Mutual fund question

[disneysteve]

what's the sense in holding a tax-efficient fund in an IRA?

By nature, index funds tend to be tax-efficient and I'm sure most of us hold index funds in our retirement plans.

[kv968]

By nature, index funds tend to be tax-efficient and I'm sure most of us hold index funds in our retirement plans.

That's true, but that's just the nature of an index fund with it's low turnover rate. However, to hold a fund that manages itself so that it is tax-efficient, while possibly losing some returns in doing so, in a tax-sheltered account isn't necessarily the best thing to do. Although good point there.

[jIM_Ohio]

That's true, but that's just the nature of an index fund with it's low turnover rate. However, to hold a fund that manages itself so that it is tax-efficient, while possibly losing some returns in doing so, in a tax-sheltered account isn't necessarily the best thing to do. Although good point there.

If fund is growth oriented, consider you could be increasing your lifetime tax bite by keeping it in an IRA.

Traditional IRA withdraws are taxed at ordinary income (probably 15%, 25%, 28%, 33% or 35% for people reading this).

If the same growth fund was held in a taxable account, capital gains rates of 5% or 15% would be used.

The most tax efficient way to accumulate is not always the most tax efficient way to withdraw.

[kv968]

IRA withdraws are taxed at ordinary income (probably 15%, 25%, 28%, 33% or 35% for people reading this).

Not if the IRA is a Roth.

If the same growth fund was held in a taxable account, capital gains rates of 5% or 15% would be used.

The most tax efficient way to accumulate is not always the most tax efficient way to withdraw.

Not all of the capital gains the fund realizes in their yearly distributions may apply for the 5% or 15% tax rate. You're right though, the best way to accumulate isn't always the best way to withdrawl. It all depends on the person's situation.

[m3racer]

Wow, a lot of good feedback. I'm too much of a novice at this point to invest in speculative stocks. I'd like to start with an index fund and an international fund. Dollar cost averaging certainly makes sense to me......get the most for my $$$. Does starting with 2-4 different funds sound reasonable? What's my endpoint?

[disneysteve]

Does starting with 2-4 different funds sound reasonable? What's my endpoint?

2-4 funds is fine. In fact, some feel 3 or 4 funds is all you need ever.

What's your endpoint? Could be 3-4 funds. Could be more. Depends how much you want to slice and dice your asset allocation. If you get much more than 6 or 8 funds, you are probably starting to overlap holdings.

[humandraydel]

I certainly wouldn't count favorable long term capital gains taxes as the sole reason to go with a taxable account over a tax advantaged account. There is certainly no guarantee that capital gains taxes and/or dividends will always be taxed favorably. That being said, I am an advocate for both taxable and tax advantaged accounts. Having both allows for more flexibility and can help minimize taxes during the withdrawal phase.

To the OP, I would suggest something like (for the equity portion of your allocation):

45% Vanguard Total Stock Market Index (VTSMX)
35% Vanguard FTSE All World Ex- US Fund (VFWIX)
20% Vanguard Tax Managed Small Cap (VTMSX)

If you want to get fancy, 10% in a commodities fund isn't a bad idea.