After-tax investing

[dunc0029]

Years ago, I bought some ING mutual funds, because I had/have a savings account there and the minimum requirements were low and I didn't really know what I was doing. Currently, I just have $3k in their INDEX+Large Cap fund. Well, I'm wanting to start adding to my after-tax investments, but not necessarily with ING.

I already have my Roth and previous employer's 401k with Fido. So, I was weighing the benefit of having everything in one place versus going with Vanguard. I was leaning towards Vanguard and just simply investing in Windsor with my after-tax money, and eventually diversifying ( I am already diversified with my pretax investments ).

My questions are:

1) Is Windsor a reasonable fund for after-tax investments? Looks like a fairly sizable yield ... would I be better off going with a more tax-efficient fund?

2) Should I sell the ING fund and move the $ over? I don't particularly like the fund, but it's not terrible, either. I'm currently padding my savings so I can Make the 10k minimum investment for Windsor. I'd be potentially hit with Capital gains tax, but then I'd have the money to open the Vanguard account now versus waiting. Plus, I'd have my after tax accounts in one place.

Just curious to hear your thoughts. Thanks!

[Gone4Good]

If ING charges high expenses versus Vanguard I'd look to move the $3K. I certainly wouldn't invest more into high cost funds just to keep my money in one place. The longer you stay, and the more you invest, the higher the cost will be to move your money once you decide to. Ideally you want to avoid buying and selling your mutual funds if possible, but with only $3K at ING I wouldn't hesitate to make a switch.

I don't own Windsor. It looks like a reasonable fund. However, my bias tends more toward Index funds. I don't believe investment managers generally outperform properly defined benchmarks. If I were starting an equity portfolio, I think my first purchase would be Vanguard's Total Stock Market fund. The fund minimum is just $3K so you don't have to wait. The expense ratio is half that of Windsor (more $ in your pocket). It gives you exposure to large, mid and small cap domestic stocks (but is heavily weighted toward large caps). As your savings grow, you can easily diversify away from the "Total Market" by adding other index funds, international, REITS, etc. One of the problems with a managed fund like Windsor, is that you don't really know what you own. Has the allocation moved from large caps to mid caps? do they already own REITs? is the manager overweight financials? If Windsor is the core part of your portfolio, your asset allocation will always be a little bit fuzzy. With index funds, you are in control of your asset allocation and you know what you own.

[soupcxan]

Yes, you should get rid of the ING account and go to Vanguard. Even if you do have some taxable gains from selling the ING fund, it's only $3k, not very much money in the grand scheme of things.

If you are holding funds in taxable accounts, I would stay away from total stock market and focus on dividend paying funds, like VEIPX, since the tax rates on qualified dividends will be advantageous.

[Gone4Good]

Quote:

Originally Posted by soupcxan If you are holding funds in taxable accounts, I would stay away from total stock market and focus on dividend paying funds, like VEIPX, since the tax rates on qualified dividends will be advantageous.

No, no, no, no . . . currently the tax rates for dividends and capital gains are the same.* However, capital gains taxes are deferred until you actually sell the investment whereas dividends are taxed currently.* If you run an IRR on a dividend paying investment and a non-dividend paying investment that both have the same before tax total rates of return, the non-dividend paying investment will yield a higher after-tax return - the difference being the present value of tax payments.*

As Wimpy said "I'll gladly pay you Tuesday for a hamburger today."

[soupcxan]

Incorrect. When a mutual fund distributes capital gains, those are taxed at the long-term/short-term rate (as appropriate). Even if you reinvest those capital gains, you still have to pay taxes on them in the current year.

If you are talking about individual stocks, then yes, you can defer paying taxes on the gains until you sell whereas dividend income is immediately taxable. But OP was talking about mutual funds.

Quote:

Originally Posted by 3 Yrs to Go No, no, no, no . . . currently the tax rates for dividends and capital gains are the same.* However, capital gains taxes are deferred until you actually sell the investment whereas dividends are taxed currently.* If you run an IRR on a dividend paying investment and a non-dividend paying investment that both have the same before tax total rates of return, the non-dividend paying investment will yield a higher after-tax return - the difference being the present value of tax payments.* As Wimpy said "I'll gladly pay you Tuesday for a hamburger today."

[saluki9]

Quote:

Originally Posted by soupcxan If you are holding funds in taxable accounts, I would stay away from total stock market and focus on dividend paying funds, like VEIPX, since the tax rates on qualified dividends will be advantageous.

What in the world are you talking about? TMI funds are some of the most tax efficient funds you can hold. On top of what has already stated, all cap funds are even better because when stocks move from small to mid to large cap (or reverse) they don't have to be sold and then purchased again.

Go look at the annual distributions from the Vanguard TMI compared to their LCV or dividend growth funds and then lets talk again.

[azanon]

In a mutual fund, money made via capital gains maybe be long-term, and the long-term capital gains tax rate is indeed lower than the dividend tax rate (assuming your marginal rate is higher than 15%).* *LT capital gains is now capped at 15%.* *Yes, some will end up being ST, and some LT (depending on when the manager bought it).

