Reinvest or take cash from bond fund in taxable account?

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daacrusher2001
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Reinvest or take cash from bond fund in taxable account?

Post by daacrusher2001 »

Maybe a strange question…but here goes:

I have a sizable position in Vanguard Total Bond in a taxable account. I know it’s not ideal from a tax point of view but it’s where I am right now.

Lately, I have just been moving the interest payments to my checking and using the cash to cover some expenses. Prior to March of this year I was reinvesting (for many years) - and I didn’t really ever need to sell any.

I’m wondering if what I’m doing now is the best approach or if I should just continue to reinvest, and sell some shares when money is needed. Maybe even just sell enough for 12 months expenses and hold it in a money market or high yield savings and use it throughout the year.

Is there some guidance or recommended approach? Am I better off continuing to reinvest and then selling shares for annual expenses?
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grabiner
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Re: Reinvest or take cash from bond fund in taxable account?

Post by grabiner »

Financially, there isn't much difference between spending a distribution of $X from a bond fund, or reinvesting $X in the fund and then selling $X of the fund for spending money. When you sell, you may have a capital gain or loss, but it should be fairly small in a bond fund. The finances depend only on how much money is in the bond fund.

However, there are two reasons that taking bond fund distributions in cash makes the tax accounting simpler. You won't have a large number of lots to keep track of, and you will avoid wash sales if you sell shares for a capital loss and then reinvest a dividend to buy more shares.
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goingup
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Re: Reinvest or take cash from bond fund in taxable account?

Post by goingup »

Generally, if you need the dividends for expenses, send them to checking. You could also send them to a settlement account. Vanguard's MM accounts are yielding around 5% now.

During the last 2 years I've harvested losses (sold shares) in several bonds we hold in taxable accounts. I imagine you could do that, too? Otherwise, I personally wouldn't sell bond shares unless I was trying to own less of a fund in my taxable account.
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Hacksawdave
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Re: Reinvest or take cash from bond fund in taxable account?

Post by Hacksawdave »

daacrusher2001 wrote: Sun May 28, 2023 9:04 am Maybe a strange question…but here goes:

I have a sizable position in Vanguard Total Bond in a taxable account. I know it’s not ideal from a tax point of view but it’s where I am right now.

Lately, I have just been moving the interest payments to my checking and using the cash to cover some expenses. Prior to March of this year I was reinvesting (for many years) - and I didn’t really ever need to sell any.

I’m wondering if what I’m doing now is the best approach or if I should just continue to reinvest, and sell some shares when money is needed. Maybe even just sell enough for 12 months expenses and hold it in a money market or high yield savings and use it throughout the year.

Is there some guidance or recommended approach? Am I better off continuing to reinvest and then selling shares for annual expenses?
Not a strange question at all.

Drawdown is unique to each individual. If you are retired and are in one of the lower tax brackets, then it makes sense to get the monthly dividends in cash to manage your cashflow. I keep municipals and have the Vanguard STAR fund in my taxable account that I do take the dividends in cash. It would not make sense to me to pay tax on STAR’s dividends, reinvest them, only to redeem shares later and pay a tax again. I reinvest the CGs distributions from STAR. This is how I maintain purchasing power by accumulating more income producing shares without making additional external purchases.

I have the institutional class VBTIX in my 401k but reinvest the dividends as I am not planning on drawing from there for some time. Since it is a tax deferred fund, I can pre-stage distributions through an exchange down to the stable value fund for an annual distribution.
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grabiner
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Re: Reinvest or take cash from bond fund in taxable account?

Post by grabiner »

Hacksawdave wrote: Sun May 28, 2023 4:39 pm Drawdown is unique to each individual. If you are retired and are in one of the lower tax brackets, then it makes sense to get the monthly dividends in cash to manage your cashflow. I keep municipals and have the Vanguard STAR fund in my taxable account that I do take the dividends in cash. It would not make sense to me to pay tax on STAR’s dividends, reinvest them, only to redeem shares later and pay a tax again.
If you are in a low tax bracket, you probably shouldn't be holding municipal bonds; you'll get a better after-tax return on taxable bonds of comparable risk such as those you have in STAR. (If munis from your state look attractive because you are in a high-tax state, it's still probably better to avoid the state tax by holding Treasury bonds instead.)
I reinvest the CGs distributions from STAR.
And that is the problem with STAR in a taxable account; these distributions are reducing your returns. If you pay 15% tax on long-term gains and receive a $10K capital gain distribution, you have to spend an extra $1500 in taxes in order to reinvest the full distribution. A more tax-efficient fund will allow you to keep more of your investment.

