Vanguard taxable account distributions

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GaryA505
Posts: 2886
Joined: Wed Feb 08, 2017 1:59 pm
Location: New Mexico

Vanguard taxable account distributions

Post by GaryA505 »

I opened a taxable account at Vanguard and there's something I don't understand. I don't want distributions reinvested, so I selected this option when I opened the account. I'd rather take the distributions in cash, and maybe once a year I'll make another deposit this account if I have money available.

However, when I opened the account I noticed that it is set up to put distributions into the Vanguard Federal Money Market Fund (VMFXX), which is the settlement fund. I have never had a taxable account with distributions not to be reinvested, but I understood that I could just take these in cash. Isn't having these go into this settlement going to generate taxable distributions of it's own? Since I'm going to get taxed on the distributions from funds in this account, wouldn't it be better if they could just deposit them into my bank, or is that not possible?
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
venkman
Posts: 1338
Joined: Tue Mar 14, 2017 10:33 pm

Re: Vanguard taxable account distributions

Post by venkman »

Distributions are taxable for the year in which you receive them, whether you reinvest them or take them in cash. There's no tax consequence from having your distributions go into VMFXX, as opposed to having them go directly to your bank. You'll also owe taxes on any interest generated by the funds in VMFXX, but that's no different than if the interest were generated by holding the funds in your bank account.

VMFXX is yielding close to 1% right now. That's pretty competitive with most bank accounts. Unless your bank is offering rates higher than 1%, I would recommend just leaving the money in VMFXX. It's very easy to manually transfer funds from your VG account to your bank if you need to.
mnaspbh
Posts: 204
Joined: Fri Sep 09, 2011 12:26 pm

Re: Vanguard taxable account distributions

Post by mnaspbh »

GaryA505 wrote: Sun Sep 10, 2017 11:28 pm I opened a taxable account at Vanguard and there's something I don't understand. I don't want distributions reinvested, so I selected this option when I opened the account. I'd rather take the distributions in cash, and maybe once a year I'll make another deposit this account if I have money available.

However, when I opened the account I noticed that it is set up to put distributions into the Vanguard Federal Money Market Fund (VMFXX), which is the settlement fund. I have never had a taxable account with distributions not to be reinvested, but I understood that I could just take these in cash. Isn't having these go into this settlement going to generate taxable distributions of it's own? Since I'm going to get taxed on the distributions from funds in this account, wouldn't it be better if they could just deposit them into my bank, or is that not possible?
Distributions in VMFXX will indeed generate additional (small) taxable distributions, but you won't be double-taxed. For example, if you have $100 in taxable distributions that go into VMFXX and you leave the $100 there for an entire year, you'll get about another $1 in taxable distributions for a total of $101.

Vanguard may have an option to direct distributions directly to one's bank account, or to set up automatic withdrawals from one's settlement fund into one's bank account; I've never tried to set up either. I direct all dividends into my settlement fund and use the settlement fund to help with rebalancing, or do manual withdrawals to a bank account if I need to.
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