Need Recommendations For Balanced Fund, Taxable Account

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hotajax
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Need Recommendations For Balanced Fund, Taxable Account

Post by hotajax »

Can you pls share your ideas for balanced fund in Taxable account?
An in-law asked for my help in selecting ONE Vanguard fund for for distribution to his heirs. He's in his 80's, has serious health issues, and doesn't want to be doing financial research. I was thinking about VTMFX and VWIAX. I ruled out VWENX. Are there others I should be researching as well? He can meet the minimums for Admiral level funds whichever way he turns. In a 35% tax bracket. Thanks in advance.
theorist
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by theorist »

The “tax cost ratio” of the tax managed balanced fund (VTFMX) is substantially less than that of Wellesley (the other fund you list). This is because Wellesley focuses on dividend stocks and taxable bonds, both of which are less than ideal for a taxable account.

VTFMX also has 50% stock vs a bit under 40% for Wellesley, and VTFMX is purely domestic stocks. (Wellesley can hold whatever the active managers select within bounds, and they tend to select value tilted mostly US stocks with about 15% international.)

So there are many differences, with the most significant here being the tax cost issue. I’d probably go with VTFMX for a single balanced fund in a taxable account. You’re not missing many other options that would change this (since almost all balanced funds are tax inefficient!).
southernlucky
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by southernlucky »

I am a big fan of balanced funds and believe they are the nirvana of simplicity (see my signature below as I eat what I cook). Just set it and forget it. No rebalancing ever…just leave it alone to do its thing. This benefit outweighs the tax inefficiency in a taxable account imho provided that they (a) pick index based balanced funds and (b) select a stock/bond allocation that they can stick with forever. Therefore, I would stay away from the active fund VWIAX Wellesley as it throws off large cap gains distributions which would be annoying come tax time especially in a 35% bracket. I would only hold Wellesley in a tax deferred account. The VTMFX tax managed balanced fund with its 49% stocks and 51% intermediate term municipal bonds sounds like a good choice given the high tax bracket *if* its stock/bond allocation is suitable for their risk tolerance and timeframe and they want no international holdings. Otherwise, If more global stocks or bonds are desired then they could also consider iShares balanced index ETF funds AOK (30/70), AOM (40/60), AOR (60/40) or AOA (80/20) which are low cost and have not issued any cap gains since 2009 iirc. Vanguard’s comparable LifeStrategy funds and VBIAX Balanced (60/40) fund are other good, low cost index based options too but they have distributed some small cap gains from time to time (due to their automatic rebalancing).

Be sure to search the wiki and other posts on this site for more helpful information regarding these balanced funds. Good luck!
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peteyboy
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by peteyboy »

VWIAX (and VWENX) pays out a hefty cap gains distribution most every year - much more than any of the other Vanguard funds mentioned above.
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Wiggums
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by Wiggums »

Consider VBIAX - Vanguard balanced index fund admiral
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retiredjg
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by retiredjg »

Vanguard Tax Managed Balanced fund is the only balanced fund I would consider for a taxable account in the 35% tax bracket.
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hotajax
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by hotajax »

Thanks, much appreciated. Will pass it on.
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Hacksawdave
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by Hacksawdave »

Taxwise, the VTFMX fund would be best suited for his high tax bracket. Is the intent to leave VTFMX to the heirs in a form of a trust when he passes? I ask because the heirs themselves may not want to keep the holding.

If the goal is to select the balanced fund for his benefit in his remaining years, then VTFMX makes sense. I see no capital gains distributions in the last 10 years, and the income stream seems to be steady and consistent.

I have two balanced funds myself. VWENX in the Roth, and VGSTX STAR in taxable. Both would be a poor fit for his circumstances.
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ruralavalon
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by ruralavalon »

I also suggest Vanguard Tax-Managed Balanced Adm (VTMFX).
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hotajax
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by hotajax »

Done deal, made purchases on behalf of two relatives. Thanks for your information.
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grabiner
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by grabiner »

retiredjg wrote: Mon Mar 20, 2023 7:46 am Vanguard Tax Managed Balanced fund is the only balanced fund I would consider for a taxable account in the 35% tax bracket.
Agreed. For this purpose, it is the right single fund assuming that its allocation of 49% stock is appropriate.

And for this purpose, it avoids my usual criticism of this fund. If you have a balanced fund and want to sell bonds (to hold fewer bonds, or a different type of bonds, or bonds in a different account), then you have to sell stocks at the same time and likely pay capital-gains tax. But the in-law is not likely to need to sell the bonds, and the heirs can switch to a different fund when they inherit it.
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the_wiki
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by the_wiki »

I might look at iShares Core Allocation ETF funds:

https://www.ishares.com/us/literature/p ... -brief.pdf
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grabiner
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by grabiner »

theorist wrote: Mon Mar 20, 2023 1:26 am The “tax cost ratio” of the tax managed balanced fund (VTFMX) is substantially less than that of Wellesley (the other fund you list). This is because Wellesley focuses on dividend stocks and taxable bonds, both of which are less than ideal for a taxable account.
Tax cost ratio is not the right measure here. The tax cost of a fund is the difference between pre-tax and after-tax returns, so it is zero for municipal bonds. However, municipal bonds have a cost for avoiding the tax, as they yield less than taxable bonds of comparable risk. My rule of thumb is that the tax cost of munis is 1/3 of the yield (and thus muni and taxable bonds break even at a 25% tax rate.)

