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If one is required to take RMDs from an IRA, but has no immediate need to spend the money, is there a better or comparable option to Vanguard's tax-managed funds?
We have not paid FIT/SIT since 2012 and won't take RMDs until Age 73, so no direct experience (yet) with your question. That said, it will be a very important question for us in a few years.
We will start our analysis at that time with a comparison of all other options versus ITOT, VOO and the like. We expect there will be plenty of better tax-efficient options than the VG (or other) tax-managed mutual fund options. But that's a job for us for another day a few years from now.
The only competitor for VTMFX that I'm aware of is TAIFX. It is also 5*, also M* silver-rated (FWIW), but performance is slightly less.
Index funds are naturally somewhat tax efficient. So with a fund like VTMSX you might look at "regular" index funds. For example, VIOO (Vanguard's "regular" S&P 600 index ETF) has a tax cost ratio of 0.40% and unrealized gains of virtually zero vs. VTMSX's 0.41% and 24% in unrealized gains.
When it comes to bonds (not exactly what you were asking about), tax-efficient (munis) funds may not produce the best after-tax returns. I haven't been looking at bond funds lately, but when it comes to MMFs, Treasury or Treasury only funds have been doing better than muni MMFs after tax.
Finally, perhaps the most tax-efficient way to deal with unneeded RMDs is to make qualified charitable contributions. You're not left with any earnings or principal, but it's certainly tax-efficient and might leave you with a warm fuzzy feeling.
If VTCLX floats your boat, there are a couple of ETFs tracking the R1K. VONE (Vanguard) and IWB (iShares). VTCLX also tracks the R1K though more loosely for better tax efficiency.
The ETFs have slightly higher tax cost ratios than VTCLX (0.41% and 0.40% respectively vs. 0.31%). Over the past 1 and 3 years they have slightly outperformed VTCLX pre-tax (with Vanguard's ETF being the best), though VTCLX has done slightly better over five years.
VTCLX has 65% in unrealized gains while the ETFs have lower exposure (likely due to their ETF structure): 17% for IWB and 35% for VONE.
Again, when it comes to tracking market cap weighted indexes, you can often find "regular" funds that are comparable to ones focused on tax efficiency. This tool may help finding comparable ETFs:
After just a cursory look, if it was our money and if we were selecting a VG "tax managed" fund...
Per one of the links I provided, there are three VG "tax managed" funds. VCTLX significantly outperforms the other two and whatever tax consequences relate to all three are muted (forgotten?) due to that.
It is NOT our money. If it were our money, we would NOT be selecting a VG "tax managed" fund, we would be selecting an ETF. [NOTE, on that, in my 1st post I stated, We expect there will be plenty of better tax-efficient options than the VG (or other) tax-managed mutual fund options.]
I probably should have super-sized and bolded the two "ifs" in my 2nd post!
I came across this promotional piece regarding preferred stock investing & purported tax advantages from Cohen & Steers many weeks ago. I have no personal knowledge of the subject. Just passing it along.
Thank you for posting that article @hank. I own a handful of preferred securities in my taxable account offered by CHS, a global agribusiness cooperative, for the qualified dividends. I don't own financial preferred's because many, if not all, are noncumulative.
@Mark, most bank preferred are noncumulative so that those can be counted as bank capital. Add to that that most preferred are bank preferreds.
Beware that preferred "stocks" are really debt of very long or indefinite maturities. The name "preferred stock" simply means that in the capital structure of the company, they are ahead of common stock in bankruptcy or liquidation.
Beware that preferred "stocks" are really debt of very long or indefinite maturities
That's a good practical description, i.e. from the investor's perspective preferred stocks are debt. Though for most tax purposes they are treated as dividend-paying equity as Mark noted.
However, from an accounting perspective they may be treated as equity depending on a whole lot of complex rules.
The FGs refer to other figures (flow charts) on that page giving more details.
ASCs refer to GAAP rules. "The Financial Accounting Standards Board (FASB) Accounting Standards Codification® (Codification or ASC) is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (US GAAP)." https://asc.fasb.org/Home
IMHO this is way more than non-CPAs should care about.
Apparently in Canada, "For non-financial corporates, preferred shares are classified as 50% debt and 50% equity on a corporation’s balance sheet." Much simpler RBC, A guide to preferred shares
I have an “ear open” here, thinking I might gain a better understanding of preferred stocks and also the tax issues in non-sheltered investments. Thanks for the comments.
