Changing VWEAX to VWALX

[widow23]

Good morning,
Does anyone see anything wrong with moving funds from VWEAX (Vanguard High Yield Corp. Admiral CL) to VWALX (Vanguard High Yield Tax Exempt Admiral) to lower my taxable income? Any pitfalls I need to be aware of? Thank you.

[tomd37]

It would be nice if posters here would identify the funds by name as well as by symbol, especially for funds that are not readily identifiable.

[GaryA505]

Good morning,
Does anyone see anything wrong with moving funds from VWEAX to VWALX to lower my taxable income? Any pitfalls I need to be aware of? Thank you.

The duration of VWALX (Vanguard High-Yield Tax Exempt) of 7.8 years is considerably longer than the duration of VWEAX (Vanguard High-Yield Corporate) of 5.1 years. This means that VWALX has more interest rate risk. Of course VWEAX has more credit risk so maybe that's a reasonable trade-off.

[sycamore]

Good morning,
Does anyone see anything wrong with moving funds from VWEAX (Vanguard High Yield Corp. Admiral CL) to VWALX (Vanguard High Yield Tax Exempt Admiral) to lower my taxable income? Any pitfalls I need to be aware of? Thank you.

Lowering taxable income can be achieved by using a muni fund but the tax-exempt interest still counts against you in other ways -- against your IRMAA/Medicare premium and SS benefit taxation calculations, etc. Muni income won't be any worse than the "regular" income of corporate bond income, but maybe the net change in your tax liability won't be as large as you expect.

If you use tax software like TurboTax, I suggest modeling your proposal to see what effect it would have. Typically, you do this by taking last year's tax return, take away the high-yield corp income and add in an appropriate amount of high-yield tax exempt income.

[CenTexan]

To reiterate sycamore's reply: Dividends earned from VWALX, while tax-free, are still used for various calculations, such as IRMAA/Medicare penalty and Social Security benefits.

But it is nice to have that tax-free income, which can give you room to manipulate taxes each year by making Roth conversions or Capital Gain harvesting. It all depends on your financial situation/income/savings/investments. I hold a big chunk of VWALX but ofter consider whether I should or not.

[widow23]

Thank you everyone. I am only 52 so I don't have IRMAA/Medicare or SS benefits yet. I am, however, trying to lower my AGI to get a better deal on my health insurance through healthcare.gov. I was hesitant to transition because my VWEAX is down about $3900 total from where we bought it a few years ago. However, I spoke to my brother-in-law about it, and he felt that since VWALX is also down that it would just be trading one for another and that when both funds rise it will be sort of equivalent. Thank you all, I really appreciate your thoughts!

[GaryA505]

Thank you everyone. I am only 52 so I don't have IRMAA/Medicare or SS benefits yet. I am, however, trying to lower my AGI to get a better deal on my health insurance through healthcare.gov. I was hesitant to transition because my VWEAX is down about $3900 total from where we bought it a few years ago. However, I spoke to my brother-in-law about it, and he felt that since VWALX is also down that it would just be trading one for another and that when both funds rise it will be sort of equivalent. Thank you all, I really appreciate your thoughts!

You might be able to tax loss harvest.

[sycamore]

...trying to lower my AGI to get a better deal on my health insurance through healthcare.gov.

For ACA insurance, they look at a version of Modified Adjusted Gross Income that includes muni income. Source: https://www.healthcare.gov/income-and-h ... on/income/

So for you the key is to use a fund with a lower yield in general. Investigate whether high yield muni or high yield corp are really all that different, yield-wise.

You're better off with a non high yield bond fund.

You're even better off with bond funds in an IRA (or 401k) and only stock funds in taxable. Stock funds have lower yields than bond funds in general.

You'll get the best portfolio suggestions if you post info as suggested in https://www.bogleheads.org/wiki/Asking_ ... _questions

[Electron]

So for you the key is to use a fund with a lower yield in general. Investigate whether high yield muni or high yield corp are really all that different, yield-wise.

The exchange to VWALX looks like a good choice. Here is a Portfolio Visualizer analysis that shows the income for each fund in a bar chart. Scroll down to the last chart on the page. The time period starts in 2002.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

VWEAX provided a higher pre-tax total return over the period but it also appears to be a riskier investment. VWALX is more conservative than most high-yield municipal bond funds and Morningstar placed the fund in the Municipal National Long category. VWALX has outperformed all other Vanguard Municipal Bond funds over longer periods of time. Morningstar has given the fund a Five Star rating.

There should be a secondary benefit in the exchange. VWEAX has paid out relatively high taxable dividends over time but this has been offset by some loss in NAV over time. VWALX has paid out less in income but the NAV has held up quite well.

[widow23]

Thank you so much everyone. As you can see, I am new to this but I am trying to learn as fast as I can. My husband was a big Boglehead, so I am confident in what he has done, am planning to leave everything the way it is, only tweaking asset allocation as needed and as I learn more. I am thankful to have a philosophy to follow moving forward. I can call Vanguard, but any suggestions on non-high yield bond funds that they offer that would lower the taxable income I am currently receiving from VWEAX? Thank you again. Also, I will try to post as suggested by sycamore in the future.

[Hiker-Biker]

Vanguard Intermediate Tax free bond (VWIUX Admiral class) would be less risky. Its 30 day SEC Yield is 3.23%. However, it requires a minimum 50k investment. VWITX is the Investor class and the minimum investment is 3k and SEC 7 day yield is 3.15%.

