Vanguard LifeStrategy Fund tax distributions

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The Vanguard LifeStrategy Funds are questionable candidates for placement in taxable accounts. The funds are often recommended as a simple indexed one fund solution for implementing a four-fund portfolio consisting of total market domestic stock, international stock, and investment grade U.S. bond and international bond funds. [1]

LifeStrategy Funds are usually singled out for use in tax deferred (employer provided or individual Traditional IRA accounts) or tax-free (Roth IRA) accounts. The funds are also common investment options in many 529 college savings plans.

In contrast to the Vanguard series of similar one fund diversified portfolios, target retirement funds, which utilize a gradual shifting strategic asset allocation over time, the LifeStrategy funds have a fixed target asset allocation. Vanguard considers the LifeStrategy funds to be target risk funds, in contrast to target date target retirement funds. The table below summarizes the fund's relation to a number of tax factors.


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

Historical gains distributions : Recently low
Qualified dividends: Yes, (avg. 13% to 70% of income)
Treasury interest: Yes, (avg. 7% to 16% of income) [2]
Stock Migration: Nil
ETF shares : No; but yes for the underlying funds
Foreign tax credit: Yes

Dividends: Higher than stock indexes
Bond dividends subject to taxation at marginal rates
Turnover: Low to Moderate

Distributions

Imbox notice.png All Vanguard LifeStrategy funds have fiscal years ending on October 31 of each year. Thus a fund's dividend and capital gains distributions for the year include distributions made in December of the prior year.


The following tables provide long term data on each LifeStrategy fund's history of both dividend and capital gains distributions. As fund of funds, a LifeStrategy fund's taxable distributions come from two sources:

  1. Income and gains distributions received from the underlying funds.
  2. The sales which the Lifestrategy fund makes when rebalancing the fund. [3]

Equity: sources of taxable distributions

Equity capital gains

Vanguard LifeStrategy Funds can distribute taxable gains if the underlying funds distribute gains and if the fund itself realizes gains when rebalancing or retargeting a fund's strategic asset allocation (see tab 5, CG source in the referenced table below) [3]. Historically, the funds have realized substantive gains when they have not had the benefit of loss carryforwards (1994-2001, see tab 6, Loss carryforwards in the referenced table below) [3] and when the underlying funds it invests in have not had loss carryforwards (particularly applicable to the distribution history of the Vanguard Asset Allocation Fund). The funds' two underlying equity funds are very tax efficient.

Equity dividends

LifeStrategy Funds pass along the tax-preferenced qualified dividends distributed by the underlying equity index funds. The Total Market Index Fund distributes 100% qualified dividends; International index funds distribute roughly 75% qualified dividends. The actual portion of the LifeStrategy Fund dividend that is qualified depends on the strategic equity allocation of the fund.

Foreign tax credit

As of 2010, the Regulated Investment Company Modernization Act of 2010 [4] allows funds of funds to pass on the foreign tax credit from the individual funds to their shareholders.

Bonds: sources of taxable distributions

Bond capital gains

Vanguard LifeStrategy Funds distribute capital gains distributions received from underlying bond funds. Currently these funds include, for all funds, the Vanguard Total Bond Market Index II Fund (since 2009; prior to 2009 the funds invested in the Vanguard Total Bond Market Fund). These bond funds occasionally distribute relatively small short term and long term gains. Future long term received gains may be offset by any loss carryforwards the fund possesses. Short term gains cannot be offset by loss carryforwards. [5]

Bond dividends

Vanguard LifeStrategy Funds receive and distribute taxable dividend income from underlying bond funds. This income is taxable at marginal income tax rates. The funds receive a modest tax preference for dividends received from treasury securities, which are exempt from state and local income tax. The bond dividend yield, and treasury bond tax preference of a given LifeStrategy Fund is dependent on the fund's strategic asset allocation.

Tax analysis

The following tables examine the tax consequences of holding the Vanguard LifeStrategy Funds in a taxable account. The tables include a 5% state tax rate (which of course may vary according to state). [6] The Funds' current fundamentals include the following.

  1. Current fund dividend and interest yields are somewhat lower than the historical average yields.
  2. The underlying equity based funds possess tax loss carryforwards that should offset gains realizations through 2017. The funds themselves do not possess loss carryforwards as they enter FY 2014. Any losses realized by the funds (and underlying funds) through 2017 will serve to lengthen the period of gain offsets.

