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tax efficiency confusion
Old 09-22-2022, 08:45 AM   #1
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tax efficiency confusion

I've got money to invest in a taxable account and I've been trying to understand tax efficiency.
So far I think these issues are relevant:
1. price of the share
2. dividend distribution history
3. fund's history of qualified vs unqualified
4. timing when I buy compared to when dividends are distributed
5. capital gains history

Is there any easy way to compare funds for tax efficiency? Preferably some site that scores them and keeps it up-to-date and says how close we are to a dividend date?

Is there a tool that somehow helps?
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Old 09-22-2022, 10:15 AM   #2
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Originally Posted by UpQuark View Post
I've got money to invest in a taxable account and I've been trying to understand tax efficiency.

So far I think these issues are relevant:

1. price of the share

2. dividend distribution history

3. fund's history of qualified vs unqualified

4. timing when I buy compared to when dividends are distributed

5. capital gains history



Is there any easy way to compare funds for tax efficiency? Preferably some site that scores them and keeps it up-to-date and says how close we are to a dividend date?



Is there a tool that somehow helps?

Donít buy a mutual fund in a taxable account if there is an ETF that meets your needs. With ETFs you control when you take your capital gains. Mutual funds can have unexpected distribution surprises, resulting in you paying more in taxes.
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Old 09-22-2022, 10:23 AM   #3
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Also look for tax-managed index funds.
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tax efficiency confusion
Old 09-22-2022, 10:28 AM   #4
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tax efficiency confusion

Here is a link to one etf comparison tool. Your brokerageís website probably has additional research tools.


https://www.etf.com/etfanalytics/etf-comparison-tool
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Old 09-22-2022, 11:47 AM   #5
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I agree with the ETF vs. mutual fund comments, during market selloffs, mutual fund holders find they not only lose money but also get a tax bill. Also, I would avoid things like "life strategy" funds that hold both stocks and bonds in taxable as they have to rebalance, leaving you holding the tax bag.

But other than that, I would be cautious about letting a few tenths of a percent difference in taxable income determine my investment decisions. Personally, I would buy a broad based index fund and not let the tax tail wag the investment dog.
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Old 09-22-2022, 07:27 PM   #6
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The Boglehead's Wiki has some good documentation on tax efficient investing and would be worth a look.
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Old 09-22-2022, 07:29 PM   #7
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Donít buy a mutual fund in a taxable account if there is an ETF that meets your needs. With ETFs you control when you take your capital gains. Mutual funds can have unexpected distribution surprises, resulting in you paying more in taxes.
Would that be true for Vanguard's Total Stock Market Index and their Total International Stock Market Index mutual funds? From what I have read they are the most tax efficient mutual funds and good to hold in a taxable account.
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Old 09-23-2022, 03:24 AM   #8
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Would that be true for Vanguard's Total Stock Market Index and their Total International Stock Market Index mutual funds? From what I have read they are the most tax efficient mutual funds and good to hold in a taxable account.
You are correct.
Looking at the first one, you can buy either VTSAX or the equivalent ETF, VTI. Both have essentially the same dividends and have never had a Capital Gains Distribution...
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Old 09-23-2022, 03:58 AM   #9
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Broadly diversified index funds tend to be far more tax efficient than non-index actively manage funds. Look for those with very low expense ratios.

At Vanguard the index mutual funds are just as tax efficient as their corresponding ETF.
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Old 09-23-2022, 07:32 PM   #10
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Yes, when I have looked at the mutual fund vs the ETF of the same funds (Total Stock and Total International Stock Market Index), there is basically no difference. I always held index mutual funds (with a few active funds exceptions over the years) and really don't see the need for the types of functions an ETF offers.
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Old 09-23-2022, 11:34 PM   #11
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Yes, when I have looked at the mutual fund vs the ETF of the same funds (Total Stock and Total International Stock Market Index), there is basically no difference. I always held index mutual funds (with a few active funds exceptions over the years) and really don't see the need for the types of functions an ETF offers.
I prefer ETFs over MFs nowadays for a few reasons, but nothing to do with tax efficiency...
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Old 09-24-2022, 10:10 AM   #12
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Donít buy a mutual fund in a taxable account if there is an ETF that meets your needs. With ETFs you control when you take your capital gains. Mutual funds can have unexpected distribution surprises, resulting in you paying more in taxes.
But for some of us these gains are taxed at 0%. So in that case is it more advantageous to seek out funds that distribute qualified dividends and LT capital gains?

I understand the concept of mutual funds distributions being out of your control but does that matter if there is no tax on it? We have plenty of room for dividends and LT capital gains before they get taxed.
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Old 09-24-2022, 10:25 AM   #13
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But for some of us these gains are taxed at 0%. So in that case is it more advantageous to seek out funds that distribute qualified dividends and LT capital gains?



I understand the concept of mutual funds distributions being out of your control but does that matter if there is no tax on it? We have plenty of room for dividends and LT capital gains before they get taxed.

Regarding Federal taxation there would no difference if youíre certain youíll be taxed at 0%. You also need to consider your state tax situation.
With an ETF you get to choose when to take that capital gain, which to me is an advantage. I also prefer to choose when during the trading day, to buy or sell my shares, rather than just accept the closing price of that day. If none of that matters to you, mutual funds are fine.
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tax efficiency confusion
Old 09-25-2022, 10:43 AM   #14
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tax efficiency confusion

In a taxable account, there is one more potential tax advantage of holding an ETF versus a mutual fund. An ETF is more portable, should you decide to change to another brokerage. Typically you cannot transfer one brokerageís mutual fund to another brokerage, but an ETF can be transferred in kind. If you had to liquidate the mutual fund to transfer, it would be a taxable event.
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Old 09-25-2022, 11:04 AM   #15
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In a taxable account, there is one more potential tax advantage of holding an ETF versus a mutual fund. An ETF is more portable, should you decide to change to another brokerage. Typically you cannot transfer one brokerageís mutual fund to another brokerage, but an ETF can be transferred in kind. If you had to liquidate the mutual fund to transfer, it would be a taxable event.
I'm not sure that is "typical" except at sleazier brokers, but the answer is easy: Don't buy funds that can't be transferred between brokers. I am involved with a couple of non-profits and non-portable assets are on the IPS "Prohibited" list for both.
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