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 Post subject: Best Vanguard Fund for Taxable Investing
PostPosted: Wed May 02, 2012 6:52 am 

Joined: Mon Sep 29, 2008 7:32 am
Posts: 289
Some time ago, I started a thread here in which we discussed how to set up another fund for taxable investing without screwing up my asset allocation (since my tax-free IRA's are currently in target funds). The consensus was that investing in a target fund in the taxable account was probably the best way to keep a consistent allocation.

I finally am getting ready to pull the trigger and start piling money into taxable investments (a threshold I think 90% of Americans never cross). I was doing some reading, however, and it looks like the target funds (partly due to their bond holdings) are not particularly tax efficient.

Does anyone have a recommendation for a tax-efficient Vanguard Fund or set of funds which will give me the maximum amount of diversification (both geographically and cap-wise)? I would ideally like to get the best U.S. broad market index and a good international fund or two.

Thanks in advance (btw - I resisted the temptation to buy the Audi)


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Wed May 02, 2012 7:10 am 

Joined: Mon Jan 11, 2010 9:06 am
Posts: 160
Location: Texas
This is one of the complications/drawbacks of using target funds to achieve a desired AA. Like you said though, it's a drawback most people aren't ever going to need to deal with/worry about.

If you're happy with the AA/funds used by your target fund, one answer would just be to replicate those funds in the taxable account without the bond fund. This will however lower your overall bond allocation. (If you really wanted to fix it back, you could start putting some of your IRA contributions into the bond fund inside your IRA to rebalance your overall portfolio.)

As for other fund recommendations, I keep it super simple. I'm using VGTSX for total international stock market and VTSMX for total US stock market.


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Wed May 02, 2012 7:12 am 

Joined: Mon Jan 11, 2010 9:06 am
Posts: 160
Location: Texas
If your desire is to skew your allocation some in favor of particular sectors, then of course you could use your taxable account to do that too.


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Wed May 02, 2012 10:15 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1977
Have you considered what Vanguard is saying about tax efficient investing with them?

https://personal.vanguard.com/us/insights/article/article/live-webcast-taxefficient-investing-032012


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Wed May 02, 2012 10:25 am 

Joined: Tue Mar 23, 2010 3:31 pm
Posts: 405
Create an overall(includes all accounts) asset allocation.

Come up with the total asset allocation strategy you want, and then rebalance between all your acocunts so that your taxable account is full of stocks that will appreciate but produce little or no dividends(small cap growth stocks, for example).


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Wed May 02, 2012 9:55 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5402
The fundamental issue you are facing is one I am struggling with as well.

Equity investments carry risk but their return is mostly increase in value, which is tax free until realized, and qualified dividends, which are taxed at a low rate.

Debt investments (bonds) have lower risk but produce income that is taxed at ordinary income rates.

The choice is between an investment with a higher expected return and higher risk but lower taxes and an investment with lower return and higher taxes.

The lower taxes on qualified dividends and the fact that your capital gains are not taxed until realized means that you are rewarded by holding equities and taking on risk. So the answer is not just mathematical. It also depends on when you decide to realize your gains and what the tax rate is then. And the higher your tax bracket the greater the reward. I'm sure you already know that.

So, the problem is, reducing risk has a cost!

In my case I need after-tax investments to fund early retirement. I have have decided that I want to have a substantial holding in bonds (~30%) and will pay the taxes on the income over the next few years as a cost of being able to lay on the beach every day at an early age.


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Thu May 03, 2012 8:15 am 

Joined: Mon Sep 29, 2008 7:32 am
Posts: 289
Thanks DH. I'm in a little different situation in that I'm 37 y.o. and am fine allocating nearly everything to stocks at this point. In retrospect, I should have probably picked a slightly earlier target fund (which would have a higher % bond holding) since it appears I'll be doing almost all stocks in my taxable account.


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Fri May 04, 2012 2:57 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 855
I would consider breaking into the 3 major funds the target retirement account invests in proportion to your liking. For example, if you are in the 2040 fund, you can invest 63% in total stock market, ~27% in total int'l and the rest in total bond II. This is the same as the target date but you now have control. you can read their stuff and figure out how they make adjustments along the way and rebalance yourself (which is a breeze). AND you can lower your effective fee to 0.09% (vs 0.19%) if you have at least $10k to invest in each (admiral shares).

As far as the taxable account goes, I would then stick the Total int'l stock market in the taxable. Why? First, growth equities are more tax efficient b/c you don't pay taxes until gains are realized (as pointed out earlier). But, not all mutual funds are created equal. You need to look at the turnover to see how much the fund is selling (a taxable event for you). VTIAX has a 3% turnover, which is incredibly low. So, if you pop in a high turnover fund (usually actively managed fund) into a taxable account, uncle sam is going to beat you up. Second, you may be able to realize a foreign investment tax credit with the international fund.

Bonds and dividend paying equities are horrible for tax efficiency. Exceptions always apply, but bond funds will beat you up tax wise.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Fri May 04, 2012 3:44 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5402
If you stick with index funds for equities then the tax consequences will be low.

Always keep your international funds in taxable accounts. Foreign taxes are still taxes but they offset US taxes you would otherwise pay. If you are going to have any foreign investments then it is better to have them in taxable accounts.

I agree that bond funds will kill you in taxes. I have recently started buying muni funds. After looking at almost 20 years of data I have convinced myself that the return, after considering taxes, is similar to corporate bonds. So even though the yield is not great, it is a reasonable place to put my bond money. I want bond money to reduce risk. I'm in a relatively low tax state.


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Fri May 04, 2012 8:44 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 855
shouldn't there be some tax advantage for buying munis from the state you live in?

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Best Vanguard Fund for Taxable Investing
PostPosted: Sat May 05, 2012 6:00 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5402
Bichon Frise wrote:
shouldn't there be some tax advantage for buying munis from the state you live in?


Yes. But I live in a ow tax state so the benefit is hardly worth worrying about.


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