Vanguard's 2020 capital gains estimates

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Billavoider
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Vanguard's 2020 capital gains estimates

Post by Billavoider »

SlowMovingInvestor
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Re: Vanguard's 2020 capital gains estimates

Post by SlowMovingInvestor »

Billavoider wrote: Mon Nov 16, 2020 7:07 pm Here they are:

https://personal.vanguard.com/pdf/RTPYEEST_112020.pdf
And Capital Opportunity drops another massive capital gain distribution. Health Care too, large distribution. These 2 funds have been doing this for years. Good funds, but very tax inefficient.
tomsense76
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Re: Vanguard's 2020 capital gains estimates

Post by tomsense76 »

Thanks for sharing! How did you know this was coming out? Is there some way to subscribe or check for this info from Vanguard?
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Billavoider
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Re: Vanguard's 2020 capital gains estimates

Post by Billavoider »

I Googled "Vanguard 2020 capital gains distribution estimates".

Here are some of the links from Vanguard search with the information (except institutional for some reason). The pages stated the information would be posted around 11/16 so I marked it on my calendar.

https://investornews.vanguard/mark-your ... butions-3/

https://institutional.vanguard.com/VGAp ... utions2020 (info not posted yet?)

https://advisors.vanguard.com/insights/ ... tributions
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Re: Vanguard's 2020 capital gains estimates

Post by grabiner »

With recent declines in bond yields, almost all the bond funds are distributing capital gains. Capital gains in a bond fund are normally advantageous, as you pay capital-gains tax when the fund replaces a high-coupon bond with a lower-coupon bond after rates fall, so the capital gain replaces non-qualified future dividends.

However, there are small capital gains in most of the muni funds, where the taxable gain is a total loss (although it will be recovered as a reduced gain when you sell the fund). VTEB, the muni ETF, is not projected to distribute a capital gain, but I don't know whether the ETF structure helped with that; Intermediate-Term Tax-Exempt, with a similar portfolio, also is not projected to distribute a gain,
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Re: Vanguard's 2020 capital gains estimates

Post by rkhusky »

Institutional Total Stock Market has some huge cap gains too.
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Re: Vanguard's 2020 capital gains estimates

Post by luckyducky99 »

What happens if you owned a fund for part of the year but don't anymore? Do you end up with some pro-rated gain? Or do you avoid it entirely?
Last edited by luckyducky99 on Mon Nov 16, 2020 10:00 pm, edited 1 time in total.
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Re: Vanguard's 2020 capital gains estimates

Post by tj »

SlowMovingInvestor wrote: Mon Nov 16, 2020 7:27 pm
Billavoider wrote: Mon Nov 16, 2020 7:07 pm Here they are:

https://personal.vanguard.com/pdf/RTPYEEST_112020.pdf
And Capital Opportunity drops another massive capital gain distribution. Health Care too, large distribution. These 2 funds have been doing this for years. Good funds, but very tax inefficient.
Wellington's is pretty big too. A lot of the active funds have big distributions though Dividend Growth is not too bad at 1.3%
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Re: Vanguard's 2020 capital gains estimates

Post by tj »

luckyducky99 wrote: Mon Nov 16, 2020 10:00 pm What happens if you owned a fund for part of the year? Do you end up with some pro-rated gain? Or do you avoid it entirely?
If you sold the fund, you are not going to get the distribution.
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Re: Vanguard's 2020 capital gains estimates

Post by NightFall »

Is VITNX just a different share class of VTSAX? If so, a nearly 8% distribution from total stock market is expected? I thought this was a tax efficient fund. And other funds like Life Strategy and Target Retirement have much smaller distributions despite holding total stock market in large amounts in some cases. Am I missing something?
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Re: Vanguard's 2020 capital gains estimates

Post by JDDS »

NightFall wrote: Mon Nov 16, 2020 10:44 pm Is VITNX just a different share class of VTSAX? If so, a nearly 8% distribution from total stock market is expected? I thought this was a tax efficient fund. And other funds like Life Strategy and Target Retirement have much smaller distributions despite holding total stock market in large amounts in some cases. Am I missing something?
No, it's not a different share class, it's a class of a different (but similarly named) fund:

Vanguard Institutional Total Stock Market Index Fund Institutional Shares (VITNX)
That's
Vanguard Institutional Total Stock Market Index Fund
not to be confused with
Vanguard Total Stock Market Index Fund
and the institutional shares of that fund
Vanguard Total Stock Market Index Fund Institutional Shares (VITSX)

