Vanguard LifeStrategy Funds tax distributions

main article: Vanguard LifeStrategy Funds

The Vanguard LifeStrategy Funds are questionable candidates for placement in taxable accounts. The funds are often recommended as a simple one fund solution for implementing a diversified portfolio consisting of the following asset class funds: total market domestic stock, international stock, and investment grade bond index funds; investment grade short term bond fund; along with an allocation into the Vanguard Asset Allocation fund, which provides access to a degree of  tactical asset allocation. LifeStrategy Funds are usually singled out for use in tax deferred (employer provided or individual Traditional IRA accounts) or tax-free (Roth IRA) accounts. The funds are also common investment options in many 529 College Savings Plans.

Distributions
The following tables provide long term data on each LifeStrategy fund's history of both dividend and capital gains distributions. As fund of funds, a LifeStrategy fund's taxable distributions come from two sources:
 * 1) Income and gains distributions received from the underlying funds.
 * 2) The sales which the Lifestrategy fund makes when rebalancing the fund.

LifeStrategy Income Fund
Note:
 * For current tax attributes and distributions see Vanguard

LifeStrategy Conservative Growth Fund
Note:
 * For current tax attributes and distributions see Vanguard

LifeStrategy Moderate Growth Fund
Note:
 * For current tax attributes and distributions see Vanguard

LifeStrategy Growth Fund
Note:
 * For current tax attributes and distributions see Vanguard

Equity capital gains
Vanguard LifeStrategy Funds can distribute taxable gains if the underlying funds distribute gains and if the fund itself realizes gains when rebalancing or retargeting a fund's strategic asset allocation. Historically, the funds have realized substantive gains when they have not had the benefit of loss carryforwards (1994-2001) and when the underlying funds it invests in have not had loss carryforwards (particularly applicable to the distribution history of the Vanguard Asset Allocation Fund). The funds' two underlying equity funds are very tax efficient.


 * Vanguard Total Stock Market Index Fund
 * Vanguard Total International Stock Index Fund.

Equity dividends
LifeStrategy Funds pass along the tax-preferenced qualified dividends distributed by the underlying equity index funds. The Total Market Index Fund distributes 100% qualified dividends; International index funds distribute roughly 75% qualified dividends; the Asset Allocation fund distributes roughly 75% qualified dividends. The actual portion of the TRF dividend that is qualified depends on the strategic equity allocation of the fund.

Foreign tax credit
As fund of funds, LifeStrategy Funds are not eligible for the foreign tax credit

Bond capital gains
Vanguard LifeStrategy Funds distribute capital gains distributions received from underlying bond funds. Currently these funds include the Vanguard Total Bond Market Index II Fund (since 2009; prior to 2009 the funds invested in the Vanguard Total Bond Market Fund) and for the Income and Conservative Growth funds the Vanguard Short Term Investment Grade Bond Fund. These bond funds occasionally distribute relatively small short term and long term gains. Future received gains can be to be offset by fund loss carryforwards.

Bond dividends
Vanguard TRF's receive and distribute taxable dividend income from underlying bond funds. This income is taxable at marginal income tax rates. The funds receive a modest tax preference for dividends received from treasury securities, which are exempt from state and local income tax. The dividend yield of a given LifeStrategy Fund is dependent on the fund's strategic asset allocation.