Re: Questions about tax-efficient fund allocation, backdoor Roth, switching to a one-fund portfolio, etc

First of all, thank you all very much for your thoughtful replies. I’ve never talked to anyone about financial stuff, I’ve just been reading stuff about this and trying my best on my own. I’m surprised at how much of a relief it is to hear some of my work and ideas validated and you’re presenting a ton of new information for me to work with.

retired@50 wrote: Mon Oct 20, 2025 9:46 am

741 wrote: Sun Oct 19, 2025 1:59 pm

Approx size of total portfolio: $1.15M

Taxable account at Fidelity:

• 37.6% Vanguard Total Stock ETF (VTI) (0.05%)
• 30% Vanguard Total International Stock ETF (VXUS)
• 12.3% SPAXX — $142k (need to invest this)

How much is tax-efficient fund placement actually saving me? This will help me decide if it’s worthwhile.

About tax efficiency… A couple of things come to mind.

Your portfolio is largely in your taxable account, (79.9%), so for someone in your shoes, tax efficiency is important if you aren’t fond of paying more taxes than necessary.

If we consider two positions you currently hold, the VTI and the SPAXX, I’d estimate that the cash holding has generated more taxable income over the past year than the VTI. Further, the dollar amount is only part of the story, because SPAXX income is non-qualified dividends which are taxed at your ordinary income tax rates. The VTI dividends are qualified dividends, which are taxed at your long term capital gains rate.

A simple illustration.

$142,000 * 4% = $5,680 from SPAXX in taxable income over 12 months.

($1.15 million * 37.6%) = $432,400 of VTI is approximately 1,322 shares at current price of $327. Over the past 12 months VTI has paid about $3.75 / share in dividends.

So, 1,322 shares * $3.75 dividend = $4,957 in qualified dividend income.

In other words, your SPAXX position, which is about 1/3 the size of your VTI position, is generating more taxable income, taxed at higher rates, than a position in VTI that is 3 times the size.

You’re only 31 years old. Do you really want to spend the next 60 years paying more income taxes on your portfolio? Something to think about.

Regards,

I had absolutely no idea about the tax implications of SPAXX, thank you very much for that info. Most of that balance is actually new because I sold some real estate recently. I’ll add that context to the OP.

I was procrastinating my investment of SPAXX because I didn’t want to back myself further into a corner of having my funds spread across many accounts. After reading this thread I feel less inclined to move to a single-fund portfolio, so I’ll probably invest it and rebalance this week.

TheWizardInBlack wrote: Mon Oct 20, 2025 10:13 am

1. A large portion of your holdings is taxable, which costs you. There isn’t much you can do about it now if you are temporarily not earning income. One thing you could do to make life more simple in your 401k is don’t try too hard to perfectly replicate VTI/VXUS there. Just hold a single S&P 500 fund and a single developed international fund. These holdings are so correlated with VTI/VXUS that they are functionally the same. Another thing to look at is that many Fidelity 401ks have access to Brokerage Link, where you can in fact buy almost anything you want in your 401k.
2. Holding balanced target date funds in a taxable generally isn’t advised. They can have unexpected tax implications, hold intermediate term bonds in unfavorable tax treatments, so on. See: https://www.bogleheads.org/wiki/Tax-eff … _placement
3. Doing whatever you can to get more money into Roth is a good idea. It grows and can be withdrawn tax free. You’re going to need to Roth convert and pay taxes on your current traditional IRA holdings so you can do clean backdoor Roth conversions. You also need earned income to do this, so right now you might be stuck but I don’t know what your full “earned income” situation is.

   If you are making $120k, you’re under the limit to directly contribute to Roth, you just need $7k on paper earned income. You could Roth convert up to the max in your IRA, if you have room after fill out the rest. Keep doing this as long you have $7k on paper earned income until your traditional IRA is all Roth converted. Then you could do clean backdoor Roth contributions when your income exceeds the direct limits.

4. I think your fund choices are fine and shouldn’t be changed. I would simplify in the 401k to where you don’t need a complicated spreadsheet to keep track of hobbled together funds to make VTI/VXUS facsimiles.
5. Forwardly, your focus should be on “how can I do whatever I can to get more money into tax advantaged accounts”. This will save you more money over the long-term than agonizing over fund selection. Taxes are the single biggest expense one has over their lifetime.

1. I’m earning income, just about half of what I normally would. Probably gonna make about 120k this year. Updated the OP to clarify that. The information about VTI and S&P 500 being interchangeable is sort of mind-blowing to me, I had no idea. I looked it up and I’m surprised at how closely they track. Thank you very much for that info, that’s likely to simplify things a great deal.
2. Noted, thank you. I’m leaning away from that after seeing all of these replies.
3. I’ll start learning more about Roth conversion. It seems more possible now that I’m leaning into my current tax-efficient fund allocation since I don’t feel as inclined to roll over my 401k.
4. Great, I’ll do that
5. Noted, I’m going to think on this. I’ll look into Roth conversion, backdoor, etc.