The Institutional TSM fund, which has two share classes, is a mutual fund without an ETF share class. This is likely a separate fund because at some point in history (2001 inception date) there was an advantage.
https://advisors.vanguard.com/investmen ... nal-shares
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Re: Vanguard's 2020 capital gains estimates

Post by vasaver »

NightFall wrote: Mon Nov 16, 2020 10:44 pm Is VITNX just a different share class of VTSAX? If so, a nearly 8% distribution from total stock market is expected? I thought this was a tax efficient fund. And other funds like Life Strategy and Target Retirement have much smaller distributions despite holding total stock market in large amounts in some cases. Am I missing something?
Since VITNX is an Institutional Fund - maybe it can only be held in tax advantaged accounts? Could Vanguard be using heartbeat trades between Mutual Fund classes to move Capital Gains Distributions to the Institutional share classes and away from investor/admiral share classes? Or can this only be done with ETFs?

https://marcellus.in/story/vanguard-pat ... ual-funds/
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Re: Vanguard's 2020 capital gains estimates

Post by Jerry55 »

Wowww.....Wellington™ Admiral VWENX $4.28 / share

I guess I'll find out about the dividends later on.....
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Re: Vanguard's 2020 capital gains estimates

Post by dcop »

Jerry55 wrote: Mon Nov 16, 2020 11:37 pm Wowww.....Wellington™ Admiral VWENX $4.28 / share
That very well could end up being higher too between now and Dec. 30. I also think that estimate is including the quarterly dividend even though it's not specified that way. The fund page shows accumulated Cap gains at $3.96 There will be another document coming out in December that has columns for the divs.
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Re: Vanguard's 2020 capital gains estimates

Post by retired@50 »

SlowMovingInvestor wrote: Mon Nov 16, 2020 7:27 pm
Billavoider wrote: Mon Nov 16, 2020 7:07 pm Here they are:

https://personal.vanguard.com/pdf/RTPYEEST_112020.pdf
And Capital Opportunity drops another massive capital gain distribution. Health Care too, large distribution. These 2 funds have been doing this for years. Good funds, but very tax inefficient.
The tax inefficiency is precisely why I hold PRIMECAP in my Roth IRA.

Regards,
This is one person's opinion. Nothing more.
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Vanguard posted 2020 cg estimates, see link below.

Post by nstar172684 »

[merged into existing thread - moderator prudent]

https://advisors.vanguard.com/iwe/pdf/t ... PYEEST.pdf
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Re: Vanguard's 2020 capital gains estimates

Post by Monster99 »

dcop wrote: Mon Nov 16, 2020 11:55 pm
Jerry55 wrote: Mon Nov 16, 2020 11:37 pm Wowww.....Wellington™ Admiral VWENX $4.28 / share
That very well could end up being higher too between now and Dec. 30. I also think that estimate is including the quarterly dividend even though it's not specified that way. The fund page shows accumulated Cap gains at $3.96 There will be another document coming out in December that has columns for the divs.
Cash for the holidays....😄
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Re: Vanguard posted 2020 cg estimates, see link below.

Post by rascott »

Woof. Some of those are painful, and at even the 15% LTCG rate dwarf the funds ERs. So fees are certainly not the ONLY thing that matter.
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Re: Vanguard's 2020 capital gains estimates

Post by grabiner »

luckyducky99 wrote: Mon Nov 16, 2020 10:00 pm What happens if you owned a fund for part of the year but don't anymore? Do you end up with some pro-rated gain? Or do you avoid it entirely?
The proration only applies to bond funds which accrue dividends daily but pay them out monthly. If you sell such a bond fund on November 30, you get 29/30 of the November dividend; if you buy on November 30, you get 1/30 of the November dividend.

For dividends for all other funds (including all stock and balanced funds, bond ETFs, and a few bond funds such as Vanguard Inflation-Protected Securities), and for all capital gains, you get the whole distribution if you hold the fund on the record date. This is why advisors talk about "buying a dividend" or "buying a distribution"; if a fund makes a distribution on December 22 and you buy it on December 21, you get the whole distribution, and owe tax if you hold the fund in a taxable account. If you wait until December 23, you avoid the tax.
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Re: Vanguard's 2020 capital gains estimates

Post by luckyducky99 »

grabiner wrote: Tue Nov 17, 2020 10:09 am
luckyducky99 wrote: Mon Nov 16, 2020 10:00 pm What happens if you owned a fund for part of the year but don't anymore? Do you end up with some pro-rated gain? Or do you avoid it entirely?
The proration only applies to bond funds which accrue dividends daily but pay them out monthly. If you sell such a bond fund on November 30, you get 29/30 of the November dividend; if you buy on November 30, you get 1/30 of the November dividend.

