The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: lhamo on December 25, 2021, 12:01:12 PM
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I was poking around Vanguard last night trying to figure out what year end distributions are going to be and on my target date funds they are CRAZY! VFORX is supposed to be paying out $7.67/share in capital gains + a $1.02 dividend. Luckily I have these funds in my retirement accounts so I won't take a tax hit, but still trying to get my brain around it.
Anybody else dealing with year end surprises on their accounts?
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I have VTTHX in a taxable account and was also surprised by the upcoming capital gains payout, which is about 30X the amount that it has paid out in prior years. See my recent post "Target Date Retirement Fund in Taxable Account - Bad Idea?" for some helpful responses with insights on why the capital gains are so much higher than usual this year and some ideas for what to do if you have a fund like this in a taxable account.
In some ways this is a good problem to have, but it's still a problem. My taxable income for 2021 is going to be about 7X what I estimated earlier, so in early January I'll need to compute my actual income and tax liability and make revised Federal and State fourth quarter tax payments. Longer-term, I'm planning to gradually reduce my VTTHX holding in the taxable account by redirecting the dividends and capital gains and selling any VTTHX shares that I can sell at a loss or around break-even. I plan to re-invest this money in 60% VTSAX and 40% VTIAX in the taxable account (same ratio of US to international stock that Vanguard uses in their Target Date funds), then buy bonds in retirement accounts to get to my target asset allocation. But it will be hard to get rid of VTTHX in the taxable account quickly without a big tax bill so this will probably be a gradual process.
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I have a new appreciation for your quandry in that thread! I have a big chunk of VTTHX, too -- enough that it is going to throw off 50k+ in capital gains. Thankfully mine is in a retirement account. If it were in my brokerage account it would have really messed me up....
I'm looking at a nominal 100k+ in year end distributions on my retirement accounts. Of course it is all paper gains, because the share price will drop correspondingly. I'm glad I figured out how that process works a few years ago because the immediate boost followed by the drop is always a shocker....
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I have a new appreciation for your quandry in that thread! I have a big chunk of VTTHX, too -- enough that it is going to throw off 50k+ in capital gains. Thankfully mine is in a retirement account. If it were in my brokerage account it would have really messed me up....
I'm looking at a nominal 100k+ in year end distributions on my retirement accounts. Of course it is all paper gains, because the share price will drop correspondingly. I'm glad I figured out how that process works a few years ago because the immediate boost followed by the drop is always a shocker....
It’s the phasing of sometimes seeing the drop before the boost that causes folks to freak out…
I’ve been investing in a taxable account for about 28 years, and have paid a lot of taxes on distributions. Hopefully that experience makes the drawdown phase a bit easier to take.
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Ouch, yeah, that's pretty brutal. You can see the final estimates here (https://personal.vanguard.com/pdf/FAPYEEST_112021_RIG_Final.pdf) on page 5. Definitely a good reminder of why it's best to avoid target date funds in taxable.
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Thanks for sharing!
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Ouch, yeah, that's pretty brutal. You can see the final estimates here (https://personal.vanguard.com/pdf/FAPYEEST_112021_RIG_Final.pdf) on page 5. Definitely a good reminder of why it's best to avoid target date funds in taxable.
I don't think the problem is so much that it's a target date fund, it's that the fund saw a net outflow of cash representing more than a quarter of the fund's present value. They had no choice but to sell assets to pay the people leaving the fund and that resulted in a capital gain. It could happen with any of Vanguard's funds if enough people sell out.
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Is it true to say that you won't see this effect in exchange traded funds?
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You can check Canada ETF distributions (estimated) here:
https://www.newswire.ca/news-releases/vanguard-investments-canada-announces-estimated-2021-annual-capital-gains-distributions-for-the-vanguard-etfs-r--879189603.html (https://www.newswire.ca/news-releases/vanguard-investments-canada-announces-estimated-2021-annual-capital-gains-distributions-for-the-vanguard-etfs-r--879189603.html)
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Is it true to say that you won't see this effect in exchange traded funds?
I think this is correct they have a special rule built for them. But I'd like someone smarter to weigh in.
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Ouch, yeah, that's pretty brutal. You can see the final estimates here (https://personal.vanguard.com/pdf/FAPYEEST_112021_RIG_Final.pdf) on page 5. Definitely a good reminder of why it's best to avoid target date funds in taxable.
If you click through to the link terran posted you'll see the ETF distributions (they are in the final section of the pdf). Minimal distributions and very few funds with any capital gains. Nothing similar to the target date funds.
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OP: For those of us with VFORX in an IRA, this is very nice news. Had no idea, as I don’t pay attention to it. Thanks for the info!
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Is it true to say that you won't see this effect in exchange traded funds?
I think this is correct they have a special rule built for them. But I'd like someone smarter to weigh in.
Yeah it's all about how each type of fund works. A mutual fund is a pot of money that varies in size as people buy in or sell out. You're never trading your mutual fund shares with another person directly; shares are created when people buy in and destroyed when people sell out. ETFs work differently: you're trading your share on an exchange. For you to sell your share someone else has to buy it. Large brokerages can create new shares by trading in the right number of shares of the underlying stocks (which they will do if they see the ETF is trading above its underlying value) and they can also destroy a basket of ETF shares and take the underlying stock back if they see the ETF is underpriced relative to the rest of the market.
