TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

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PGR
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TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by PGR »

For the last couple of years I've underestimated our quarterly taxes. One of the culprits has been the Schwab SWTSX my spouse holds.

I have VG's TSM in the form of VTI and VTSAX.

She has Schwabs TSM in the form of Scwhab's SWTSX.

Percentage wise she seems to do a little better WRT capital gains. But... a portion of her gains are not qualified and that incurs a notable tax penalty. All the gains on my VG fund were qualified last year as I recall. The Schwab fund uses the "Dow Jones U.S. Total Stock Market Index". Vanguard's TSM tracks "CRSP US Total Market Index".

Any insights into the Schwab TSM (SWTSX) fund VS Vanguard's TSM (VTSAX) fund with respect to tax efficiency? (or other performance measures if you like).

Thanks,
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Taylor Larimore
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Two excellent funds for U.S. stocks

Post by Taylor Larimore »

Any insights into the Schwab TSM (SWTSX) fund VS Vanguard's TSM (VTSAX) fund with respect to tax efficiency? (or other performance measures if you like).
PGR:

I went to Morningstar to learn the after-tax annualized returns of the two Total Market Index Funds:

FUND-----10 Yrs ---15 Yrs
SWTSX----6.32%----6.03%
VTSMX----6.49%----6.12%

In my opinion, both funds are very tax efficient and the difference in returns is almost meaningless. Chose the one that is most convenient to represent the U.S. stock market in your portfolio.

Past performance does not forecast future performance.

Best wishes.
Taylor
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in_reality
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by in_reality »

I would prefer the ETF version SCHB in taxable.

SWTSX issues yearly capital gain distributions (in addition to dividends).

SCHB and VTSAX both only issue dividends and all capital gains will only be taxed when sold. (It's possible to have a yearly capital gain distribution but I don't think they ever have.) This is due to the nature of how ETFs work. VTSAX is a dual share class fund so even though you own it as a mutual fund, you are getting the advantages of the ETF.

SCHB QDI percentage was 95.33%. If it's within 5% of 100, I believe they can report it as 100%.
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by Coles »

in_reality wrote:SCHB QDI percentage was 95.33%. If it's within 5% of 100, I believe they can report it as 100%.
Well that begs the question, "Why didn't they report it as 100%?"
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in_reality
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by in_reality »

Coles wrote:
in_reality wrote:SCHB QDI percentage was 95.33%. If it's within 5% of 100, I believe they can report it as 100%.
Well that begs the question, "Why didn't they report it as 100%?"
I'm not sure it matters for what you actually get taxed.

Given that the actual QDI rate for a specific ex-date may be different and thus the actual QDI rates experienced by each shareholder may be different, I think it gets calculated for each shareholder.

The specific rules mentions the 95% rules in context of "written statements furnished to its shareholders". So I am guessing that if the exact rate for you is 97.5%, then that is what your tax forms will have, even though the fund could list the fund as having 100% QDI on their website or in "written statements furnished to its shareholders".

Specific rule mentioned in a discussion on why different S&P 500 funds have different QDI rates:
viewtopic.php?t=186795
and is here
https://www.law.cornell.edu/uscode/text/26/854
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by livesoft »

VTSAX and SWTSX do NOT have the same tax efficiency. Yes, since they are total stock market index funds, it would seem they should have the same tax efficiency, but they do not. And the obvious difference is not because of the qualified dividends. The difference is the amount of capital gains distributions paid out by these funds.

SWTSX paid a capital gain distribution in 2015, 2014, and 2013. VTSAX did NOT pay out a capital gains distribution.

Something similar happens with some other index funds. Notably Fidelity Spartan index funds sometimes pay out capital gains distributions when the similar Vanguard fund does not.

For most mutual funds it is much harder to find the history of the percentage of qualified dividends and foreign taxes paid because those numbers are not usually shown on the fund web site.

Not all index funds are managed equally well when it comes to tax-efficiency. In general, Vanguard index funds will have a better tax efficiency.
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PGR
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by PGR »

livesoft wrote:SWTSX paid a capital gain distribution in 2015, 2014, and 2013. VTSAX did NOT pay out a capital gains distribution.
That is correct and I mis-spoke in my original post - I should have mentioned (and emphasized) the cap gains in the original post. That was a big culprit in my under estimating our quarterly taxes as I was complacent in my past and ongoing VTSAX ownership and expected similar from spouses Schwab TSM.
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by PGR »

...so now I need to ask a really naive question if someone can break it down for me into simple terms.