[Electron]

Tax Loss Harvesting was mentioned in an earlier post which is an excellent suggestion. I would check your cost basis in VWEAX which is available in your Vanguard account.

If selling or exchanging VWEAX results in a capital loss you would be able to reduce your Adjusted Gross Income for the current tax year.

In my earlier post I mentioned the NAV performance in VWEAX and VWALX. Morningstar data shows an NAV loss of 17.33% for VWEAX since the end of 2001.

VWALX shows an NAV loss of only 1.34% over the same time period.

[James.534]

VWEAX (Vanguard High Yield Corp. Admiral CL) to VWALX (Vanguard High Yield Tax Exempt Admiral)

These funds actually track different types of investments, both are bond funds, but have different default risks , especially buying bonds from PR and other localities. They may have a higher default risk with slowing economy and tax revenues, especially in high risk areas. Bond funds work a little different than stock funds, they just don't comeback because they went down. There might be an increase in NAV or a capital gain based upon changing/lowering of future rates, though.

[grabiner]

Does anyone see anything wrong with moving funds from VWEAX (Vanguard High Yield Corp. Admiral CL) to VWALX (Vanguard High Yield Tax Exempt Admiral) to lower my taxable income? Any pitfalls I need to be aware of? Thank you.

This is likely a good move, but it isn't actually a neutral move. Vanguard High-Yield Corporate is a junk-bond fund, holding mostly bonds rated BB and B. Vanguard High-Yield Tax-Exempt is a medium-quality fund, holding mostly bonds rated A and BBB; it is closer in risk to Vanguard's corporate-bond index ETF VCIT. Thus, by making this switch, you are reducing your portfolio risk.

But it is a good move to get High-Yield Corporate out of a taxable account. If you want to hold junk bonds, hold this fund in an IRA. (If you sell in taxable for a capital loss, wait 31 days before you buy it in your IRA, or else the wash sale rule will disallow the deduction of the loss.)

The reason High-Yield Corporate is a poor fund for a taxable account is that it has a huge tax cost. Since some junk bonds default, you expect a lower total return than the dividend yield, but you pay tax on the full dividend yield.

[chickadee]

It would be best for taxes/ACA subsidies to hold bonds in tax deferred space and equities in taxable. We could advise better if you take the time to fill out the standard form with all of your investments. There may well be a good reason the bond fund is in taxable, if so then you’re goal to reduce the yield is a good one. Swapping one for other also gets you a tax break this year, which further helps you get an ACA subsidy, since you will be tax loss harvesting. Pay attention to what grabiner says above, you must wait 30 days before rebuying the SAME fund in another account to ensure you do the tax loss harvest properly and avoid a wash sale.

[sycamore]

...any suggestions on non-high yield bond funds that they offer that would lower the taxable income I am currently receiving from VWEAX?

Considering the above question in isolation, you can see Vanguard's US fixed income funds on their website. First click this link, and then click on the word "Performance". Then click on the little caret symbol ^ by the "SEC yield".

(Note that I also filtered the list to Admiral share class. The non-index Admiral funds have a $50k minimum purchase, so switch the share class to Investor if you want to see ones with a $3k minimum purchase.)

The SEC yield is not perfect but it will give you an idea of which funds are yielding higher or lower than VWEAX. VWEAX has the highest SEC yield at 6.88%.

But as others have noted, there are some factors that greatly affect which bond fund is best for you: your marginal tax rate, the role bonds play in your portfolio, how much "income" you need, etc. We'll be happy to work with you!

[grabiner]

The SEC yield is not perfect but it will give you an idea of which funds are yielding higher or lower than VWEAX. VWEAX has the highest SEC yield at 6.88%.

And the expected return from VWEAX (High-Yield Corporate) is lower than that yield. If none of the bonds default, they will earn 6.88% if held to maturity. But if a bond defaults, it will have a large loss instead. (VWEAX doesn't usually hold bonds until they default; rather, it sells most bonds when they are downgraded, but it sells for a loss. So it might lose 25% by selling two downgraded bonds instead of losing 50% when one defaults and nothing on the other.)

The same is true for VWALX (High-Yield Tax-Exempt), but to a much smaller extent. VWALX holds mostly bonds rated A and BBB, and these bonds do occasionally default or get downgraded to junk.

[Electron]

An interesting option for the current tax year would be selling VWEAX and investing the proceeds in a T-Bill maturing next year. The taxable income from the T-Bill would be deferred to next year. The T-Bill could be purchased at auction or in the secondary market. Annual yields currently available are in the range of 5% and higher.

There would be a secondary benefit if VWEAX is sold at a capital loss. You can check the current unrealized capital gains and losses in your account for all holdings in the cost basis section.

One consideration not mentioned is that replacing VWEAX with a lower income or more conservative alternative would be expected to reduce portfolio total return in the coming years.

[GaryA505]

An interesting option for the current tax year would be selling VWEAX and investing the proceeds in a T-Bill maturing next year. The taxable income from the T-Bill would be deferred to next year. The T-Bill could be purchased at auction or in the secondary market. Annual yields currently available are in the range of 5% and higher.

There would be a secondary benefit if VWEAX is sold at a capital loss. You can check the current unrealized capital gains and losses in your account for all holdings in the cost basis section.

One consideration not mentioned is that replacing VWEAX with a lower income or more conservative alternative would be expected to reduce portfolio total return in the coming years.

I wanted to push some income into 2024 so that's exactly what I did. I found bought t-bills on the secondary market that mature in Jan 2024. Easy peezy.