With either type of fund if they trade stock within the fund they have to pay out any gains as cash and the investor is taxed accordingly. This will commonly happen in actively managed funds where they're trading stock all the time according to the manager's strategy. With index funds there's much less trading, so it's uncommon to see much of a capital gain distribution from one. The exception is if an index mutual fund shrinks they have no choice but to sell shares to pay the investors leaving the fund. They can try to sell higher-basis stock to minimize this, but with how much the market has increased in recent years there's only so much they can do to control the distribution when there's a significant outflow of investment from the fund. Index ETFs won't have this problem because the fund doesn't have to sell shares for this reason.
Furthermore I think Vanguard has a process where they link the mutual fund and ETF shares together somehow. They push the lower-basis shares into the ETF (and then into the hands of big brokerages when they destroy ETF shares), leaving less unrealized gain for the mutual fund holders. Unfortunately Vanguard doesn't have ETF versions of their target date funds, so they can't employ that strategy here.
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OP: For those of us with VFORX in an IRA, this is very nice news. Had no idea, as I don’t pay attention to it. Thanks for the info!
Why would this be nice news? Fund distributes $10 per share and share price drops by $10. Net nothing.
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OP: For those of us with VFORX in an IRA, this is very nice news. Had no idea, as I don’t pay attention to it. Thanks for the info!
Why would this be nice news? Fund distributes $10 per share and share price drops by $10. Net nothing.
Those with the target date fund in taxable will owe tax on the distribution.
... ETFs work differently: you're trading your share on an exchange. For you to sell your share someone else has to buy it. Large brokerages can create new shares by trading in the right number of shares of the underlying stocks (which they will do if they see the ETF is trading above its underlying value) and they can also destroy a basket of ETF shares and take the underlying stock back if they see the ETF is underpriced relative to the rest of the market.
It's actually not the brokerage, but a designated list of institutional investors motivated by profit. When their profit is enough, they use derivatives to lock in prices, and then transact a huge block of shares (for VTI it's 100,000 shares or about $24 million worth). If the price is too high, they gather the stocks that make up the ETF, create shares, and sell those shares at a profit. Their act of buying stocks and selling ETF shares drives the prices closer together.
With mutual funds that don't use Vanguard's patented approach, it's a pool of assets. If Vanguard naively held 100% stocks, any selling would require it to sell and realize capital gains. There was actually an S&P 500 fund run by a bank that did this, and suffered in it's first year in existence. But most mutual funds aren't naive, and they keep a mixture of stock, cash and derivatives. They might hold 97% stock, 1% 3x S&P 500, and 2% cash. Most of the time, redemptions come from cash. They can adjust derivatives to keep 100% stock exposure. But sometimes the selling is excessive, and they're forced to sell underlying assets.
A stock + bond fund also has another source of volatility: rebalancing. If stocks drop too far, they might be forced to rebalance. And when stocks recover, to rebalance again.
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OP: For those of us with VFORX in an IRA, this is very nice news. Had no idea, as I don’t pay attention to it. Thanks for the info!
Why would this be nice news? Fund distributes $10 per share and share price drops by $10. Net nothing.
Those with the target date fund in taxable will owe tax on the distribution.
Of course, but August26th specifically said IRA. Trying to see if they don’t understand how distributions work, so they could be informed about it.
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Where are you seeing the this information? I don’t see anything listed for 2021 yet.
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Another poster posted this link above:
https://personal.vanguard.com/pdf/FAPYEEST_112021_RIG_Final.pdf
Target funds are on page 5 of the pdf. VTSAX is on page 6. VTI, etc are in the ETF section
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Ouch, yeah, that's pretty brutal. You can see the final estimates here (https://personal.vanguard.com/pdf/FAPYEEST_112021_RIG_Final.pdf) on page 5. Definitely a good reminder of why it's best to avoid target date funds in taxable.
I don't think the problem is so much that it's a target date fund, it's that the fund saw a net outflow of cash representing more than a quarter of the fund's present value. They had no choice but to sell assets to pay the people leaving the fund and that resulted in a capital gain. It could happen with any of Vanguard's funds if enough people sell out.
Don't ETFs, and by extension vanguard index funds that have an ETF partner (which doesn't include their funds of funds) avoid this issue?
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Ouch, yeah, that's pretty brutal. You can see the final estimates here (https://personal.vanguard.com/pdf/FAPYEEST_112021_RIG_Final.pdf) on page 5. Definitely a good reminder of why it's best to avoid target date funds in taxable.
I don't think the problem is so much that it's a target date fund, it's that the fund saw a net outflow of cash representing more than a quarter of the fund's present value. They had no choice but to sell assets to pay the people leaving the fund and that resulted in a capital gain. It could happen with any of Vanguard's funds if enough people sell out.
Don't ETFs, and by extension vanguard index funds that have an ETF partner (which doesn't include their funds of funds) avoid this issue?
Here's an article summarizing Vanguard's process (https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985). When a redemption is settled in stock instead of cash, no tax is due immediately. I presume the cost basis follows the stock in this case. ETFs typically redeem their shares in stock, giving the ETF owner the ability to get rid of whichever shares have the lowest cost basis (and highest unrealized gain). Mutual funds redeem in cash, so net outflows mean that they need to sell shares and distribute any gains to remaining investors. Vanguard's special patented process is they link an ETF (such as VTI) to a mutual fund (such as VTSAX). They can shift the lowest-basis shares from the mutual fund into the ETF, so when someone redeems ETF shares they can get rid of the stock with the maximum tax liability.
