Might have a modest sum to invest from sale of some property later this summer. Would like to "meld" it into existing portfolio which is currently mostly tax-deferred funds. Would prefer to invest in something at T. Rowe for simplicity. If it's a fund I already own there inside the tax shelter, that's even better.
I've looked at their muni funds and not impressed by any in the current low interest rate environment - though they might suffice for part of the money. I'm thinking maybe PIEQX (international equity index) which I already own in the tax-sheltered account might be a good choice for non-sheltered money?
Is there a website somewhere where you can input a fund and get a reading of its relative tax efficiency? I'm a neophyte at non-sheltered investing. Am assuming taxable income is to be discouraged in favor of long term capital gains. Further, you want low fees and low turnover. Thanks for any thoughts.
Comments
http://performance.morningstar.com/fund/tax-analysis.action?t=FCNTX
This calculation is but one way of representing tax efficiency. This one tells you what percentage of your investment went to pay taxes. Here's M*'s brief description:
http://www.morningstar.com/InvGlossary/tax_cost_ratio.aspx
Note that most sites (and all prospectuses) use the highest tax rates in computing tax efficiency. If you're in a lower bracket, and especially if you're in a 15% or lower bracket (where qualified divs and long term cap gains get taxed at 0%), you'll want to take the figures with a grain of salt.
There's also an oddity in how mutual funds handle cap gains. If they have net gains, they distribute them to you, just as if you'd owned the portfolio and bought and sold it yourself. But if they have net losses, they are not allowed to distribute them to you. The losses accrue (accumulate), and next year, or the year after, or ... whenever they have a net gain, they can use those accrued losses to reduce the gains distributed.
This has the effect of distorting tax cost figures. After the market swoons (e.g. 2008), pretty much everyone has large losses accrued. So for the next few years, all funds look tax efficient as they apply those losses against realized gains.
IMHO turnover should be low enough that the fund isn't generating short term gains (taxed as ordinary income). But so long as the cap gains are long term, it doesn't matter too much. Sooner or later, even with very low turnover, the fund is going to sell appreciated shares. If it's allowed the stock to appreciate a lot, then it will recognize large gains then. Averaged over time, it comes out the same as taking a little at a time.
Very low turnover (vs. low turnover) helps on the cost side, since trading costs are a big hidden cost in fund ownership. As you noted, you want low costs, whether explicit (in the ER) or implicit, in the trading commissions paid by the fund.
I pay attention to tax efficiency but I don't obsess over it.
- Looks like lower tax cost ratio is better.
- Also looks like PIEQX isn't a bad choice given the constraints I mentioned.
- Re: Earned dividends - I assume you have to pay taxes yearly whether you sell shares or not?
- Re: Long-term cap gains - I assume (possibly incorrectly) you only pay those after selling shares?
This tax stuff is beginning to look complicated.
Conversely, you don't pay taxes on the appreciation of your shares until you sell them, just like regular stocks.