Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

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max12377
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Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by max12377 » Sun Jul 12, 2015 7:55 am

I was wondering about this so I figured I'd ask. I like the 3 fund portfolio. I have a Roth, 403b, Inherited IRA and a Taxable account.

I hold VTSAX (Vanguard Total Stock) in my Taxable account. I hold the S&P 500 index (VFIAX) fund in the other accounts. Why? When I tax loss harvest it's easy to sell VTSAX and buy VFIAX and then switch back when appropriate.

The question I have is, if I hold VTSAX in ANY of the tax deferred accounts, I risk a dividend payout (purchase) triggering a wash sale if the Dividend payout happens around the time of my TLH, right?

In other words, I sell VTSAX in taxable and buy VFIAX in my 403b.
I hold VTSAX in my Roth and a dividend is payed out & reinvested within 30 days after my TLH, effectively "buying" VTSAX after I just sold it. That would need to be accounted for, right? Do average people actually take great care in accounting for this? I would imagine some folks may not even consider it.

Am I thinking logically here? Perhaps I should just accept I will have 4 funds (considering that I hold both total stock and the S&p) and call it a day? I suppose I could add other funds to the S&P 500 approx total stock. But then I am adding, perhaps, unnecessary complexity (ie, splitting hairs).

Thoughts?

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by jjface » Sun Jul 12, 2015 10:18 am

turn off dividend reinvestment and do it manually to avoid wash sales.

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Hodor
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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by Hodor » Sun Jul 12, 2015 10:20 am

Yes, you are right that you would have a wash sale because of the reinvested dividends in your tax-deferred. And even worse, since you never pay taxes on your Roth, the wash sale amount is just lost for good.

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by livesoft » Sun Jul 12, 2015 10:21 am

This has been discussed around last September's dividends since the 10% dip in October begat a flurry of tax-loss harvesting threads.

I would say you are right that most people don't know about the wash sale rules and potential conflicts with IRAs. But most people don't know about tax-loss harvesting and most people do not invest in taxable accounts anyways. At least that's what I learned here at Bogleheads.

Last year, I had a wash sale that was disallowed because of a transaction in my IRA that I noted in this thread: viewtopic.php?t=131697 I did account for it on my tax return.

I think that since you are aware of the rules, that you will have them in mind if you sell at a loss. And that will mean you will really have no problems with having the same funds in multiple accounts.

And as jjface just noted, turning off dividend reinvestment can be helpful in many ways. In taxable it makes sense from a rebalancing standpoint, but in tax-advantaged, I would automatically re-invest bond fund dividends and most equity funds, but might turn off dividend reinvestment if I anticipated a wash sale or other conflict with a fund in taxable.
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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by retiredjg » Sun Jul 12, 2015 10:46 am

livesoft wrote:...but in tax-advantaged, I would automatically re-invest bond fund dividends and most equity funds, but might turn off dividend reinvestment if I anticipated a wash sale or other conflict with a fund in taxable.
Can you turn off reinvestment of dividends in a 401k/403b? I don't think you can (although I also think it does not matter). And there is still the problem of simply periodic buying in the 401k/403b.

For someone like livesoft who knows the intimate history of every penny and every share, keeping up with all this is no big deal. I think the average person would find it difficult or impossible or so frustrating they'd just avoid the harvest. For this reason, if you want to TLH, I think it is better to just not hold anything in taxable that you hold in any other account. The most obvious suspect is holding the S&P 500 Index in taxable because it is likely to be in the 401k/403b or your spouse's 401k/403b.

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by grabiner » Sun Jul 12, 2015 9:57 pm

retiredjg wrote:
livesoft wrote:...but in tax-advantaged, I would automatically re-invest bond fund dividends and most equity funds, but might turn off dividend reinvestment if I anticipated a wash sale or other conflict with a fund in taxable.
Can you turn off reinvestment of dividends in a 401k/403b? I don't think you can (although I also think it does not matter). And there is still the problem of simply periodic buying in the 401k/403b.
Unless you have only one fund in the 401(k), you can turn off periodic buying for 31 days before and after the harvest by directing investments to another fund. If your 401(k) doesn't allow you to direct dividends to a different fund, you can also keep track of the dividend dates; if the fund pays dividends quarterly, you have a one-month window every three months to TLH safely.
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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by max12377 » Mon Jul 13, 2015 6:41 am

Thanks all. I so far have been avoiding the wash sale issues by holding total stock in taxable and the 3 amigos (large +mid+small) in tax deferred.

As a secondary note, I am now going to Morningstar X-Ray (also in wiki) for the Total Stock Market approximation rather than using the Vanguard tool. It is quite a significant difference as VG is 64/28/8 and Morningstar was about 81/4/15. I am adjusting my portfolio in the days ahead. End result is that I have been significantly overweight in midcaps because of it. Thanks to Livesoft for mentioning in a separate thread - otherwise I never would have checked this out.