And as a separate issue, the published tax costs assume the highest federal tax and no state tax, which may not match your situation. If you are in a moderate tax bracket in a high-tax state, you have less difference between qualified and non-qualified dividends, and a significantly lower tax cost on Treasury bonds than on other taxable bonds.

But it is still true that Tax-Managed Balanced is the most tax-efficient fund in a high tax bracket, while Wellesley is tax-inefficient in most brackets. (In lower brackets, Vanguard LifeStrategy Conservative Growth is comparable to Wellesley but more tax-efficient.)
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theorist
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by theorist »

grabiner wrote: Wed Mar 22, 2023 11:34 pm
theorist wrote: Mon Mar 20, 2023 1:26 am The “tax cost ratio” of the tax managed balanced fund (VTFMX) is substantially less than that of Wellesley (the other fund you list). This is because Wellesley focuses on dividend stocks and taxable bonds, both of which are less than ideal for a taxable account.
Tax cost ratio is not the right measure here. The tax cost of a fund is the difference between pre-tax and after-tax returns, so it is zero for municipal bonds. However, municipal bonds have a cost for avoiding the tax, as they yield less than taxable bonds of comparable risk. My rule of thumb is that the tax cost of munis is 1/3 of the yield (and thus muni and taxable bonds break even at a 25% tax rate.)

And as a separate issue, the published tax costs assume the highest federal tax and no state tax, which may not match your situation. If you are in a moderate tax bracket in a high-tax state, you have less difference between qualified and non-qualified dividends, and a significantly lower tax cost on Treasury bonds than on other taxable bonds.

But it is still true that Tax-Managed Balanced is the most tax-efficient fund in a high tax bracket, while Wellesley is tax-inefficient in most brackets. (In lower brackets, Vanguard LifeStrategy Conservative Growth is comparable to Wellesley but more tax-efficient.)
This makes sense. Thanks for the correction!
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by GaryA505 »

Can anyone clarify the differences in distributions between VTMFX and VBIAX?

It appears to me that:
All distributions from VTMFX are shown by Vanguard as "income" but are tax-exempt.
Distributions from VBIAX are "income", "Long-term Capital Gain", and "Short-term Capital Gain", all taxable.

Is that correct?
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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grabiner
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by grabiner »

GaryA505 wrote: Sun Apr 23, 2023 1:52 pm Can anyone clarify the differences in distributions between VTMFX and VBIAX?

It appears to me that:
All distributions from VTMFX are shown by Vanguard as "income" but are tax-exempt.
Distributions from VBIAX are "income", "Long-term Capital Gain", and "Short-term Capital Gain", all taxable.

Is that correct?
All balanced funds distribute dividends on both stocks and bonds, which are in the "income" category; the tax treatment varies.

For VTMFX (Tax-Managed Balanced Fund), the bond dividends are on municipal bonds, so they are exempt from federal tax. The stock dividends should be almost all qualified, and thus taxable but at a lower rate (15% in most brackets).

For VBIAX (Balanced Index Fund), the bond dividends are on taxable bonds, so they are subject to federal tax at your full rate (but the Treasury portion is exempt from state tax in most states). The stock dividends are again almost all qualified.

Any fund can distribute long-term capital gains taxed at the lower rate, or short-term capital gains taxed at your full rate. Balanced Index Fund happens to have distributed some capital gains, probably because it needs to sell stock to rebalance when the stock market rises. I don't think Tax-Managed Balanced Fund has ever distributed a capital gain.
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Re: Need Recommendations For Balanced Fund, Taxable Account

Post by GaryA505 »

grabiner wrote: Sun Apr 23, 2023 2:06 pm
GaryA505 wrote: Sun Apr 23, 2023 1:52 pm Can anyone clarify the differences in distributions between VTMFX and VBIAX?

It appears to me that:
All distributions from VTMFX are shown by Vanguard as "income" but are tax-exempt.
Distributions from VBIAX are "income", "Long-term Capital Gain", and "Short-term Capital Gain", all taxable.

Is that correct?
All balanced funds distribute dividends on both stocks and bonds, which are in the "income" category; the tax treatment varies.

For VTMFX (Tax-Managed Balanced Fund), the bond dividends are on municipal bonds, so they are exempt from federal tax. The stock dividends should be almost all qualified, and thus taxable but at a lower rate (15% in most brackets).

For VBIAX (Balanced Index Fund), the bond dividends are on taxable bonds, so they are subject to federal tax at your full rate (but the Treasury portion is exempt from state tax in most states). The stock dividends are again almost all qualified.

Any fund can distribute long-term capital gains taxed at the lower rate, or short-term capital gains taxed at your full rate. Balanced Index Fund happens to have distributed some capital gains, probably because it needs to sell stock to rebalance when the stock market rises. I don't think Tax-Managed Balanced Fund has ever distributed a capital gain.
Oh yes thanks, now I remember researching this a couple of years ago. VBIAX (Balanced Index) occasionally distributes both short-term and long-term cap gains, but VTMFX (Tax Managed Balanced) never has. Andthe QDI varies from year-to-year for either.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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