So, all other things being equal, a fund that emphasis LT capital gains, where the fund has a low turnover rate, is going to be very tax efficient, whereas a fund that makes money either primarily through dividends or where the fund manager has a very high turnover rate is better in a tax-sheltered investment such as a 401(k).*

Azanon

[Gone4Good]

Quote:

Originally Posted by soupcxan Incorrect. When a mutual fund distributes capital gains, those are taxed at the long-term/short-term rate (as appropriate). Even if you reinvest those capital gains, you still have to pay taxes on them in the current year.

Yes.* Capital gains distributions are also taxable.* But both index funds and dividend paying funds will have capital gains distributions.* The size of the distributions will be determined largely by the turn-over of the portfolio.* Most managed funds will have a higher turn-over rate then un-managed/index funds and therefore will also have higher taxable distributions.* Therefore, a managed dividend paying fund will almost certainly have higher taxable income then an unmanaged index fund.

It may also be worth noting that the mutual fund distributes only gains realized when the portolio sells securities. It does not distribute to holders their unrealized gains. If the portfolio has zero turn-over during the year, then it will have zero gains distribution . . . and juicy tax deferrals on any capital appreciation.

[shorttimer]

Don't forget to look at your state muni bonds too for tax considerations. They make sense for some. I asked for and received great help here in how to research them (thanks again).

[mickeyd]

I don't own Windsor either, but since this appears to be taxable money (not tax-deferred) I would look at the Total Stack Market fund at Vanguard.

True, Windsor has a long history (1958) but it has an ER of .37% and only seems to invest in LC and MC issues. The TSM has an ER of .19% and is split up LC 70%, MC 20% and SC 10%, so it may be more tax efficient than Windsor.

(Caveat: I consider a low ER to be more important than historical return in the long run.)

[FinanceDude]

Quote:

Originally Posted by mickeyd (Caveat: I consider a low ER to be more important than historical return in the long run.)

Isn't that counterintuitive? I mean, if one gets as little as 1% a year more average return, is it not worth the extra .18 to do it? Sounds like getting $1 for each $.18 spent.............

[yakers]

Quote:

Originally Posted by FinanceDude Isn't that counterintuitive? I mean, if one gets as little as 1% a year more average return, is it not worth the extra .18 to do it? Sounds like getting $1 for each $.18 spent.............

Well mickyd sounds like a Vanguard diehard. These folks, and I generally agree with them, hold that the only thing the investor has control over are their expenses. There are a few actively managed funds that outperform indexs over a long period of time and overcome their higher ERs. But not many, not the vast majority and no one knows if they will continue to outperform in the future.

I am sure someone can explain it better but discovering the impact of expenses is an important step, like learning about compounding and risk, it is something worth focusing on. And it helps one avoid the siren song of chasing hot stocks and the costs of frequent trades.

[eridanus]

Quote:

Originally Posted by yakers There are a few actively managed funds that outperform indexs over a long period of time and overcome their higher ERs. But not many, not the vast majority and no one knows if they will continue to outperform in the future.

There are very few. Legg Mason Value has beat the S&P for 15 years. The next contender has a 7 year streak.

Do ya feel lucky, punk? 8)

[Gone4Good]

Quote:

Originally Posted by eridanus There are very few. Legg Mason Value has beat the S&P for 15 years. The next contender has a 7 year streak. Do ya feel lucky, punk? 8)

Yup, and just to prove how unreliable historic performance is, check Legg Mason Value's year-to-date performance. -1.6%!! If you had relied on Bill Miller's long run of beating the market and bought in on Dec 31 2005, you would have underperformed Vanguard's Total Market Index by a whopping 12.75% YTD.

[Brat]

I stole this link from FundAlarm. Note the comment about value funds and managers.

Some times the sun shines on value, other times on growth. Index funds can be very low cost, TSM solves the diversity & value vs. growth problem for the US market.

I am not an indexer, but that means that I must pay close attention to my portfolio. Suits me now, I have the time to stay on top of allocation and managers too. Were I very busy, or having too many senior moments, TSM would be the solution. Note my recent discovery that I had fell in love with one of my funds and found that it had become 45% of our portfolio. Great fund manager, but too much of a good thing is not wise. You are just getting started, one fund is OK. BUT if you buy a huge fund it is very difficult for the manager to beat the market long term.

http://news.morningstar.com/article/....asp?id=175698

[ats5g]

There's nothing special about Windsor. It has consistently failed to beat its benchmark, the Russell 1000 Value. If I was going to hold LC Value in a taxable account I'd probably use IWD or VTV.

dunc0029,

If you're already diversified in your tax deferred accounts, you could just move the large cap blend/growth outside in the taxable account. I think that'd be the most tax efficient.

- Alec

[Nords]

Quote:

Originally Posted by 3 Yrs to Go Yup, and just to prove how unreliable historic performance is, check Legg Mason Value's year-to-date performance. -1.6%!! If you had relied on Bill Miller's long run of beating the market and bought in on Dec 31 2005, you would have underperformed Vanguard's Total Market Index by a whopping 12.75% YTD.

So I guess it shows that slacker was just lucky after all...

[Alex]

Personally, I'd move the money to Vanguard and invest it in a "Target Retirement fund" appropriate to your age. These funds are simple and efficient and have EXTREMELY low cost. You won't need to rebalance because the fund does it for you.