For dividends for all other funds (including all stock and balanced funds, bond ETFs, and a few bond funds such as Vanguard Inflation-Protected Securities), and for all capital gains, you get the whole distribution if you hold the fund on the record date. This is why advisors talk about "buying a dividend" or "buying a distribution"; if a fund makes a distribution on December 22 and you buy it on December 21, you get the whole distribution, and owe tax if you hold the fund in a taxable account. If you wait until December 23, you avoid the tax.
Thanks. Everything I read talked about dividends but nothing mentioned capital gains distributions.
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Re: Vanguard's 2020 capital gains estimates

Post by jebmke »

rkhusky wrote: Mon Nov 16, 2020 9:50 pm Institutional Total Stock Market has some huge cap gains too.
I noticed that too. Probably since they are mainly held in tax-advantage accounts they don't need to go through the motions to offset the gains and not distribute.
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Re: Vanguard's 2020 capital gains estimates

Post by flblazer »

HOW LONG DO YOU NEED TO OWN THE FUND BEFORE YOU GET THE CAPITAL GAINS.
Since cap op is paying over 15 dollars could you sell off your portfolio and put it all in cap. op. for year end distribution
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Re: Vanguard's 2020 capital gains estimates

Post by Grt2bOutdoors »

Jerry55 wrote: Mon Nov 16, 2020 11:37 pm Wowww.....Wellington™ Admiral VWENX $4.28 / share

I guess I'll find out about the dividends later on.....
One more reason why I advocate holding managed funds in a taxable account (now that I know better). Sometimes though, it’s difficult to liquidate long term holdings which may cause even greater tax pain!
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Re: Vanguard's 2020 capital gains estimates

Post by Grt2bOutdoors »

flblazer wrote: Tue Nov 17, 2020 11:54 am HOW LONG DO YOU NEED TO OWN THE FUND BEFORE YOU GET THE CAPITAL GAINS.
Since cap op is paying over 15 dollars could you sell off your portfolio and put it all in cap. op. for year end distribution
If you own the shares on the date of record, you will be on the hook for receiving it.
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Re: Vanguard's 2020 capital gains estimates

Post by cas »

flblazer wrote: Tue Nov 17, 2020 11:54 am HOW LONG DO YOU NEED TO OWN THE FUND BEFORE YOU GET THE CAPITAL GAINS.
Since cap op is paying over 15 dollars could you sell off your portfolio and put it all in cap. op. for year end distribution
You could, but - assuming you are thinking this is a way to turn a guaranteed profit* - you'd end up terribly disappointed by the way the math works out.

Cap Gain Distributions (CGD) aren't free money. The day that a fund distributes a $15/shr CGD, the share price will drop by $15. (Plus you will owe tax on the $15/shr distribution. And also owe tax on whatever cap gains you realized when you sold off your whole portfolio in order to buy the Capital Opportunities Fund.).

*Edit: Sometimes I've seen people on these forums with a need to manufacture income, e.g. in order to get enough income to qualify for ACA rather than Medicaid. My comment doesn't address that type of goal.
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Re: Vanguard's 2020 capital gains estimates

Post by Mullins »

So then the total stock market fund (VTSAX), not being on the list, isn't expected to distribute cap gains this year?

And, what of quarterly dividends?
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Re: Vanguard's 2020 capital gains estimates

Post by PaunchyPirate »

Mullins wrote: Tue Nov 17, 2020 1:02 pm So then the total stock market fund (VTSAX), not being on the list, isn't expected to distribute cap gains this year?