The mutual fund is still its own entity with its own shares. Just because they've optimized it so that the mutual fund owns the stock with the highest basis doesn't mean it's impossible for a selloff to cause a capital gains distribution; it's just much less likely. A small selloff can probably be mitigated by doing some loss harvesting in tandem with selling shares for a gain, but at some point I'd assume they'd run out of losers and have no choice but to sell some stock that had gained.
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Friends don't let friends buy mutual funds in taxable accounts.
ETFs, control the gains (for now as Democrats are after punishing Bezos, Gates, Musk who hold trillions in ETFs???). I thought Democrats wanted to tax the rich. All the wealthy investors piling into low-cost index ETFs ;)
https://www.cnbc.com/2021/09/16/democratic-plan-would-close-tax-break-on-exchange-traded-funds.html
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Perhaps I do not understand, as JoePublic3.14 mentioned.
If this is all happening in an IRA, I’m only taxed when I withdraw funds someday many years from now… correct? If that is the case and I withdraw a long time from now and am only taxed at my normal tax rate at the time I withdraw, why wouldn’t I be happy about dividends, etc. NOW that only make the account grow?
Educate me. Thank you.
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Perhaps I do not understand, as JoePublic3.14 mentioned.
If this is all happening in an IRA, I’m only taxed when I withdraw funds someday many years from now… correct? If that is the case and I withdraw a long time from now and am only taxed at my normal tax rate at the time I withdraw, why wouldn’t I be happy about dividends, etc. NOW that only make the account grow?
Educate me. Thank you.
Dividends and capital gains distributions don't make the account grow. When a company pays dividends, that money comes from somewhere: the company's bank account. This payout reduces the value of the company, and thereby reduces the value of the shares. Let's imagine someone founds a company that will just hold cash in a checking account: they issue 100 shares for $100 apiece. The company has $10,000 in its bank account. They decide they'll pay a $2 per share dividend. Their bank account is down to $9,800, still with 100 shares outstanding, so each share is now worth $98. Instead of having a $100 share like you did before the dividend, now you have a $98 share and $2 of cash. Obviously you wouldn't invest in a company that just has a checking account. You expect them to have some business operations that make the value of the stock go up, but the principle is the same: the dividend comes out of the value of the shares and is a completely neutral thing for the overall value of your portfolio.
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Another poster posted this link above:
https://personal.vanguard.com/pdf/FAPYEEST_112021_RIG_Final.pdf
Target funds are on page 5 of the pdf. VTSAX is on page 6. VTI, etc are in the ETF section
I see it now.
Weird how the capital gains are so much higher than the closely related 2035 AND 2045 funds.
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Perhaps I do not understand, as JoePublic3.14 mentioned.
If this is all happening in an IRA, I’m only taxed when I withdraw funds someday many years from now… correct? If that is the case and I withdraw a long time from now and am only taxed at my normal tax rate at the time I withdraw, why wouldn’t I be happy about dividends, etc. NOW that only make the account grow?
Educate me. Thank you.
SeattleCyclone explained it, but please ask more questions if it is not clear. We are all trying to keep learning, so don’t feel bad.
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Jumping in to the discussion involving August 26th. As a poster wrote, if dividends reduce the value of a share, why invest in any fund or stock that issues dividends? Is this a momentary concern for rapid traders and not for buy and hold types like myself?
My dividends are reinvested in the fund, hence more shares for me. Over time it is hoped the value of the shares increase meaning more $$. Is my thinking wrong?
Finally, I am not understanding the capital gains implication in this discussion. Wild guesses here: Are they taxes per share that must be paid, or a further dividend to the seller? Excuse my novice question!
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Jumping in to the discussion involving August 26th. As a poster wrote, if dividends reduce the value of a share, why invest in any fund or stock that issues dividends? Is this a momentary concern for rapid traders and not for buy and hold types like myself?
Dividends are a way for a company to get profits into the hands of investors. Another way is for the company to retain the profits (reinvesting the money into growing the business) and investors can sell their shares for a gain. There are various reasons why one or the other option might be desirable for different companies and different investors. Within a taxable account you might generally have a small bias against dividends because dividends take away your choice about when to realize the income on your own taxes. It's often better to let that gain ride and compound until later. Within a retirement account it's more of a neutral thing that doesn't make much difference either way. Whether you get cash that you then reinvest to buy more shares (and keep the value of your investment the same as it was before the dividend), or whether the company just lets the shares go up, it's mostly irrelevant.
My dividends are reinvested in the fund, hence more shares for me. Over time it is hoped the value of the shares increase meaning more $$. Is my thinking wrong?
Once again, the dividends aren't magic money. They come out of the value of the fund. If you immediately reinvest your dividend right back into the fund, it's little different than if there had been no dividend at all. The value of your resulting investment is the same either way, minus any taxes you pay on the dividend.
Finally, I am not understanding the capital gains implication in this discussion. Wild guesses here: Are they taxes per share that must be paid, or a further dividend to the seller? Excuse my novice question!
When a mutual fund sells shares for a gain they have to track how much that gain was. They are required to pay cash equivalent to this amount out to their shareholders at the end of the year. You might get two payments: a dividend and a capital gain payment. The tax treatment of these payments is very similar.
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This has been educational - thanks very much.
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Thank you!
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I'm appreciating this thread today, as my target date fund fell 11.6% for no apparent reason . . .
