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Tax advanted fund in a Roth?
Old 01-04-2017, 07:09 AM   #1
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Tax advanted fund in a Roth?

I've often read that one shouldn't keep tax advantaged investments in a Roth. Often it makes sense to me, but I have a question.

I hold ETV Eaton Vance Buy Right tax managed fund, in my brokerage account. It's been paying a very nice monthly dividend. I of course have to report this as income and pay the IRS.

Why wouldn't I hold my next purchase of ETV in my Roth, get the same dividend and owe no taxes?

Thanks very much for any thoughts on this
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Old 01-04-2017, 07:39 AM   #2
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That's correct, but tax advantaged funds are managed to minimize taxes and you pay for that management which has no advantage in a Roth.
Bruce
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Old 01-04-2017, 08:46 AM   #3
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+1 The benefit of a tax managed investment is wasted in a Roth.
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Old 01-04-2017, 09:37 AM   #4
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comparison of ETV and Schwab Total Stock Market Index Fund:

ETV Eaton Vance Tax-Managed Buy-Write Opportunities Fund CEF ETV chart

If I interpret the report correctly, ETV may be a tax managed plan but it isn't very tax efficient with lots of ST and LT CG.
If you like it, I suppose it would be ok to have it in a Roth to shelter those inefficiencies. My question would be why one might select that ETV over a simple index fund.

note: My understanding is that Morningstar charts show growth assuming the distributions are reinvested. I don't know if that is true for ETV here.
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Old 01-04-2017, 10:32 AM   #5
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Quote:
Originally Posted by DrRoy View Post
+1 The benefit of a tax managed investment is wasted in a Roth.
If the tax advantage is low turnover to minimize cap gains, yes it is wasted in a Roth, but a fund that throws off lots of dividends that are taxed at your income level, like a REIT are great for Roths.
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Old 01-05-2017, 12:09 AM   #6
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Quote:
Originally Posted by COcheesehead View Post
If the tax advantage is low turnover to minimize cap gains, yes it is wasted in a Roth, but a fund that throws off lots of dividends that are taxed at your income level, like a REIT are great for Roths.
Thanks Cheese and everyone else for the replies. I'm not a good communicator, but I'm grateful for the advice. Like my REITS, ETV pays a very good dividend. I am an income investor. I may be paying for their tax managing, but the fact is that I'm getting fairly high yield from them every month. That is income that currently has taxable consequences.

INFO: 100 shares pays $11.08 a month (not bad for a $15 stock)

Aside from reciting the mantra "don't hold tax advantaged funds in a Roth", how would it actually be harmful to Roth shelter this currently taxable yield?

Summary:
1) A very nice dividend (even after paying them to tax manage)
2) that very nice dividend is currently subject to taxation.
3) In a Roth, that nice income won't be taxed.

I could be missing something?
Thanks again
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Old 01-05-2017, 05:14 AM   #7
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I think the lesson here is that just because a fund or ETF or CEF has the phrase "Tax-Managed" in its name does not mean that it is very tax-efficient. It pretty clear that ETV is tax inefficient and deserves to go in a tax-advantaged account if one wants to hold it there. It hasn't been all bad since about 58% of the ETV distribution is tax-free return-of-capital, but that leaves LTCG and income for the rest, so it has a taxable yield of 0.416 * $1.33 / ~14.8 = 3.7% although much of the 3.7% is LT cap gains.

So you are missing that most of the dividend you get is return-of-capital which is not taxed. If you are just using the monthly dividend to buy more shares, then what's the point of having the manager churn things for you? They say: Here's your return of capital. You say: Here it is back to buy more shares.

By the same token, just because a fund does NOT have tax-managed in its name does not mean it is not reasonably tax-efficient. A total US market index fund has outperformed ETV over the years and has been very tax efficient. You could sell shares if you wanted to get return-of-capital like you do with ETV.

And a total US market index can go in tax-advantaged accounts just as easily as it can go in a taxable account.

I don't see the need to pay the manager of ETV to play with my money since they do worse than some simple things.

But if you ilke to do this sort of thing, you can do it yourself:
1. Buy 100 shares of VTI.
2. At the end of every month, sell 1 share of VTI and buy it back 1 second later. Make sure you use a broker that has free trades.

This will give you a churn of 12 shares a year plus the dividends of about 2%, so you will have 14% "yield" most of which is tax free. Awesome!

You should select the 1 share to sell each month that is the most advantageous tax-wise: Either a share (or shares) with losses or a share held long-term. After a year, there will be pleny of shares held long-term (up to 99 of them) with this scheme.
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Old 01-05-2017, 06:08 AM   #8
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It also depends on your own situation. For example, as long as I'm in the 15% bracket I try to keep most of my taxable investments in dividend stocks, since the dividends are taxed at 0% and at the end of each year I can take enough long term capital gains to use up most of the bracket and, when I immediately repurchase, I basically increase my cost basis with no tax hit.

Fixed income investments are usually the best to put in a tax-advantaged account. With stocks, you eventually pay taxes at ordinary income rates instead of LTCG and dividend rates.
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Old 01-05-2017, 08:32 AM   #9
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Once again, there are at least 2 kinds of tax-advantaged accounts: tax-deferred (like traditional IRA) and tax-free (like Roth IRA).
Stocks and investments held in a Roth IRA will not be subjct to taxes at ordinary income tax rates.

I keep only tax-efficient index funds in my taxable account and no stocks there. Those funds pay qualified dividends. I am also in the 15% marginal income tax bracket. I haven't paid capital gains taxes in more than decade.
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Old 01-05-2017, 09:22 AM   #10
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Thank You all. I see I am missing something, I was preparing to make a larger purchase of ETV. I'll slow down and dig a little more.
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