If two comparable funds vary only in Fund A (let's say a Schwab TSM) giving out say $1,000 in capital gain distributions and the other Fund B (a VG TSM for example) not... while taxes are not desirable at higher marginal rates - isn't it better to take the $1,000 distro, pay say 25% and keep $750 rather than get nothing as in the 2nd case? Or does the later (tax efficient) fund outperform in share pricing over time?

E.g. is the trade-off:
A) Do I want some cap gains every year that I pay taxes on?
- or -
B) Do I want want my price per share a little higher each year and I'll deal with the taxes when I choose to sell?
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PGR
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Re: Two excellent funds for U.S. stocks

Post by PGR »

Taylor Larimore wrote:
In my opinion, both funds are very tax efficient and the difference in returns is almost meaningless. Chose the one that is most convenient to represent the U.S. stock market in your portfolio.
Thanks for the data. I'm already heavily invested in VTSAX/VTI and she is already heavily invested in SWTSX. We're not looking to make any changes per se at this point - It is what it is.

I'm just trying to learn and gain some insights into their inherent differences which are becoming apparent as we do our taxes. :D
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by livesoft »

I think you don't want ANY distributions because then someone else is deciding for you what your income will be.

If you are the one that makes the SELL decision, then you can control your income and taxes.

Many people are lulled into a false sense of fund performance by distributions. If they automatically reinvest the distributions, then the taxes have to be paid from somewhere and that somewhere is usually from a checking account. In effect, paying the taxes from somewhere else is like stealthily adding more dollars to the fund. But that could be a good way to force more savings.
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PGR
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by PGR »

So no cap gains but the price per share performance is better instead?
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by livesoft »

Yes, I think so.
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Re: Two excellent funds for U.S. stocks

Post by grabiner »

Taylor Larimore wrote:
Any insights into the Schwab TSM (SWTSX) fund VS Vanguard's TSM (VTSAX) fund with respect to tax efficiency? (or other performance measures if you like).
PGR:

I went to Morningstar to learn the after-tax annualized returns of the two Total Market Index Funds:

FUND-----10 Yrs ---15 Yrs
SWTSX----6.32%----6.03%
VTSMX----6.49%----6.12%
Do not trust Morningstar for these numbers; Morningstar doesn't always know about qualified dividends. You can confirm this by comparing Admiral and ETF shares of some Vanguard funds, which have equal distributions but often report different tax costs.

The best source for tax data is usually the fund company. Schwab reports a 10-year return (through 12/31/15) of 7.49% pre-tax, 6.76% after-tax, which gives the same 0.68% tax cost that Morningstar reports. Vanguard reports (through 3/31/16, so the overall returns are not comparable) 6.93% and 6.57%, which implies a tax cost of 0.38%, as compared to Morningstar's reported 0.41%,

The expenses are the same, and I would expect the same pre-tax returns, so the Schwab fund would have lost 0.27% annually to taxes (in the highest tax bracket, but excluding state taxes).
PGR wrote:...so now I need to ask a really naive question if someone can break it down for me into simple terms.

If two comparable funds vary only in Fund A (let's say a Schwab TSM) giving out say $1,000 in capital gain distributions and the other Fund B (a VG TSM for example) not... while taxes are not desirable at higher marginal rates - isn't it better to take the $1,000 distro, pay say 25% and keep $750 rather than get nothing as in the 2nd case?
The capital gain distribution is getting your own money back. If you have $100K in both funds before the distribution, then you will have $99K in Fund A after the distribution, and $750 in spendable cash if the tax rate is 25%. If you reinvest the whole dividend, you will have $100K in Fund B, but $250 less in cash once you pay your taxes; if you reinvest the after-tax distribution, you will have $99,750 in Fund B and the same amount of cash.
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by boglechu »

I may invest about $100k in my after-tax assets total in the upcoming year.

SWTSX will decrease to 0.03% annual ER vs 0.05% for vtsax.

I have both vanguard and schwab brokerage accounts.

For $100k invested, can someone show me the difference in each in terms of having to pay taxes on dividends?

