Vanguard Inflation Protected Securities Fund tax distributions

From Bogleheads
Jump to: navigation, search

The table below summarizes the fund's relation to a number of tax factors.

Swensen Lazy Portfolio2.PNG
Fig. 1 David Swensen's lazy portfolio, using a Treasury Inflation Protected Securities allocation.


Table. Summary
Fund Distributions.jpg Favorable tax factors Fund Distributions.jpg Unfavorable tax factors

Treasury interest: Yes (average 99%)

Historical gains distributions : Yes
Dividends: Taxed at marginal tax rates
"Phantom" dividends: inflation adjustments are taxed each year
Qualified dividends: No
ETF shares: No


Distributions

Table. Vanguard Inflation Protected Securities Fund Tax Distributions
Year Dividend Investor shares[1] Dividend Admiral shares[1] Treasury Interest [2] Short-term Capital Gains [3] Long-term Capital Gains [3] Return of Capital distribution [4][5] Total Return
2013 1.33% 1.43% 99.90% 0.03% 0.36% 0.00% -8.92%
2012 2.55% 2.65% 99.96% 0.18% 0.99% 0.00% 6.78%
2011 4.21% 4.30% 99.95% 0.00% 0.14% 0.00% 13.24%
2010 2.48% 2.59% 99.85% 0.00% 0.00% 0.00% 6.17%
2009 2.00% 2.13% 98.81% 0.00% 0.00% 0.00% 10.80%
2008 5.02% 5.11% 99.78% 0.00% 0.00% 0.00% -2.85%
2007 5.92% 6.01% 99.23% 0.00% 0.00% 0.00% 11.40%
2007 3.87% 3.96% 99.23% 0.00% 0.00% 0.16% 0.43%
2006 4.83% 4.92% 97.52% 0.12% 0.28% 0.00% 2.76%
2005 4.83% - 99.56% 0.05% 0.53% 0.00% 6.96%
2004 3.46% - 99.31% 0.62% 0.52% 0.00% 8.69%
2003 4.55% - - 0.72% 0.00% 0.00% 16.64%
2002 3.92% - - 0.84% 0.00% 0.00% 6.17%
2001 6.38% - - 0.16% 0.00% 0.00% 8.07%

  • In July 2007, the board of trustees approved a change in the fund’s fiscal year-end from January 31 to December 31. This change was effected through a tax-free reorganization of the fund from a series of Vanguard Fixed Income Securities Funds to a series of Vanguard Bond Index Funds. The change had no effect on the fund’s financial position or results of operations. The change is reflected in the two entries for the year 2007 (from Jan. 31 2006 to Jan 31. 2007) and (Jan. 31 2007 to Dec. 31 2007).
  • 2006 Admiral class dividend annualized.
  • 2001 Investor class dividend annualized.

Table. Coupon and Inflation Adjustment yields (Investor shares) [6]
Year Dividend Investor  % Coupon  % Inflation Adjustment Coupon Inflation Adjustment
2013 1.33% 32.41% 67.59% 0.43% 0.90%
2012 2.55% 34.15% 65.85% 0.87% 1.68%
2011 4.21% 34.92% 65.08% 1.47% 2.74%
2010 2.48% 57.41% 42.59% 1.42% 1.06%
2009 2.00% 84.58% 15.42% 1.69% 0.31%
2008 5.02% 34.47% 65.53% 1.73% 3.29%
2007 5.92% 43.74% 56.26% 2.59% 3.33%
2007 3.87% 29.57% 70.43% 1.14% 2.73%
2006 4.83% 30.98% 69.02% 1.50% 3.33%
2005 4.83% 41.42% 58.58% 2.86% 1.97%
2004 3.46% 59.11% 40.89% 2.05% 1.41%
2003 4.55% 63.04% 36.69% 2.87% 1.68%
2002 3.92% 63.82% 36.18% 2.50% 1.42%
2001 6.38% 55.56% 44.44% 3.54% 2.84%

  • In July 2007, the board of trustees approved a change in the fund’s fiscal year-end from January 31 to December 31. This change was effected through a tax-free reorganization of the fund from a series of Vanguard Fixed Income Securities Funds to a series of Vanguard Bond Index Funds. The change had no effect on the fund’s financial position or results of operations. The change is reflected in the two entries for the year 2007 (from Jan. 31 2006 to Jan 31. 2007) and (Jan. 31 2007 to Dec. 31 2007).
  • 2001 Investor class dividend annualized.

Accounting data

The accounting figures and associated ratios (tables below) can help one visualize some of the major determinants of a fund’s tendency to distribute taxable gains. These determining features include:

Turnover: The rate at which a fund manager sells securities within the fund has a major effect on potential gains realization. Bond funds have higher turnover ratios than stock funds, since the bond manager must buy and sell bonds as they mature, and as the manager maintains the maturity and duration structure of the portfolio. The gains or losses on a bond are primarily determined by changes in interest rates, and in some instances, credit quality.

