Author Topic: Quirk about Vanguard that you may want to be aware of  (Read 8506 times)

johnny847

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Quirk about Vanguard that you may want to be aware of
« on: July 01, 2015, 12:14:19 PM »
I do not set my funds to reinvest dividends and capital gains - I redirect them to money market funds instead.

Here's the quirk: Vanguard cannot do this if the target fund (which I will reference as the money market fund VMMXX as according to my settings) has a zero balance. They warn you about this if you try to change the reinvestment settings and VMMXX has a zero balance at the time. However, they do not warn you if you let the VMMXX balance drop to zero after you've changed the settings.

I had dividends from VTSMX in my traditional IRA set to be direct to my money market fund VMMXX in the tIRA. However, VMMXX had a zero balance. Hence, Vanguard didn't direct my dividends there. They instead cut me a check.

Now if this had occurred in a Roth or taxable, that's not really a problem. Yes, I just decreased my tax advantaged space. But, the dividend amount wasn't much at all - $23.23 before tax withholding. Unfortunately, this occurred in a tIRA. Meaning this is now an early withdrawal from a tIRA, which would be subject to a 10% penalty. This would become a reporting headache, all for a measly $23.23

Fortunately, there is the rollover rule. When you wish to transfer your IRA from one custodian to another, you have two main options: a custodian to custodian transfer where you never come in direct contact with the money, or a rollover via check. Custodian 1 cuts you a check, which you then have 60 days to deposit to an IRA at custodian 2 for it to not count as an early withdrawal from an IRA.
What's interesting is this rule can be used for a "rollover" from one IRA to the same IRA. As in, you can loan yourself IRA money for 60 days. But, to prevent this kind of abuse, the government ruled  last year that you can only do a rollover via check once in a twelve month window, across all IRAs.
What this means for me is that because I haven't done a rollover via check in the past 12 months, I can deposit the $23.23 back into my IRA and the dividend payment will not count as an early withdrawal.


So, long story short, if you wish to redirect dividends to a money market account, the money market account needs a nonzero balance. There are no real consequences if you do this in a taxable account. In a Roth account, that means you're giving up tax advantaged space but it's no that big a deal since dividends by definition are only a fraction of your fund balance. In a traditional account, this can cause reporting issues which can be avoided by redepositing the pre-tax amount back into the IRA within 60 days, as long as you have not done a rollover by check in the past 12 months.

In case you're wondering why I redirect dividends and capital gains to VMMXX instead of reinvesting them:
  • I might be tax loss harvesting at the time. Suppose I'm TLH'ing fund X. If so, I do not want to buy any shares of X in any of my accounts. Reinvesting dividends would cause me to automatically buy shares of X. Even though you cannot TLH funds in a retirement account, any purchases in them can cause wash sales of funds you're TLHing in the taxable account.
    I could certainly set it to reinvest and then change it when I want to TLH, but I don't want to forget. I do get emails of transaction notices when I receive dividends to VMMXX, so I do remember to do something with it.
  • My asset allocation may be off from what I want. If that's the case, why keep reinvesting? I should direct my dividends towards the fund that is underallocated.
    This reason is not all that compelling on it's own, but reason #1 is compelling enough and this one just makes the case stronger

forummm

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #1 on: July 01, 2015, 12:25:48 PM »
Wow, I never would have thought of that.

Why do you not have auto-reinvest in your IRA? You can move funds around whenever you want to without tax consequences.

johnny847

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #2 on: July 01, 2015, 12:32:44 PM »
Wow, I never would have thought of that.

Why do you not have auto-reinvest in your IRA? You can move funds around whenever you want to without tax consequences.

In case you're wondering why I redirect dividends and capital gains to VMMXX instead of reinvesting them:
  • I might be tax loss harvesting at the time. Suppose I'm TLH'ing fund X. If so, I do not want to buy any shares of X in any of my accounts. Reinvesting dividends would cause me to automatically buy shares of X. Even though you cannot TLH funds in a retirement account, any purchases in them can cause wash sales of funds you're TLHing in the taxable account.
    I could certainly set it to reinvest and then change it when I want to TLH, but I don't want to forget. I do get emails of transaction notices when I receive dividends to VMMXX, so I do remember to do something with it.
  • My asset allocation may be off from what I want. If that's the case, why keep reinvesting? I should direct my dividends towards the fund that is underallocated.
    This reason is not all that compelling on it's own, but reason #1 is compelling enough and this one just makes the case stronger

Crushtheturtle

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #3 on: July 01, 2015, 12:57:37 PM »
Wow, I never would have thought of that.

