Tax Efficient Fund Placement. Where do international funds go?

[JK]

Looking to best allocate my money between my taxable accounts vs tax advantaged accounts in the various asset classes. All of my funds are with Vanguard. I came across this link which has a nice chart (https://www.bogleheads.org/wiki/Tax-efficient_fund_placement), but was curious getting other people's opinions. From most efficient to least efficient among the asset classes I have, this is what I was thinking (all equity):

Domestic: Total market > LC > LCV > SC > SCV > REIT

Where do International Funds go in this list (Total market, Int LC, Int LCV, Int SC, Int SCV, Int REIT, EM)? I know they have foreign tax credit but I wasn't sure how it fits in to the above?

Thanks.

[Son of a Doctor]

The bogleheads article is a great starting point, but I think WCI's article is better.  Because foreign funds have foreign dividend taxes, which cannot be taken as a tax credit if the fund is held in an IRA, then they are less tax efficient than their US counterparts, if their dividend yields (adjusted for whether they are qualified dividends) are equal.  As you noticed in the bogleheads article (and there's a 286 post thread on bogleheads about this topic, which is linked in the article), there are many other arguments about tax efficient asset location that go into much more detail than is appropriate for a comment response.  There are also many white papers on the subject that go into painstaking detail.

There is not a permanent, strict order for asset location if you want to do it the right way.  You need to compare interest/dividend yields, whether the dividends are qualified, foreign tax implications, investing time horizon and expected capital gains, among other things. Take a look at WCI's article and respond if you have further questions.

[Lithium]

I think reading calculating the tax efficiency of funds/etf's yourself is worth doing.  See this thread for how to do it:

https://www.bogleheads.org/forum/viewtopic.php?t=188491

when I do this, I find it is very difficult to generalize that one class of equities is more tax efficient than another.  However, within a class of equities, certain funds and etf's can vary dramatically in tax efficiency.  It seems to depend heavily on the distribution history and QDI ratio of the particular fund/ETF.  For instance, in small value, IJS appears to be very tax efficient, more so than VBR.  In fact, my calculations (which I think are correct) show it is even more efficient than VTI.

In my tax bracket, if I were to rank the tax efficiency of the best ETF in each class that I've found, this is how it looks:

SC (VIOO) > SCV (IJS) > EM (IEMG) > MC (SCHM) > Int SC (SCZ) > Tot Int (IXUS) > TSM (VTI) > LCV (VOOV).

obviously, that doesn't fit the boglehead wiki at all, and I don't put a lot of credence in it.  Hence I don't worry that much about tax efficiency beyond bonds and REITs.  I would just try to put volatile assets like EM in taxable to take advantage of TLH opportunities and put the highest growth assets like SCV in the Roth IRA.

[The White Coat Investor]

I wish it were as simple as the Bogleheads Wiki makes it out to be. It isn't. You have to not only look at the tax-efficiency of the asset class and the fund you're using for it, but also the expected returns. And your own personal tax-efficiency. It's really, really complicated to get asset location right and probably requires a crystal ball. But there are a few generalities:

1) if an asset class has a high expected return and is very tax-inefficient put it in a tax protected account. (Think REITs)

2) If an asset class has a low expected return and is very tax efficient, put it in taxable.  (Think muni bonds.)

3) Other stuff can probably be ignored with regards to asset location. It just doesn't matter that much.

[PhysicianOnFIRE]

I have total international / developed international markets in a taxable account. Emerging markets are in my Roth account.

I believe the emerging market fund has higher turnover and perhaps a higher proportion of ordinary dividends, but I'd have to doublecheck that. I think it would be fine to have both in taxable, though.

If you have an international REIT or bond fund, put those in tax protected accounts.

Best,

-PoF

 

[Zaphod]

Then you have some countries that credit your dividend taxes before you see it, some that are able to be captured via taxes if in the right place, etc...complicated.