I noted with interest your point on losing the Foreign Tax Credit (FTC) deduction if holding a fund similar to Vanguard Total World Stock in a taxable account. For tax year 2022 the FTC for Vanguard International Index was approximately $28 for $10,000 of assets (28 basis points). But what is the cost of taxes paid when realizing gains due to moving funds between the domestic and international index to maintain the target allocation? My back of the envelope analysis for the past 15 years is diverting dividend and capital gain distributions from domestic to international was not sufficient to maintain the target allocation, it was necessary to sell some of the holdings to maintain the target allocation. Obviously if one is investing sufficient new money every year the new investments could be invested to the lower performing fund to maintain the target allocation assuming sufficient discipline by the investor. In my case I was tight on money to pay taxes on realized gains, busy raising kids, etc. as the domestic markets outperformed international. We did not keep up with rebalancing every year. We now have holdings in Vanguard Total Stock and Total International that do not align with planned allocation with a large tax bill due if they are realigned. (But we did direct funds to 401K and other retirement accounts). I do not claim to know the right answer but it is another point to consider for taxable accounts. Buying one 'global' fund loses out on FTC but the investor does not have to actively rebalance between domestic and international.
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I noted with interest your point on losing the Foreign Tax Credit (FTC) deduction if holding a fund similar to Vanguard Total World Stock in a taxable account. For tax year 2022 the FTC for Vanguard International Index was approximately $28 for $10,000 of assets (28 basis points). But what is the cost of taxes paid when realizing gains due to moving funds between the domestic and international index to maintain the target allocation? My back of the envelope analysis for the past 15 years is diverting dividend and capital gain distributions from domestic to international was not sufficient to maintain the target allocation, it was necessary to sell some of the holdings to maintain the target allocation. Obviously if one is investing sufficient new money every year the new investments could be invested to the lower performing fund to maintain the target allocation assuming sufficient discipline by the investor. In my case I was tight on money to pay taxes on realized gains, busy raising kids, etc. as the domestic markets outperformed international. We did not keep up with rebalancing every year. We now have holdings in Vanguard Total Stock and Total International that do not align with planned allocation with a large tax bill due if they are realigned. (But we did direct funds to 401K and other retirement accounts). I do not claim to know the right answer but it is another point to consider for taxable accounts. Buying one 'global' fund loses out on FTC but the investor does not have to actively rebalance between domestic and international.
Post: Don’t Mess Around
Link to comment from August 12, 2023