Why do you not have auto-reinvest in your IRA? You can move funds around whenever you want to without tax consequences.

In case you're wondering why I redirect dividends and capital gains to VMMXX instead of reinvesting them:
  • I might be tax loss harvesting at the time. Suppose I'm TLH'ing fund X. If so, I do not want to buy any shares of X in any of my accounts. Reinvesting dividends would cause me to automatically buy shares of X. Even though you cannot TLH funds in a retirement account, any purchases in them can cause wash sales of funds you're TLHing in the taxable account.
    I could certainly set it to reinvest and then change it when I want to TLH, but I don't want to forget. I do get emails of transaction notices when I receive dividends to VMMXX, so I do remember to do something with it.
  • My asset allocation may be off from what I want. If that's the case, why keep reinvesting? I should direct my dividends towards the fund that is underallocated.
    This reason is not all that compelling on it's own, but reason #1 is compelling enough and this one just makes the case stronger

I assume you're referencing reason #2. TLH doesn't apply to IRAs.

forummm

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #4 on: July 01, 2015, 01:08:51 PM »
Wow, I never would have thought of that.

Why do you not have auto-reinvest in your IRA? You can move funds around whenever you want to without tax consequences.

In case you're wondering why I redirect dividends and capital gains to VMMXX instead of reinvesting them:
  • I might be tax loss harvesting at the time. Suppose I'm TLH'ing fund X. If so, I do not want to buy any shares of X in any of my accounts. Reinvesting dividends would cause me to automatically buy shares of X. Even though you cannot TLH funds in a retirement account, any purchases in them can cause wash sales of funds you're TLHing in the taxable account.
    I could certainly set it to reinvest and then change it when I want to TLH, but I don't want to forget. I do get emails of transaction notices when I receive dividends to VMMXX, so I do remember to do something with it.
  • My asset allocation may be off from what I want. If that's the case, why keep reinvesting? I should direct my dividends towards the fund that is underallocated.
    This reason is not all that compelling on it's own, but reason #1 is compelling enough and this one just makes the case stronger

Haha! Hey, the post was pretty long OK :)

a1smith

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #5 on: July 01, 2015, 01:29:30 PM »
Wow, I never would have thought of that.

Why do you not have auto-reinvest in your IRA? You can move funds around whenever you want to without tax consequences.

In case you're wondering why I redirect dividends and capital gains to VMMXX instead of reinvesting them:
  • I might be tax loss harvesting at the time. Suppose I'm TLH'ing fund X. If so, I do not want to buy any shares of X in any of my accounts. Reinvesting dividends would cause me to automatically buy shares of X. Even though you cannot TLH funds in a retirement account, any purchases in them can cause wash sales of funds you're TLHing in the taxable account.
    I could certainly set it to reinvest and then change it when I want to TLH, but I don't want to forget. I do get emails of transaction notices when I receive dividends to VMMXX, so I do remember to do something with it.
  • My asset allocation may be off from what I want. If that's the case, why keep reinvesting? I should direct my dividends towards the fund that is underallocated.
    This reason is not all that compelling on it's own, but reason #1 is compelling enough and this one just makes the case stronger

I assume you're referencing reason #2. TLH doesn't apply to IRAs.

He is doing TLH in an after tax account and purchases of the same fund in the tIRA will screw up the TLH because of wash sale rules.  All accounts, even your spouse's, are included, not just the account you are doing TLH in.

johnny847

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #6 on: July 01, 2015, 01:39:41 PM »
He is doing TLH in an after tax account and purchases of the same fund in the tIRA will screw up the TLH because of wash sale rules.  All accounts, even your spouse's, are included, not just the account you are doing TLH in.

Precisely. You get the worst of both worlds with respect to TLH in IRAs. You can't TLH in IRAs, but any purchases in IRAs can invoke the wash sale rules of TLH incurring in a taxable account.

Of course, you still get a tax benefit for funds in the IRAs which more than make up for this TLH downside.

a1smith

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #7 on: July 01, 2015, 02:48:27 PM »
He is doing TLH in an after tax account and purchases of the same fund in the tIRA will screw up the TLH because of wash sale rules.  All accounts, even your spouse's, are included, not just the account you are doing TLH in.

