Author Topic: Moving to Vanguard Admiral Shares in a taxable account  (Read 7748 times)

capital

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Moving to Vanguard Admiral Shares in a taxable account
« on: January 22, 2015, 12:19:28 AM »
I currently have taxable holdings in VFIFX, which in turn holds Investor-class shares of four Vanguard funds.

I would like to lower my fees by moving to a similar portfolio consisting of Admiral-class shares.

Is there any way to do this without realizing capital gains? If not, is there a preferred strategy to minimize capital gains– should I just wait until a market swoon, and try to tax-loss harvest to avoid capital gains? (That seems unlikely without a major downturn soon, however, as the market has been increasing substantially recently and since I hold a single diversified fund-of-funds I am unable to sell individual asset classes to tax-loss harvest). Or just save up $10000 in cash to start buying VTSAX instead?

(one detail that may be relevant— I already hold VTSAX in my IRA. Hopefully that would count toward the minimum investment, but I doubt it)

GizmoTX

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #1 on: January 22, 2015, 05:46:51 AM »
Ask Vanguard. If they handle it, I believe they have a way to make it a transfer rather than a sale.

OriolesFan89

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #2 on: January 22, 2015, 09:13:03 AM »
I believe that Vanguard will change the shares from "Investor" to "Admiral" automatically. I do not know exactly how this is triggered.

johnny847

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #3 on: January 22, 2015, 09:39:03 AM »
None of the target date retirement funds have an admiral class equivalent. If I'm understanding you correctly, you'd like to replace VFIFX with the admiral versions of the four constituents: VTSAX, VTIAX, VBTLX, and VTABX (by the way, in my opinion I don't think people really need international bonds, but it's not a big deal either way).

In order to do that in a taxable account I am 99.99% certain it will be a taxable event. I do not believe that Vanguard can do some trickery and convert your shares of VFIFX into shares of the constituent funds. This would mean you'd have to sell VFIFX and buy the constituents. (The magic that Vanguard can do is convert your investor shares of a fund to admiral shares of the same fund, if it exists, with no tax consequences whatsoever)

You could try to wait until a market dip happens. But, I do not recommend this approach because you may wait a long time before such a dip occurs. It may be such that by the time a dip in the market occurs, the minimum of the dip is higher than today's price.

So that leaves you with two options:
  • Take the hit now to switch the fund
  • Just start buying VTSMX instead (total US stock, $3000 minimum) and once you hit $10k in that, you can ask Vanguard to convert to VTSAX without tax consequences. The repeat for the other constituent funds

If you're in the 25% bracket or greater:
What I would probably do is just start buying VTSMX instead and convert when possible. And then, when you have an unrealized loss in that fund, or any other fund in general, sell it to realize the loss, and then also sell VFIFX (so you're using the fund that lost money to offset the gains in VFIFX). That way, you can switch VFIFX to what you want without paying the capital gains tax on it.

If you're in the 15% bracket or less:
Your long term capital gain rate is zero. Start buying VTSMX, wait until VFIFX gains become long term (if they're not already), and you can sell it without federal taxes on it. But, you will still have to pay state taxes on this (generally speaking) because most states do not have a favorable tax treatment on long term capital gains. It depends though. So, it's still not a clear cut decision here either, just something to think about.
Holding VTSAX in your IRA doesn't count towards the minimum investment for a holding of VTSMX in a taxable account.



Another thing to consider:
Holding VFIFX in a taxable account is not tax efficient because part of the dividends are bond dividends, which can never be qualified dividends taxed at the favorable long term capital gains rates. Right now, bonds only constitute 10.1% of VFIFX, so it's not that big a deal. However, over time, the fund will shift to more bonds, and the tax drag on the fund will become more significant.

Nothlit

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #4 on: January 22, 2015, 09:58:34 AM »
I had written up a reply but johnny847 hit the nail on the head.

In addition to the caveat regarding bonds in taxable, I would also add that while holding VTIAX (international stock) in taxable can be beneficial for the foreign tax credit, keep in mind that it throws off approx 30% of its dividends as nonqualified (meaning you pay ordinary income tax rates on those rather than the long-term-capital-gain-equivalent rates available for qualified dividends). Depending on the amount of foreign tax paid and your marginal tax rate, this may erode any benefit you would have received from the foreign tax credit (it did for me).