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I have a new appreciation for your quandry in that thread! I have a big chunk of VTTHX, too -- enough that it is going to throw off 50k+ in capital gains. Thankfully mine is in a retirement account. If it were in my brokerage account it would have really messed me up....
I'm looking at a nominal 100k+ in year end distributions on my retirement accounts. Of course it is all paper gains, because the share price will drop correspondingly. I'm glad I figured out how that process works a few years ago because the immediate boost followed by the drop is always a shocker....
It’s the phasing of sometimes seeing the drop before the boost that causes folks to freak out…
You were right about the order -- the drop just happened today and my accounts are over 100k lower than they were yesterday when the reinvested shares will bump them back up.
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I'm appreciating this thread today, as my target date fund fell 11.6% for no apparent reason . . .
That's the drop in share price to account for the payouts -- those will hit your account tomorrow in additional shares (if you have automatic reinvesting turned on) or cash in your money market fund.
I am glad I figured out ahead of time how big the hit was going to be, though. Really feel for anybody who has these funds in taxable accounts who wasn't aware this was coming....
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I'm appreciating this thread today, as my target date fund fell 11.6% for no apparent reason . . .
That's the drop in share price to account for the payouts -- those will hit your account tomorrow in additional shares (if you have automatic reinvesting turned on) or cash in your money market fund.
I am glad I figured out ahead of time how big the hit was going to be, though. Really feel for anybody who has these funds in taxable accounts who wasn't aware this was coming....
I had no idea this level of realized gains was a thing. I'm scrubbing all my holdings to make sure I've prioritized selling any remaining mutual funds once I have room for the capital gains tax hit.
I hadn't found a lot of good math posts contrasting dividends and realized gains for equivalent ETF and Mutual Funds . . . I can't be the only person relying on fund pages, bogleheads, and Investopedia. Anyone have recommendations?
Tried to figure out the ETF vs mutual fund tax efficiency question years ago - and I obviously didn't do it well enough!
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I am an unsophisticated investor so please bear with me. I’ve read the thread but I still don’t understand it all. I have a tIRA and Roth in the 2030 fund, just saw the drop (down $50K) and came here looking for an explanation. What is going to be the actual impact for me in these accounts? And maybe more importantly, I have $100k in the equivalent fund at T.Rowe Price, but that one is in a taxable account. Is the same thing going to happen over there? Thanks for your help ans don’t worry about insulting me with very simple explanations! :)
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With your Vanguard funds, if you have the accounts set up to reinvest dividends and capital gains you will see a bump in both the number of shares you have in the accounts and the value of the account after those transactions register tomorrow. Account value should go back to close to what it was yesterday. There are no tax implications because this is happening inside your tax sheltered retirement accounts.
If you have these Vanguard target date funds in your taxable brokerage account at TRP then the dividends and capital gains are going to be taxable. If they are different funds the gain and associated taxes might not be so bad, though.
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I'm appreciating this thread today, as my target date fund fell 11.6% for no apparent reason . . .
Right on. I had logged onto my account a few mins ago to update my year-end spreadsheets and saw -13.6% and was like WTF???
Glad this forum exists (for many reasons)
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As someone who holds some target-date funds in a retirement account, I'm planning to just not check my balances for a week or so. For mental health. :-)
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I am an unsophisticated investor so please bear with me. I’ve read the thread but I still don’t understand it all. I have a tIRA and Roth in the 2030 fund, just saw the drop (down $50K) and came here looking for an explanation. What is going to be the actual impact for me in these accounts? And maybe more importantly, I have $100k in the equivalent fund at T.Rowe Price, but that one is in a taxable account. Is the same thing going to happen over there? Thanks for your help ans don’t worry about insulting me with very simple explanations! :)
You need to go check your transaction history at TRP. That will show how much you will be claiming come tax time. I think all TRP distributions are complete.
Check it out and come back with more questions.
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Yep, this hit me this year, I did have a chunk of a vanguard target retirement fund in Taxable from long ago that due to gains never seriously considered getting rid of (ETFs were not really a thing when I bought this...or maybe they were and I didn't know the difference, cant really recall). I remember buying it just so I wouldn't be tempted to be market timing my re-balancing, which I know I otherwise probably would, and it being Vanguard the fees were so low anyway.
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I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."
How hard is that? Would save some headaches.
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I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."
How hard is that? Would save some headaches.
Vanguard is an investment firm which provides investments. What you're describing is tax advice, which Vanguard does not provide but can be found from a tax professional such as a CPA.
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But is it actually a target date fund issue? If a quarter of the holders of any fund decide to leave for the ETF equivalent, wouldn't that have the same result?
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Perhaps I do not understand, as JoePublic3.14 mentioned.
If this is all happening in an IRA, I’m only taxed when I withdraw funds someday many years from now… correct? If that is the case and I withdraw a long time from now and am only taxed at my normal tax rate at the time I withdraw, why wouldn’t I be happy about dividends, etc. NOW that only make the account grow?
Educate me. Thank you.
Dividends and capital gains distributions don't make the account grow. When a company pays dividends, that money comes from somewhere: the company's bank account. This payout reduces the value of the company, and thereby reduces the value of the shares. Let's imagine someone founds a company that will just hold cash in a checking account: they issue 100 shares for $100 apiece. The company has $10,000 in its bank account. They decide they'll pay a $2 per share dividend. Their bank account is down to $9,800, still with 100 shares outstanding, so each share is now worth $98. Instead of having a $100 share like you did before the dividend, now you have a $98 share and $2 of cash. Obviously you wouldn't invest in a company that just has a checking account. You expect them to have some business operations that make the value of the stock go up, but the principle is the same: the dividend comes out of the value of the shares and is a completely neutral thing for the overall value of your portfolio.