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by livesoft » Mon Jul 13, 2015 7:25 am

max12377 wrote:... and Morningstar was about 81/4/15. I am adjusting my portfolio in the days ahead. End result is that I have been significantly overweight in midcaps because of it.
81/4/15 suggests to me a significant overweight to large-caps and a very significant underweight to mid-caps.
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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by Longdog » Mon Jul 13, 2015 8:40 am

max12377 wrote:Thanks all. I so far have been avoiding the wash sale issues by holding total stock in taxable and the 3 amigos (large +mid+small) in tax deferred.

As a secondary note, I am now going to Morningstar X-Ray (also in wiki) for the Total Stock Market approximation rather than using the Vanguard tool. It is quite a significant difference as VG is 64/28/8 and Morningstar was about 81/4/15. I am adjusting my portfolio in the days ahead. End result is that I have been significantly overweight in midcaps because of it. Thanks to Livesoft for mentioning in a separate thread - otherwise I never would have checked this out.
I'm curious - which Vanguard tool allows you to approximate the total stock market by using multiple other funds?
Steve

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by Phineas J. Whoopee » Mon Jul 13, 2015 9:14 am

There are no standard, industry-wide definitions of the cut-off points between large, mid, and small, which almost certainly accounts for the observed discrepancy.

I don't know about a tool per se, but here's a page from our wiki about doing what you just asked: Approximating Total Stock Market.

Hope that's helpful.

PJW

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by goingup » Mon Jul 13, 2015 9:55 am

max12377 wrote:I was wondering about this so I figured I'd ask. I like the 3 fund portfolio. I have a Roth, 403b, Inherited IRA and a Taxable account.

I hold VTSAX (Vanguard Total Stock) in my Taxable account. I hold the S&P 500 index (VFIAX) fund in the other accounts. Why? When I tax loss harvest it's easy to sell VTSAX and buy VFIAX and then switch back when appropriate.
Just thinking about your taxable account, why not pick a different TLH partner? The Large Cap Index (VLCAX admiral shares) is one that is mentioned often.

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by livesoft » Mon Jul 13, 2015 10:29 am

SteveM wrote:I'm curious - which Vanguard tool allows you to approximate the total stock market by using multiple other funds?
See this thread: viewtopic.php?t=150267 But the Vanguard tool reports incorrect information and should not be used for this purpose.
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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by max12377 » Tue Jul 14, 2015 5:44 am

goingup wrote:
max12377 wrote:I was wondering about this so I figured I'd ask. I like the 3 fund portfolio. I have a Roth, 403b, Inherited IRA and a Taxable account.

I hold VTSAX (Vanguard Total Stock) in my Taxable account. I hold the S&P 500 index (VFIAX) fund in the other accounts. Why? When I tax loss harvest it's easy to sell VTSAX and buy VFIAX and then switch back when appropriate.
Just thinking about your taxable account, why not pick a different TLH partner? The Large Cap Index (VLCAX admiral shares) is one that is mentioned often.
One reason is that VV is not available in my 403b. I find it easiest to sell in taxable and buy back in tax deferred then reverse after x days. If I buy VV in taxable there is a chance I would have short term gains when I go to sell and buy back the total stock market.

One clarification of a point I made above.. Vanguard model has led me to hold 28% midcaps - this is the model I have been following and therefore, if my goal was to approximate total stock (and assuming Morningstar is the correct model), it led me to overweight midcaps. Assuming Morningstar is the correct ratio, they want me to hold only 4 % of the midcaps fund. This is likely, I think, because one of the other two funds (S&P 500 or the small cap fund) holds a good deal of midcaps already.

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by max12377 » Tue Jul 14, 2015 6:57 am

I'm researching the Vanguard vs Morningstar estimation of Total Stock Market. Vanguard's site does describe their philosophy.

https://personal.vanguard.com/us/conten ... ontent.jsp
This approach is consistent with Vanguard's philosophy of investing for the long-term. In the context of a diversified portfolio, investors should view funds as relatively constant single holdings that serve defined subasset allocation roles, and should base investment decisions on the funds' ongoing appropriateness for those roles—not on minor changes in the underlying portfolios. In some instances, the fund-level allocation results may vary from those of other portfolio analysis tools or channels. However, we believe our results present the truest picture of overall asset allocation and best serve the interests of long-term investors.
Now I'm wondering if I need to bother.. all I want to do is approximate the total stock market in my Domestic Portfolio. Since I use all Vanguard funds for my domestic holdings, maybe it's OK to just stick with Vanguards tool?

Bah, I give up .. I think I'll call Vanguard and see what they say.. :confused

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by BL » Tue Jul 14, 2015 8:13 am

It is not clear to me what you are doing/planning to do.

What do you buy in taxable when you TLH? Do you buy bonds or just hold the cash for 30+ days rather than buy a similar but not identical fund?

Do you move from bonds to Total stock market in 403b when you TLH or are you just moving stocks around?