And, what of quarterly dividends?
Correct. Quarterly dividends are scheduled to be estimated on December 9th.

https://investornews.vanguard/mark-your ... butions-3/
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Re: Vanguard's 2020 capital gains estimates

Post by Billavoider »

Keep in mind this is only a preliminary list. A second list will be published around December 9 with updated amounts.
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Re: Vanguard's 2020 capital gains estimates

Post by grabiner »

Mullins wrote: Tue Nov 17, 2020 1:02 pm So then the total stock market fund (VTSAX), not being on the list, isn't expected to distribute cap gains this year?
Not this year, nor ever. None of Vanguard's diversified stock indexes with an ETF class has distributed a capital gain since 2011. The only one which ever distributed a gain (VSS, FTSE All-World Ex-US Small-Cap) distributed gains only in its first two years after starting near the 2009 market bottom, so that almost all its holdings rose in value in the first year.
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Re: Vanguard's 2020 capital gains estimates

Post by Electron »

Morningstar has an interesting article on estimated capital gains distributions from all the major fund families including Vanguard.

https://www.morningstar.com/articles/10 ... -this-year
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Re: Vanguard's 2020 capital gains estimates

Post by rkhusky »

Electron wrote: Tue Nov 17, 2020 2:41 pm Morningstar has an interesting article on estimated capital gains distributions from all the major fund families including Vanguard.

https://www.morningstar.com/articles/10 ... -this-year
Did Ms. Benz get a sneak peek at the Nov 16 Vanguard document, or is that information available elsewhere?
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Re: Vanguard's 2020 capital gains estimates

Post by SeamusAlan »

I made the mistake years ago of putting Primecap in my taxable account. It is still there I haven’t wanted to sell because of all the cap gains the fund has realized. I was planning on directing the upcoming Primecap capital gain to my MM fund but I recently read that doing this will reduce the Primecap fund’s cost basis. If this is true, can someone explain? Thanks!
Seamus
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Re: Vanguard's 2020 capital gains estimates

Post by tj »

SeamusAlan wrote: Tue Nov 17, 2020 11:09 pm I made the mistake years ago of putting Primecap in my taxable account. It is still there I haven’t wanted to sell because of all the cap gains the fund has realized. I was planning on directing the upcoming Primecap capital gain to my MM fund but I recently read that doing this will reduce the Primecap fund’s cost basis. If this is true, can someone explain? Thanks!
Seamus
That makes zero sense. The distributions are going to get taxed regardless. Reinvesting them does not reduce tax in anyway.
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Re: Vanguard's 2020 capital gains estimates

Post by playtothebeat »

I’m trying to understand why the funds with high cap gains would be tax inefficient.. I understand you’d have to pay taxes on the capital gains that are distributed to you (which of course isn’t fun from a cash flow standpoint since you - most likely - reinvested dividends and thus didn’t actually receive cash). But at the same time, wouldn’t you be “even” so to say when you liquidate the holdings (if you do) at a future date? In simplistic terms: You received a cap gains distribution. You pay cap gains tax on it. Share value drops accordingly with the distribution. You go to sell, so the “realized” cap gain is reduced accordingly. Am I completely wrong about this? Wouldn’t be the first time if I was!
Or is the inefficiency due to the fact that, presumably, most of us expect to be in a lower tax bracket later and/or never sell the holdings entirely?
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Re: Vanguard's 2020 capital gains estimates

Post by vasaver »

SeamusAlan wrote: Tue Nov 17, 2020 11:09 pm I made the mistake years ago of putting Primecap in my taxable account. It is still there I haven’t wanted to sell because of all the cap gains the fund has realized. I was planning on directing the upcoming Primecap capital gain to my MM fund but I recently read that doing this will reduce the Primecap fund’s cost basis. If this is true, can someone explain? Thanks!
Seamus
Consider a Donor Advised Fund - Fidelity has a pretty good one.
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Re: Vanguard's 2020 capital gains estimates

Post by rkhusky »

playtothebeat wrote: Tue Nov 17, 2020 11:54 pm Or is the inefficiency due to the fact that, presumably, most of us expect to be in a lower tax bracket later and/or never sell the holdings entirely?
Combination of being in a lower tax bracket later, plus you miss out on all the earnings that you would have made on the cap gain tax that you paid each year. Those are the benefits of using a tax-deferred account, you get to defer the taxes until a much later date and earn money on those deferred taxes, plus pay a lower rate on the taxes when they are paid.