The table examines tax costs under the (2010- 2012) tax regime, using each fund's average non-qualified dividend, average qualified dividend, average government bond dividend, and average capital gain. The table also provides results for the current tax regime( with qualified dividends taxed at 0% , 15%, or 20%, depending on tax bracket, and an additional ACA Net Investment Income tax accessed against higher tax brackets). Keep in mind the table does not include the tax cost should one sell an investment in the fund and realize a gain.

LifeStrategy Income Fund

2080allocation.png

The LifeStrategy Income Fund invests in other Vanguard mutual funds according to a fixed formula that provides an allocation of 80% of the Fund’s assets to bonds, and 20% to common stocks (14% U.S. equity/6% international equity allocation). Prior to 2012, the fund included a 20% allocation to a short term investment grade bond fund and a 20% allocation to the Vanguard Asset Allocation Fund.

Table. Vanguard LifeStrategy Income Fund
Tax Distributions
Year Dividends Short Term Capital Gains [3]
Long Term Capital Gains Qualified Dividends Treasury Dividends FY Annual Return Asset Allocation
2013 2.04% 0.42% 3.03% 18.02% 18.48% 3.88% Stock 20.3%
Bond 79.7%
2012 2.45% 0.31% 0.31% 18.45% 20.35% 6.41% Stock 19.9%
Bond 80.1%
2011 2.52% 0.23% 0.00% 14.04% 17.40% 3.77% Stock 19.8%
Bond 80.2%
2010 [7] 2.89% 0.00% 0.00% 16.55% 17.84% 10.32% Stock 25.0%
Bond 75.0%
2009 3.55% 0.00% 0.00% 16.58% 11.87% 12.83% Stock 22.0%
Bond 78.0%
2008 4.00% 0.10% 0.10% 14.24% 12.99% -12.29% Stock 31.0%
Bond 69.0%
2007 4.07% 0.19% 0.04% 11.03% 17.23% 8.14% Stock 28.0%
Bond 72.0%
2006 3.85% 0.00% 0.00% 11.72% 17.98% 8.49% Stock 30.0%
Bond 70.0%
2005 3.47% 0.00% 0.00% 17.13% 3.39% Stock 30.0%
Bond 70.0%
2004 3.31% 0.00% 0.00% 13.22% 18.95% 6.15% Stock 28.0%
Bond 72.0%
2003 3.53% 0.00% 0.00% - 9.95% Stock 28.0%
Bond 72.0%
2002 4.64% 0.02% 0.34% - -0.79% Stock 30.0%
Bond 70.0%
2001 [8] 4.87% 0.04% 0.11% - 4.85% Stock 22.0%
Bond 78.0%
2000 5.84% 0.00% 0.00% - 8.06% Stock 22.0%
Bond 78.0%
1999 5.37% 0.56% 0.00% - 2.82% Stock 15.0%
Bond 85.0%
1998 5.24% 0.86% 0.96% - 13.17% Stock 21.0%
Bond 79.0%
1997 [9] 5.54% 0.66% 0.34% - 14.23% Stock 20.0%
Bond 80.0%
1996 5.66% 0.83% 1.08% - 7.65% Stock 22.5%
Bond 77.5%
1995 [10] 5.76% 0.00% 1.82% - 22.99% Stock 25.0%
Bond 75.0%


Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)
source:SEC Edgar Annual Reports(2003 onwards, (1994 - 2003) and SEC Edgar NSAR reports

Note: For current tax attributes and distributions see Vanguard

LifeStrategy Conservative Growth Fund

4060allocation.png

The LifeStrategy Conservative Growth Fund invests in other Vanguard mutual funds according to a fixed formula that provides an allocation of 60% of the Fund’s assets to bond and 40% to common stocks (28% US equity/ 12% international equity). Prior to 2012, the fund included a 20% allocation to a short term investment grade bond fund and a 20% allocation to the Vanguard Asset Allocation Fund.


