Sell VWIUX to Buy VBTLX Since Now in Lower Tax Bracket?

[BobGuy]

In my taxable account, I am investing in VTSAX, VTIAX, and VWIUX. For the past 5 or 6 years my marginal tax rate was either 32% or 35%, but starting in 2025, it will be 24%. I have approximately $715K in VWIUX in this account.

Does it make sense to sell VWIUX and buy VBTLX since my tax rate is now lower? At this point in time, considering taxes and expense ratios for each fund, I would certainly come out ahead with VBTLX [4.52 (SEC rate) - 0.04 (ER) - 0.24 (my federal tax) = 4.24%] compared with VWIUX [3.40 (SEC rate) - 0.09 (ER) = 3.31%]. (I don’t have a state tax.) However, I would have a capital loss of approximately $48K if I sold all the VWIUX.

I am in the process of gradually going from a 4-fund to a 3-fund portfolio with the goal of having all stocks in my Roth IRA. I have been doing this by using VTSAX and VTIAX dividends to buy VWIUX in my taxable account. I could probably finish that process off quickly if I wanted to offset the capital loss of selling VWIUX with some capital gains by selling some VTSAX and/or VTIAX in my taxable account and buying VBTLX.

Another factor: Sometimes the higher yield of VBTLX is not high enough to compensate for the tax-exempt status of VWIUX, and VWIUX is the clear winner. In fact, over the last 10-year period, the average yield for VWIUX was 2.35%, and that of VBTLX was 1.48% (if I’m reading the charts correctly). I am thinking, even though the rates for VBTLX may be better than VWIUX now, they may not average out to be so in the future. So does it really make sense to switch to VBTLX? I don’t plan to use any of my investments in Vanguard for at least 20 years.

After that complicated description, I would very much appreciate any advice!

[welderwannabe]

However, I would have a capital loss of approximately $48K if I sold all the VWIUX.

Good!

Your math is wonky though.
#1 Don't subtract the ER, thats already included in the SEC yield
#2 Don't subtract your tax rate, you need to multiply 1-tax rate. See below:

VBTLX 4.52% SEC Yield * (1-.24) = 3.44%
VWIUX = 3.31%

Still make sense to do the move, especially with the losses you can claim. Not sure why you would want to offset them, you can carry that loss forward and use it to offset future non discretionary sale that has a profit.

[retiredjg]

The better choice in the 24% bracket (if you have the choice) is not to hold bonds in taxable at all. Move them to tax-deferred accounts instead (401k, traditional IRA).

If I had to hold bonds in taxable in the 24% bracket, I'd probably use a short term treasury fund and use 5% less of it (because it is less risky).

I think I'd be willing to hold VBTLX in taxable in the 12% bracket if I had to.

[BobGuy]

Good points/information, and thanks for the math corrections, welderwannabe.
I do not have any tax-deferred accounts, only the Roth and taxable account. retiredjg, what short term treasury fund would you recommend?

[retiredjg]

If your taxable account is at Vanguard here is a suggestion. https://investor.vanguard.com/investmen ... file/vsbsx

But the more important question is why don't you have any money in tax-deferral? Has the opportunity just not presented itself yet? Are you avoiding it?

What you are doing (only taxable and Roth) is not necessarily a bad thing. There are reasons to do it under certain circumstances. But it is a very unusual and possibly poor choice for someone in the higher tax brackets.

[BobGuy]

I used to have a Traditional IRA, but after I retired I gradually converted it all over to a Roth.

[retiredjg]

I used to have a Traditional IRA, but after I retired I gradually converted it all over to a Roth.

Well, that makes a big difference. And not what I had imagined.

In retirement, you may have a fairly large allocation to bonds. I'm not sure I'd put all of it in a short term treasury fund myself. And I would not want a large bond allocation in taxable because of the taxable income it produces which will be taxed at your 24% tax rate. And I would put some of the bonds in Roth IRA (which is the opposite of what you are planning) in a broader fund....like a total bond market.

In a case like this, maybe keeping some in a tax-exempt fund is reasonable - you'll make less money, but have less tax drag too.

Hard to know exactly what to suggest. Maybe someone else will have some ideas.

[retired@50]

I used to have a Traditional IRA, but after I retired I gradually converted it all over to a Roth.

You could use I-bonds from the US Treasury Direct website for some of your fixed income holdings.
I believe you can defer the income taxes until you cash them in.

Regards,

[BobGuy]

Here are more situational details: I am retired, but I never plan to “cash in” my investments with Vanguard – it will all be inherited by my kids, who are in their 30s. I am essentially investing with their long-term investment future in mind.

My portfolio is 80/20 stocks/bonds with nearly all stocks in my Roth IRA (VTSAX and VTIAX). Right now, I am investing in VWIUX (plus VTSAX and VTIAX) in my taxable account because in the past my marginal tax rate was higher than the 24% that it is now. I also have $$ in VUSXX in my taxable account, used mainly for my emergency fund.

According to the performance charts on these websites, VWIUX comes out ahead of VBTLX long-term, irrespective of its tax-exempt status:

https://investor.vanguard.com/investmen ... file/vwiux
https://investor.vanguard.com/investmen ... file/vbtlx

Considering this, does it make sense for me to sell VWIUX and buy VBTLX now that my tax rate is lower and the bond investment (hopefully) will be very long term?

[grabiner]

Here are more situational details: I am retired, but I never plan to “cash in” my investments with Vanguard – it will all be inherited by my kids, who are in their 30s. I am essentially investing with their long-term investment future in mind.

This is a strong argument for stocks, rather than bonds, in your taxable account; the capital-gains tax will never be paid.

According to the performance charts on these websites, VWIUX comes out ahead of VBTLX long-term, irrespective of its tax-exempt status:

https://investor.vanguard.com/investmen ... file/vwiux
https://investor.vanguard.com/investmen ... file/vbtlx

Considering this, does it make sense for me to sell VWIUX and buy VBTLX now that my tax rate is lower and the bond investment (hopefully) will be very long term?

Past performance is not an indication of future results. When taxable bond yields rise more than muni yields, as happened in 2022, munis will outperform taxable bonds. When they fall more, or are stable as muni yields rise, as happened in September-November 2008 (not in the current performance data), taxable bonds will outperform munis.

What is a good indication of future results is the current yield, as this is what you will get if bonds are held to maturity. The current yields are 4.48% for Total Bond Market and 3.41% for Intermediate-Term Tax-Exempt, which are equal after tax in a 24% bracket, so you should expect equal returns. I slightly prefer Total Bond Market in this tax bracket because I believe it is better at reducing your portfolio risk; investors tend to move to Treasuries when the stock market crashes. When stocks crashed in September-November 2008 and March 2020, Total Bond Market rose while Intermediate-Term Tax-Exempt fell.