See the first example table on this page for an explicit calculation of the difference, even with the same initial and final tax rates:
https://www.bogleheads.org/wiki/Non-ded ... tional_IRA (compare the final after-tax results for deductible tIRA (tax deferred) and taxable).
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Re: Vanguard's 2020 capital gains estimates

Post by Billavoider »

rkhusky wrote: Tue Nov 17, 2020 8:10 pm
Electron wrote: Tue Nov 17, 2020 2:41 pm Morningstar has an interesting article on estimated capital gains distributions from all the major fund families including Vanguard.

https://www.morningstar.com/articles/10 ... -this-year
Did Ms. Benz get a sneak peek at the Nov 16 Vanguard document, or is that information available elsewhere?
I was wondering the same thing since the article is dated prior to the Vanguard's CG release date.
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Re: Vanguard's 2020 capital gains estimates

Post by Buffetologist »

So I don't see VFIAX, Vanguard 500 Index Fund Admiral Shares (VFIAX) but I see VINIX the institutional shares for the SP500. The institutional shares give off 1.11%. Does that mean that VFIAX isn't giving off anything?
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Re: Vanguard's 2020 capital gains estimates

Post by cas »

Billavoider wrote: Wed Nov 18, 2020 8:38 am
rkhusky wrote: Tue Nov 17, 2020 8:10 pm
Electron wrote: Tue Nov 17, 2020 2:41 pm Morningstar has an interesting article on estimated capital gains distributions from all the major fund families including Vanguard.

https://www.morningstar.com/articles/10 ... -this-year
Did Ms. Benz get a sneak peek at the Nov 16 Vanguard document, or is that information available elsewhere?
I was wondering the same thing since the article is dated prior to the Vanguard's CG release date.
In previous years, the equivalent article has just silently updated as various fund families release their estimated year end distributions. I suspect that the Vanguard section said something similar to the current Fidelity section (see below) until Vanguard released their estimates on 11/16.

If you really wanted to know for sure, right now the Fidelity section of the article says
Fidelity
Fidelity has yet to announce capital gains estimates for a large swath of its funds; many of the firm’s funds have made distributions at other times during the year. We’ll provide more detail on estimates as they become available.
Check after Fidelity releases their estimates and see if it updates silently...
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Re: Vanguard's 2020 capital gains estimates

Post by Monster99 »

Buffetologist wrote: Wed Nov 18, 2020 8:47 am So I don't see VFIAX, Vanguard 500 Index Fund Admiral Shares (VFIAX) but I see VINIX the institutional shares for the SP500. The institutional shares give off 1.11%. Does that mean that VFIAX isn't giving off anything?
Estimate is up to Oct 31st (usually) - another estimate will come on Dec 9. You really only know the actual amount after the end of the year.
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Re: Vanguard's 2020 capital gains estimates

Post by goingup »

SeamusAlan wrote: Tue Nov 17, 2020 11:09 pm I made the mistake years ago of putting Primecap in my taxable account. It is still there I haven’t wanted to sell because of all the cap gains the fund has realized. I was planning on directing the upcoming Primecap capital gain to my MM fund but I recently read that doing this will reduce the Primecap fund’s cost basis. If this is true, can someone explain? Thanks!
Seamus
The cited Morningstar article in this thread gives a short answer to your question. Ms. Benz: At the same time, it's also worth noting that reinvested capital gains help increase your cost basis; that has the potential to lessen the amount of capital gains taxes due when you eventually sell the position. You’ve essentially paid part of the tax bill that would otherwise be due. If you hold a serial capital-gains-distributing fund in your portfolio, selling it may cost less than you anticipated, owing to the step-ups in cost basis you've received in years past.. https://www.morningstar.com/articles/10 ... -this-year
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Re: Vanguard's 2020 capital gains estimates

Post by Billavoider »

cas wrote: Wed Nov 18, 2020 8:50 am
Billavoider wrote: Wed Nov 18, 2020 8:38 am
rkhusky wrote: Tue Nov 17, 2020 8:10 pm
Electron wrote: Tue Nov 17, 2020 2:41 pm Morningstar has an interesting article on estimated capital gains distributions from all the major fund families including Vanguard.

https://www.morningstar.com/articles/10 ... -this-year
Did Ms. Benz get a sneak peek at the Nov 16 Vanguard document, or is that information available elsewhere?
I was wondering the same thing since the article is dated prior to the Vanguard's CG release date.
In previous years, the equivalent article has just silently updated as various fund families release their estimated year end distributions. I suspect that the Vanguard section said something similar to the current Fidelity section (see below) until Vanguard released their estimates on 11/16.

