Tax Sheltered Mutual Fund (Vanguard)

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Tax Sheltered Mutual Fund (Vanguard)

Postby jsc » Thu Jun 27, 2013 12:46 am

Hello,

I am reading The Intelligent Asset Allocator by William Berstein.

The book is published in 2000. Most of the Vanguard funds mentioned in the book seem to have changed names a bit.

On page 150 of the book, it lists funds into three categories, "Tax-sheltered and taxable", "Tax-sheltered only", and "Taxable only (tax-managed).

Question - other than from the name "tax-managed", how else can one determine is a Vanguard mutual fund is tax sheltered? For example, the book lists Vanguard Total Stock Market Index Fund as a "Tax-sheltered and taxable" fund. It seems like this fund has since (2000) been re-branded into Investor Shares and Admiral Shares. Therefore, how would I know if they are still "tax-sheltered and/or taxable"?

Thanks!
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Re: Tax Sheltered Mutual Fund (Vanguard)

Postby Duckie » Thu Jun 27, 2013 9:50 pm

jsc wrote:Question - other than from the name "tax-managed", how else can one determine is a Vanguard mutual fund is tax sheltered? For example, the book lists Vanguard Total Stock Market Index Fund as a "Tax-sheltered and taxable" fund. It seems like this fund has since (2000) been re-branded into Investor Shares and Admiral Shares. Therefore, how would I know if they are still "tax-sheltered and/or taxable"?

The categories are referring to suitability. In your example, Vanguard Total Stock Market Index Fund is suitable for either tax-sheltered or taxable accounts; meaning it is fine in either. The Investor shares/Admiral shares issue isn't relevant in this context.

Taxable bonds are best suited for tax-sheltered accounts (401k, 403b, IRA). Municipal bonds (tax-exempt) are best suited for taxable accounts. (I don't think Vanguard will even let you buy a tax-exempt fund in a tax-sheltered account.) REITs are best suited for tax-sheltered accounts.

See Principles of Tax-Efficient Fund Placement.
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Re: Tax Sheltered Mutual Fund (Vanguard)

Postby grabiner » Fri Jun 28, 2013 7:11 pm

Tax-sheltered is not a characteristic of a fund; it is a characterstic of the account in which you hold it.

Ordinary mutual fund and brokerage accounts are taxable; if a mutual fund pays a dividend or distributes a capital gain, you owe income tax, and you owe tax on any capital gains when you sell.

IRAs and 401(k)s are tax-sheltered; if a mutual fund in an IRA or 401(k) pays a dividend or distributes a capital gain, you do not pay any tax at that time. When you sell, you pay no tax (qualified Roth withdrawal) or tax on the full amount you sell (traditional account withdrawal). Therefore, you don't care about taxable distributions in these accounts.
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Re: Tax Sheltered Mutual Fund (Vanguard)

Postby R Wins » Fri Jun 28, 2013 11:23 pm

See Principles of Tax-Efficient Fund Placement.


I have seen this reference many times throughout this site but the reference confuses me because the article is inconsistent with many Vanguard fund Asset Classes in regard to the tax efficiency rating from Lipper Leaders Ratings. For example, a Large Cap Value fund should be efficient according to the Principles of Tax-Efficient Fund Placement, however it scores relatively low on tax efficiency with the Lipper Leader Ratings. Can anyone please clarify?
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Re: Tax Sheltered Mutual Fund (Vanguard)

Postby grabiner » Fri Jun 28, 2013 11:39 pm

R Wins wrote:
See Principles of Tax-Efficient Fund Placement.


I have seen this reference many times throughout this site but the reference confuses me because the article is inconsistent with many Vanguard fund Asset Classes in regard to the tax efficiency rating from Lipper Leaders Ratings. For example, a Large Cap Value fund should be efficient according to the Principles of Tax-Efficient Fund Placement, however it scores relatively low on tax efficiency with the Lipper Leader Ratings. Can anyone please clarify?


A large-cap value ETF (including a Vanguard fund with an ETF class) is relatively tax-efficient, because the ETF structure allows it to avoid capital gains, It is still less tax-efficient than a blend index because of a higher dividend yield, although the lower tax rate on qualified dividends means that the higher dividend yield doesn't cost as much.

Most large-cap value funds are tax-inefficient. When a value stock rises in price, it often becomes a growth stock, and value funds will sell it, leading to tax bills on capital gains. Thus, even though there haven't been many capital gains in recent years (because 2007-2009 gave funds large losses to offset against gains), Vanguard's actively managed value funds have a significantly higher 10-year tax cost than Value Index does.
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