Sunday, February 16, 2014

Tax planning and Vanguard Funds

Over at Early-Retirement.org we came across the following discussion: 
Tax planning and Vanguard Funds

I purchased Wellington and Wellesley fund shares for the first time last October and was a bit surprised at year-end at the tax hit in these funds for 2013.

How do I estimate the anticipated "income" in these funds for 2014? I am concerned that a significant amount of unrecognized "income" in these funds might push me over the ACA subsidy cliff. I am even considering ditching these funds for something with a more tax-efficient focus.
Your thoughts are most welcome.
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Most funds will give estimates in December. If you have some income flexibility to do anything about it that late. Other than that, 2013 may be your best estimate.

Since those are balanced funds, you probably would do better with an all-equity index fund as far as taxes.
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 Quote:
Originally Posted by TimSF View Post
I purchased Wellington and Wellesley fund shares….

How do I estimate the anticipated "income" in these funds for 2014?
Since these are balanced funds with lots of bond income, you can assume that income for 2014 will be about the same or higher than in 2013. Bonds are paying a higher interest rate than in the beginning of 2013.

You can just go to vanguard.com and look up the per share distributions of these funds in 2013 and then do your own calculation. It's probably all in the prospectus and annual report that you read before purchasing shares, too.
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Tim,

Have you looked at CA municipal bonds? I have the vanguard VCADX fund which is state and federal tax free. It solves the problem you are experiencing. Then just go with a pure equity index fund for your equity holdings.
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I've always looked up tax efficiency for each fund before I buy on Morningstar. By looking at all my holdings it's easy to see which ones will throw off more dividends and STCG's and which focus on capital appreciation instead of income. There may be an equivalent metric on the Vanguard site, but it's not readily apparent to me.

As a general rule, you don't want taxable bond funds in taxable accounts if you have sheltered/deferred accounts. That's why I don't own Wellesley (great fund though) or any balanced funds. I keep equity funds in taxable and bonds and other less tax efficient funds in sheltered accounts (IRAs). You probably know this but FWIW...
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Does tax-exempt muni income counts towards a modified AGI when it comes to ACA? I know tax-exempt muni bond income counts towards SS income being taxed.
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Take a look at Vanguard Tax managed balanced fund. If you're concerned over your tax bracket, the tax free muni bonds work well. For me, I earn more after tax than I would in either of the funds you are in.
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 Quote:
Originally Posted by Ready View Post
... Then just go with a pure equity index fund for your equity holdings.
That will help, but even an index equity fund can throw off some LT/ST Cap Gains distributions from redemptions and re-balancing. If you really want control on the equity side, consider ETFs.

-ERD50
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 Quote:
Originally Posted by LOL! View Post
Does tax-exempt muni income counts towards a modified AGI when it comes to ACA? I know tax-exempt muni bond income counts towards SS income being taxed.

Yes it does I'm pretty sure. Muni income is counted in qualifying for aca subsidies.
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