If you have a large capital gain on STAR, it may not be worth switching now, but you could still reinvest unneeded distributions and sell shares with small gains to buy a more tax-efficient fund. If you want a single fund with a similar allocation to STAR, use Vanguard LifeStrategy Moderate Growth; you could also split between separate stock index and bond funds.
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James.534
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Re: Reinvest or take cash from bond fund in taxable account?

Post by James.534 »

Did you TLH the bond fund recently ?
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daacrusher2001
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Re: Reinvest or take cash from bond fund in taxable account?

Post by daacrusher2001 »

James.534 wrote: Sun May 28, 2023 7:56 pm Did you TLH the bond fund recently ?
Actually, I did, late last year. I have some carryover loss as well.

Until I start collecting SS, the bond dividends are helping on the expense side. Income will be low for a couple of years.
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Hacksawdave
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Re: Reinvest or take cash from bond fund in taxable account?

Post by Hacksawdave »

grabiner wrote: Sun May 28, 2023 6:11 pm
Hacksawdave wrote: Sun May 28, 2023 4:39 pm Drawdown is unique to each individual. If you are retired and are in one of the lower tax brackets, then it makes sense to get the monthly dividends in cash to manage your cashflow. I keep municipals and have the Vanguard STAR fund in my taxable account that I do take the dividends in cash. It would not make sense to me to pay tax on STAR’s dividends, reinvest them, only to redeem shares later and pay a tax again.
If you are in a low tax bracket, you probably shouldn't be holding municipal bonds; you'll get a better after-tax return on taxable bonds of comparable risk such as those you have in STAR. (If munis from your state look attractive because you are in a high-tax state, it's still probably better to avoid the state tax by holding Treasury bonds instead.)
I reinvest the CGs distributions from STAR.
And that is the problem with STAR in a taxable account; these distributions are reducing your returns. If you pay 15% tax on long-term gains and receive a $10K capital gain distribution, you have to spend an extra $1500 in taxes in order to reinvest the full distribution. A more tax-efficient fund will allow you to keep more of your investment.

If you have a large capital gain on STAR, it may not be worth switching now, but you could still reinvest unneeded distributions and sell shares with small gains to buy a more tax-efficient fund. If you want a single fund with a similar allocation to STAR, use Vanguard LifeStrategy Moderate Growth; you could also split between separate stock index and bond funds.
This is the beauty of municipal income and the 0% QD/LTCG rate rules. I reached the withdrawal phase in 2021 and use a hybrid approach to keep tax rates much lower. Last year was at the zero rate as will this year based upon the know estimates consisting of:

• $17,000 401k distribution
• $3,631 STCG and ordinary estimates
• $18,592 in LTCGs and QDs estimates
• $29,436 in municipal income estimates

I use the Fed standard deduction and itemized deductions for the state of CA. $39,233 AGI and $68,699 MAGI calculated.

Fed tax liability $678, CA state tax liability $556. CGs and QDs are in the zero rate as they were last year. Effective combined tax ratio is 3.15 percent. I got a great 'tax arbitrage' on my 401k distributions. I averaged deferment at 37.57 percent for combined federal and state over 31 years, and pulled it out at 3.15%. That is why the oddball distribution amount of $17,000 on the 401k.

STAR was much more tax efficient when I purchased it back in 1995. There was no Roth IRA at the time, and another tax deferred account made no sense. I have room in the ordinary tax bucket for STAR ODs and STCGs.

The VFINX S&P index fund dividends in my taxable account are always reinvested. Those I don’t touch.
Visual Artist
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Re: Reinvest or take cash from bond fund in taxable account?

Post by Visual Artist »


This is the beauty of municipal income and the 0% QD/LTCG rate rules. I reached the withdrawal phase in 2021 and use a hybrid approach to keep tax rates much lower. Last year was at the zero rate as will this year based upon the know estimates consisting of:

• $17,000 401k distribution
• $3,631 STCG and ordinary estimates
• $18,592 in LTCGs and QDs estimates
• $29,436 in municipal income estimates

I use the Fed standard deduction and itemized deductions for the state of CA. $39,233 AGI and $68,699 MAGI calculated.

Fed tax liability $678, CA state tax liability $556. CGs and QDs are in the zero rate as they were last year. Effective combined tax ratio is 3.15 percent. I got a great 'tax arbitrage' on my 401k distributions. I averaged deferment at 37.57 percent for combined federal and state over 31 years, and pulled it out at 3.15%. That is why the oddball distribution amount of $17,000 on the 401k.

STAR was much more tax efficient when I purchased it back in 1995. There was no Roth IRA at the time, and another tax deferred account made no sense. I have room in the ordinary tax bucket for STAR ODs and STCGs.