When a company makes payroll and pays the electric bill doesn't that reduce the value of the company? Does that affect the stock price?
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VWUAX distributed more than $22 per share (last year was $6). I own a shit ton in taxable as well as retirement. It totally blew up my health subsidy and I am sending a large check to Uncle Sam where last year I paid zero tax. Strangely I find I am not mad about that at all.
ETA- Post-FIRE my taxable brokerage proceeds come directly to my checking account rather than re-invested. This means I didn't have to sell some of the stock I planned for filling the annual living expenses account this year.
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Perhaps I do not understand, as JoePublic3.14 mentioned.
If this is all happening in an IRA, I’m only taxed when I withdraw funds someday many years from now… correct? If that is the case and I withdraw a long time from now and am only taxed at my normal tax rate at the time I withdraw, why wouldn’t I be happy about dividends, etc. NOW that only make the account grow?
Educate me. Thank you.
Dividends and capital gains distributions don't make the account grow. When a company pays dividends, that money comes from somewhere: the company's bank account. This payout reduces the value of the company, and thereby reduces the value of the shares. Let's imagine someone founds a company that will just hold cash in a checking account: they issue 100 shares for $100 apiece. The company has $10,000 in its bank account. They decide they'll pay a $2 per share dividend. Their bank account is down to $9,800, still with 100 shares outstanding, so each share is now worth $98. Instead of having a $100 share like you did before the dividend, now you have a $98 share and $2 of cash. Obviously you wouldn't invest in a company that just has a checking account. You expect them to have some business operations that make the value of the stock go up, but the principle is the same: the dividend comes out of the value of the shares and is a completely neutral thing for the overall value of your portfolio.
When a company makes payroll and pays the electric bill doesn't that reduce the value of the company? Does that affect the stock price?
Technically speaking, yes. But for large companies those expenses are small, continuous, and regular enough that for the stock price analyses they are probably ignored and/or just modeled as a continuous outflow.
I think companies are required to accrue expenses on financial statements, but probably only ones that are significant. In theory, if payroll or the electric bill were significant, then when preparing financial statements they would have to reflect, say, 12/15th of their payroll or 13/30ths of their electric bill based. This is different from ordinary people who usually don't accrue their paychecks or electric bills on a daily basis - they get their paycheck every other Friday or whatever and pay their electric bill on the due date.
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Reinvested shares have already hit my accounts, bringing the balances back up to about where they were pre-distribution. So far I am up about 5k for the week.
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In light of this eye-opening discussion, I remembered that I began participating in a deferred compensation program just in the past couple of months, and I put those funds in a target plan. Should I consider selling/moving them to regular ETFs? It’s only about 14K right now, but I do see that there were $850 in dividends this week. I believe I can change future contributions too. I expect to put 60-100K per year in this account going forward, depending on my income. It is tax-deferred, so maybe I’m okay though?
Thank you.
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In light of this eye-opening discussion, I remembered that I began participating in a deferred compensation program just in the past couple of months, and I put those funds in a target plan. Should I consider selling/moving them to regular ETFs? It’s only about 14K right now, but I do see that there were $850 in dividends this week. I believe I can change future contributions too. I expect to put 60-100K per year in this account going forward, depending on my income. It is tax-deferred, so maybe I’m okay though?
Thank you.
Deferred compensation plans like 457's will not pay taxes on dividends and capital gains. Like 401k or 403b plans, you will be taxed upon withdrawal, so dividends and capital gains distributions within these accounts won't affect your taxes. No need to change to ETfs for this reason.
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I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."
How hard is that? Would save some headaches.
Vanguard is an investment firm which provides investments. What you're describing is tax advice, which Vanguard does not provide but can be found from a tax professional such as a CPA.
No. It's entirely possible to lawyer-up the verbiage so as to remove accusations of providing "tax advice," while still highlighting to customers that the model used for re-balancing increases dividend and capital gains exposure in taxable accounts.
Highlighting the tax implications of how their target date funds are managed is providing transparency and clarity to customers on the nature of the product. Not tax advice.
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I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."
How hard is that? Would save some headaches.
Vanguard is an investment firm which provides investments. What you're describing is tax advice, which Vanguard does not provide but can be found from a tax professional such as a CPA.
No. It's entirely possible to lawyer-up the verbiage so as to remove accusations of providing "tax advice," while still highlighting to customers that the model used for re-balancing increases dividend and capital gains exposure in taxable accounts.
Highlighting the tax implications of how their target date funds are managed is providing transparency and clarity to customers on the nature of the product. Not tax advice.
OK, let's try this: What is the reason you think Vanguard has not yet implemented your idea? Perhaps they've never thought of it, or perhaps nobody has ever made the suggestion to them, or perhaps they're dumb?
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I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."
How hard is that? Would save some headaches.
Vanguard is an investment firm which provides investments. What you're describing is tax advice, which Vanguard does not provide but can be found from a tax professional such as a CPA.
No. It's entirely possible to lawyer-up the verbiage so as to remove accusations of providing "tax advice," while still highlighting to customers that the model used for re-balancing increases dividend and capital gains exposure in taxable accounts.
