Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

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BigJoeAllen
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Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by BigJoeAllen »

All,
In our brokerage accounts I converted all our mutual funds into the mirrored VG ETF, as recommended by a financial advisor. It was easy, but you have to call VG to do it over the phone.

Question - should I do the same with our 401k accounts, or does it not make much of a difference? Looking for advice on this, thanks.
livesoft
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by livesoft »

Presumably this is all at Vanguard. We did not convert our mutual funds at Vanguard because the brokerage frankly sucks for ETFs. We also no longer make any trades in our mutual funds at Vanguard. We do have ETFs at other financial institutions.

So for you I would be in no rush to convert. Are you used to ETFs now and do you feel they are helpful to you?
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BigJoeAllen
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by BigJoeAllen »

Thanks for input. I have read that ETF's are slightly more tax efficient than their mirror mutual funds. But not sure if that difference will exist in our 401k accounts.
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BigJoeAllen
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by BigJoeAllen »

I agree, it is a little more hinky to convert our VG ETFs, but I rarely trade or pull money out of our brokerage accounts. We are 100% VG, am proud to say!
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Wiggums
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by Wiggums »

ETFs are more portable. We have mutual funds because we can automate our purchases and there is no urge to daytrade them.
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sycamore
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by sycamore »

BigJoeAllen wrote: Wed Jan 10, 2024 7:16 am Thanks for input. I have read that ETF's are slightly more tax efficient than their mirror mutual funds. But not sure if that difference will exist in our 401k accounts.
Any tax efficiency difference does not matter in retirement accounts like 401k, 403b, or IRA.

But with Vanguard index funds there is no tax efficiency difference between the mutual fund and its corresponding ETF. Why? Because the mutual fund and ETF are actually share classes of the same underlying company. They share the same accounting of gains/losses.

That's unique to Vanguard, however.

With other companies' mutual funds, it's often the case they will pay out capital gains distributions (i.e. the source of the tax inefficiency) whereas a similar ETF would not.

Again, that's because with those other companies, their mutual funds are not merely share classes like the ETF, they're legally/technically/financially a different investment company. Some companies like Fidelity and DFA have applied to the SEC to be able to issue dual share class funds, like Vanguard did. We'll see how that turns out.
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BigJoeAllen
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by BigJoeAllen »

Any tax efficiency difference does not matter in retirement accounts like 401k, 403b, or IRA.


Great thanks, that's exactly what I was wondering!
exodusNH
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by exodusNH »

BigJoeAllen wrote: Wed Jan 10, 2024 7:16 am Thanks for input. I have read that ETF's are slightly more tax efficient than their mirror mutual funds. But not sure if that difference will exist in our 401k accounts.
That doesn't matter in 401ks.

And in any event, the Vanguard mutual funds that have ETF shares classes are just as tax efficient.
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BigJoeAllen
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by BigJoeAllen »

Thanks for confirming exodus.
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by Broken Man 1999 »

Are you 401Ks just using Vanguard funds, or are your 401Ks at Vanguard?

If the 401Ks are just using Vanguard mutual funds, I'm not sure you can convert to ETFs. However, the only way to convert mutual funds to ETFs is to call Vanguard, unless something has recently changed.

At one time you could convert online, but apparently there were a lot of people who wanted to change ETFs back to mutual funds for one reason or another. If you can convert, and do call in, expect to be asked several times if you understand you cannot switch back to a mutual fund without selling your ETFs and buying mutual funds.

I use ETFs almost exclusively for our retirement accounts. Though I have no desire to leave Vanguard, ETFs are very portable, as mentioned in a prior post. As well, one can buy/sell Vanguard ETFs at other brokerages, but sometimes Vanguard mutual funds have a fee to buy elsewhere, or aren't available.

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goingup
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by goingup »

I've been out of the working world for awhile now and didn't realize 401Ks had ETFs. I thought it was all mutual funds.

