Based on the capital gains distributed on several of my funds held in taxable accounts, I would like to make my taxable portfolio more tax efficient. I have a fairly high value account overall, with approx. half a million dollars in taxable accounts. They include large stakes in Vanguard Wellington, Berwyn Income, Fidelity Contrafund, Fidelity Low Priced Stock, Artisan Global Value, Scout Mid Cap, Yacktman Focused and FMI International. Some of these funds had very hefty capital gains distributions which will cause some heartburn during tax season. Do you have any suggestions on how best to substitute some of these holdings with more tax efficient ETFs or Index Funds? I'm not too concerned with slightly lower performance if the fund is more tax efficient. Thanks.
Comments
Mike_E
2013 was a fantastic year. If funds were still sitting on realized but undistributed losses going back to 2008, they all but surely used them up that year. (Funds are required to distribute substantially all of their net gains each year, but if they have losses, they can't distribute them. Instead, they are allowed to use them against gains in future years - I believe for up to ten years.)
Follow that with an above average 2014 (domestically, anyway), and you've got the makings of disproportionately large distributions. It pays to keep things in perspective. For example, FMIJX (FMI Int'l) is in the 2nd percentile for 3 year after tax returns (excluding this year). And this is a very concentrated fund (29 stocks, plus some other securities) - do you want to replace it with a fund that has a gazillion holdings?
Don't overreact to one year's taxes and lose sight of the objective - net return, not minimizing taxes. The latter is easy - don't make money.
If you sell your shares, you'll wind up paying more taxes now (gains on the shares). If you want to make some moves, you might consider taking the distributions in cash, and investing them in newly selected funds.
I would be more inclined to use Vanguard than Fidelity for broad based stock index funds. They tend to have lower cap gains distributions (e.g. Spartan 500 made cap gains distributions this year and in 2007), Spartan Total Market made cap gains distributions in 2007-2010). You don't see these in the Vanguard funds. (Also, the Vanguard funds have ETF shares, so they have the tax advantages of an ETF, with no bid/ask spread.)
Your points are well taken and I will certainly take a look at some of those Vanguard ETFs and indexes.
I am in the 25% tax bracket, BTW.
The portfolio is value-leaning, non-large cap, low turnover (12%), 1/3 foreign. IMHO, it's that last factor that explains the relative underperformance the past few years. It's a global stock in all but M* classification. Which is not a bad thing if that's what you want. For that sort of fund, it's doing quite well.
I think I finally did find a possible alternative. Polaris Global Value (PGVFX). But here's the thing - it is classified a global stock, and is somewhat more heavily foreign weighted (60/40 foreign/domestic).
Having more foreign stocks, it doesn't match FLPSX in performance - but it does tend crudely track the same performance curve, and it helps if one wants/needs a bit more foreign exposure. (Since domestic stocks have been outperforming foreign ones, a person's portfolio could easily have tilted "too much" toward domestic.)
It's more tax efficient (both relative to FLPSX, though this may be because it is still sitting on losses from 2008-2009 (per website). On an absolute basis), it falls into the same mid cap value box (though with slightly higher average market cap). Same low turnover (14%).
This has been a fund on my radar for years, but I always considered it too expensive (and in the past have been disinclined to buy global funds). But it has temporarily lowered its ER (it remains to be seen whether the temporary reduction will be renewed).
Finally, unlike FLPSX, one can benefit here from a foreign tax credit. The rule is that if a fund's portfolio is more than 50% foreign, then the fund is allowed to pass the foreign taxes through to you. FLPSX, at 1/3 foreign, can't do that. (Funds are not required to pass through the taxes, but they usually do.)
Just an offbeat thought on a replacement or complement to FLPSX. I'd say it was thinking outside the box, but part of the appeal is that it falls within the same style box.
Sorry, some how that "logic" blows my mind," I'll take less money if I don't have to pay taxes", I wish employees thought that way..... I would have more money
As I said before in my posts - which you conveniently excluded - I have a large portfolio so I'm not swinging for the fences with returns. I can settle for average returns without paying more in taxes. The index funds that I cited have done very well in the past and I would have saved some money in taxes. Tax-adjusted returns do mean something, despite what you may think.
Thanks for the constructive input, BTW.
Tb is a businessman with staff, I believe, so was simply analogizing about priorities. (Tb, apologies if misrepresenting you!)
More concretely, have you talked with a savvy cpa or cfp about max funding of Roths and moving all possible non-Roth moneys into Roths and the like? (Yes, tax hits there for sure.) That is what I did many years ago, bit the April bite, and am glad of it.
Maybe none of this sort of thing applies to your situation. Some of us also have 'large' (in some sense) portfolios. Just not seeing how 'tax-adjusted returns do mean something', ultimately.
As for contacting a competent CFP, I have yet to do so. I've had conversations with Fidelity and they always try to steer me into Fidelity funds and charge a 1% fee annually for their investing services. Another CFP tried to steer me into load funds and annuities, which didn't sit well with me. So, I've had no luck yet on that front. I may hunt around again in the new year.
BTW, I mentioned my tax bracket once, David. Anyway, Happy New Year and thanks for taking the time to comment !
The rest of this is detail, but an attempt to explain that last comment:
Say you have $100 in a traditional IRA. It is worth $75 post tax (25% bracket).
Say you have $25 in a taxable account.
Your total after tax worth is $100.
Pay the tax on the IRA now (convert it to a Roth).
You now have $100 in a Roth, worth $100.
Your total after tax worth is $100.
The difference is that all earnings on top of that $100 after-tax value are tax free. And you have the flexibility to make changes in your investments with no tax consequences (unlike the situation if that $25 were in a taxable account).
>> I have a large portfolio
What I was responding to; sorry.
I guess with cfp I shoulda added fee-based. No annuity sales, no Fido pressure. I have gotten sound advice at Fido but made it clear I was diy.
G/l whatever you decide. My father long ago pointed out to me, attempting wit and wisdom with a know-it-all young adult, that the counterintuitive goal of investing was to pay, always and absolutely, as much cg and div tax as you possibly could.
You are obviously an intelligent, forward thinking, realistic investor ...that wants earnings and PLANS for taxes
as every American Should and doesn't do...thus finding themselves in a problem(tax) situation
I think it has been mentioned once or twice already but Index ETF's might fit the bill here.
You might be thinking about the Medicare surtax of 3.8% on investment income, to the extent that it raises one's MAGI over a certain threshold. For MFJ, that's $250K, for singles, that's $200K.
So, if you are single, and your MAGI, excluding cap gains, is $190K, and you have $30K in cap gains, then the last $20K (the portion over $200K) gets taxed an extra 3.8%.
You are much too kind. I may have a little bit of the first qualities listed, but I have never planned for taxes in my life (okay, maybe I once read an article about December selling against losses, or against gains, or something), and I have seldom or never taken conscious and methodical steps toward reducing them significantly. Usually I have had enough losses not to worry about gain impacts, except for the years of Roth conversions.
In that lesson from my father about actively aiming/desiring to pay a ton of cg tax, I think he also added, for the first time I had heard, the phrase about never letting the tax tail wag the investment dog.