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Taxable Investments
Old 02-24-2008, 10:05 AM   #1
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Taxable Investments

I could use some advice regarding taxable investments.

I will be 53 this year, invest in my 401k, own some real estate etc. I would like to retire in 3-4 years, but will need money to draw from to get me to the 401k/IRA money. (when I'm 60 or so)

I like index funds, and own Vanguard 500, Total International fund, and some Windsor 2. I keep reading bond funds are bad in a tax scenario. Is there one index fund that's appropriate for after tax investing? Or a mix of several that would be good for this? I really don't know. Most of the funds I own are in tax deferred 401k/IRA.

Thanks for any input.
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Old 02-24-2008, 10:23 AM   #2
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Old 02-24-2008, 10:39 AM   #3
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What percent of your current total assets are in tax-advantaged and in taxable?

What is your current asset allocation in terms of % bonds and % stocks?

If you retire in 3 to 4 years, will 4% of your portfolio's total value cover your yearly expenses including taxes and healthcare?
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Old 02-24-2008, 12:18 PM   #4
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Put your bond funds in the tax deferred accounts and tax efficient equity funds in your taxable. While waiting to access your tax protected accounts sell the equities in the taxable account and then swap an equal value of bonds in the tax protected into similar equity fund in that account.

ie sell $10,000 equity fund X in taxable, sell $10,000 bond fund Y in tax protected and buy $10,000 equity fund X in tax protected account.

This maintains your AA and keeps your Asset Location efficient. If you tax loss harvest beware the "wash" sale rule.

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Old 02-24-2008, 01:55 PM   #5
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44% is in Tax Advantaged
56% is in Taxable

I used the x-ray Tool and came up with these percentages for both holdings:
44% Cash
40% Us Stocks
9% Foreign Stocks
7% Bonds
This doesn't include $66000 in I Bonds or 529 Funds for my kids College.

I would like to use some of the cash holdings (currently in cd's @ 5.25% due to mature soon) and buy into the market in the next few months.
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Old 02-24-2008, 03:03 PM   #6
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I agree with the post by DblDoc.

So for your taxable accounts, you really only need to consider 2 funds: Vanguard Total Stock Market (VTSMX or VTI) and Vanguard FTSE all-world ex-US international stock index fund (VFWIX or VEU).

All your fixed income can be held in your tax-advantaged accounts.

You say you own S&P500 index fund which is just fine, but it has only large caps and not large/mid/small of the total market fund. I would not sell out of the S&P500 fund if you have a capital gain, but I would not reinvest dividends and distributions, but take them in cash to put elsewhere.

You say you own a total international fund. Different total international funds are not created equal. A consensus at the Diehard's site is the VFWIX / VEU is the best nowadays for a taxable account because (a) you get the foreign tax credit with it, (b) it has a slice of emerging markets and (c) it contains Canadian stocks. The Vanguard Total International Index fund is a fund of funds so is not eligible for foreign tax credit, does not contain emerging markets nor Canadian stocks.

If you want to have more small caps, then let us know and we can suggest some funds for that as well.

I hope this helps with your decision.

PS: We own Vanguard Windsor II in an IRA. It is not tax efficient. I would recommend that you do not reinvest any distribution but take those in cash and use them for rebalancing into one of these new recommended index funds instead.
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Old 02-25-2008, 12:11 PM   #7
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You say you own a total international fund. Different total international funds are not created equal. A consensus at the Diehard's site is the VFWIX / VEU is the best nowadays for a taxable account because (a) you get the foreign tax credit with it, (b) it has a slice of emerging markets and (c) it contains Canadian stocks. The Vanguard Total International Index fund is a fund of funds so is not eligible for foreign tax credit, does not contain emerging markets nor Canadian stocks.
It's good I came across your post. Just in time, I'd say, because last week I requested to get a prospectus by mail (instead of printing it out) because I was strongly considering the Total Int'l Idx fund for our taxable account (in addition to VTSMX).
I thought that any Int'l fund would qualify for a foreign tax credit. Is the "a wrap-up of funds" the only reason why Vang.Int'l Idx fund wouldn't qualify for the tax credit? I wonder whether its prospectus specify that.

Also, does Vanguard provide detailed monthly or yearly statements and 1099 for any int'l fund? I mean do they specify companies (or countries) that paid dividends and to which countries they paid taxes based on those dividends?

By the way, could you please provide the link to Diehards where folks discussed this fund?

Thanks

PS. All I know is that it's better not to have more than $600 (joint return) in foreign taxes (via mutual funds/stocks) or the tax filing becomes overly complicated.
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Old 02-25-2008, 02:36 PM   #8
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I went to find the link for you (there are many) but see you already posted over there and are getting the answers you need.