Raspberry-503 wrote: Mon Oct 20, 2025 10:36 am

VTI is really quite tax efficient. VXUS is not horrible but the emerging market component is a little more costly. You get some foreign tax credit from that too.

The SPAXX component is a drag, since you say it needs invested. It’s not tax efficient and is not earning enough if it’s an investment and not an emergency fund.

As others said here, you’re in good shape with taxable, you should take advantage of tax-advantaged accounts if you are investing for retirement. Learn about Roth vs Traditional and you will have to take a guess at whether Roth is for you, at 24% you’re in that not-so-obvious zone.

If you have a 401(k) match, always put enough in the 401(k) to get the match, it’s free money.

Feel free to list your 401(k) options here.if you want more advice on how to simplify it, as other said close-enough is good-enough

I didn’t know about the tax implications of SPAXX until today, thank you very much.

With my normal income I stretch into that 32% bracket but I’m working part-time. The big problem was that I made money “too quickly” when I was in my mid-to-late-twenties, then I was a contractor for a few years so I wasn’t able to contribute as much as I wanted to into my tax-advantage accounts. I’m gonna start looking into ways to change that.

Unfortunately no 401k at the moment as I’m a contractor. Gonna look into a Solo 401k.

I’m looking for a list of available funds but I’m seeing conflicting info. I’ll post it when I find it.

TheWizardInBlack wrote: Mon Oct 20, 2025 1:00 pm

I would continue to do tax-efficient fund placement. Simplify your 401k holdings. Make a new spreadsheet or use a tool you’re confident in. Your holdings are not very complicated and you’re doing a lot right with your fund selection. Almost everyone’s 401k has “weird funds”. Mine has CITs in S&P 500, international, company stock, active funds, high cost actively managed target date funds, weird funds without ticker symbols. I have access to Brokerage Link but skip it because I’m satisfied with holding funds that track indexes like S&P 500 and a developed international for ridiculously cheap and no need to manage dividends. For all intents and purposes, my 500 fund is free.

I would not roll it in to a trad IRA especially if you’re looking to do backdoor Roth contributions. Hold on to it until you get a new 401k at a new job then roll it in to that one (if you like it), or just hold it until you start moving towards decumulation instead of accumulation (or something 401k side becomes prohibitive to hold it).

Ok thanks for validating my fund placement, I think I was just getting unsure about it because I set it up myself and I don’t really know what I’m doing. I think I have access to Brokerage Link too but I’m having trouble understanding what it is, should I bother with it or no?

SnowBog wrote: Mon Oct 20, 2025 2:05 pm

I agree with what others have posted, not sure you gain much, and could in fact have worse outcomes switching to a target date fund.

Specifically, your issue is the amount of your portfolio in taxable accounts…

retired@50 wrote: Mon Oct 20, 2025 9:46 am

About tax efficiency… A couple of things come to mind.

Your portfolio is largely in your taxable account, (79.9%), so for someone in your shoes, tax efficiency is important if you aren’t fond of paying more taxes than necessary.

…

The example used in this post showed your money market as generating more in taxable income (even though it’s balance is smaller). What might have been less obvious is the “interest” is taxed at your marginal tax bracket while “qualified dividends” are taxed more favorable at “long term capital gains rate” – which is what makes them far more tax-efficent.

TheWizardInBlack wrote: Mon Oct 20, 2025 10:13 am

• Holding balanced target date funds in a taxable generally isn’t advised. They can have unexpected tax implications, hold intermediate term bonds in unfavorable tax treatments, so on. See: https://www.bogleheads.org/wiki/Tax-eff … _placement

This notes that target date funds – which hold an increasing amount of bonds (until they hit their peak) – aren’t generally recommended in taxable, for the reasons previously noted that “interest” from bonds are taxed at higher rates than other options.

And to switch in taxable, you’ll have to pay taxes on any existing gains… To know the “cost”, you’d need to understand how much “short-term” (regular income) and “long-term” (capital gains) gain you have, and then use your tax-software or something like https://engaging-data.com/tax-brackets/ to plug in your numbers. Note, this won’t include state taxes, or other things like NIIT – but gets you an idea…

If interested to learn more, there’s a wiki (and I believe a template) to help figure out if switching funds in taxable is a good idea. https://www.bogleheads.org/wiki/Paying_ … itch_funds

But per the above, I can’t see how you come out “financially” ahead doing so… You’d have to value “simplicity” of a single fund holding pretty high…

Which isn’t to say there aren’t benefits of a One-fund type approach. There’s a 23 page post recommending this very idea, but admittedly more for tax-advantaged accounts for the aforementioned reasons. viewtopic.php?t=287967

741 wrote: Sun Oct 19, 2025 1:59 pm

Questions

1. How much is tax-efficient fund placement actually saving me? This will help me decide if it’s worthwhile. Several years ago when I started investing I tried to allocate my funds for tax efficiency. Part of me regrets this. Rebalancing is a chore and I don’t really have confidence in the spreadsheet I made anymore. It’s especially tricky now that I have enough VXUS that it’s spilling over into my 401k and I also have to approximate larger index funds in my 401k.