I thought I’d toss out that the company that provided the promotional piece I linked seems to utilize ROC in some of their offerings as an integral part of total performance / return. I do invest with them and have observed from their literature the incorporation of some limited ROC to lessen the tax impact on clients. This does not seem to materially affect the integrity of the fund(s) - though I realize it raises concerns. They do seem very focused on after tax return.
Comments
We will start our analysis at that time with a comparison of all other options versus ITOT, VOO and the like. We expect there will be plenty of better tax-efficient options than the VG (or other) tax-managed mutual fund options. But that's a job for us for another day a few years from now.
Here's a primer for your current analysis:
https://russellinvestments.com/us/blog/understanding-tax-managed-funds-and-strategies
https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency
https://www.morningstar.com/funds/25-top-picks-tax-efficient-etfs-mutual-funds
https://www.bogleheads.org/wiki/Tax-managed_fund_comparison
Index funds are naturally somewhat tax efficient. So with a fund like VTMSX you might look at "regular" index funds. For example, VIOO (Vanguard's "regular" S&P 600 index ETF) has a tax cost ratio of 0.40% and unrealized gains of virtually zero vs. VTMSX's 0.41% and 24% in unrealized gains.
When it comes to bonds (not exactly what you were asking about), tax-efficient (munis) funds may not produce the best after-tax returns. I haven't been looking at bond funds lately, but when it comes to MMFs, Treasury or Treasury only funds have been doing better than muni MMFs after tax.
Finally, perhaps the most tax-efficient way to deal with unneeded RMDs is to make qualified charitable contributions. You're not left with any earnings or principal, but it's certainly tax-efficient and might leave you with a warm fuzzy feeling.
The ETFs have slightly higher tax cost ratios than VTCLX (0.41% and 0.40% respectively vs. 0.31%). Over the past 1 and 3 years they have slightly outperformed VTCLX pre-tax (with Vanguard's ETF being the best), though VTCLX has done slightly better over five years.
Here's Portfolio Visualizer's comparison of these funds over 10 years.
VTCLX has 65% in unrealized gains while the ETFs have lower exposure (likely due to their ETF structure): 17% for IWB and 35% for VONE.
Again, when it comes to tracking market cap weighted indexes, you can often find "regular" funds that are comparable to ones focused on tax efficiency. This tool may help finding comparable ETFs:
https://etfdb.com/tool/mutual-fund-to-etf/
VTCLX has 65% in unrealized gains", more for a tax advantage account ?
After just a cursory look, if it was our money and if we were selecting a VG "tax managed" fund...
Per one of the links I provided, there are three VG "tax managed" funds. VCTLX significantly outperforms the other two and whatever tax consequences relate to all three are muted (forgotten?) due to that.
It is NOT our money.
If it were our money, we would NOT be selecting a VG "tax managed" fund, we would be selecting an ETF.
[NOTE, on that, in my 1st post I stated, We expect there will be plenty of better tax-efficient options than the VG (or other) tax-managed mutual fund options.]
I probably should have super-sized and bolded the two "ifs" in my 2nd post!
Have a good weekend, Derf
Note that I've edited my most recent post I think since you posted this.
Beware that preferred "stocks" are really debt of very long or indefinite maturities. The name "preferred stock" simply means that in the capital structure of the company, they are ahead of common stock in bankruptcy or liquidation.
That's a good practical description, i.e. from the investor's perspective preferred stocks are debt. Though for most tax purposes they are treated as dividend-paying equity as Mark noted.
However, from an accounting perspective they may be treated as equity depending on a whole lot of complex rules.
This is from PwC: Classification of Preferred Stock
The FGs refer to other figures (flow charts) on that page giving more details.
ASCs refer to GAAP rules. "The Financial Accounting Standards Board (FASB) Accounting Standards Codification® (Codification or ASC) is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (US GAAP)."
https://asc.fasb.org/Home
IMHO this is way more than non-CPAs should care about.
Apparently in Canada, "For non-financial corporates, preferred shares are classified as 50% debt and 50% equity on a corporation’s balance sheet." Much simpler
RBC, A guide to preferred shares
I thought I’d toss out that the company that provided the promotional piece I linked seems to utilize ROC in some of their offerings as an integral part of total performance / return. I do invest with them and have observed from their literature the incorporation of some limited ROC to lessen the tax impact on clients. This does not seem to materially affect the integrity of the fund(s) - though I realize it raises concerns. They do seem very focused on after tax return.
As I said earlier, I’m not expert on this.