Highlighting the tax implications of how their target date funds are managed is providing transparency and clarity to customers on the nature of the product. Not tax advice.
OK, let's try this: What is the reason you think Vanguard has not yet implemented your idea? Perhaps they've never thought of it, or perhaps nobody has ever made the suggestion to them, or perhaps they're dumb?
I'm happy to engage in debates that don't involve sarcastic condescension. Please reconsider how you would like to continue the conversation.
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I really feel like they should have a disclaimer on the fund page. Like, "due to tax implications, these target date funds may not be appropriate for taxable accounts."
How hard is that? Would save some headaches.
Vanguard is an investment firm which provides investments. What you're describing is tax advice, which Vanguard does not provide but can be found from a tax professional such as a CPA.
No. It's entirely possible to lawyer-up the verbiage so as to remove accusations of providing "tax advice," while still highlighting to customers that the model used for re-balancing increases dividend and capital gains exposure in taxable accounts.
Highlighting the tax implications of how their target date funds are managed is providing transparency and clarity to customers on the nature of the product. Not tax advice.
OK, let's try this: What is the reason you think Vanguard has not yet implemented your idea? Perhaps they've never thought of it, or perhaps nobody has ever made the suggestion to them, or perhaps they're dumb?
I'm happy to engage in debates that don't involve sarcastic condescension. Please reconsider how you would like to continue the conversation.
Neither sarcasm nor condescension was intended. While I'm not particularly interested in debates (I've had my fill of those already), I disagree with you and was sincerely interested in your answer to the posed question so I could better understand your point of view.
The second part of the question was to give examples of what my question was after. I've found that sometimes my questions get understood in a different vein than I was trying to convey, so to try to be more efficient, I listed some reasonable examples so I would have a better chance of the thrust of my question being understood.
I'm still interested in your answer to the question.
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Vanguard, Schwab, Fidelity, nearly all other brokers sell mutual funds and ETFs. Asking why a mutual fund salesperson sells a mutual fund over an ETF is like asking why a Toyota salesman doesn't recommend a Honda when a Honda is the best vehicle for the customer. ETFs have been around for over 20 years, my first investments were SPY, DIA and QQQ. There is no reason to buy a mutual fund in a taxable account for any reason. Many mutual fund holders will have capital gains despite the fund losing money this year.
A better way to manage investments in IRA accounts is to just match equity percentage of target date fund once a year. Most target date funds are loaded with extra fees and the glide path is meaningless in delivering excess returns. Target date funds have no justification for existing as one can do the same allocations in 2 minutes once a year. Go 100% index, ignore target date and when you are reading to retire, you will have much more $$$.
Some target date funds are the default in retirement accounts and horrible investments with ridiculous investment fees. Buy the lowest cost S&P 500 index fund in all employer retirement accounts.
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I now have a bee in my bonnet about this, and did some googling. Apologies for the lengthy post.
To try and compare apples to apples, I went to the Vanguard Pages for VFIFX (Vanguard Target Retirement Fund 2050), VTSAX (Vanguard Total Market Index Admiral), and VTI (Vanguard Total Market ETF). I also looked up their pages on MarketWatch, Fidelity, and Morningstar.
Vanguard pages are at:
https://investor.vanguard.com/mutual-funds/profile/overview/vtsax
https://investor.vanguard.com/mutual-funds/profile/overview/vfifx
https://investor.vanguard.com/etf/profile/overview/vti
As mentioned earlier in this thread, there's no direct equivalent to the Target Date Funds in ETFs, so the VTI is something of an orange in comparison.
Going through their Vanguard page tabs, there's effectively nothing that addresses how they approach distributions and capital gains on the Overview, Price and Performance, Fees and Minimums, or News and Reviews pages. The VTI and VTSAX portfolio and management pages include a line on turnover (irrelevant to us, as mentioned previously in this thread), VFIFX just has a list of the funds included.
The page that's significant for this topic is Distributions. On that page, it lists the distributions for the last year, type (Dividend or Cap Gain), date, and amount per share. All of the values are given in dollars and cents. So, to begin with I have to do math, on each fund in my portfolio, without any future predictability, to see what these dividends actually mean for me tax-wise.
Below that, we have a chart for Realized / Unrealized Gains, that includes a "realized capital gains as percent of Net Asset Value," line. For VFIFX, it's 10.13% as of 30 November. For VTI and VTSAX both, it's -.90%. What's frustrating is that they don't list historic averages, and I can't find the numbers for 2020 on any of the other sites either. I looked at the summary prospectus - nothing. I looked at the statutory prospectus - only this:
"Portfolio Turnover
The Fund may pay transaction costs, such as purchase fees, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 9% of the average value of its portfolio."
In the VTI prospectus? Exact same verbiage. No historic % NAV information, no historic realized / unrealized capital gains info, and here's the main point: no information that makes it simple or logical for a retail investor to compare the probable capital gains impact of three of their own, very popular, funds.
I'm sure Vanguard has constraints on how they can communicate tax information to customers. But I also think there's a pretty big gap between the information they have available now, and what they can publicize to retail investors trying to figure this out. I don't think it's too much to ask for, say, readily available (on their fund page) information on historic Capital Gain, Loss, and % of NAV, and perhaps a written statement on how the fund handles these requirements.
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I now have a bee in my bonnet about this, and did some googling. Apologies for the lengthy post.