Table. LifeStrategy Conservative Growth Fund
Tax Distributions
Year Dividends Short Term Capital Gains [3] Long Term Capital Gains Qualified Dividends Treasury Dividends FY Annual Return' Asset Allocation
2013 2.12% 0.17% 1.66% 35.50% 13.60% 9.18% Stock 40.3%
Bond 59.7%
2012 2.51% 0.24% 0.00% 36.28% 15.10% 7.88% Stock 39.8%
Bond 60.2%
2011 2.27% 0.14% 0.00% 30.40% 12.27% 3.74% Stock 39.6%
Bond 60.4%
2010 [7] 2.63% 0.00% 0.00% 31.10% 13.64% 12.30% Stock 46.0%
Bond 54.0%
2009 3.23% 0.00% 0.00% 32.50% 8.86% 13.72% Stock 42.0%
Bond 58.0%
2008 3.52% 0.06% 0.00% 27.59% 9.53% -20.71% Stock 51.0%
Bond 49.0%
2007 3.40% 0.00% 0.00% 23.17% 12.87% 10.84% Stock 48.0%
Bond 52.0%
2006 3.21% 0.00% 0.00% 24.74% 13.33% 11.23% Stock 50.0%
Bond 50.0%
2005 2.95% 0.00% 0.00% 12.53% 5.77% Stock 50.0%
Bond 50.0%
2004 2.74% 0.00% 0.00% 26.47% 14.64% 7.49% Stock 48.0%
Bond 52.0%
2003 2.92% 0.00% 0.00% - 13.99% Stock 48.0%
Bond 52.0%
2002 3.79% 0.00% 0.00% - -4.11% Stock 50.0%
Bond 50.0%
2001[8] 3.78% 0.00% 0.28% - -3.25% Stock 42.0%
Bond 58.0%
2000 4.73% 0.00% 0.17% - 3.12% Stock 42.0%
Bond 58.0%
1999 4.34% 0.30% 0.47% - 7.86% Stock 36.0%
Bond 64.0%
1998 4.32% 0.80% 0.89% - 15.88% Stock 41.0%
Bond 59.0%
1997 [9] 4.61% 0.84% 1.28% - 16.81% Stock 40.0%
Bond 60.0%
1996 4.86% 0.00% 1.71% - 10.36% Stock 42.5%
Bond 57.5%
1995 [10] 5.14% 1.12% 0.00% - 24.35% Stock 45.0%
Bond 55.0%
Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)
source:SEC Edgar Annual Reports(2003 onwards, (1994 - 2003) and SEC Edgar NSAR reports

Note: For current tax attributes and distributions see Vanguard

LifeStrategy Moderate Growth Fund

6040allocation.png

The LifeStrategy Moderate Growth Fund invests in other Vanguard mutual funds according to a fixed formula that provides an allocation of 60% (US equity 42%/international equity 18%) of the Fund’s assets to common stocks and 40% to bonds. Prior to 2012 the fund invested 20% of its assets in the Vanguard Asset Allocation Fund.


Table. LifeStrategy Moderate Growth Fund
Tax Distributions
Year Dividends Short Term Capital Gains [3] Long Term Capital Gains Qualified Dividends Treasury Dividends FY Annual Return Asset Allocation
2013 2.19% 0.11% 1.49% 52.15% 8.86% 14.66% Stock 60.1%
Bond 39.9%
2012 2.56% 0.15% 0.00% 53.38% 10.02% 9.25% Stock 59.6%
Bond 40.4%
2011 2.05% 0.15% 0.00% 48.55% 11.47% 4.14% Stock 60.0%
Bond 40.0%
2010 [7] 2.37% 0.00% 0.00% 49.79% 15.06% 14.50% Stock 65.0%
Bond 35.0%
2009 2.89% 0.00% 0.00% 52.13% 9.33% 13.82% Stock 62.0%
Bond 38.0%
2008 2.98% 0.05% 0.08% 45.62% 10.03% -27.69% Stock 71.0%
Bond 29.0%
2007 2.81% 0.00% 0.00% 39.61% 13.32% 13.55% Stock 62.0%
Bond 38.0%
2006 2.70% 0.00% 0.00% 40.64% 14.17% 14.09% Stock 70.0%
Bond 30.0%
2005 2.61% 0.00% 0.00% 13.33% 7.97% Stock 70.0%
Bond 30.0%
2004 2.36% 0.00% 0.00% 41.66% 14.28% 9.37% Stock 68.0%
Bond 32.0%
2003 2.39% 0.00% 0.00% - 18.06% Stock 68.0%
Bond 32.0%
2002 2.98% 0.00% 0.00% - -7.30% Stock 70.0%
Bond 30.0%
2001[8] 2.69% 0.06% 0.28% - -10.71% Stock 62.0%
Bond 38.0%
2000 3.59% 0.11% 0.53% - -0.88% Stock 62.0%
Bond 38.0%
1999 3.47% 0.00% 0.87% - 12.01% Stock 64.0%
Bond 36.0%
1998 3.43% 0.82% 0.92% - 19.03% Stock 61.0%
Bond 39.0%
1997 [9] 3.72% 0.76% 0.97% - 19.77% Stock 60.0%
Bond 40.0%
1996 3.98% 0.97% 1.33% - 12.71% Stock 62.5%
Bond 27.5%
1995 [10] 4.42% 0.00% 1.96% - 27.94% Stock 65.0%
Bond 35.0%
Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)
source:SEC Edgar Annual Reports(2003 onwards, (1994 - 2003) and SEC Edgar NSAR reports

Note: For current tax attributes and distributions see Vanguard

LifeStrategy Growth Fund

8020allocation (2).png

The LifeStrategy Growth Fund invests in other Vanguard mutual funds according to a fixed formula that provides 80% of the Fund’s assets to common stocks (US equity 56%/ international equity 24%) and 20% to bonds. Prior to 2012, the fund invested 20% of its assets in the Vanguard Asset Allocation Fund.


