Best way to take out money from VWITX

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FB01
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Best way to take out money from VWITX

Post by FB01 »

HI,

I put monthly some money in VWITX (Intermediate Term Tax Exempt Bonds) which is in my taxable account. I also reinvenst the dividend every month. Now my question is below

-on 1/1/2013 I deposted 1000
-on 2/1/2013 I deposited 500

Now if I want to withdraw money from VWITX should I take out in batches meaning first I take out 500 and then 1000 or withdraw like 750.

Which is more preferred from tax point of view? I know Vanguard will do all the cost basis but wanted to know the best method.

THank,s
FB
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JD
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Re: Best way to take out money from VWITX

Post by JD »

You do not have to take it in batches. You can withdraw any amount you want at once, i.e. you can take it all, or in diffrent increments as you desire. Vanguard will use the average cost basis for tax purposes unles you instruct otherwise.
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grabiner
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Re: Best way to take out money from VWITX

Post by grabiner »

For a muni-bond fund, the price doesn't vary much, so you could just use average-cost basis for simplicity. However, if you do want to use specific identification, then you just identify to Vanguard when you sell (online, or by letter) which shares you are selling. Thus, if you want to sell 75 shares, you can tell Vanguard to sell 75 shares bought on 1/1/13, or 25 shares bought on 1/1/13 and all 50 shares bought on 2/1/13, whichever is better for your taxes.
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cliffedelgado
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Re: Best way to take out money from VWITX

Post by cliffedelgado »

I thought that tax-exempt dividends lose their tax-exempt status if you hold the security for less than 6 months. And that the Vanguard cost basis does NOT take this into consideration. If this is true, then it does make a difference which one is taken out (if you wait a couple more months). Can anyone chime in and let me know if I am remembering incorrectly ? It doesn't matter in the OP's scenario, but after a couple months, it could make a difference.
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grabiner
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Re: Best way to take out money from VWITX

Post by grabiner »

cliffedelgado wrote:I thought that tax-exempt dividends lose their tax-exempt status if you hold the security for less than 6 months. And that the Vanguard cost basis does NOT take this into consideration. If this is true, then it does make a difference which one is taken out (if you wait a couple more months). Can anyone chime in and let me know if I am remembering incorrectly ? It doesn't matter in the OP's scenario, but after a couple months, it could make a difference.
The IRS rule is that you must subtract the tax-exempt dividends you received on a share from any capital loss if you held the share less than 6 months. This is likely to be a very small loss, since it applies only to shares sold within 6 months, and they won't have paid out much in dividends.

For example:

You bought 1000 shares for $12 each in February with a 2% yield.
These shares pay a dividend of $0.24 annually, or $0.02 per month.
You sell the shares for $11.50 each in June; you have received $0.08 per share for a total of $80.
Your capital loss would be $12,000-$11,500=$500, but it is reduced to $420 because of the $80 of tax-exempt income.
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cliffedelgado
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Re: Best way to take out money from VWITX

Post by cliffedelgado »

Thanks grabiner, that's what I was thinking of.

While the amount may be small, I would avoid the extra accounting if possible. Especially if you had reinvested dividends. Just wanted to point that out to OP should OP actually be near the 6 month mark.
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