Vanguard Brokerage account tax question

[New Mom and Dad]

Hey fellow Mustachians,

If I invest in vstax in my vangaurd brokerage account, how will that be taxed each year? What can I expect?

This would be after I max our IRA's and my 401k.

Thanks for any help!

[dandarc]

You'll pay tax on dividends every year, and capital gains if you have any.  You can get capital gains 2 ways - first is if you sell shares of the fund at more than you paid for them.  Second would be if the fund sold shares of the underlying stocks, and therefore had to distribute the gain.

Not that it can't happen, but VTSAX does a pretty good job at not generating the 2nd type - nothing but dividend distributions showing for the last 18 months on the website.

[New Mom and Dad]

What is the tax rate on dividends? Is it whatever tax bracket we are in?

[mskyle]

For reference, last year I think VTSAX paid about $200 in dividends per $10K invested. So you would owe tax on that dividend. This is generally taxed at a lower rate than your regular income.

As far as capital gains goes, if you had bought $10K worth of VTSAX in 2010 and sold those shares at the end of 2015, you would also have owed taxes on ~$6K of capital gains. These would be long-term capital gains, which are taxed at a lower rate than your regular income. If you only held the shares for 364 days they would be short-term capital gains and you would be taxed at (generally speaking) your normal rate.

[New Mom and Dad]

So of that $200 you would keep $180ish?

[dandarc]

What is the tax rate on dividends? Is it whatever tax bracket we are in?

It depends.  VTSAX generally spits out 100% qualified dividends - so if you buy and hold the fund, you get the qualified dividend rate.  Qualified dividend tax rate is 0% up to the top of the 15% bracket, 15% if you are in the 25 through 35% brackets, and 20% if you are in the highest tax bracket.

[New Mom and Dad]

Thanks everyone!