To try and compare apples to apples, I went to the Vanguard Pages for VFIFX (Vanguard Target Retirement Fund 2050), VTSAX (Vanguard Total Market Index Admiral), and VTI (Vanguard Total Market ETF). I also looked up their pages on MarketWatch, Fidelity, and Morningstar.
Vanguard pages are at:
https://investor.vanguard.com/mutual-funds/profile/overview/vtsax
https://investor.vanguard.com/mutual-funds/profile/overview/vfifx
https://investor.vanguard.com/etf/profile/overview/vti
As mentioned earlier in this thread, there's no direct equivalent to the Target Date Funds in ETFs, so the VTI is something of an orange in comparison.
Going through their Vanguard page tabs, there's effectively nothing that addresses how they approach distributions and capital gains on the Overview, Price and Performance, Fees and Minimums, or News and Reviews pages. The VTI and VTSAX portfolio and management pages include a line on turnover (irrelevant to us, as mentioned previously in this thread), VFIFX just has a list of the funds included.
The page that's significant for this topic is Distributions. On that page, it lists the distributions for the last year, type (Dividend or Cap Gain), date, and amount per share. All of the values are given in dollars and cents. So, to begin with I have to do math, on each fund in my portfolio, without any future predictability, to see what these dividends actually mean for me tax-wise.
Below that, we have a chart for Realized / Unrealized Gains, that includes a "realized capital gains as percent of Net Asset Value," line. For VFIFX, it's 10.13% as of 30 November. For VTI and VTSAX both, it's -.90%. What's frustrating is that they don't list historic averages, and I can't find the numbers for 2020 on any of the other sites either. I looked at the summary prospectus - nothing. I looked at the statutory prospectus - only this:
"Portfolio Turnover
The Fund may pay transaction costs, such as purchase fees, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 9% of the average value of its portfolio."
In the VTI prospectus? Exact same verbiage. No historic % NAV information, no historic realized / unrealized capital gains info, and here's the main point: no information that makes it simple or logical for a retail investor to compare the probable capital gains impact of three of their own, very popular, funds.
I'm sure Vanguard has constraints on how they can communicate tax information to customers. But I also think there's a pretty big gap between the information they have available now, and what they can publicize to retail investors trying to figure this out. I don't think it's too much to ask for, say, readily available (on their fund page) information on historic Capital Gain, Loss, and % of NAV, and perhaps a written statement on how the fund handles these requirements.
There are no realized gains in an ETF until the owner sells the ETF, this is the tax advantage of ETFs>MFs. Investor is in 100% control of when capital gains are realized. An ETF sells Telsa for LT gain, no taxable event, mutual fund sells Tesla for LT gain, investor has a taxable gain. For target date funds, one can match the equity bond mix once a year with VTI/VOO/BBUS/SCHX/IVV and any general bond index ETF and again, completely control amount and timing of capital gains.
I know there are several retirement "gurus" who recommend mutual funds and swear to not buy ETFs but can only speculate this is because the "gurus" receive ad dollars from mutual fund offerings as ETFs typically have significantly lower expense ratios. There is zero reason for any investor to hold any mutual fund in any taxable account, 0%, but brokers still recommend using these for clients.
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I now have a bee in my bonnet about this, and did some googling. Apologies for the lengthy post.
To try and compare apples to apples, I went to the Vanguard Pages for VFIFX (Vanguard Target Retirement Fund 2050), VTSAX (Vanguard Total Market Index Admiral), and VTI (Vanguard Total Market ETF). I also looked up their pages on MarketWatch, Fidelity, and Morningstar.
Vanguard pages are at:
https://investor.vanguard.com/mutual-funds/profile/overview/vtsax
https://investor.vanguard.com/mutual-funds/profile/overview/vfifx
https://investor.vanguard.com/etf/profile/overview/vti
As mentioned earlier in this thread, there's no direct equivalent to the Target Date Funds in ETFs, so the VTI is something of an orange in comparison.
Going through their Vanguard page tabs, there's effectively nothing that addresses how they approach distributions and capital gains on the Overview, Price and Performance, Fees and Minimums, or News and Reviews pages. The VTI and VTSAX portfolio and management pages include a line on turnover (irrelevant to us, as mentioned previously in this thread), VFIFX just has a list of the funds included.
The page that's significant for this topic is Distributions. On that page, it lists the distributions for the last year, type (Dividend or Cap Gain), date, and amount per share. All of the values are given in dollars and cents. So, to begin with I have to do math, on each fund in my portfolio, without any future predictability, to see what these dividends actually mean for me tax-wise.
Below that, we have a chart for Realized / Unrealized Gains, that includes a "realized capital gains as percent of Net Asset Value," line. For VFIFX, it's 10.13% as of 30 November. For VTI and VTSAX both, it's -.90%. What's frustrating is that they don't list historic averages, and I can't find the numbers for 2020 on any of the other sites either. I looked at the summary prospectus - nothing. I looked at the statutory prospectus - only this:
"Portfolio Turnover
The Fund may pay transaction costs, such as purchase fees, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 9% of the average value of its portfolio."
In the VTI prospectus? Exact same verbiage. No historic % NAV information, no historic realized / unrealized capital gains info, and here's the main point: no information that makes it simple or logical for a retail investor to compare the probable capital gains impact of three of their own, very popular, funds.