Hard to say, and will vary based on % of bonds in target date fund (which will increase as you approach target date) and the average interest rate of the bonds.

But a few examples:

• We can assume 2% of Total Stock Market as “dividends” per year (on average), so for every $100k that would be $2k of taxable income. But the majority of that taxable income is likely “qualified dividends” taxed at the lower “long term capital gains” rates. Let’s assume for you that’s 15% federal rate instead of 24% marginal rate, that’s a “savings” of roughly $180/year per $100k of stocks.
• Believe current Total Bond Market funds have roughly a 3.75% interest rate, so for every $100k of bonds, that would be roughly $3.8k of taxable income – all at your marginal rate, or roughly $900/year per $100k of bonds.
• So for every $100k moved to bonds, you’d pay roughly $600/year more (subject to current interest rates, tax brackets, etc.)

741 wrote: Sun Oct 19, 2025 1:59 pm

• Is there any way I can migrate from my tax-efficient placement to just having a single target-date fund in all my accounts or am I kinda stuck now? Around how much would I have to pay in taxes to sell the funds in my taxable account and buy a target-date fund?

You are limited by what your accounts allow… Main issue is likely to be your 401k and HSA accounts…

And I’ll note there is no reason you “have” to do this… Very few of us maintain all funds in all accounts… Most of us figure out our AA and manage it uniquely across all accounts. https://www.bogleheads.org/wiki/Asset_a … e_accounts As an example, the bulk of my “fixed income” is held in tax-advantaged accounts, as is the entirely of my international allocation. My taxable is almost exclusively Total Stock Market (plus muni bonds – suitable for my tax bracket and Savings Bonds – as I need “some” bonds in my taxable account to hit my AA). But transparently, tax-advantaged is a much bigger piece of my portfolio.

But my point is, you could switch whatever accounts you want (and make sense to do so) to a target date (or similar “balanced” fund) if you wanted – while leaving other accounts (like your taxable) largely alone. That might require a little “tweaking” to hit your target AA, as you’ll need more in bonds than the TDF includes – if only a portion of your portfolio is in a TDF.

In a similar fashion, the “three-fund” portfolio model wasn’t intended to be taken “literally”. Many of us have accounts at different brokerages, some may not have all the options we want so we use proxies like S&P 500 instead of TSMs, might avoid certain funds (like international) in an account with bad options (holding more in accounts with better options), etc. It’s more that “you don’t need a bunch of complicated funds”… In concept, you just need 3 types of funds… In reality, that might be more then 3 funds (including proxy funds) across different accounts – that’s completely OK. https://www.bogleheads.org/wiki/Three-fund_portfolio

See above for thoughts on “costs”.

741 wrote: Sun Oct 19, 2025 1:59 pm

• How much would I save by attempting a backdoor Roth? What little money I have in my traditional IRA is post-tax. Backdoor Roth sounds like a bit of a headache and if knowing how much money I stand to save would help me gauge whether I want to bother doing it, because right now it’s the only thing (as far as I know) preventing me from rolling my 401k into an IRA.

Not sure I’m following this part…

If the funds in your traditional IRA are “post-tax”, meaning “non-deductible IRA contributions”, it sounds like you started – but didn’t complete – a Backdoor Roth. The last step is completing the conversion to Roth. Your “non-deductible” contributions are essentially “tax-free” conversions to Roth, but if you have any remaining traditional IRA balance the IRS doesn’t make it that easy with their “pro-rata” rules. If your balance is < $6k, I’m assuming any “gains” are minimal – and normally I’d advise just converting the whole thing (paying taxes on the gains converted). If you had larger gains, if you still had access to a 401k, you could see if it allows rollover of Traditional IRA funds to get the balance to $0… https://www.bogleheads.org/wiki/Backdoor_Roth

If the question is more a “go forward” impact, well that really depends on your employment/earnings… Believe you can earn up to $150k and make “direct” Roth conversions, in which case no need to bother with Backdoor Roth (or worry about Traditional IRA balances). It’s only when you “earn too much” to contribute directly where “Backdoor Roth” (and issues with Traditional IRA balances) come into play. If you are earning more than $150k, are you also maxing out your 401k (assuming you are back to having one)? If not, that seems the obvious choice – do that first, worry about IRA after… If you are “self-employed”, could also explore other applicable options…

Ok, after reading this reply closely and considering what it would look like in my portfolio I’ve successfully been persuaded not to change from my current allocation. I now feel like I can invest the SPAXX without worrying about switching my AA and I don’t feel the need to roll my 401k into my IRA so most of my problems have been fixed now. Thank you so much for the detailed reply, it has helped me a great deal.

I’m going to have to look into Backdoor Roth and learn more about it before I respond to the last part, I don’t really know much about it so I’m just spitballing.

Mike Scott wrote: Mon Oct 20, 2025 4:20 pm

Do VTI in taxable and split VXUS as needed to hit your % desired. Basically you don’t need to change much. Add some bonds when ready in tax deferred. You can choose a one fund but you should calculate the cost of the additional taxes to do so before you buy it in the taxable account.

Thank you, that sounds like exactly what I’m currently doing. Phew.