Calculate VTWAX Taxable "FTC" inefficiency?

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MattyVTWAX
Posts: 3
Joined: Fri Dec 11, 2020 4:45 pm

Calculate VTWAX Taxable "FTC" inefficiency?

Post by MattyVTWAX »

New investor as of a couple years ago. I currently have 10k in a taxable account with VTWAX. Every few months I read forum post for hours on the inefficiencies of FTC and TLH with VTWAX.

How do I calculate these inefficiencies? I don't want to be kicking myself in 40 years over the tax inefficiencies. Although - I also go back and forth on if the simplicity of never having to think about the domestic/internal weight in the account.

Is the "inefficiency" just the total "unqualified" dividends on a 1099? For example - last year I paid $121 in ordinary dividends and 107.16 in "qualified" dividends. Is the tax inefficiency the difference of these 2? I then pay my marginal tax rate on ~$14?

Its possible I just said half of that wrong. I am ignorant on this topic despite my research into this.

Any insight would be great.
MrJedi
Posts: 736
Joined: Wed May 06, 2020 11:42 am

Re: Calculate VTWAX Taxable "FTC" inefficiency?

Post by MrJedi »

In recent history, I think foreign tax has been roughly 7% of dividends from a total international fund like VTIAX.

If you held 6k VTSAX and 4k VTIAX instead of 10k VTWAX, you have about 114 shares of VTIAX. Last year VTIAX paid about 0.682 per share in dividends, about $78.

From the $78 in dividends, if we assume 7% foreign tax was paid, that's about $5 of foreign tax paid that you could claim as a tax credit.

So $5 of tax credit benefit in a $10k investment. That would equate to about 5 basis points.

These are rough numbers but I think close enough for the estimate you are looking for.
Topic Author
MattyVTWAX
Posts: 3
Joined: Fri Dec 11, 2020 4:45 pm

Re: Calculate VTWAX Taxable "FTC" inefficiency?

Post by MattyVTWAX »

MrJedi wrote: Sat Apr 17, 2021 12:37 pm In recent history, I think foreign tax has been roughly 7% of dividends from a total international fund like VTIAX.

If you held 6k VTSAX and 4k VTIAX instead of 10k VTWAX, you have about 114 shares of VTIAX. Last year VTIAX paid about 0.682 per share in dividends, about $78.

From the $78 in dividends, if we assume 7% foreign tax was paid, that's about $5 of foreign tax paid that you could claim as a tax credit.

So $5 of tax credit benefit in a $10k investment. That would equate to about 5 basis points.

These are rough numbers but I think close enough for the estimate you are looking for.
Thank you for this. I guess that's why I see people torn on this all the time. 5 basis points is certainly not enough to warrant the "stress" of even having to consider re balancing. Especially since my FIRE number is so small and I plan on hitting it before 45. I would be drawing from my taxable account long before any of my tax advantaged accounts. Thank you for the help.
bgf
Posts: 1631
Joined: Fri Nov 10, 2017 9:35 am

Re: Calculate VTWAX Taxable "FTC" inefficiency?

Post by bgf »

MattyVTWAX wrote: Sat Apr 17, 2021 12:48 pm
MrJedi wrote: Sat Apr 17, 2021 12:37 pm In recent history, I think foreign tax has been roughly 7% of dividends from a total international fund like VTIAX.

If you held 6k VTSAX and 4k VTIAX instead of 10k VTWAX, you have about 114 shares of VTIAX. Last year VTIAX paid about 0.682 per share in dividends, about $78.

From the $78 in dividends, if we assume 7% foreign tax was paid, that's about $5 of foreign tax paid that you could claim as a tax credit.

So $5 of tax credit benefit in a $10k investment. That would equate to about 5 basis points.

These are rough numbers but I think close enough for the estimate you are looking for.
Thank you for this. I guess that's why I see people torn on this all the time. 5 basis points is certainly not enough to warrant the "stress" of even having to consider re balancing. Especially since my FIRE number is so small and I plan on hitting it before 45. I would be drawing from my taxable account long before any of my tax advantaged accounts. Thank you for the help.
because investors on this board agree about so much, the longest and most combative discussions tend to be over things of minor overall significance. VTWAX is an excellent choice, and you've done well to avoid a plethora of problems with that choice alone.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
bogledogle87
Posts: 369
Joined: Wed Sep 26, 2018 7:03 pm

Re: Calculate VTWAX Taxable "FTC" inefficiency?

Post by bogledogle87 »

If it helps, I do model VTWAX in my taxable account with VTI + IXUS. In 2020, my FTC value was $98 for a balance of $120k. It’s real money, but not very much at all.

The majority of my assets are in VTWAX in retirement accounts and aren’t FTC eligible anyway, so I never give this issue a second thought.

If you love the simplicity, it’s probably worth waiving the very small opportunity cost. If you don’t mind a little upkeep, you’re entitled to a few extra bucks for your trouble. Both approaches are sound.
VTWAX and chill
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