See the Best Vanguard Tax-Avoidance Funds and the Best Vanguard Tax-Avoidance Funds. Selecting the best Vanguard funds for taxable accounts necessitates a more strategic approach than selecting the best Vanguard funds for tax-deferred accounts such as IRAs and 401(k)s. It's crucial to look into the tax efficiency of the funds because it has an impact on the portfolio's performance. If you know how to identify the right funds, you can get the most out of your portfolio by reducing fund expenses and tax costs.
The Worst Investments for Taxable Accounts
You should first figure out which funds are the worst for taxable accounts. Avoiding short-term losses is frequently the best way to win in the long run. When investing in taxable accounts, the quickest way to lose money is to invest in mutual funds that pay the most taxes. Important: Capital gains, interest, and dividends are taxed on investments held in a regular brokerage account. When you sell a fund at a price (NAV) higher than what you paid for it, you'll have a gain on which you'll owe tax. Interest and dividends are taxed as ordinary income, just like any other source of income. When a fund manager sells securities within the fund, he or she earns capital gains. These profits (along with their associated taxes) are distributed to shareholders. Actively managed funds with high turnover ratios, funds that pay above-average dividends, and the majority of bond funds are the worst types of funds to hold in a taxable account. If you need to generate income from mutual funds in taxable accounts, you can use tax-efficient strategies such as tax-loss harvesting and the "bucket system approach."The Best Investments for Taxable Accounts
The best funds to hold are index funds and those that don't pay high or any dividends, such as small-cap growth funds. If you're looking for a way to generate income, municipal bond funds are a good option. They're tax-free on the federal level and, in some cases, on the state level. You can also look at the "tax cost ratio," which indicates how much of a fund's return is taxed. Look for the tax-to-cost ratio that is the lowest.Vanguard Funds to Consider for Taxable Accounts
In no particular order, here are some of the best Vanguard funds for taxable accounts.Vanguard Total Stock Market Index (VTSAX)
If you're looking for a tax-efficient core holding, consider the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) or the Vanguard Total Stock Market ETF (VTI). Small-cap stocks, which tend to boost long-term returns and reduce short-term dividend taxes, are included in the VTSAX and VTI. VTSAX has a 0.04 percent expense ratio. The initial investment is $3,000 as a minimum.Vanguard Tax-Managed Capital Appreciation Fund (VTCLX)
Vanguard offers a variety of tax-managed funds, with VTCLX providing the broadest stock exposure. The fund invests in mid- and large-cap stocks in the United States, employing a unique index investing strategy that keeps tax costs low and overall expenses low. VTMFX has a 0.09 percent expense ratio. To begin, a $10,000 investment is required.Vanguard Tax-Managed Balanced Fund (VTMFX)
If you're looking for a one-fund solution for your taxable account, VTMFX may be a good fit. The fund's portfolio is made up of about half of mid- and large-cap U.S. stocks and half of the federally tax-exempt municipal bonds. VTMFX has a 0.09 percent expense ratio. A $10,000 start-up investment is required.Vanguard Intermediate-Term Tax-Exempt Fund (VWITX)
VWITX invests in high-quality municipal bonds that are federally tax-exempt. This mix of quality and tax efficiency could give you both stability and diversification. VWITX has a 0.17 percent expense ratio. A $3,000 start-up investment is required.Vanguard Tax-Exempt Bond Index (VTEAX)
If you're looking for a bond index fund with broad diversification and tax efficiency, VTEAX is a good choice. It's available as Admiral Shares with a 0.09 percent expense ratio and a minimum investment of $3,000. The Vanguard Tax-Exempt Bond ETF is another option (VTEB). VTEAX has a 0.09 percent expense ratio. A $3,000 start-up investment is required.Tax Efficiency and Vanguard Funds
Actively managed funds are often more tax efficient than index funds. They follow a benchmark index passively, resulting in a very low turnover or the buying and selling of securities such as stocks and bonds within a portfolio. Tip: Because index funds have a low turnover rate, they produce fewer capital gains. The turnover of actively managed funds is much higher than that of index funds. The turnover ratio of a mutual fund can be found online. You might also want to look into Vanguard's exchange-traded funds (ETFs), which are index-tracking passive investments. They have very low turnover ratios, just like index funds. They frequently have very low expense ratios, sometimes as low as 0.20 percent, especially Vanguard's ETFs. Your investment objective and risk tolerance should come first when selecting the best mutual funds. When you know which funds are best for your objectives, you can start your search there.Most Commonly Asked Questions (FAQs)
What are the advantages of transferring your brokerage account to Vanguard?
Although a Vanguard brokerage account has some advantages over a mutual fund account, both are subject to the same taxation. You won't notice a difference if you only own Vanguard mutual funds, but it might be worth switching, especially if you want to buy individual stocks in the future. A Vanguard brokerage account, unlike a mutual fund account, allows you to buy stocks and ETFs more easily.When are dividends paid out by Vanguard funds?
Although not all Vanguard funds pay dividends on the same schedule, the majority do so at the end of March, June, September, and December. Some companies only pay dividends once a year (in December), while others pay them on the first of every month. For a complete list of dividend dates, see Vanguard's dividend schedule. We do not offer or advise on tax, investment, or financial services. The information is being provided without taking into account any specific investor's investment objectives, risk tolerance, or financial circumstances and may not be suitable for all investors. Past performance does not guarantee future outcomes. Investing entails risk, including the possibility of losing money.