I'm sure Vanguard has constraints on how they can communicate tax information to customers. But I also think there's a pretty big gap between the information they have available now, and what they can publicize to retail investors trying to figure this out. I don't think it's too much to ask for, say, readily available (on their fund page) information on historic Capital Gain, Loss, and % of NAV, and perhaps a written statement on how the fund handles these requirements.
There are no realized gains in an ETF until the owner sells the ETF, this is the tax advantage of ETFs>MFs. Investor is in 100% control of when capital gains are realized. An ETF sells Telsa for LT gain, no taxable event, mutual fund sells Tesla for LT gain, investor has a taxable gain. For target date funds, one can match the equity bond mix once a year with VTI/VOO/BBUS/SCHX/IVV and any general bond index ETF and again, completely control amount and timing of capital gains.
I know there are several retirement "gurus" who recommend mutual funds and swear to not buy ETFs but can only speculate this is because the "gurus" receive ad dollars from mutual fund offerings as ETFs typically have significantly lower expense ratios. There is zero reason for any investor to hold any mutual fund in any taxable account, 0%, but brokers still recommend using these for clients.
I now wish I held VTI ETF instead of the VTSAX index fund, but so far it appears Vanguard's capital gains reduction scheme is working. I went back 4 years of tax history in my Vanguard account, and there were ZERO capital gain distributions spit out by Vanguard for VTSAX in that time unless I actually sold some shares, so I'm hoping this will continue to be the case.
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I now wish I held VTI ETF instead of the VTSAX index fund, but so far it appears Vanguard's capital gains reduction scheme is working. I went back 4 years of tax history in my Vanguard account, and there were ZERO capital gain distributions spit out by Vanguard for VTSAX in that time unless I actually sold some shares, so I'm hoping this will continue to be the case.
You can exchange from VTSAX to VTI, with no tax issues. Can’t go back though.
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I now wish I held VTI ETF instead of the VTSAX index fund, but so far it appears Vanguard's capital gains reduction scheme is working. I went back 4 years of tax history in my Vanguard account, and there were ZERO capital gain distributions spit out by Vanguard for VTSAX in that time unless I actually sold some shares, so I'm hoping this will continue to be the case.
You can exchange from VTSAX to VTI, with no tax issues. Can’t go back though.
I guess as long as Vanguard keeps from spitting out capital gains distributions on VTSAX, I'll just stay put. I do like the simplicity of mutual funds and automatic dividend reinvesting but it would be a bummer if I would get large unexpected capital gains since I strategically contribute to my pretax 401k, HSA, and Roth IRA based on my expected income and tax bracket.
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This post on Bogleheads (https://www.bogleheads.org/forum/viewtopic.php?p=6423268#p6423268) posits a theory for why this happened:
It seems Vanguard lowered the minimum on their institutional versions of the funds (https://pressroom.vanguard.com/news/Press-Release-Vanguard-Broadens-%20Access%20-to-Low-Cost-Institutional-Target-Date-Funds-12-11-2.html), so small business "upgraded" from e.g. VFORX to VIRSX, triggering a large net outflow from VFORX, requiring distributing large capital gains (not good for anyone holding VFORX in a taxable account, as noted in this thread).
But there's more: Vanguard is apparently going to merge the funds back together (https://pressroom.vanguard.com/news/Press-Release-Vanguard-to-Lower-Investor-Costs-by-an-Estimated-190M-Through-Enhancements-to-TRFs-092821.html), so... couldn't they have avoided all this by just merging the funds in the first place?
Edit to add relevant blog post on mymoneyblog.com (a site that I usually find to be credible): https://www.mymoneyblog.com/vanguard-target-retirement-funds-nav-drop-cap-gains-distribution.html
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ETF>MF
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VWUAX distributed more than $22 per share (last year was $6). I own a shit ton in taxable as well as retirement. It totally blew up my health subsidy and I am sending a large check to Uncle Sam where last year I paid zero tax. Strangely I find I am not mad about that at all.
ETA- Post-FIRE my taxable brokerage proceeds come directly to my checking account rather than re-invested. This means I didn't have to sell some of the stock I planned for filling the annual living expenses account this year.
I don't own any target date funds, but VWUAX got me too. It was, very unexpected. I just bought them early last year, but reading through their materials it didn't seem like something they did often. Glad to see I didn't make a horrible mistake. Ugh STCG. They paid out so much, I might have had a capital loss. Still trying to figure out vanguards paper work on that.
I came here seeking knowledge and am actually learning a lot from this thread, so thank you MMM. Though I'll need to read though it again as I got lost a few times, this is a little deeper than buy low, sell high, hold.
I am mostly mutual funds and mostly taxable, so the last two years and have been very interesting on what payouts can happen - considering historically I would get a pittance.
Loren
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I just came across an article about how someone's attempting a class-action lawsuit over this (https://www.bloomberg.com/news/articles/2022-05-02/vanguard-investors-were-hit-by-huge-surprise-tax-bills-now-they-re-suing). Will be interesting to follow for anyone affected.
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My ERs with Vanguard, while low, should be plenty to make the law firm that represents them very rich(er).
Pretty sad that a corporation has to answer for this type of thing. But there’s a long sad history of it happening here across many many slices of our world.
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So, this happened. Reuters: Vanguard to pay millions to mutual fund investors hit with big tax bills (https://www.reuters.com/legal/transactional/vanguard-pay-millions-mutual-fund-investors-hit-with-big-tax-bills-2022-07-06/). But I think that the settlement is only for Massachusetts residents.