If you really wanted to know for sure, right now the Fidelity section of the article says
Fidelity
Fidelity has yet to announce capital gains estimates for a large swath of its funds; many of the firm’s funds have made distributions at other times during the year. We’ll provide more detail on estimates as they become available.
Check after Fidelity releases their estimates and see if it updates silently...
Fidelity posted their CG estimates several weeks ago. Not sure why she didn't update the article to include them.
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Re: Vanguard's 2020 capital gains estimates

Post by cas »

rkhusky wrote: Wed Nov 18, 2020 8:29 am
playtothebeat wrote: Tue Nov 17, 2020 11:54 pm Or is the inefficiency due to the fact that, presumably, most of us expect to be in a lower tax bracket later and/or never sell the holdings entirely?
Combination of being in a lower tax bracket later, plus you miss out on all the earnings that you would have made on the cap gain tax that you paid each year. Those are the benefits of using a tax-deferred account, you get to defer the taxes until a much later date and earn money on those deferred taxes, plus pay a lower rate on the taxes when they are paid.
That is the main part of it, but, if you are in a phase of life where some income/tax threshold or phase-out or phase-in is relevant to you (and the tax code is filled with them), capital gains distributions make planning more difficult, since you don't know what/if they will be until near the end of the year.

Tends to cause angst (not to mention increased taxes or income-related payments) if some unanticipated large CGD spikes your income past some ACA or IRMAA (Medicare) cliffs or vaults you into the 49.95% part of the social security tax hump or into owing Net Investment Income Tax (NIIT) or Alternative Minimum Tax (AMT) or makes you ineligible for some tax credit like the American Opportunity Tax Credit or unexpectedly ineligible to make Roth contributions via the "front door" or .... or .... or ...
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Re: Vanguard's 2020 capital gains estimates

Post by sperry8 »

cas wrote: Wed Nov 18, 2020 9:05 am
rkhusky wrote: Wed Nov 18, 2020 8:29 am
playtothebeat wrote: Tue Nov 17, 2020 11:54 pm Or is the inefficiency due to the fact that, presumably, most of us expect to be in a lower tax bracket later and/or never sell the holdings entirely?
Combination of being in a lower tax bracket later, plus you miss out on all the earnings that you would have made on the cap gain tax that you paid each year. Those are the benefits of using a tax-deferred account, you get to defer the taxes until a much later date and earn money on those deferred taxes, plus pay a lower rate on the taxes when they are paid.
That is the main part of it, but, if you are in a phase of life where some income/tax threshold or phase-out or phase-in is relevant to you (and the tax code is filled with them), capital gains distributions make planning more difficult, since you don't know what/if they will be until near the end of the year.

Tends to cause angst (not to mention increased taxes or income-related payments) if some unanticipated large CGD spikes your income past some ACA or IRMAA (Medicare) cliffs or vaults you into the 49.95% part of the social security tax hump or into owing Net Investment Income Tax (NIIT) or Alternative Minimum Tax (AMT) or makes you ineligible for some tax credit like the American Opportunity Tax Credit or unexpectedly ineligible to make Roth contributions via the "front door" or .... or .... or ...
I agree, this is the most annoying part (trying to plan ahead to not bump up against NIIT, AMT, etc.

On the other hand, I live off the distributions (divs & cap gains) and it's a nice way to keep AA right where I want it (since as the market goes up, this is sort of forced selling). Even along this amazing bull market my AA never got too way out of whack due to cap gains and div distributions. If one needs to keep AA at same level during a bull, they'd have to sell anyway... so I see not much diff in whether it's distributions or sales.
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282
rkhusky
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Re: Vanguard's 2020 capital gains estimates

Post by rkhusky »

cas wrote: Wed Nov 18, 2020 9:05 am
rkhusky wrote: Wed Nov 18, 2020 8:29 am
playtothebeat wrote: Tue Nov 17, 2020 11:54 pm Or is the inefficiency due to the fact that, presumably, most of us expect to be in a lower tax bracket later and/or never sell the holdings entirely?
Combination of being in a lower tax bracket later, plus you miss out on all the earnings that you would have made on the cap gain tax that you paid each year. Those are the benefits of using a tax-deferred account, you get to defer the taxes until a much later date and earn money on those deferred taxes, plus pay a lower rate on the taxes when they are paid.
That is the main part of it, but, if you are in a phase of life where some income/tax threshold or phase-out or phase-in is relevant to you (and the tax code is filled with them), capital gains distributions make planning more difficult, since you don't know what/if they will be until near the end of the year.

