Investing in VWALX and VWIUX in our regular investment accounts

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Zillions
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Joined: Sun May 24, 2020 12:58 am

Investing in VWALX and VWIUX in our regular investment accounts

Post by Zillions » Sun Jun 28, 2020 4:11 pm

We've finished our ROTH IRA contributions for the year. We have a regular brokerage account that has been staying un-invested for a while now. We have about $5000 right now that we'd like to invest. I want to make sure I am understanding "tax exempt" accurately.

If we use this $5000 to purchase shares of VWALX & VWIUX, and then decide to sell later this year or next for ANY reason (I hope not, I want to be invested for the long haul, but one never knows), am I correctly understanding that we will not have to pay federal taxes on any gains but will be on the hook for state taxes on gains? We're in California.

How can I find bonds / funds that would tax exempt both state & federally ?

Also, if anyone has options to VWALX & VWIUX (maybe ETFs?) that you could recommend, I'd be grateful to hear those.

Thank you!

02nz
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Re: Investing in VWALX and VWIUX in our regular investment accounts

Post by 02nz » Sun Jun 28, 2020 4:40 pm

I don't have an answer to your question, but help people help you by spelling out the fund names rather than making everybody look it up themselves. (These are not super common tickers, either, like VTSAX and VTIAX.)

fabdog
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Re: Investing in VWALX and VWIUX in our regular investment accounts

Post by fabdog » Sun Jun 28, 2020 4:46 pm

in the case of these funds, "tax exempt" means the monthly income is exempt from federal taxes. Most of the income will be taxable in CA (except for the part generated in CA) which Vanguard will have in an annual statement.

If you sell at some point, any gain or loss on the shares would be a capital gain/loss, as with any other mutual fund

Vanguard and other firms have CA tax exempt funds, in which the monthly income is both Federal and CA tax exempt. On sale of the fund, as above, you may have a capital gain or loss, depending on your sale price vs your purchase price

In summary... tax exempt funds like these, the tax exempt refers to the income generated, not any gain or loss on sale of shares

Mike

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Zillions
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Re: Investing in VWALX and VWIUX in our regular investment accounts

Post by Zillions » Sun Jun 28, 2020 7:17 pm

fabdog wrote:
Sun Jun 28, 2020 4:46 pm
in the case of these funds, "tax exempt" means the monthly income is exempt from federal taxes. Most of the income will be taxable in CA (except for the part generated in CA) which Vanguard will have in an annual statement.

If you sell at some point, any gain or loss on the shares would be a capital gain/loss, as with any other mutual fund

Vanguard and other firms have CA tax exempt funds, in which the monthly income is both Federal and CA tax exempt. On sale of the fund, as above, you may have a capital gain or loss, depending on your sale price vs your purchase price

In summary... tax exempt funds like these, the tax exempt refers to the income generated, not any gain or loss on sale of shares

Mike
Thank you. If I reinvested dividends I assume that I would still be taxed by California? I am also concerned that I would owe federal income taxes at liquidation.

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goingup
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Re: Investing in VWALX and VWIUX in our regular investment accounts

Post by goingup » Sun Jun 28, 2020 7:49 pm

The taxes on dividends of a $5K investment will be minimal. Suppose the dividend is 1.5%. That’s $75 per year. What’s CA’s income tax rate—10%? You’ll owe $7.50.

If your $5K investment increases 5% and you sell, you’ll owe capital gains tax on $250.

I’m not a tax expert but my point is that tax considerations on a $5K investment are very small.

fabdog
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Re: Investing in VWALX and VWIUX in our regular investment accounts

Post by fabdog » Mon Jun 29, 2020 8:13 am

If I reinvested dividends I assume that I would still be taxed by California?
Yes, the reinvestment of dividends has no bearing... you are taxed on the dividends whether you spend them, buy something else, or reinvest. As noted above there are CA specific funds
I am also concerned that I would owe federal income taxes at liquidation.
Well, you could owe on any gain over your purchase price or loss if sold for less than you paid. As the poster above noted, you are really letting the tax issues control your investment. As a data point... I have held VWAHX since 2012, reinvesting dividends. I've paid Virginia Tax on the part that is generated outside VA/US possession, and still come out way ahead of a standard bond fund. My capital gains exposure after 8 years of decling interest rates is ~5% of the total position value.

Hopefully that adds perspective.

Now, the real question... how did you determine that a tax free fund is the right choice for you? You need bond exposure to meet your investment policy statement? and your tax bracket is such that a tax free fund will deliver a better after tax result?

Mike

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grabiner
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Re: Investing in VWALX and VWIUX in our regular investment accounts

Post by grabiner » Mon Jun 29, 2020 1:07 pm

fabdog wrote:
Sun Jun 28, 2020 4:46 pm
in the case of these funds, "tax exempt" means the monthly income is exempt from federal taxes. Most of the income will be taxable in CA (except for the part generated in CA) which Vanguard will have in an annual statement.
CA does not give any tax exemption unless the fund is at least 50% invested in bonds exempt from CA tax.
Vanguard and other firms have CA tax exempt funds, in which the monthly income is both Federal and CA tax exempt. On sale of the fund, as above, you may have a capital gain or loss, depending on your sale price vs your purchase price.
And CA will tax capital gains even on those funds. (However, this varies by state; NJ, for example, does not tax capital gains on NJ tax-exempt funds, while MD does not tax capital gains on individual MD tax-exempt bonds but does tax capital gains on funds holding them.)

However, I wouldn't worry about capital gains on bond funds. Bond funds get almost all of their return from dividends; any capital gains or losses are likely to be small.
Wiki David Grabiner

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