Vanguard Balanced (VBIAX) in taxable account

[GaryA505]

I'm curious about the implications of distributed cap gains for Vanguard Balanced (VBIAX) in a taxable account. I understand it is not considered tax-efficient, but I'm not sure how to quantify that, exactly. I know it will depend a lot on income. I searched on this forum and could find anything, though I thought I saw it once. Has anyone done this analysis or does anyone know where to find one done previously?

[Rocky Mtn Man]

Two immediate thoughts:

1. Vanguard Balanced is only 43% qualified dividends (due to the bond portion), so 57% is taxed as ordinary income. This compares to S&P 500 funds which are 97% qualified.

2.Only 20.77% of the dividends were U.S. Gov't interest (which is exempt from state tax). This is due to the bond portion holding corporate bonds. This will not matter in Florida or Texas, but may in California or Hawaii.

(all this is 2023 data).

You'd be better off holding a broad market fund in taxable and bonds in tax deferred. If you are holding bonds in taxable, try to make them Treasury bonds (high state tax bracket) or municipal bonds (high federal tax bracket).

[GaryA505]

Two immediate thoughts:

1. Vanguard Balanced is only 43% qualified dividends (due to the bond portion), so 57% is taxed as ordinary income. This compares to S&P 500 funds which are 97% qualified.

2.Only 20.77% of the dividends were U.S. Gov't interest (which is exempt from state tax). This is due to the bond portion holding corporate bonds. This will not matter in Florida or Texas, but may in California or Hawaii.

(all this is 2023 data).

You'd be better off holding a broad market fund in taxable and bonds in tax deferred. If you are holding bonds in taxable, try to make them Treasury bonds (high state tax bracket) or municipal bonds (high federal tax bracket).

I understand tax-efficient asset allocation, but I'm not doing that. I may hold only VTMFX or VBIAX in taxable for the simplicity, for my surviving spouse.

[retired@50]

I understand tax-efficient asset allocation, but I'm not doing that. I may hold only VTMFX or VBIAX in taxable for the simplicity, for my surviving spouse.

The choice between the two funds you mention above boils down to what tax bracket you'll be in, or the surviving spouse will be in.

If your marginal rate is 25% or higher, then it's probably better to use VTMFX, which is half municipal bonds. Otherwise, you can live with the inefficiency of VBIAX because you're in a low enough bracket that it won't cause any significant harm.

Regards,

[GaryA505]

I understand tax-efficient asset allocation, but I'm not doing that. I may hold only VTMFX or VBIAX in taxable for the simplicity, for my surviving spouse.

The choice between the two funds you mention above boils down to what tax bracket you'll be in, or the surviving spouse will be in.

If your marginal rate is 25% or higher, then it's probably better to use VTMFX, which is half municipal bonds. Otherwise, you can live with the inefficiency of VBIAX because you're in a low enough bracket that it won't cause any significant harm.

Regards,

We are but 24% marginal this year. For the next few years we will be 22% marginal. After TCJA expires we will be 25%, maybe 28%. Projections show that when I'm gone my wife will be in a higher bracket after two years when her Qualifying Surviving Spouse tax status expires.

[retired@50]

I understand tax-efficient asset allocation, but I'm not doing that. I may hold only VTMFX or VBIAX in taxable for the simplicity, for my surviving spouse.

The choice between the two funds you mention above boils down to what tax bracket you'll be in, or the surviving spouse will be in.

If your marginal rate is 25% or higher, then it's probably better to use VTMFX, which is half municipal bonds. Otherwise, you can live with the inefficiency of VBIAX because you're in a low enough bracket that it won't cause any significant harm.

Regards,

We are but 24% marginal this year. For the next few years we will be 22% marginal. After TCJA expires we will be 25%, maybe 28%. Projections show that when I'm gone my wife will be in a higher bracket after two years when her Qualifying Surviving Spouse tax status expires.

Any state income tax?

Regards,

[GaryA505]

I understand tax-efficient asset allocation, but I'm not doing that. I may hold only VTMFX or VBIAX in taxable for the simplicity, for my surviving spouse.

The choice between the two funds you mention above boils down to what tax bracket you'll be in, or the surviving spouse will be in.

If your marginal rate is 25% or higher, then it's probably better to use VTMFX, which is half municipal bonds. Otherwise, you can live with the inefficiency of VBIAX because you're in a low enough bracket that it won't cause any significant harm.

Regards,

We are but 24% marginal this year. For the next few years we will be 22% marginal. After TCJA expires we will be 25%, maybe 28%. Projections show that when I'm gone my wife will be in a higher bracket after two years when her Qualifying Surviving Spouse tax status expires.

Any state income tax?

Regards,

5%

[retired@50]

I understand tax-efficient asset allocation, but I'm not doing that. I may hold only VTMFX or VBIAX in taxable for the simplicity, for my surviving spouse.

The choice between the two funds you mention above boils down to what tax bracket you'll be in, or the surviving spouse will be in.

