How to structure my 401k alongside a new taxable account - VXUS in taxable or 401k?

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coliver
Posts: 16
Joined: Tue Dec 29, 2020 11:40 pm

How to structure my 401k alongside a new taxable account - VXUS in taxable or 401k?

Post by coliver »

Hi folks!

Now that I'm comfortably maxing out my annual 401k, Roth IRA, and have a one-year emergency fund, I've been slowly adding money in the past few months (thankful for the stimulus checks) into my brokerage account. In case it matters, I use Robinhood for its interface and because I'm in this to buy and hold for the long run.

Target AA
10% bond, 60% VTSAX, 30% VXUS

Rounded numbers if it helps:
Roth IRA: $13,000 (100% VTSAX)
401k: $65,000 (10% bonds, 60% VTSAX, 30% VTIAX)
Taxable (RH): $2,000 (50% VTI, 50% VXUS)

I'm looking to start making monthly investments into my taxable, and am wondering if I should be more strategic about where I invest in VTI and VXUS. For simplicity in rebalancing, I have my Roth IRA 100% VTSAX.

Questions:
1. Assuming I regularly rebalance and keep my target AA across all 3 accounts and I'm only investing in low cost index funds, does it matter whether I invest future funds in VTI or VXUS in my brokerage account?
2. If it matters, what's the risk if I go 100% VTSAX in my 401k and mixed in my taxable account? I've heard of folks mentioning the foreign tax credit in taxable, but a little confused as to how to what triggers the credit and the limit.

Thanks so much in advance!
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: How to structure my 401k alongside a new taxable account - VXUS in taxable or 401k?

Post by MrJedi »

You can get foreign tax credits by having international in taxable, increasing tax efficiency. But international funds tend to distribute more dividends than US, a significant being non-qualified as well, which decreases tax deficiency. These effects mostly wash each other out and the difference is small either way.

If you hold VTSAX in the IRA, you may want to be cautious with VTI in taxable if you ever tax loss harvest.
surfstar
Posts: 2853
Joined: Fri Sep 13, 2013 12:17 pm
Location: Santa Barbara, CA

Re: How to structure my 401k alongside a new taxable account - VXUS in taxable or 401k?

Post by surfstar »

RE: TLH options...

As we hold VTSAX in our Roths and I have an S&P 500 fund in my 457, I have assumed that using VTCLX and VLCAX as TLH partners in taxable would be simplest.
Just opened a joint taxable with Vanguard today. :sharebeer

I wanted the option to TLH without having to move other funds around. The above should work for us.
The other option was to exchange the VXUS (Total US) in Roths to VFIAX (SP500). As it seems unlikely our taxable with get larger than our Roths, I chose to leave the existing funds alone and using the two options above [VTCLX - VLCAX] to not trigger wash sales.
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grabiner
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Location: Columbia, MD

Re: How to structure my 401k alongside a new taxable account - VXUS in taxable or 401k?

Post by grabiner »

coliver wrote: Thu Apr 08, 2021 1:43 pm 1. Assuming I regularly rebalance and keep my target AA across all 3 accounts and I'm only investing in low cost index funds, does it matter whether I invest future funds in VTI or VXUS in my brokerage account?
2. If it matters, what's the risk if I go 100% VTSAX in my 401k and mixed in my taxable account? I've heard of folks mentioning the foreign tax credit in taxable, but a little confused as to how to what triggers the credit and the limit.
When a foreign country taxes a dividend, you can take a credit against your US tax for the tax paid to the foreign country. Usually, you get the whole tax back. For example, suppose that the stocks in your international fund earned $1000 in dividends, and the foreign countries took $80 in tax. If you hold the fund in an IRA, you get the $920 net dividend. If you hold in a taxable account, you pay tax on the full $1000, but you get $80 back in foreign tax credit. (If your foreign tax is less than $300 single/$600 married, you just claim the credit on a single line on your tax form. If it is more, you have to fill out IRS Form 1116 to compute the credit, but most investors in foreign stock will get the whole tax back.)

This makes foreign stocks more attractive in taxable, but working the other way is that foreign stocks tend to have higher dividend yields and more non-qualified dividends.

Whether US or foreign in taxable is better depends on your tax situation; it's usually pretty close. US in taxable is better in high federal or state tax brackets; international in taxable is better in states which offer a foreign tax credit.
Wiki David Grabiner
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