DD
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Old 02-25-2008, 02:44 PM   #9
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I went to find the link for you (there are many) but see you already posted over there and are getting the answers you need.
DD
Yep, I thought I must start moving and learning everything ASAP because my plan is to open a new account by April (hopefully). Actually, hopefully DH gets a bonus as anticipated
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Old 02-25-2008, 03:14 PM   #10
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Quote:
Originally Posted by Livefree View Post
44% is in Tax Advantaged
56% is in Taxable

I used the x-ray Tool and came up with these percentages for both holdings:
44% Cash
40% Us Stocks
9% Foreign Stocks
7% Bonds
This doesn't include $66000 in I Bonds or 529 Funds for my kids College.

I would like to use some of the cash holdings (currently in cd's @ 5.25% due to mature soon) and buy into the market in the next few months.
A few comments to summarize-

age 53 was listed as current age? Retiring in 4 years puts you at age 57.

As another poster pointed out, 72(t) could be used to get penalty free access to money at age 57. You would need to withdraw the same amount for 5 straight years.

The question is whether you
a) let tax deferred monies grow
b) 72(t) the tax deferred monies to start drawing down early
c) cash out/draw down the taxable investments
d) what is the withdraw rate -relative to
  1. total portfolio value
  2. taxable accounts
  3. tax deferred accounts
  4. tax brackets
I would use 4) (tax brackets) to determine short term allocation and plan.

For example, if the amount of the withdraw (72t) is less than 65,100 (married filing jointly) or 32,550 (single) you are in 15% tax bracket. I would do everything I could to stay inside that bracket, even if the total amount needed was higher.

If you need 80k to live on, I would consider using 72(t) to get access to 65,100 (cap of 15% tax bracket) then cash out only enough from taxable accounts (15k) because these would be taxed at 5%.

If you withdrew 65101 or more in this situation 2 things happen.
1) any dollar over 65100 is taxed at 25%
2) the taxes on the taxable account jump from 5% to 15%

If you need less than 65100 to live on, then I would modify the plan above. I would 72(t) enough to be in 10% tax bracket ($8025 single or $16050 married filing jointly), then cash out the taxable accounts. I would also convert a portion of the IRA/401k monies to a Roth, paying either 10% or 15% taxes on the money, then never pay taxes on it again.


Once you figure out the answer to above, I would then look to take new money which needed to be invested and look for 3 things.

1) dividend income. Dividend income is taxed at 5% if in 15% bracket or lower, 15% if in 25% bracket or higher. I would build a dividend portfolio to supplement any income need, especially if using the second plan, but would probably use it for both plans.

2) bond allocation. You have 51% in stocks and bonds. If you are building a dividend stream above, you will need to buy some bonds in tax deferred accounts.

3) Overall withdraw rate. Make sure the plan did not change the withdraw rate from initial calculations. I am suggesting more of a bucket approach. Mostly because you have the ability to get taxed very little on the income, provided you keep the right amounts in the right buckets.
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Old 02-25-2008, 03:17 PM   #11
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Originally Posted by LOL! View Post
...say you own a total international fund. Different total international funds are not created equal. A consensus at the Diehard's site is the VFWIX / VEU is the best nowadays for a taxable account because (a) you get the foreign tax credit with it, (b) it has a slice of emerging markets and (c) it contains Canadian stocks. The Vanguard Total International Index fund is a fund of funds so is not eligible for foreign tax credit, does not contain emerging markets nor Canadian stocks.
LOL,

I have VEU, but it's within a Rollover IRA. Would you mind elaborating some on the foreign tax credit angle, your item (a) above? I'll need to move out of some of my cash positions, taxed & tax deferred accounts, in the near future.
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Old 02-25-2008, 07:09 PM   #12
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Suppose an int'l fund pays a dividend of 10 cents a share each year, but that dividend gets taxed by the foreign government(s) in which the dividend is earned. Let's say the tax is 2 cents a share. So what happends is on 1000 shares you earn $100, but $20 gets taxed away before you see it, so you keep only $80 of the dividend.

Well, the IRS allows you to take a $20 credit (not a deduction, a credit) on your taxes for that $20 you paid to a foreign tax authority but only if this was in a taxable account. In an IRA, there is no foreign tax credit. So you get to reduce your taxes by $20 if the int'l fund is held in a taxable account.

