (you still need to educate yourself about Asset Allocation, tho'). You would be in control of when the changes get made, not the planner.

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Old 10-02-2015, 01:52 PM   #11
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Originally Posted by Dreaming of Freedom View Post
I want to have mutual funds and ETF's that do not produce a lot of unqualified dividends and/or a lot of short term capital gains, right? I am in the 15% tax bracket. What do you keep in your taxable accounts?

Also, I am all for learning how to "intentionally" cause and harvest capital gains and losses, but I am still a newbie, and it would be nice if I don't have to do that quite yet. I worry that I could really screw up and regret something come tax time, so good, tax efficient funds would be best for me at this time.
!
In general be careful with MF in taxable accounts. MF can hold gains internal to the fund for a long time, but they have to distribute when they realize them. I've had CG distributions of greater than 20% in a year at times from funds that typically distribute little.

Harvesting a loss or gain, easy, just sell something that has an unrealized loss or gain. For a gain you can sell it and then buy it back... gain realized. For a loss, sell the loss but do not buy it back within +/- 31 days. If you do it will be considered a wash sale and you will need to track the loss going forward. It is better to buy something similar, but not identical, like replace an S&P ETF with a LCB and MCB ETFs.
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