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by max12377 » Wed Jul 15, 2015 4:55 am

BL wrote:It is not clear to me what you are doing/planning to do.

What do you buy in taxable when you TLH? Do you buy bonds or just hold the cash for 30+ days rather than buy a similar but not identical fund?

Do you move from bonds to Total stock market in 403b when you TLH or are you just moving stocks around?
Yes. When I TLH, I just exchange Total Stock to cash in taxable. Then I exchange from stable value (or sometimes bond) into the S&P 500 fund in the 403b. Then I wait the requisite amount of time to elapse and then buy Total Stock back in taxable while exchanging S&P 500 back to stable value (or bond) in the 403b.

The reason I do it the above way is if I exchanged to VV or something like that in taxable, there is always a chance VV will rise while I am waiting things out. Then when I go to exchange VV into Total Stock I'd have to take a short term gain in taxable.

The swaps are similar in nature to the methodology explained in the wiki about how to keep cash needs in a Tax advantaged account.

http://www.bogleheads.org/wiki/Placing_ ... ed_account

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by livesoft » Wed Jul 15, 2015 6:33 am

max12377 wrote:Yes. When I TLH, I just exchange Total Stock to cash in taxable. Then I exchange from stable value (or sometimes bond) into the S&P 500 fund in the 403b. Then I wait the requisite amount of time to elapse and then buy Total Stock back in taxable while exchanging S&P 500 back to stable value (or bond) in the 403b.

The reason I do it the above way is if I exchanged to VV or something like that in taxable, there is always a chance VV will rise while I am waiting things out. Then when I go to exchange VV into Total Stock I'd have to take a short term gain in taxable.

The swaps are similar in nature to the methodology explained in the wiki about how to keep cash needs in a Tax advantaged account.

http://www.bogleheads.org/wiki/Placing_ ... ed_account
This is a most excellent idea and should be added to the Tax Loss Harvesting bit of the bogleheads wiki.
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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by BL » Wed Jul 15, 2015 9:03 am

livesoft wrote:
max12377 wrote:Yes. When I TLH, I just exchange Total Stock to cash in taxable. Then I exchange from stable value (or sometimes bond) into the S&P 500 fund in the 403b. Then I wait the requisite amount of time to elapse and then buy Total Stock back in taxable while exchanging S&P 500 back to stable value (or bond) in the 403b.

The reason I do it the above way is if I exchanged to VV or something like that in taxable, there is always a chance VV will rise while I am waiting things out. Then when I go to exchange VV into Total Stock I'd have to take a short term gain in taxable.

The swaps are similar in nature to the methodology explained in the wiki about how to keep cash needs in a Tax advantaged account.

http://www.bogleheads.org/wiki/Placing_ ... ed_account
This is a most excellent idea and should be added to the Tax Loss Harvesting bit of the bogleheads wiki.
+1

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by avenger » Sun Jul 19, 2015 9:40 am

max12377 wrote:
BL wrote:It is not clear to me what you are doing/planning to do.

What do you buy in taxable when you TLH? Do you buy bonds or just hold the cash for 30+ days rather than buy a similar but not identical fund?

Do you move from bonds to Total stock market in 403b when you TLH or are you just moving stocks around?
Yes. When I TLH, I just exchange Total Stock to cash in taxable. Then I exchange from stable value (or sometimes bond) into the S&P 500 fund in the 403b. Then I wait the requisite amount of time to elapse and then buy Total Stock back in taxable while exchanging S&P 500 back to stable value (or bond) in the 403b.

The reason I do it the above way is if I exchanged to VV or something like that in taxable, there is always a chance VV will rise while I am waiting things out. Then when I go to exchange VV into Total Stock I'd have to take a short term gain in taxable.

The swaps are similar in nature to the methodology explained in the wiki about how to keep cash needs in a Tax advantaged account.

http://www.bogleheads.org/wiki/Placing_ ... ed_account
I have never considered doing this, and it is a brilliant idea. I haven't yet had the opportunity to TLH and i was never quite sure how I was going to do it.

Thanks for posting!!

Edit to add: I agree that this concept should be added to the Wiki.
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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by cmublitz » Sun Jul 19, 2015 10:40 am

How far do you have to take funds into account? For example, if I hold VTIVX (Vanguard Target Retirement Fund 2045) in my 401K, which has Vanguard Total Stock Market in its composition as a fund of funds, do I still have to be concerned about wash sales for holding VTSAX in a taxable account?

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Re: Holding VTSAX in taxable and tax-deferred - Dividend payout & Wash Sale Rules

Post by livesoft » Sun Jul 19, 2015 1:01 pm

cmublitz wrote:How far do you have to take funds into account? For example, if I hold VTIVX (Vanguard Target Retirement Fund 2045) in my 401K, which has Vanguard Total Stock Market in its composition as a fund of funds, do I still have to be concerned about wash sales for holding VTSAX in a taxable account?
In this case, no concerns about wash sales.
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