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rila3400
Contributor ○

Portfolio Tax-Efficiency

This article was written for advisors but non-advisors may find some of this information useful.
The author has an interesting take on municipal bonds vs. taxable bonds.

Link

2 Replies
retiredat48
Participant ○○○

Re: Portfolio Tax-Efficiency


@rila3400 wrote:

This article was written for advisors but non-advisors may find some of this information useful.
The author has an interesting take on municipal bonds vs. taxable bonds.

Link


Hi rila...thanks for post.

Yes, the article covers some of the basics for tax efficiency re portfolios.

However, he labels this as "advanced" tax strategies, yet I find it surprising he does not cover some advanced thinking and new tax strategies, in this regard.

For instance, he is silent on Exchange Traded Funds.  ETFs have very special tax provisions such that annual capital gains are not realized or distributed to shareholders, thus saving any annual fed cap gains tax.  A huge benefit...and long story why ETFs have this structural advantage over open-ended funds.

For instance one can now have portfolio monies in TAXABLE accounts that is the same benefit if in IRAs.  An example:  Buy a domestic (USA) small cap ETF in taxable, as part of your allocation.  This type of fund pays very little in annual income, thus no taxes.  The ETF pays little or no capital gains annually, thus no cap gains tax.  You thus do not pay any tax until you sell.  Hold a lifetime and your heirs get a stepped up basis, thus no cap gains also.

He is also silent on some Vanguard PATENTED techniques that enable their funds to operate with lower taxes due.

Other "advanced strategies" exist.

I am busy this weekend...may comment more early next week.

Good day.

R48

 

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rila3400
Contributor ○

Re: Portfolio Tax-Efficiency


@retiredat48 wrote:

@rila3400 wrote:

This article was written for advisors but non-advisors may find some of this information useful.
The author has an interesting take on municipal bonds vs. taxable bonds.

Link


Hi rila...thanks for post.

 

Hi R48,

 

Yes, the article covers some of the basics for tax efficiency re portfolios.

However, he labels this as "advanced" tax strategies, yet I find it surprising he does not cover some advanced thinking and new tax strategies, in this regard.

For instance, he is silent on Exchange Traded Funds.  ETFs have very special tax provisions such that annual capital gains are not realized or distributed to shareholders, thus saving any annual fed cap gains tax.  A huge benefit...and long story why ETFs have this structural advantage over open-ended funds.

The author generally prefers mutual funds vs. ETFs.
A snippet from another article he wrote is below.

While converting your mutual funds is easy, tax-free and cost-free, it may still not be the right thing to do.
That’s because mutual funds still have such advantages as:

Can buy at NAV with no bid/ask spread
Can buy at NAV with no premium or discount
Ability to purchase fractional shares
Ability to set up automated purchases such as monthly amounts to buy or sell
Dividends get reinvested faster, so there is less of a cash drag

 For instance one can now have portfolio monies in TAXABLE accounts that is the same benefit if in IRAs.  An example:  Buy a domestic (USA) small cap ETF in taxable, as part of your allocation.  This type of fund pays very little in annual income, thus no taxes.  The ETF pays little or no capital gains annually, thus no cap gains tax.  You thus do not pay any tax until you sell.  Hold a lifetime and your heirs get a stepped up basis, thus no cap gains also.

I don't own a small-cap ETF in my taxable account.
However, Vanguard Tax-Managed Small Cap (VTMSX) resides in the account.
This has been a very tax-efficient fund for me.

He is also silent on some Vanguard PATENTED techniques that enable their funds to operate with lower taxes due.

Gus Sauter (former Vanguard CIO) developed a structure under which ETFs were offered as a separate
share class of existing Vanguard index funds. He was awarded a corresponding patent in 2005.

Other "advanced strategies" exist.

I am busy this weekend...may comment more early next week.

Good day.

R48

 


 

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