Tax efficient investing bogleheads portfolio

For details on the tax consequences of this return of capital distribution, refer to Vanguard REIT Index tax distributions. If all else is equal, international funds have a small tax advantage over US funds, because they are eligible for the foreign tax credit. All else is not necessarily equal; if an emerging market is reclassified as developed, an emerging-markets index fund will have to sell all its stock in that country, infrequently generating a large capital gain.

Assigning asset classes to different accounts Treat your entire portfolio as a whole include spouse. Consider what you already own. It may be inadvisable to pay additional taxes just to get a more tax efficient location. Even if your current location is not ideal it may be better to stick with certain aspects of it. This could mean keeping tax inefficient investments in a taxable account.

Over time you can reduce the effect of a historically imposed asset location by not automatically reinvesting taxable distributions. Take any distributions in cash and reinvest them in a tax efficient manner. Step 1: Categorize your portfolio's tax efficiency Understand the tax consequences of holding each of your chosen investment assets based on the tax-efficiency of each asset class.

Step 2: Place your least tax efficient funds first Fill your tax-advantaged accounts with your least efficient funds. Exhaust these accounts before putting these funds into your taxable account; if you run out of room, consider more tax-efficient alternatives, such as a stock index fund rather than an active fund or a muni bond fund rather than a total-market bond fund. An example portfolio with three asset classes a total market US stock market index fund; a total market international stock market index fund, and an intermediate taxable bond fund, is shown below.

Note that in this scenario, we assume bond interest rates have a higher tax cost than stock investments. An Example using Three Asset Classes Step 3: Placing international stock funds in the taxable account It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but this opportunity is lost in tax-advantaged accounts.

If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is sufficient depends on such factors as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and the the US marginal tax bracket of the fundholder.

Example Consider Foreign Tax Credit Step 4: Place high growth stock funds If all else is equal and it often isn't, because you may have different options in your k and your Roth IRA , it is slightly better to have the fund with the highest expected return in your Roth account or HSA, because these accounts are free from Required Minimum Distributions RMDs , [note 6] are not counted as income for making Social Security taxable, and probably are less subject to the risk of changing tax rates.

Rebalancing in a taxable account is often best done by investing new money so that capital gains can be avoided. Example Tax Efficient Fund Placement Criticisms of this tax placement strategy Due to higher returns, equities have the potential to expand tax-advantaged space, leading to higher tax savings later on despite higher tax bills in the present.

This is particularly true at the presently low bond yields, when the tax penalty from bonds in taxable is not as high as it has been in the past. It is possible under some combinations of lifetime investment results and lifetime individual tax situations to be better off doing the opposite of the strategy recommended here.

However, some investors especially those just starting out are unable to fill all this space. This can make the page confusing and possibly counterproductive if [for example] someone is buying international equities in taxable space without filling tax-advantaged space just to get the foreign tax credit. When interest rates are low, bonds are more tax-efficient. In contrast, switching from stocks to bonds in taxable will result in a significant tax cost.

For long-term holdings, estimation of tax costs necessarily depends on assumptions about the expected returns and future tax policy, such as that long-term gains will continue to be taxed at a lower rate than short-term gains or bond interest; or that the tax preference for "qualified dividends" will extend into the distant future.

The following tax costs math helps identify high tax cost candidates for tax advantaged accounts. Table 1 assumptions use historical data available from Vanguard's index funds in the Vanguard fund distributions tables, which is used as a guide for qualified dividends, and the relative yields of value, small-cap, and tax-managed funds. Future capital gains are uncertain, but the table now assumes that all ETFs will avoid capital gains, as most ETFs have done so. Moreover, Table 1 is based on the assumption that foreign dividend yields will remain higher than US yields, as has been true since ; foreign yields are assumed to be 1.

I suppose when interest rates are very low, even a high turnover bond fund might look tax-efficient In order to quantify tax-efficiency, you look for return before and after taxes. Here is how it is done at Vanguard.

Find your fund at its home and click on "performance". On the performance page, find After-tax returns. If the number you get is. These numbers are not static. They change from year to year.

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