The VFINX S&P index fund dividends in my taxable account are always reinvested. Those I don’t touch.
Wow,

This is quite a tax strategy! I’m also a CA resident, but currently on ACA medical coverage and need to keep my MAGI under 40k. Can I ask you what CA munis you’re holding - are they individual or etfs/mutual funds?
NYCwriter
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Re: Reinvest or take cash from bond fund in taxable account?

Post by NYCwriter »

grabiner wrote: Sun May 28, 2023 9:09 am Financially, there isn't much difference between spending a distribution of $X from a bond fund, or reinvesting $X in the fund and then selling $X of the fund for spending money. When you sell, you may have a capital gain or loss, but it should be fairly small in a bond fund. The finances depend only on how much money is in the bond fund.

However, there are two reasons that taking bond fund distributions in cash makes the tax accounting simpler. You won't have a large number of lots to keep track of, and you will avoid wash sales if you sell shares for a capital loss and then reinvest a dividend to buy more shares.
This response makes sense, and it's how I do it. One question is how this factors into AA. But all things being equal, regularly taking cash seems simpler from a tax perspective than selling shares. The current MM yield means cash isn't losing much, although it will add some tax liability.

I still have an intermediate bond fund in taxable and as my contributions to fixed in retirement accounts grow (TRS is 100% fixed, 457(b) moving from stable value into total bond) I just use the cash for Total Stock (taxable) or Roth.
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Hacksawdave
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Re: Reinvest or take cash from bond fund in taxable account?

Post by Hacksawdave »

Visual Artist wrote: Mon May 29, 2023 9:41 pm

This is the beauty of municipal income and the 0% QD/LTCG rate rules. I reached the withdrawal phase in 2021 and use a hybrid approach to keep tax rates much lower. Last year was at the zero rate as will this year based upon the know estimates consisting of:

• $17,000 401k distribution
• $3,631 STCG and ordinary estimates
• $18,592 in LTCGs and QDs estimates
• $29,436 in municipal income estimates

I use the Fed standard deduction and itemized deductions for the state of CA. $39,233 AGI and $68,699 MAGI calculated.

Fed tax liability $678, CA state tax liability $556. CGs and QDs are in the zero rate as they were last year. Effective combined tax ratio is 3.15 percent. I got a great 'tax arbitrage' on my 401k distributions. I averaged deferment at 37.57 percent for combined federal and state over 31 years, and pulled it out at 3.15%. That is why the oddball distribution amount of $17,000 on the 401k.

STAR was much more tax efficient when I purchased it back in 1995. There was no Roth IRA at the time, and another tax deferred account made no sense. I have room in the ordinary tax bucket for STAR ODs and STCGs.

The VFINX S&P index fund dividends in my taxable account are always reinvested. Those I don’t touch.
Wow,

This is quite a tax strategy! I’m also a CA resident, but currently on ACA medical coverage and need to keep my MAGI under 40k. Can I ask you what CA munis you’re holding - are they individual or etfs/mutual funds?
Hello! I have Covered CA as well and will for another 5 years. Unfortunately, municipal income is factored into your ACA PTC as it is considered part of MAGI. Yes, ACA counts everything.

I have owned the Vanguard CA tax-exempt MM VCTXX and CA Intermediate fund VCADX since 1997 and bought the CA Long-term fund VCLAX in 2018 before being retired. I do not think they have ETF equivalents, but other fund companies do if you want an ETF.

I am guessing you are itemizing your CA state income tax? You can deduct medical and dental premiums on Schedule CA Part II with your other medical expenses. Municipals help here by lowering the AGI amount that determines how much of your itemized deduction is excluded from the CA form 540.
Visual Artist
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Re: Reinvest or take cash from bond fund in taxable account?

Post by Visual Artist »

Hello! I have Covered CA as well and will for another 5 years. Unfortunately, municipal income is factored into your ACA PTC as it is considered part of MAGI. Yes, ACA counts everything.

I have owned the Vanguard CA tax-exempt MM VCTXX and CA Intermediate fund VCADX since 1997 and bought the CA Long-term fund VCLAX in 2018 before being retired. I do not think they have ETF equivalents, but other fund companies do if you want an ETF.

I am guessing you are itemizing your CA state income tax? You can deduct medical and dental premiums on Schedule CA Part II with your other medical expenses. Municipals help here by lowering the AGI amount that determines how much of your itemized deduction is excluded from the CA form 540.
Thanks for the information. I don't itemize my CA state income tax - I didn't know one could deduct medical and dental premiums if itemizing. Turns out the premiums are too low to make itemized deductions more advantageous than the standard deduction in my case since I don't have any mortgage interest payments or other deductions that would beat the $5,202 standard deduction. I still appreciate learning about your strategy and may revisit it once I start medicare in about 3 years.
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