Any benefit for quarterly dividends in vtsax vs annual dividends for swtsx?
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by BrandonBogle »

boglechu wrote:I may invest about $100k in my after-tax assets total in the upcoming year.

SWTSX will decrease to 0.03% annual ER vs 0.05% for vtsax.

I have both vanguard and schwab brokerage accounts.

For $100k invested, can someone show me the difference in each in terms of having to pay taxes on dividends?

Any benefit for quarterly dividends in vtsax vs annual dividends for swtsx?
If you have no problem adding funds in either fund, I would pick the more tax efficient Vanguard fund even with a .02% increase in expense ratio. The tax hit will be more than 0.02%. But if the Schwab fund is more convenient for some reason, it is not an earth-shattering difference if you get that one instead.
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by triceratop »

boglechu wrote:I may invest about $100k in my after-tax assets total in the upcoming year.

SWTSX will decrease to 0.03% annual ER vs 0.05% for vtsax.

I have both vanguard and schwab brokerage accounts.

For $100k invested, can someone show me the difference in each in terms of having to pay taxes on dividends?

Any benefit for quarterly dividends in vtsax vs annual dividends for swtsx?
If you are in accumulation mode then a quarterly distribution schedule is optimal, so Vanguard. Reverse this for withdrawals.

Also I think iShares are better managed for taxes than Vanguards. but with a biannual distribution schedule.
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by CompoundSavvy »

Apologies for the simple question but would the tax efficiency difference be meaningless if you held it in a Roth IRA?
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Re: TSM vs TSM Tax Efficiency: Vanguard VTSAX vs Schwab SWTSX

Post by frcabot »

CompoundSavvy wrote: Mon Oct 07, 2019 2:51 pm Apologies for the simple question but would the tax efficiency difference be meaningless if you held it in a Roth IRA?
Yes. Roth IRA has no taxes.
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Re: Two excellent funds for U.S. stocks

Post by frcabot »

grabiner wrote: Fri Apr 01, 2016 8:55 pm
Taylor Larimore wrote:
Any insights into the Schwab TSM (SWTSX) fund VS Vanguard's TSM (VTSAX) fund with respect to tax efficiency? (or other performance measures if you like).
PGR:

I went to Morningstar to learn the after-tax annualized returns of the two Total Market Index Funds:

FUND-----10 Yrs ---15 Yrs
SWTSX----6.32%----6.03%
VTSMX----6.49%----6.12%
Do not trust Morningstar for these numbers; Morningstar doesn't always know about qualified dividends. You can confirm this by comparing Admiral and ETF shares of some Vanguard funds, which have equal distributions but often report different tax costs.

The best source for tax data is usually the fund company. Schwab reports a 10-year return (through 12/31/15) of 7.49% pre-tax, 6.76% after-tax, which gives the same 0.68% tax cost that Morningstar reports. Vanguard reports (through 3/31/16, so the overall returns are not comparable) 6.93% and 6.57%, which implies a tax cost of 0.38%, as compared to Morningstar's reported 0.41%,

The expenses are the same, and I would expect the same pre-tax returns, so the Schwab fund would have lost 0.27% annually to taxes (in the highest tax bracket, but excluding state taxes).
PGR wrote:...so now I need to ask a really naive question if someone can break it down for me into simple terms.

If two comparable funds vary only in Fund A (let's say a Schwab TSM) giving out say $1,000 in capital gain distributions and the other Fund B (a VG TSM for example) not... while taxes are not desirable at higher marginal rates - isn't it better to take the $1,000 distro, pay say 25% and keep $750 rather than get nothing as in the 2nd case?
The capital gain distribution is getting your own money back. If you have $100K in both funds before the distribution, then you will have $99K in Fund A after the distribution, and $750 in spendable cash if the tax rate is 25%. If you reinvest the whole dividend, you will have $100K in Fund B, but $250 less in cash once you pay your taxes; if you reinvest the after-tax distribution, you will have $99,750 in Fund B and the same amount of cash.
Keep in mind after-tax performance is reported for the highest tax bracket, so unless you’re making over $600K (married), then the difference isn’t as big.

IIRC, Vanguard has some special patented system to increase tax efficiency for their mutual funds by using some ETF-like exchange system. All else being equal, an ETF Is more tax-efficient than a mutual fund. As someone else mentioned, SCHB is likely more tax efficient than SWTSX.
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