If your marginal rate is 25% or higher, then it's probably better to use VTMFX, which is half municipal bonds. Otherwise, you can live with the inefficiency of VBIAX because you're in a low enough bracket that it won't cause any significant harm.

Regards,

We are but 24% marginal this year. For the next few years we will be 22% marginal. After TCJA expires we will be 25%, maybe 28%. Projections show that when I'm gone my wife will be in a higher bracket after two years when her Qualifying Surviving Spouse tax status expires.

Any state income tax?

Regards,

5%

So, this pushes your marginal rate on the taxable bond income from VBIAX to around 27% to 33% (Fed + State) based on the numbers you mention above.

If you held the VTMFX fund which is 50% municipal bonds, then you'd only be paying state income tax on that portion of the bond income.

In your shoes, I'd probably use VTMFX.

Regards,

[GaryA505]

The choice between the two funds you mention above boils down to what tax bracket you'll be in, or the surviving spouse will be in.

If your marginal rate is 25% or higher, then it's probably better to use VTMFX, which is half municipal bonds. Otherwise, you can live with the inefficiency of VBIAX because you're in a low enough bracket that it won't cause any significant harm.

Regards,

We are but 24% marginal this year. For the next few years we will be 22% marginal. After TCJA expires we will be 25%, maybe 28%. Projections show that when I'm gone my wife will be in a higher bracket after two years when her Qualifying Surviving Spouse tax status expires.

Any state income tax?

Regards,

5%

So, this pushes your marginal rate on the taxable bond income from VBIAX to around 27% to 33% (Fed + State) based on the numbers you mention above.

If you held the VTMFX fund which is 50% municipal bonds, then you'd only be paying state income tax on that portion of the bond income.

In your shoes, I'd probably use VTMFX.

Regards,

Thanks.

Also, one of the downsides for VBIAX I've been thinking about is the lumpy year-to-year cap gains distributions (all in December I think). This makes retirement income planning (withdrawal planning) more complicated. Unless there was some clear, un-ignorable, advantage to VBIAX this would tip the scales.

[sycamore]

...Unless there was some clear, un-ignorable, advantage to VBIAX this would tip the scales.

VTMFX has a lower stock allocation at 50% (*) versus VBIAX at 60%. So slightly higher volatility and slightly higher expected return for VBIAX. Some people (not necessarily me) would say the potential higher expected returns of VBIAX is a clear advantage.

But it's best to consider your taxable account in context of your whole portfolio. If the taxable account is not very big then I think the lower stock allocation is something you could ignore.

E.g. if taxable is 30% of the portfolio, that's only a 30% x 10% = 3% lower stock allocation. That 3% stock allocation won't make or break things.

(*) Technically I think VTMFX is required to restrain itself under 50% stock, so maybe it's just 49% ?

[GaryA505]

...Unless there was some clear, un-ignorable, advantage to VBIAX this would tip the scales.

VTMFX has a lower stock allocation at 50% (*) versus VBIAX at 60%. So slightly higher volatility and slightly higher expected return for VBIAX. Some people (not necessarily me) would say the potential higher expected returns of VBIAX is a clear advantage.

But it's best to consider your taxable account in context of your whole portfolio. If the taxable account is not very big then I think the lower stock allocation is something you could ignore.

E.g. if taxable is 30% of the portfolio, that's only a 30% x 10% = 3% lower stock allocation. That 3% stock allocation won't make or break things.

(*) Technically I think VTMFX is required to restrain itself under 50% stock, so maybe it's just 49% ?

Yes, I have considered my overall AA if taxable was all VTMFX. My taxable account is about 40% of total assets. So to reach an overall target AA of 60/40 I would need about 67% equities in tax-deferred and Roth. If I held VBIAX in tax-deferred and Roth my overall AA would still be 56/44. Roth is small, but 100% stock in Roth would almost get me to 60/40 (about 58/42). And my taxable account will probably be spent down faster than the others, so there's that.

I think VTMFX usually 49% or 48% equities.

[Lastrun]

One thought.

I looked at VTMFX a while back for your same purposes, ease of use for the surviving spouse. One thing I noticed, when Portfolio Visualizer was still fully available , is that you could emulate this fund using just the Vanguard Total Stock and muni bond funds (think 50% VTI and 50% VTEB using the ETF tickers).

The idea is to tell the spouse to withdraw whatever is needed to keep them at 50/50 and you should get similar tax treatment to VTMFX and hopefully this is simple enough for the surviving spouse to maintain.

[GaryA505]

One thought.

I looked at VTMFX a while back for your same purposes, ease of use for the surviving spouse. One thing I noticed, when Portfolio Visualizer was still fully available , is that you could emulate this fund using just the Vanguard Total Stock and muni bond funds (think 50% VTI and 50% VTEB using the ETF tickers).

The idea is to tell the spouse to withdraw whatever is needed to keep them at 50/50 and you should get similar tax treatment to VTMFX and hopefully this is simple enough for the surviving spouse to maintain.

Yes you could, and you could also use VTSAX & VWIUX to allow for automatic recurring withdrawals to be set up. While this is true, it does require the knowledge and willingness to use withdrawals to rebalance.