I currently just hold VTSAX in my taxable account.
« Last Edit: January 22, 2015, 10:08:45 AM by Nothlit »

johnny847

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #5 on: January 22, 2015, 10:13:15 AM »
In addition to the caveat regarding bonds in taxable, I would also add that while holding VTIAX (international stock) in taxable can be beneficial for the foreign tax credit, keep in mind that it throws off approx 30% of its dividends as nonqualified (meaning you pay ordinary income tax rates on those rather than the long-term-capital-gain-equivalent rates available for qualified dividends). Depending on the amount of foreign tax paid and your marginal tax rate, this may erode any benefit you would have received from the foreign tax credit (it did for me).
Yea I remember seeing a Bogleheads thread on this effect. I think the conclusion was at the 25% bracket, it's a wash, above that it's better in tax advantaged account, and below it's better in a taxable? I don't remember though, I wish I could find that thread again.

Nothlit

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #6 on: January 22, 2015, 10:27:34 AM »
Yea I remember seeing a Bogleheads thread on this effect. I think the conclusion was at the 25% bracket, it's a wash, above that it's better in tax advantaged account, and below it's better in a taxable? I don't remember though, I wish I could find that thread again.

Not sure if this is the thread you are thinking of, but it helped inform my thinking on the topic: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=130486

I am in the 28% bracket.

johnny847

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #7 on: January 22, 2015, 10:32:30 AM »
Yea I remember seeing a Bogleheads thread on this effect. I think the conclusion was at the 25% bracket, it's a wash, above that it's better in tax advantaged account, and below it's better in a taxable? I don't remember though, I wish I could find that thread again.

Not sure if this is the thread you are thinking of, but it helped inform my thinking on the topic: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=130486

I am in the 28% bracket.
Ah thanks. Not the thread I was thinking of, but it looks like there's enough there for me to figure it out

capital

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #8 on: January 25, 2015, 12:28:06 PM »
None of the target date retirement funds have an admiral class equivalent. If I'm understanding you correctly, you'd like to replace VFIFX with the admiral versions of the four constituents: VTSAX, VTIAX, VBTLX, and VTABX (by the way, in my opinion I don't think people really need international bonds, but it's not a big deal either way).

In order to do that in a taxable account I am 99.99% certain it will be a taxable event. I do not believe that Vanguard can do some trickery and convert your shares of VFIFX into shares of the constituent funds. This would mean you'd have to sell VFIFX and buy the constituents. (The magic that Vanguard can do is convert your investor shares of a fund to admiral shares of the same fund, if it exists, with no tax consequences whatsoever)

You could try to wait until a market dip happens. But, I do not recommend this approach because you may wait a long time before such a dip occurs. It may be such that by the time a dip in the market occurs, the minimum of the dip is higher than today's price.

So that leaves you with two options:
  • Take the hit now to switch the fund
  • Just start buying VTSMX instead (total US stock, $3000 minimum) and once you hit $10k in that, you can ask Vanguard to convert to VTSAX without tax consequences. The repeat for the other constituent funds

If you're in the 25% bracket or greater:
What I would probably do is just start buying VTSMX instead and convert when possible. And then, when you have an unrealized loss in that fund, or any other fund in general, sell it to realize the loss, and then also sell VFIFX (so you're using the fund that lost money to offset the gains in VFIFX). That way, you can switch VFIFX to what you want without paying the capital gains tax on it.

If you're in the 15% bracket or less:
Your long term capital gain rate is zero. Start buying VTSMX, wait until VFIFX gains become long term (if they're not already), and you can sell it without federal taxes on it. But, you will still have to pay state taxes on this (generally speaking) because most states do not have a favorable tax treatment on long term capital gains. It depends though. So, it's still not a clear cut decision here either, just something to think about.
Holding VTSAX in your IRA doesn't count towards the minimum investment for a holding of VTSMX in a taxable account.



Another thing to consider:
Holding VFIFX in a taxable account is not tax efficient because part of the dividends are bond dividends, which can never be qualified dividends taxed at the favorable long term capital gains rates. Right now, bonds only constitute 10.1% of VFIFX, so it's not that big a deal. However, over time, the fund will shift to more bonds, and the tax drag on the fund will become more significant.
Thank you for the very thorough answer! It's pretty much what I thought the answer would be, but I really you sharing your wisdom so I didn't need to do all the research to feel sure about my answer.