Similarly, fund shareholders' sales flows have major effects on a fund’s distribution tendencies. Net flows into the fund have the following effects:

  1. Constant inflows allow a fund manager to purchase a wide range of bonds at different prices. The manager can select high basis securities when forced to sell a bond (this may realize a loss). The manager can also select low basis securities when redeeming a bond in-kind (a non-taxable transaction that can remove an unrealized gain out of the portfolio.)
  2. A large and growing net asset base serves to diffuse any realized capital gains across a large base of shareholders and reduces the per share gain distribution. Large outflows have the opposite effect; any gains realized are spread across a smaller asset base and result in higher per share distributed gains. [7]

The level of unrealized gains and carryover realized losses in a fund: A fund which defers gains realization accumulates unrealized appreciation, which when distributed, will be taxed; thus the unrealized gain/loss figure shows the potential gain (or loss) that would be realized if the portfolio was to be entirely liquidated. Any loss carryovers a fund possesses can be used to offset future realized gains (carryovers have an eight year expiration period). The third tab on the Table 3. spreadsheet shows the data in percentage of total assets form.

Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)


Definition of terms

Net sales/redemptions: This statistic reveals whether investors are net buyers or sellers of the fund.

Realized gain/loss: A realized capital gain/loss is an increase (or decrease) in the value of a security that is "real" because the security has been sold by the portfolio manager. The capital gains/losses are "realized" by the fund, and any distributions to the shareholder as a result of realized gains (adjusted for any realized losses) are taxable during the tax year in which the security was sold. Realized losses can be used to offset realized gains in an attempt to reduce taxable gains. If realized losses are higher than realized gains, a fund can "carry forward" these excess losses to offset future gains. In-kind redemption gains are included as gains in this statistic. As these gains are not taxable, they must be deducted from the realized/gain tally to reflect the net gain/loss for the year. (see tax attributes for the net gain computation).

Distributed gains: A net realized gain will be distributed to shareholders as a capital gains distribution.

Unrealized gain/loss: An unrealized capital gain/loss (also called a "paper profit or loss") is an increase (or decrease) in the value of a security that isn't "real" because the security hasn't been sold. When a portfolio manager sells a security, however, the capital gains/losses become "realized" by the fund, and any realized gains (net of any losses) are taxable during the tax year in which the security was sold. Funds with low turnover rates, such as index funds, tend to have more unrealized gains than actively managed funds and are less likely to pass taxable gains on to investors. A fund's unrealized appreciation or depreciation figures are valuable because they can give an idea of whether a fund would need to distribute any gains if all of its securities were sold. Such information may help you determine your potential exposure to taxable distributions. This statistic is volatile, and will increase or decrease depending on market returns.

Loss carryforward: Realized losses can be “carried forward”, over a set span of years, to offset any future net realized gains.

In-kind redemptions: Instead of selling securities, a portfolio manager may elect to distribute securities in-kind to redeeming shareholders. Unlike a sale, an in-kind transfer is not taxable. This technique is frequently used in the ETF creation/redemption process. For institutional redemptions, a portfolio manager can select low-basis securities to transfer (removing the embedded tax liability) from the portfolio.

Turnover

Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)


Definition of terms

Average net assets: Average net assets are derived from NSAR reports from the EDGAR database.

Redemptions: The dollar amount of fund shares sold by shareholders.

Sales: The dollar amount of fund shares bought by shareholders.

Turnover: The rate at which the fund manager sells securities within the portfolio. The reciprocal of this number reflects the average holding period of the portfolio. Low turnover often results in low capital gains realization.

R/ANA: The redemptions/average net assets (R/ANA) ratio reflects how fund shareholders are turning over their holdings in the fund. It is analogous to the investment manager's turnover ratio.

R/S: The redemption/sales ratio (R/S) illustrates whether investors are net buyers or sellers of the fund. A ratio of less than 1 means that investors are net purchasers of the fund. A ratio more than one means investors are net sellers of the fund. The R/ANA and R/S ratios, viewed together, can signal market timing activity within a fund. For example a fund showing an R/ANA ratio of 400% and an R/S ratio of 1 (equal buys and sells) is likely being market timed by fund shareholders.

Tax rates

Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2013 onward are outlined below. Keep in mind that investment income may also be subject to state and local taxation.

  1. Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 39.6%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
  2. Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets, at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets, and at 20% in the 39,6% tax bracket. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
  3. Qualified dividends are the ordinary dividends [8] that are subject to the same tax rate that applies to long-term capital gains. They should be shown in box 1b of the Form 1099-DIV you receive.
  4. When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.
  5. The Affordable Care Act imposes a Medicare surcharge of 3.8% on all net investment income (NII) once the taxpayer's adjusted gross income exceeds $200,000 (single) or $250,000 (married); while this tax is not part of the income tax, it has the same effect on investors as a higher tax rate. The NII tax begins to apply to individuals falling in the 33% tax bracket. Thus the top effective marginal tax rate is 23.8% on qualified dividends and long-term gains, 43.4% on ordinary investment income.
Federal Income Tax Rates in 2013
Taxable income up to this level Tax rate
Single Married filing joint Head of Household Ordinary income Long-term gains and qualified dividends
$8,925 $17,850 $12,750 10% 0%
$36,250 $72,500 $48,600 15% 0%
$87,850 $146,400 $125,450 25% 15%
$183,250 $223,050 $203,150 28% 15%
$398,350 $398,350 $398,350 33% 15%
$400,000 $450,000 $425,000 35% 15%
above above above 39.6% 20%

In addition, there is a 3.8% Medicare tax rate on investment income in excess of an adjusted gross income of $200,000 ($250,000 for married filing jointly), and 0.9% on salary and self-employment income in excess of this level.


