Best Vanguard Funds for Brokerage Account to limit tax drag

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ThankYouJack
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Best Vanguard Funds for Brokerage Account to limit tax drag

Post by ThankYouJack »

What are the best Vanguard funds to hold in a brokerage account to limit the amount of dividend tax drag? Let's assume 24% federal tax rate and 5% state, and there's plenty of room in pre-tax accounts to maintain asset allocation.

VTSAX (Vanguard Total Stock) seems good with a dividend yield of about 1.34% and 92-94% qualified.

Would you go VTSAX? What other funds should one consider?
rkhusky
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by rkhusky »

VTSAX is good - that’s what I would use. Some people like Total International to get the foreign tax credit, but the higher dividends and lower qualified dividends counteracts the FTC to some extent. If you don’t mind extra complexity, look at Growth Index for lower dividends.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by livesoft »

Don't forget that while VTSAX is 92-94% qualified, the other 6% is Section 199A dividends with that tax break.

VLCAX has 100% qualified dividends.

It is often mentioned to put a growth index fund in taxable instead of VTSAX, then compensate by putting a value index fund in tax-advantaged.

In any event look for that spreadsheet in those fund tax-efficiency threads and sort on tax-efficiency for your tax situation. It is all there in black and white. I'm too lazy to look it up for you. Sorry.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by retired@50 »

ThankYouJack wrote: Mon Jun 10, 2024 7:40 am What are the best Vanguard funds to hold in a brokerage account to limit the amount of dividend tax drag? Let's assume 24% federal tax rate and 5% state, and there's plenty of room in pre-tax accounts to maintain asset allocation.

VTSAX (Vanguard Total Stock) seems good with a dividend yield of about 1.34% and 92-94% qualified.

Would you go VTSAX? What other funds should one consider?
Because you said there is plenty of room in pre-tax...

Consider splitting the US market by Growth and Value.
Use VIGAX in taxable - dividend rate currently 0.42%, and hold the value index (VVIAX) in pre-tax - dividend rate currently 2.24%.

If you hold them in a 50/50 split for US stock, it comes awfully close to tracking VTSAX.

If you need to go with foreign stock in taxable, consider VEA or VTMGX the developed markets index.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by retired@50 »

livesoft wrote: Mon Jun 10, 2024 8:05 am
In any event look for that spreadsheet in those fund tax-efficiency threads and sort on tax-efficiency for your tax situation. It is all there in black and white. I'm too lazy to look it up for you. Sorry.
I guess I'm feeling energetic this morning.

Here's a couple of good threads on the tax efficiency topic.

viewtopic.php?t=397966

viewtopic.php?t=422068

Regards,
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by exodusNH »

ThankYouJack wrote: Mon Jun 10, 2024 7:40 am What are the best Vanguard funds to hold in a brokerage account to limit the amount of dividend tax drag? Let's assume 24% federal tax rate and 5% state, and there's plenty of room in pre-tax accounts to maintain asset allocation.

VTSAX (Vanguard Total Stock) seems good with a dividend yield of about 1.34% and 92-94% qualified.

Would you go VTSAX? What other funds should one consider?
Note that dividends are nothing special. They are part of total return. They are not a unique source of income. In particular, they are not like interest earned on a bond or savings account.

I wouldn't focus on dividends with stock funds. The stock (and by extension stock fund) drops by the price of the dividend, making it a neutral event from a wealth perspective.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by aristotelian »

You might take a look at VTCLX. Follow VTSAX closely but has a slightly lower dividend (1.05% vs 1.28% 30-day SEC yield).
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ThankYouJack
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by ThankYouJack »

retired@50 wrote: Mon Jun 10, 2024 8:07 am
ThankYouJack wrote: Mon Jun 10, 2024 7:40 am What are the best Vanguard funds to hold in a brokerage account to limit the amount of dividend tax drag? Let's assume 24% federal tax rate and 5% state, and there's plenty of room in pre-tax accounts to maintain asset allocation.

VTSAX (Vanguard Total Stock) seems good with a dividend yield of about 1.34% and 92-94% qualified.

Would you go VTSAX? What other funds should one consider?
Because you said there is plenty of room in pre-tax...

Consider splitting the US market by Growth and Value.
Use VIGAX in taxable - dividend rate currently 0.42%, and hold the value index (VVIAX) in pre-tax - dividend rate currently 2.24%.