Tends to cause angst (not to mention increased taxes or income-related payments) if some unanticipated large CGD spikes your income past some ACA or IRMAA (Medicare) cliffs or vaults you into the 49.95% part of the social security tax hump or into owing Net Investment Income Tax (NIIT) or Alternative Minimum Tax (AMT) or makes you ineligible for some tax credit like the American Opportunity Tax Credit or unexpectedly ineligible to make Roth contributions via the "front door" or .... or .... or ...
That makes Vanguard's funds that don't distribute capital gains especially useful for taxable accounts. Dividends tend to be more stable and easier to predict.
SeamusAlan
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Re: Vanguard's 2020 capital gains estimates

Post by SeamusAlan »

Thank you all for your comments and great insights!
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Dale_G
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Re: Vanguard's 2020 capital gains estimates

Post by Dale_G »

I am not excited about the projected capital gain of 8.1% in the Long Term Treasury fund (VUSUX) in my taxable account. To the extent these are long term capital gains, it won't have any tax effect because I have more tax loss carry-forwards than I won't ever use against ordinary income, but it is a little disconcerting non-the-less.

I am curious about the internal workings of the fund that caused the recognition of the capital gains. The fund surely kicks out shorter term bonds in order to maintain the desired maturity/duration, but an 8% realized capital gain seems outsized.

I want to keep about the same number of dollars invested in the fund. I am now thinking about "buying the dividend" with the expected dollar amount of the dividend before the dividend date rather than re-investing the dividend.

Still thinking about it.

Dale
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palanzo
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Re: Vanguard's 2020 capital gains estimates

Post by palanzo »

grabiner wrote: Mon Nov 16, 2020 8:38 pm With recent declines in bond yields, almost all the bond funds are distributing capital gains. Capital gains in a bond fund are normally advantageous, as you pay capital-gains tax when the fund replaces a high-coupon bond with a lower-coupon bond after rates fall, so the capital gain replaces non-qualified future dividends.

However, there are small capital gains in most of the muni funds, where the taxable gain is a total loss (although it will be recovered as a reduced gain when you sell the fund). VTEB, the muni ETF, is not projected to distribute a capital gain, but I don't know whether the ETF structure helped with that; Intermediate-Term Tax-Exempt, with a similar portfolio, also is not projected to distribute a gain,
Can you explain why muni funds like California Long-Term Tax-Exempt Admiral are declaring capital gains? And why the taxable gain is a total loss?
Seasonal
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Re: Vanguard's 2020 capital gains estimates

Post by Seasonal »

NY Long-Term Tax Exempt is estimated at 0.8% (likely higher since the estimate is as of October). Last year was about 0.3% (for the entire year). That's a huge amount for a muni fund and a huge increase. A double whammy of lower income and higher cap gains resulting from the decline in interest rates, with no corresponding benefit if shares will not be sold.
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grabiner
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Re: Vanguard's 2020 capital gains estimates

Post by grabiner »

palanzo wrote: Fri Nov 20, 2020 2:45 am
grabiner wrote: Mon Nov 16, 2020 8:38 pm With recent declines in bond yields, almost all the bond funds are distributing capital gains. Capital gains in a bond fund are normally advantageous, as you pay capital-gains tax when the fund replaces a high-coupon bond with a lower-coupon bond after rates fall, so the capital gain replaces non-qualified future dividends.

However, there are small capital gains in most of the muni funds, where the taxable gain is a total loss (although it will be recovered as a reduced gain when you sell the fund). VTEB, the muni ETF, is not projected to distribute a capital gain, but I don't know whether the ETF structure helped with that; Intermediate-Term Tax-Exempt, with a similar portfolio, also is not projected to distribute a gain,
Can you explain why muni funds like California Long-Term Tax-Exempt Admiral are declaring capital gains? And why the taxable gain is a total loss?
If a fund buys a bond for $1000, and then rates fall, the bond price might rise to $1050. If the fund holds the bond to maturity, the price drops back to $1000 at maturity. If it sells the bond to buy a new bond, the fund has a $50 capital gain, and the new bond which is worth $1050 at maturity has smaller distributions. The pre-tax return for the investor is the same either way.

However, long-term bond funds must sell bonds before maturity, as the bonds are no longer long-term. So the investor in the fund gets a $50 capital gain, but $50 less in future dividends, because the fund has sold the bond. In a muni fund, the capital gain is taxed, while the dividends are not, so it is a loss to the investor. In a taxable bond fund, the capital gain is taxed at a lower rate than the dividends, so it may be a benefit to the investor.
Wiki David Grabiner
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