Federal Income Tax Rates in 2012
Taxable income up to this level Tax rate
Single Married filing joint Head of Household Ordinary income Long-term gains and qualified dividends
$8,700 $17,400 $12,400 10% 0%
$35,350 $70,700 $47,350 15% 0%
$85,650 $142,700 $122,300 25% 15%
$178,650 $217,450 $198,050 28% 15%
$388,350 $388,350 $388,350 33% 15%
above above above 35% 15%

In addition, there is a 3.8% Medicare tax rate on investment income in excess of an adjusted gross income of $200,000 ($250,000 for married filing jointly), and 0.9% on salary and self-employment income in excess of this level.


Fund analysis

The following table presents the federal tax cost on the fund's historical distributions (see second tab, table 6.) under two scenarios: the current favorable tax rate regime (2010-2012) and under a higher tax regime (with long term capital gains taxed at a maximum 20%). Keep in mind that the coupon and inflation adjusted distributions are not subject to state and local taxation if the fund is held in the taxable account. The third tab provides a breakdown of the yearly division of the fund distribution between coupon yield (average 2.17%) and inflation adjusted principal (average 2.23%). The averages are based on the results from the 2001-2010 life of the fund. One should note that the coupon yield of the fund is presently lower than the long term average, and that the fund's tax liability will increase or fall depending on the rise or fall of future inflation adjustments.

Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)

See also

References

  1. 1.0 1.1 Dividend data is derived from the N-CSR filings 2007-forward; N-CSR filings 2003-2006; N-30D reports back to 1994
  2. Vanguard Tax Preparation Archive
  3. 3.0 3.1 Capital Gains are derived from annual reports, and are calculated by dividing the dollar amount capital gain distribution by the average net assets of the fund, derived from NSAR reports 2007-forward;NSAR filings 1994-2006
  4. Return of Capital dividends are derived from annual reports, and are calculated by dividing the dollar amount return of capital distribution by the average net assets of the fund, derived from NSAR reports 2007-forward; NSAR filings 1994-2006.
    From 2007 Annual Report: The fund has adopted a tax year-end of December 31. The quarterly income dividends declared by the fund exceeded the fund’s taxable income for 2006. Accordingly, a portion of the fund’s income dividends was reallocated to return of capital to reflect its tax character.
  5. Table.

    (view Google Spreadsheet in browser or download as xls, ods, or pdf)

  6. From Important information about Vanguard Inflation-Protected Securities Fund Investor Shares distributions:
    Income from the Vanguard Inflation-Protected Securities Fund Investor Shares is from 2 sources: real yield and an inflation adjustment that maintains the purchasing power of investments over time. Investors interested in maintaining the purchasing power of their investments should reinvest their dividend distributions. Because inflation fluctuates, it cannot be projected into the future with any accuracy. Measured over short periods, inflation can deviate from its long-term trend. A complete estimate of the fund's total distributions requires that an estimate of future inflation be added to the real yield. The inflation adjustment can be positive or negative, based on the change in the Consumer Price Index. Note about June and September 2009 distributions: The Fund had no net income to distribute for the second and third quarter of 2009 because negative inflation adjustments offset the "regular" interest income (coupon interest and amortization) on the securities held by the Fund.
  7. Larry E. Swedroe, What Wall Street Doesn’t Want You To Know, 2001, pp.227-28. ISBN 0312335725
  8. Fairmark says:

    A portion of your ordinary dividend may be nonqualified because it can include items like these:

    • Taxable interest. When a mutual fund receives taxable interest, the income gets paid out as a dividend. It's a dividend when it goes out of the mutual fund, but it wasn't a dividend when it came into the mutual fund, so it can't be a qualified dividend.
    • Nonqualified dividends. Your mutual fund may receive dividends that are nonqualified. For example, the mutual fund may sell shares just 35 days after buying them, but after receiving a dividend. The mutual fund has to hold the shares at least 61 days to have a qualified dividend. Any amount the mutual fund receives as a nonqualified dividend gets paid to you as a nonqualified dividend.
    • Short-term capital gain. When a mutual fund has a short-term capital gain, it pays this amount to the mutual fund shareholders as an ordinary dividend.
    • Holding mutual fund shares less than 61 days. You should also be aware that any dividend you receive on mutual fund shares held less than 61 days is a nonqualified dividend, even if the mutual fund reports that amount to you as a qualified dividend. You don't have to buy the shares 61 days before the dividend is paid, but the total amount of time you hold the shares (including time before and after the dividend) has to be at least 61 days.
  9. Almost all of the dividends distributed by Equity REITS come in the form of non-qualified dividends. Non-qualified dividends are taxed at marginal income tax rates.

External links

Vanguard:

  • Current tax attributes and distributions:Vanguard