So a good place for a tax-efficient foreign index fund like VEU is in your taxable account because you are gonna pay the foreign tax whether it is in a tax-advantaged account or a taxable account, but the only place you get credit for paying that tax is if it is held in a taxable account.
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Old 02-25-2008, 07:52 PM   #13
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FTSE Index Fund

One thing I did notice about this fund is it assesses a 0.25% fee ($2.50 per $1,000 invested) on purchases. It also looks like it's only been around for one year?
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Old 02-25-2008, 10:09 PM   #14
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One thing I did notice about this fund is it assesses a 0.25% fee ($2.50 per $1,000 invested) on purchases. It also looks like it's only been around for one year?
Its still one of if not the cheapest MF for this asset class. The ER of Vanguard funds tends to fall over time. You could also look at the ETF version, depending on how you are investing that may be the cheapest way to go. It is new but is an index fund.

DD
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Old 02-25-2008, 10:30 PM   #15
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I agree with the post by DblDoc.

The Vanguard Total International Index fund is a fund of funds so is not eligible for foreign tax credit, does not contain emerging markets nor Canadian stocks.
You're right it does not hold Canadian stocks, however, it does hold 20.1% Emerging Markets.

https://personal.vanguard.com/us/fun...FundIntExt=INT
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Old 02-25-2008, 10:41 PM   #16
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Ooops! My mistake. I was confusing it with the vanguard tax-managed international fund (VTMGX). Thanks for the correction.
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Old 02-26-2008, 09:03 AM   #17
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Thanks LOL. It's amazing what you can learn on this forum.
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Old 02-26-2008, 09:20 AM   #18
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Suppose an int'l fund pays a dividend of 10 cents a share each year, but that dividend gets taxed by the foreign government(s) in which the dividend is earned. Let's say the tax is 2 cents a share. So what happends is on 1000 shares you earn $100, but $20 gets taxed away before you see it, so you keep only $80 of the dividend.

Well, the IRS allows you to take a $20 credit (not a deduction, a credit) on your taxes for that $20 you paid to a foreign tax authority but only if this was in a taxable account. In an IRA, there is no foreign tax credit. So you get to reduce your taxes by $20 if the int'l fund is held in a taxable account.

So a good place for a tax-efficient foreign index fund like VEU is in your taxable account because you are gonna pay the foreign tax whether it is in a tax-advantaged account or a taxable account, but the only place you get credit for paying that tax is if it is held in a taxable account.
A great post!! But I have a few more questions, if you don't mind. Taxes is a painful topic for me.

First of all, I haven't invested in a taxable Int'l fund (we've DODGX & VTSMX right now), so I have no clue how specific 1099 of an int'l fund look like. But based on your numbers above:

- Would a taxpayer have to put $80 net or $100 gross dividends on Line 9a (& maybe Line 9b) on form 1040 before claiming $20 foreign tax credit on Line 51 (I think)?

Also, how does one learn which funds give Foreign Tax Credits? Is it specified some place within a prospectus? I didn't notice it mentioned on Vanguard's or probably I'm looking in the wrong place.

One last question. How do people go about buying an ETF? I've NEVER used a brokerage, so no clue how that stuff works. Would you buy Vanguard ETF thru their brokerage services?
When buying an ETF? What's the minimum amount to be best invested ($5k, $10k?) since DCA would be too expensive?
Do peple hold the ETF for a long time or do they trade them (and incure fees each time)?

Thank you
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Old 02-26-2008, 10:48 AM   #19
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On the int'l fund dividend, the 1099DIV would have $100 in box 1 and $20 for the foreign tax paid in another box (box 9?). Thus you would be paying US taxes on the $100, maybe that would be $15 and you would then get a credit for the $20 elsewhere on your tax return.

On buying ETFs, they are pretty much like stocks. You may pay a commission to buy and sell them. Commissions run between $0 and $20 nowadays depending on which firm you have your brokerage account with. The minimum purchase amount is one (1) share. DCA would be too expensive unless your commission was $0.

Some people hold ETFs forever. Some trade them. When I buy an ETF, I intend to hold it forever, but I will do tax-loss harvesting and rebalancing occassionally in order to save money.
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Old 02-26-2008, 09:19 PM   #20
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One last question. How do people go about buying an ETF? I've NEVER used a brokerage, so no clue how that stuff works. Would you buy Vanguard ETF thru their brokerage services?
When buying an ETF? What's the minimum amount to be best invested ($5k, $10k?) since DCA would be too expensive?
Do peple hold the ETF for a long time or do they trade them (and incure fees each time)?

Thank you
I wouldn't use Vanguard brokerage services unless you have enough invested with them to get low cost or free trades. Vanguard has a comparison calculator that will tell you which is the most cost effective way to go when deciding between the MF or ETF. https://personal.vanguard.com/us/funds/etf. The last question depends on the kind of investor you are and the purpose of the investment. Personally I'm a buy and hold and am accumulating. Not sophisticated enough yet to tax loss harvest so what I buy I keep...

DD
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