I think it is still the case that if you set up automatic RMDs withdrawals in an IRA you need to use funds not ETFs.
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by PaunchyPirate »

If you really want to do the switch in a tax sheltered account, you don't really have to call Vanguard. Just sell the mutual fund(s) and buy whatever ETFs you want. There are no tax consequences. Yes, your funds may be out of the market for a day or two, but I don't worry about such swings. You could do it over multiple days/months if you wanted to spread it out.
exodusNH
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by exodusNH »

goingup wrote: Wed Jan 10, 2024 10:55 am I've been out of the working world for awhile now and didn't realize 401Ks had ETFs. I thought it was all mutual funds.

I think it is still the case that if you set up automatic RMDs withdrawals in an IRA you need to use funds not ETFs.
Most don't.
robertalpert
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by robertalpert »

In my vanguard account, selling a vanguard mutual fund results in losing the ability to re-purchase the same vanguard mutual fund within 30 days. But when selling vanguard ETFs, a person can repurchase that same ETF without regard to time period.

It that true / correct?
exodusNH
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by exodusNH »

robertalpert wrote: Wed Jan 10, 2024 2:10 pm In my vanguard account, selling a vanguard mutual fund results in losing the ability to re-purchase the same vanguard mutual fund within 30 days. But when selling vanguard ETFs, a person can repurchase that same ETF without regard to time period.

It that true / correct?
Yes.

With a mutual fund, you're buying directly from Vanguard. The fund manager has to go out and buy shares to cover your purchase. Or, sell shares to cover your withdrawal. This imposes trading costs that the rest of the shareholders bear.

With an ETF, you're buying from a counterparty. The fund doesn't have to deal with acquiring or disposing of shares. The "Authorized Participants" bear that cost and make their money on the bid/ask spread. (So, the people actively buying and selling ultimately bear the cost of trading, which is more fair.)
Makefile
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by Makefile »

goingup wrote: Wed Jan 10, 2024 10:55 am I've been out of the working world for awhile now and didn't realize 401Ks had ETFs. I thought it was all mutual funds.

I think it is still the case that if you set up automatic RMDs withdrawals in an IRA you need to use funds not ETFs.
Mutual funds and collective investment trusts. There may be a brokerage window in which you could buy ETFs.
Truckdriver
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by Truckdriver »

So in my taxable account am I not getting the tax advantages I thought I was by using VT and VTI vs something like a Fidelity ETF?
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by Northern Flicker »

BigJoeAllen wrote: Wed Jan 10, 2024 7:16 am Thanks for input. I have read that ETF's are slightly more tax efficient than their mirror mutual funds. But not sure if that difference will exist in our 401k accounts.
The ETF shares that resulted are not more tax-efficient than the mutual fund shares that were converted. The mutual fund share class of such a fund will have the same tax-efficiency as the ETF shares. The benefit of the ETF shares is a lower expense ratio.

I would tend to convert funds where the ETF has a 3 bp or more advantage on ER. I'd probably hold VTSAX over VTI (1bp difference) in a taxable account if holding the asset at Vanguard. ETFs are not inherently more portable than Vanguard index funds that can be converted to ETF shares because the latter can be converted when porting is done.
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by Northern Flicker »

Truckdriver wrote: Wed Jan 10, 2024 4:11 pm So in my taxable account am I not getting the tax advantages I thought I was by using VT and VTI vs something like a Fidelity ETF?
A Vanguard ETF should be as tax-efficient as a non-Vanguard ETF for the same asset class. Some iShares ex-US ETFs have been more tax-efficient than similar Vanguard ETFs based on percentage of dividends that are qualified, but this is not related to using an ETF structure. It is accomplished by using sampling techniques for portfolio management, and accepting slightly more tracking error risk as a tradeoff for being slightly more tax-efficient.

There may be some corner cases where a Vanguard ETF can be less tax-efficient than a non-Vanguard ETF because of the Vanguard ETF being a share class of a fund with mutual fund share classes, but these have not occurred in the past, and I think should be unlikely to occur in the future.
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Re: Convert VG Mutual Funds to ETF's in Tax Sheltered Accounts?

Post by Northern Flicker »

BigJoeAllen wrote: Wed Jan 10, 2024 7:02 am Question - should I do the same with our 401k accounts, or does it not make much of a difference? Looking for advice on this, thanks.
I doubt that Vanguard can do the conversion for funds held in a 401K.
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