If you hold them in a 50/50 split for US stock, it comes awfully close to tracking VTSAX.

If you need to go with foreign stock in taxable, consider VEA or VTMGX the developed markets index.

Regards,
Thanks, good to know.

My back of the napkin estimate is:

VTSAX = .0134 * ((.93 * .2) + (.07 * .29)) = 0.28%
VIGAX = .0042 * ((.97 * .2) + (.03 * .29)) = 0.08%

I'm torn on if it's worth it. If I plan on holding a large amount of the fund in taxable long term (decades), it probably is due to the power of compounding.
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ThankYouJack
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by ThankYouJack »

aristotelian wrote: Mon Jun 10, 2024 8:37 am You might take a look at VTCLX. Follow VTSAX closely but has a slightly lower dividend (1.05% vs 1.28% 30-day SEC yield).
Thanks but with a higher expense ratio .09% vs .04% I think that would negate the tax savings.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by aristotelian »

exodusNH wrote: Mon Jun 10, 2024 8:10 am
ThankYouJack wrote: Mon Jun 10, 2024 7:40 am What are the best Vanguard funds to hold in a brokerage account to limit the amount of dividend tax drag? Let's assume 24% federal tax rate and 5% state, and there's plenty of room in pre-tax accounts to maintain asset allocation.

VTSAX (Vanguard Total Stock) seems good with a dividend yield of about 1.34% and 92-94% qualified.

Would you go VTSAX? What other funds should one consider?
Note that dividends are nothing special. They are part of total return. They are not a unique source of income. In particular, they are not like interest earned on a bond or savings account.

I wouldn't focus on dividends with stock funds. The stock (and by extension stock fund) drops by the price of the dividend, making it a neutral event from a wealth perspective.
OP is trying to limit dividends to reduce the tax drag. Their question has nothing to do with the total return.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by retired@50 »

ThankYouJack wrote: Mon Jun 10, 2024 9:55 am
I'm torn on if it's worth it.
I think the strategy of dividing growth and value is typically used by high income earners in high tax states.

It's not that you'd have to be one of those people to save on your income taxes, but for those types, it can certainly be a more compelling case.

In my case, I don't have anywhere near enough room in tax-deferred accounts to hold both my bond fund allocation and a value index allocation.

Regards,
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by stan1 »

Decisions like splitting growth to taxable and value to tax advantaged become lifelong decisions that add complexity. It will not make a difference in your lifelong investing success. Yes a confident 1%er Boglehead can handle it in their 40s or 50s, but even 1%er Bogleheads in their 80s or 90s might experience cognitive decline and will die handing off portfolio to spouse.

I think people should really consider whether the savings are worth the hassle. It's your call and a personal decision.

Put S&P 500 into taxable instead of VTSAX is fine, although some people only have S&P 500 in their 401Ks so they want to keep that for separation of tax loss harvest pairs. Hyper-optimization can lead to quandaries like that. Also assuming tax rates and laws never change is a flawed assumption.
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ThankYouJack
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by ThankYouJack »

retired@50 wrote: Mon Jun 10, 2024 10:02 am
ThankYouJack wrote: Mon Jun 10, 2024 9:55 am
I'm torn on if it's worth it.
I think the strategy of dividing growth and value is typically used by high income earners in high tax states.

It's not that you'd have to be one of those people to save on your income taxes, but for those types, it can certainly be a more compelling case.

In my case, I don't have anywhere near enough room in tax-deferred accounts to hold both my bond fund allocation and a value index allocation.

Regards,
That makes sense as well.

I need a crystal ball for this one. On one hand, I expect my lowest tax bracket to be 24%, I may hold this fund for decades and would like to eventually move to California. On the other hand, I could spend/sell it quicker than expected and the tax savings would be minimal. Am leaning towards just going VTSAX but still considering splitting.
stan1 wrote: Mon Jun 10, 2024 11:05 am Decisions like splitting growth to taxable and value to tax advantaged become lifelong decisions that add complexity. It will not make a difference in your lifelong investing success. Yes a confident 1%er Boglehead can handle it in their 40s or 50s, but even 1%er Bogleheads in their 80s or 90s might experience cognitive decline and will die handing off portfolio to spouse.

I think people should really consider whether the savings are worth the hassle. It's your call and a personal decision.