Table. LifeStrategy Growth Fund
Tax Distributions
Year Dividends Short Term Capital Gains [3] Long Term Capital Gains Qualified Dividends Treasury Dividends FY Annual Return Asset Allocation
2013 2.27% 0.05% 0.97% 68.00% 4.35% 20.34% Stock 80.3%
Bond 19.7%
2012 2.61% 0.08% 0.00% 70.49% 4.98% 3.63% Stock 79.9%
Bond 20.1%
2011 1.79% 0.04% 0.00% 71.00% 5.15% 3.63% Stock 80.3%
Bond 19.7%
2010 [7] 2.09% 0.00% 0.00% 73.83% 9.20% 16.21% Stock 85.0%
Bond 15.0%
2009 2.57% 0.00% 0.00% 77.00% 5.12% 13.74% Stock 82.0%
Bond 18.0%
2008 2.47% 0.00% 0.00% 72.49% 4.26% -37.98% Stock 92.0%
Bond 8.0%
2007 2.15% 0.00% 0.00% 65.24% 5.76% 16.32% Stock 88.0%
Bond 12.0%
2006 2.17% 0.00% 0.00% 66.42% 6.42% 16.94% Stock 90.0%
Bond 10.0%
2005 2.09% 0.00% 0.00% 5.94% 10.30% Stock 90.0%
Bond 10.0%
2004 1.79% 0.00% 0.00% 66.25% 10.00% 10.70% Stock 88.0%
Bond 12.0%
2003 1.79% 0.00% 0.00% - 22.12% Stock 88.0%
Bond 12.0%
2002 2.12% 0.00% 0.00% - -10.91% Stock 90.0%
Bond 10.0%
2001[8] 1.53% 0.00% 0.32% - -18.21% Stock 82.0%
Bond 18.0%
2000 2.49% 0.10% 0.26% - -5.44% Stock 82.0%
Bond 18.0%
1999 2.50% 0.00% 1.75% - 17.32% Stock 75.0%
Bond 25.0%
1998 2.53% 0.59% 0.90% - 21.40% Stock 79.0%
Bond 21.0%
1997 [9] 2.84% 0.91% 1.35% - 22.26% Stock 80.0%
Bond 20.0%
1996 3.18% 0.88% 1.48% - 15.41% Stock 82.5%
Bond 17.5%
1995 [10] 3.67% 0.00% 2.10% - 29.24% Stock 85.0%
Bond 15.0%
Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)
source:SEC Edgar Annual Reports(2003 onwards, (1994 - 2003) and SEC Edgar NSAR reports

Note: For current tax attributes and distributions see Vanguard

See also

Notes


References

  1. Until late 2011 the funds also included an investment grade short term bond fund; along with an allocation into the Vanguard Asset Allocation fund, which provides access to a degree of tactical asset allocation. The inclusion of a tactical asset allocation component to these funds is a controversial topic among forum participants, who often criticize this investment policy. See forum topic search: LifeStrategy funds and asset allocation fund
  2. Table. Treasury interest

    (view Google Spreadsheet in browser or download as xls, ods, or pdf)
    source:US government obligations data

  3. 3.0 3.1 3.2 3.3 3.4 3.5 3.6
  4. Regulated Investment Company Modernization Act of 2010 (see page 12)
  5. See financial footnotes from the 2011 Annual report
  6. According to data from the Tax Foundation, state individual marginal tax rates range from 0% to 12%.
  7. 7.0 7.1 7.2 7.3 In 2010, Vanguard increased the international allocation in the fund from 20% of the equity allocation to 30% of the equity allocation:press release.
  8. 8.0 8.1 8.2 8.3 In 2001 the fund changed the close of its fiscal year from December 31 of the year to October 31
  9. 9.0 9.1 9.2 9.3 In January 1997 the funds replaced four Vanguard bond funds with the Total Bond Index fund. In February 1997 the funds replaced the European and Pacific stock index funds with the Total International Index fund.
  10. 10.0 10.1 10.2 10.3 In 1995 the funds reduced the allocation in the Asset Allocation Fund from 30% to 25%.

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