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Placing international funds in 401k/Roth rather than taxable?

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  • Placing international funds in 401k/Roth rather than taxable?

    I'm reading that for those above the 28% tax bracket, it actually makes more sense to put international index funds in tax-advantaged accounts, rather than in taxable accounts, due to the fact that the higher unqualified dividend rate in international funds tends to outweigh the small foreign tax credit. Thoughts?

    See: https://www.reddit.com/r/portfolios/comments/3vc4sa/which_portfolio_makes_the_most_sense/cxmb0bt/

  • #2
    That's a tough call, but since I don't plan on being in this high marginal tax bracket much longer, I am comfortable with international in taxable. Although emerging markets appeared to be somewhat less tax-efficient than a total international index fund, so I put those in my Roth account.

    One could make a compelling argument for emerging markets in taxable, because the volatility may provide more tax loss harvesting opportunities. In the grand scheme of things, if we're at the point where we have a strong enough understanding to be comparing and contrasting the pros and cons of these asset location dilemmas, we're likely to be in great shape regardless of the ultimate decision.

     

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    • #3
      You're splitting hairs. Don't forget you lose TLH that way.

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      • #4
        Thanks guys. If I keep international and emerging markets funds in taxable, should I avoid those in my 401k/backdoor Roth so that I can TLH?

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        • #5
          One of the things I've learned is there are pretty wide variations within asset classes on tax efficiency and so much overlap that these asset location rules of thumb become not that useful once you get beyond bonds and REITs.

          what I have found, is that based on total dividend volume and QDI ratio, vanguards international ETFs stack out poorly compared to schwab's from a tax efficiency standpoint.  This goes for their developed market, emerging market, and especially small cap offerings.
          I sometimes have trouble reading private messages on the forum. I can also be contacted at [email protected]

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