Tax-Optimizing Vanguard Mutual Fund Distributions

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Hannibal Barca
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Tax-Optimizing Vanguard Mutual Fund Distributions

Post by Hannibal Barca »

I read something recently that there's sometimes value in waiting until after a mutual fund does its tax distributions to buy it in order to pay less tax. In certain cases, it may even make sense to sell a lot with de minimus unrealized gains to do so. Is this relevant for Vanguard index mutual funds, which tend to be very tax efficient?
rkhusky
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Re: Tax-Optimizing Vanguard Mutual Fund Distributions

Post by rkhusky »

If I was within a couple of days of a distribution for VTSAX, I would wait to buy, but not much more.
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retired@50
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Re: Tax-Optimizing Vanguard Mutual Fund Distributions

Post by retired@50 »

Hannibal Barca wrote: Tue Nov 22, 2022 9:41 pm I read something recently that there's sometimes value in waiting until after a mutual fund does its tax distributions to buy it in order to pay less tax.
I think this is more of a warning against actively managed mutual funds that tend to make capital gains distributions each December.
Vanguard does have some funds in this category, like PRIMECAP (VPMAX), or Equity Income Fund (VEIRX).

For index funds, this is a much smaller concern. So, if you have the money now, go ahead and invest it.

If you're choosing between investing two days before a dividend payment and two days after, then sure, choose two days after. This is under the presumption that we're talking about a taxable account. If this investment is inside an IRA or Roth IRA or 401k, the tax issue isn't relevant.

Regards,
This is one person's opinion. Nothing more.
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grabiner
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Re: Tax-Optimizing Vanguard Mutual Fund Distributions

Post by grabiner »

Hannibal Barca wrote: Tue Nov 22, 2022 9:41 pm I read something recently that there's sometimes value in waiting until after a mutual fund does its tax distributions to buy it in order to pay less tax. In certain cases, it may even make sense to sell a lot with de minimus unrealized gains to do so. Is this relevant for Vanguard index mutual funds, which tend to be very tax efficient?
For Vanguard's mutual funds and ETFs, which rarely distribute capital gains, the benefit is trivial. If a fund has a 2% yield, mostly qualified, and pays dividends quarterly, the dividend on a $10,000 investment is $50, and the tax cost is about $8. You expect to lose more than that by staying out of the market for a week to wait for the purchase.

If you know the fund will distribute a significant capital gain, and you still want to hold it in taxable (because you expect the capital gain to be a one-time event), then it's worth waiting a few weeks. I did this in 2010, waiting to buy Vanguard FTSE All-World Ex-US Small-Cap (VSS) until after it distributed a capital gain. This was a new ETF that started near the 2009 market bottom, so it had gains on almost all its holdings and had to distribute them in 2009-2010; it hasn't distributed a gain since then.
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Hannibal Barca
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Re: Tax-Optimizing Vanguard Mutual Fund Distributions

Post by Hannibal Barca »

Thanks folks.

Is the tax distributions issue different if I invested in a Vanguard index ETF (instead of the mutual fund equivalent)? I believe they're generally two share classes of the same fund, so I feel like the answer should be no.
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grabiner
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Re: Tax-Optimizing Vanguard Mutual Fund Distributions

Post by grabiner »

Hannibal Barca wrote: Wed Nov 23, 2022 2:02 pm Thanks folks.

Is the tax distributions issue different if I invested in a Vanguard index ETF (instead of the mutual fund equivalent)? I believe they're generally two share classes of the same fund, so I feel like the answer should be no.
The mutual funds with an ETF share class will have the same distributions, except for a slight difference in dividends if the expense ratios for the share classes are different. At Vanguard, the mutual fund benefits from the ETF share class in avoiding capital gains; therefore, only two diversified Vanguard stock ETFs have ever distributed a capital gain.
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