Precisely. You get the worst of both worlds with respect to TLH in IRAs. You can't TLH in IRAs, but any purchases in IRAs can invoke the wash sale rules of TLH incurring in a taxable account.

Of course, you still get a tax benefit for funds in the IRAs which more than make up for this TLH downside.

And, if you create a wash sale with a purchase in an IRA then the loss on the sale in the after tax account is disallowed forever!  Because, all you are doing is changing the cost basis of the purchase in the IRA but the cost basis doesn't matter!

MrMoogle

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #8 on: July 02, 2015, 06:36:11 AM »
Wow for some reason I thought as long as they were different types of accounts, it wouldn't matter.  But you guys are correct, a buy in a tIRA will ruin a TLH:

http://www.investopedia.com/articles/retirement/09/ira-wash-sale-rule.asp

I might be switching the reinvestment options on funds that I have in both.  Thanks!

johnny847

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #9 on: July 02, 2015, 06:57:14 AM »
Wow for some reason I thought as long as they were different types of accounts, it wouldn't matter.  But you guys are correct, a buy in a tIRA will ruin a TLH:

http://www.investopedia.com/articles/retirement/09/ira-wash-sale-rule.asp

I might be switching the reinvestment options on funds that I have in both.  Thanks!

Yup.
Technically the ruling was only for IRAs (Roth and traditional), but people have interpreted this ruling to also apply to 401k's, 403b's, and 457b's because there isn't really a reason that this logic cannot be applied to them.

Indexer

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #10 on: July 05, 2015, 04:31:08 PM »
Easy fix.  Upgrade to the Vanguard Brokerage Account.  There should be a big red button that says 'upgrade' above the account.  If there isn't just call them.

This quirk is actually no longer a problem unless you still have one of the old mutual fund accounts.  I have my dividends sweep to the money market which is normally at a 0 balance.  I haven't had any problems and I use the new brokerage account. 

tj

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #11 on: July 05, 2015, 05:25:01 PM »
I have the dividends set to reinvest, unless its a taxable account, in which case they get ACHd to my checking account. They removed the ACH feature if you upgrade to brokerage, which frustrates me.

johnny847

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #12 on: July 05, 2015, 05:27:29 PM »
Easy fix.  Upgrade to the Vanguard Brokerage Account.  There should be a big red button that says 'upgrade' above the account.  If there isn't just call them.

This quirk is actually no longer a problem unless you still have one of the old mutual fund accounts.  I have my dividends sweep to the money market which is normally at a 0 balance.  I haven't had any problems and I use the new brokerage account.

Tried this. They said I'm not eligible to upgrade.

johnny847

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #13 on: July 05, 2015, 05:28:13 PM »
I have the dividends set to reinvest, unless its a taxable account, in which case they get ACHd to my checking account. They removed the ACH feature if you upgrade to brokerage, which frustrates me.

Wait you can't revinest your dividends in a taxable account at all?

tj

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #14 on: July 05, 2015, 05:44:44 PM »
I have the dividends set to reinvest, unless its a taxable account, in which case they get ACHd to my checking account. They removed the ACH feature if you upgrade to brokerage, which frustrates me.

Wait you can't revinest your dividends in a taxable account at all?

of course you can. I just choose not to.

johnny847

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #15 on: July 05, 2015, 05:55:54 PM »
I have the dividends set to reinvest, unless its a taxable account, in which case they get ACHd to my checking account. They removed the ACH feature if you upgrade to brokerage, which frustrates me.

Wait you can't revinest your dividends in a taxable account at all?

of course you can. I just choose not to.

/face palm. I don't know why I misinterpreted that.

a1smith

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Re: Quirk about Vanguard that you may want to be aware of
« Reply #16 on: July 05, 2015, 06:31:19 PM »
Easy fix.  Upgrade to the Vanguard Brokerage Account.  There should be a big red button that says 'upgrade' above the account.  If there isn't just call them.

This quirk is actually no longer a problem unless you still have one of the old mutual fund accounts.  I have my dividends sweep to the money market which is normally at a 0 balance.  I haven't had any problems and I use the new brokerage account.

So, when you upgraded did everything, including mutual funds, move to the brokerage account?

I'm just wondering how your upgrade worked.  I wanted to buy some ETF's so I added brokerage account but I still have the mutual fund account as well.  They accounts are linked by VMMMX.  Is that how yours works or is yours only brokerage account now?