Put S&P 500 into taxable instead of VTSAX is fine, although some people only have S&P 500 in their 401Ks so they want to keep that for separation of tax loss harvest pairs. Hyper-optimization can lead to quandaries like that. Also assuming tax rates and laws never change is a flawed assumption.
Good points. I don't expect to hold the fund for the rest of my life, but am not certain that will be the case and I was thinking the same thing about the dying / cognitive decline with the added complexity. Am leaning even more towards not splitting.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by retiringwhen »

I split VIGAX and VVIAX between taxable in Roth/Traditional accounts after a major TLH episode in DEC 2018.

The reduced tax drag is real and as valuable as expected even for a mid-range tax rate person like me (24%+NIIT some years, 15% LTCG/QDI rate) plus 6.37% state income taxes.

It also has the benefit of splitting gains between different funds for future TLH and charitable giving via a DAF. I have been donating VIGAX shares since with much higher gains than for the value fund. I hold a small amount of VVIAX/VTV in taxable and in the future if/when Value has a resurgence I will donate those shares instead.

Splitting does cost a bit more time to calculate asset allocation decisions and tax-adjusted analysis is important as the funds diverge over time, but I have found it to be a most valuable tax efficiency decision.

BTW, my tax efficiency spreadsheets have pretty consistently shown that the split between large cap growth and value is about the only decision you can make like that will consistently play with an advantage. Most other fund categories are either unpredictable or very dependent on relative returns.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by rationalactor »

Over the weekend I watched a rerun of the ESPN 30 for 30, “Broke”, about pro athletes (particularly NFL players) who go from rich to broke quickly. Clearly there are multiple factors at work but as a lifelong NFL fan, it made me sad and I wondered if a simple investment product could help. Onto the topic of this thread, since pro athlete investment holdings will be virtually 100 percent taxable, I wondered if just defaulting every player into putting most of their paycheck into the Vanguard Tax Managed Balanced Index Fund would be a “good enough” solution that would get them decent returns, save on taxes, reduce the odds of shyster investment advisors getting them into risky ventures, and simplify their lives dramatically….
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by retiringwhen »

rationalactor wrote: Mon Jun 10, 2024 11:48 am Over the weekend I watched a rerun of the ESPN 30 for 30, “Broke”, about pro athletes (particularly NFL players) who go from rich to broke quickly. Clearly there are multiple factors at work but as a lifelong NFL fan, it made me sad and I wondered if a simple investment product could help. Onto the topic of this thread, since pro athlete investment holdings will be virtually 100 percent taxable, I wondered if just defaulting every player into putting most of their paycheck into the Vanguard Tax Managed Balanced Index Fund would be a “good enough” solution that would get them decent returns, save on taxes, reduce the odds of shyster investment advisors getting them into risky ventures, and simplify their lives dramatically….
The problem is not the investment vehicle, it is the sharks swimming around the athlete. I once had a long talk on a flight with a former NBA player whose career was cut very short by injury. He had a completed education and a family business that he transitioned to. He told me he still went back to his alma mater and provided a class/lesson on how to handle the sharks every year. But almost no one would follow his advice. Maybe things are better now, but I don't see evidence to support that hope.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by retiredjg »

ThankYouJack wrote: Mon Jun 10, 2024 7:40 am What are the best Vanguard funds to hold in a brokerage account to limit the amount of dividend tax drag? Let's assume 24% federal tax rate and 5% state, and there's plenty of room in pre-tax accounts to maintain asset allocation.

VTSAX (Vanguard Total Stock) seems good with a dividend yield of about 1.34% and 92-94% qualified.

Would you go VTSAX? What other funds should one consider?
My observation over the years is that people who have a taxable account often need 2 funds there to make the portfolio work efficiently. By that I mostly mean easily maintaining ones desired ratios (US v International v bonds and fixed) while adding money (often lumpy amounts) during the year.

Another observation is that many work plans do not have a low cost total international fund available. This was more true 10 years ago than now...but it is still a factor.

The combination of these things often means that holding both a broad US stock index fund and a broad foreign stock fund in taxable is a very workable approach.

Yes, we know that foreign stocks funds are not always as tax-efficient as total US stock, but the difference is not much and having only the one most efficient fund should not be the goal. Holding the most tax-efficient fund together with the next most tax-efficient fund is still a very good choice for the portfolio as a whole.