I guess step one is to make next month's contribution to VTSMX. Should I hold all of my bond allocation in my IRA/401k for the sake of tax efficiency?

johnny847

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #9 on: January 25, 2015, 01:01:10 PM »
Thank you for the very thorough answer! It's pretty much what I thought the answer would be, but I really you sharing your wisdom so I didn't need to do all the research to feel sure about my answer.

I guess step one is to make next month's contribution to VTSMX. Should I hold all of my bond allocation in my IRA/401k for the sake of tax efficiency?
You're welcome.

Yup, you should hold bonds in a retirement account for tax efficiency.

ltt

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #10 on: January 25, 2015, 01:38:35 PM »
Just as a side note, VanGuard recently switched us from investor to admiral shares--it was in the same taxable account and the amount had hit $50K, so they automatically took care of it.  No taxes to pay.

MustachianMD

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #11 on: January 28, 2015, 12:19:47 PM »
For index funds in vanguard, they will usually automatically switch you over to admiral funds after you hit 10,000. Actively managed funds usually convert at 50,000.

clutchy

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #12 on: January 28, 2015, 12:23:51 PM »
I currently have taxable holdings in VFIFX, which in turn holds Investor-class shares of four Vanguard funds.

I would like to lower my fees by moving to a similar portfolio consisting of Admiral-class shares.

Is there any way to do this without realizing capital gains? If not, is there a preferred strategy to minimize capital gains– should I just wait until a market swoon, and try to tax-loss harvest to avoid capital gains? (That seems unlikely without a major downturn soon, however, as the market has been increasing substantially recently and since I hold a single diversified fund-of-funds I am unable to sell individual asset classes to tax-loss harvest). Or just save up $10000 in cash to start buying VTSAX instead?

(one detail that may be relevant— I already hold VTSAX in my IRA. Hopefully that would count toward the minimum investment, but I doubt it)

click the button that says "convert to admiral shares". 

that's all you have to do.

lizzie

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #13 on: January 28, 2015, 01:26:34 PM »
OK, dumb question here: does your eligibility for Admiral shares depend on the amount you invested, or does it also include your gains? And if the latter, then what happens if you suffer losses and go below the eligibility requirement?

johnny847

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #14 on: January 28, 2015, 01:30:12 PM »
OK, dumb question here: does your eligibility for Admiral shares depend on the amount you invested, or does it also include your gains? And if the latter, then what happens if you suffer losses and go below the eligibility requirement?
It depends on your fund balance. Meaning it includes your gains.
What I've heard is that once you make admiral, if you drop below admiral threshold because of market movements, they don't force you back down to investor shares. However, if you hold investor shares and market moves force you under the investor share threshold, they cash you out.

lizzie

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #15 on: January 28, 2015, 01:35:33 PM »
OK, dumb question here: does your eligibility for Admiral shares depend on the amount you invested, or does it also include your gains? And if the latter, then what happens if you suffer losses and go below the eligibility requirement?
It depends on your fund balance. Meaning it includes your gains.
What I've heard is that once you make admiral, if you drop below admiral threshold because of market movements, they don't force you back down to investor shares. However, if you hold investor shares and market moves force you under the investor share threshold, they cash you out.

Interesting. Thanks for the response. I temporarily reallocated my automatic deposit so that I can qualify for Admiral shares in one of my funds and I was wondering if I had to wait until I had a $10K basis and whether I should also wait until I had something of a cushion over $10K. Knowing this, I won't wait.

mustachianism_is_aredpill

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Re: Moving to Vanguard Admiral Shares in a taxable account
« Reply #16 on: January 28, 2015, 07:44:54 PM »
I posted the same question a while back here: http://forum.mrmoneymustache.com/investor-alley/does-a-'sell-to-buy'-transaction-on-vanguard-incur-tax/msg321073

TL;DR Going from Investor to Admiral shares on Vanguard isn't a "sell-to-buy" transaction and no gains are triggered. And (from personal experience) Vanguard will automatically convert an Investor shares fund to an Admiral shares fund as soon as your investment balance goes over $10k