The bottom line for me is that a total stock index and a total international index are the best choices to consider for taxable.

If one is willing to add some complexity, then splitting US stock into value (for tax-advantaged accounts) and growth (for taxable accounts) can be considered. This assumes that growth funds are available in tax-advantaged accounts. Along the same lines one might split foreign stock into developed markets (for taxable accounts) and emerging markets (for tax-advantaged accounts). Again, this assumes that emerging markets fund is available in a tax-advantaged account.

These kinds of splits are not going to hurt the portfolio (the stocks don't care) but they will add some complexity and some challenges to rebalancing. Might be worth that extra effort for some, not so much for others.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by ThankYouJack »

retiredjg wrote: Mon Jun 10, 2024 12:06 pm
My observation over the years is that people who have a taxable account often need 2 funds there to make the portfolio work efficiently. By that I mostly mean easily maintaining ones desired ratios (US v International v bonds and fixed) while adding money (often lumpy amounts) during the year.

Another observation is that many work plans do not have a low cost total international fund available. This was more true 10 years ago than now...but it is still a factor.

I'm in a bit of a unique situation where my spouse and I have had tons of retirement account space over the years (often into 6 figures annually). We also have many accounts with different companies (most of which have a low cost total international option). So rebalancing tax-efficiently is never a problem.
I also consider my taxable account a bit of a "splurge/slush fund" that I may use before retirement.

However, my AA spreadsheet already has so many funds across different accounts so that may be the biggest current downside. I track everything in a spreadsheet to calculate the AA automatically, and hardly ever rebalance (at most once a year) so it's not complex but splitting would add another fund and be one more thing to track.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by anon_investor »

ThankYouJack wrote: Mon Jun 10, 2024 1:14 pm
retiredjg wrote: Mon Jun 10, 2024 12:06 pm
My observation over the years is that people who have a taxable account often need 2 funds there to make the portfolio work efficiently. By that I mostly mean easily maintaining ones desired ratios (US v International v bonds and fixed) while adding money (often lumpy amounts) during the year.

Another observation is that many work plans do not have a low cost total international fund available. This was more true 10 years ago than now...but it is still a factor.

I'm in a bit of a unique situation where my spouse and I have had tons of retirement account space over the years (often into 6 figures annually). We also have many accounts with different companies (most of which have a low cost total international option). So rebalancing tax-efficiently is never a problem.
I also consider my taxable account a bit of a "splurge/slush fund" that I may use before retirement.

However, my AA spreadsheet already has so many funds across different accounts so that may be the biggest current downside. I track everything in a spreadsheet to calculate the AA automatically, and hardly ever rebalance (at most once a year) so it's not complex but splitting would add another fund and be one more thing to track.
Just get VTSAX and call it a day, it is extremely tax efficient and you get good diversification. No need to waste more time and/or mental energy to squeeze out minimal tax efficiency gains.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by jeffyscott »

ThankYouJack wrote: Mon Jun 10, 2024 10:00 am
aristotelian wrote: Mon Jun 10, 2024 8:37 am You might take a look at VTCLX. Follow VTSAX closely but has a slightly lower dividend (1.05% vs 1.28% 30-day SEC yield).
Thanks but with a higher expense ratio .09% vs .04% I think that would negate the tax savings.
Perhaps, or might be pretty much a wash. The tax difference isn't just due to the lower yield, it's also 100% QDI.

If there ever were to be a change in tax law that eliminates the magical ETF tax deferral via "heartbeat trades", etc. the old tax managed fund will not be affected. Also, I have to think there's some hidden costs to all that? The entities that Vanguard makes those heartbeat trades with must have some financial reason to participate.

OTOH, lower expenses are a permanent savings, while some of the tax savings is only tax deferral.
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Re: Best Vanguard Funds for Brokerage Account to limit tax drag

Post by sycamore »

ThankYouJack wrote: Mon Jun 10, 2024 7:40 am Would you go VTSAX? What other funds should one consider?
Go with large cap VLCAX in taxable (as livesoft suggested) and if you really want the small cap exposure that you'd get from a "total" market, then buy a small cap fund in a tax-advantaged account.

Also, Vanguard's ETFs will save you 0.01% each year compared to the mutual funds due to the lower expense ratio. Just in case you really want to optimize your portfolio :)

That's VTI instead of VTSAX. VV instead of VLCAX.
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