Looking at Vanguard funds for an inheritance, hmmm

[Telly]

This may be a bit unusual... so I need to paint-in the background first:

DW will be receiving an inheritance. It will be kept as "Separate Property" in our Shared-Property state. Which means that all Income, as defined by our state, must not be co-mingled, or else the Separate Property reverts to Shared Property. Years ago, each of us received inheritances (no, NOT yacht class!) which we kept as separates. At the time, we each put them into moderate-allocation (balanced) funds. DW's went into Wellington. Dividends are taken as cash, any CGs are reinvested. These are in TAXABLE accounts, an important point. For years, the dividends that these put out were helpful. But Dividends and Capital Gains became an issue with respect to Roth conversions.

To be able to continue Roth conversions, the next inheritance can NOT go into Wellington! I'm doing VG fund research for DW and sharing it with her. The ultimate decision is hers. And it will be a VG mutual FUND, not an ETF. (please, let's not get into ETFs)

First looked at VBIAX, the VG Balanced Index Fund. Even though it's an index, divs will be a problem, and the effects from its fixed side, too.

Then VTMFX, the VG Tax-Managed Balanced Fund. A bit better, but still too much, and also the CGs that can come about due to managing.

Then, in a big shift, to skip balanced funds, which have the built-in problem in a taxable account. So then VFIAX the VG S&P 500 Fund. Dividends are lower, and CGs are extremely rare. So that is a possibility, with all comments about increased volatility in comparison to balanced funds understood.

Then, thinking about it, going further out in volatility, Growth Funds can be very low-dividend, how about a Growth INDEX? Looking at VIGAX, the VG Growth Index Fund. Divs are significantly less than the S&P 500 fund, which makes sense. Did find a bogleheads wiki on it, that had fund inflow/outflows, in 2019 the outflows were large, the fund is smaller than it used to be.

More research is required, need to look at a greater history of divs & CGs rather than just the easy-to-find 2020 distributions.

Does anyone have VIGAX? Anything else at VG I and DW should look at too? Comments welcome on the search for a fund in this odd situation! Please remember, it will be going into a stand-alone TAXABLE account.

 

[bloom2708]

Can you just use Total US (VTSAX) and Total International (VTIAX) in a mix of say 80/20 and then increase bonds/fixed in other pre-tax accounts?

Without the full picture it is hard to give advice. Even though this is separate, still consider your portfolio as a whole being. Growth index is a slice of the Total US market. I'd go with the Total US index 9/10 times. Season with a bit of Total International for diversity.

 

[SecondCor521]

I don't have VIGAX. You might look at VTSAX, which is total market. It looks to have a slightly lower dividend rate than VFIAX in 2020, plus in theory it should have fewer capital gains because it doesn't have to buy/sell as stocks enter/leave the S&P500.

But probably a bigger concern than tax efficiency is what your wife feels comfortable with in terms of asset allocation and volatility. VTSAX is probably much more volatile than VBIAX.

 

[Masquernom]

You could split it between the S&P and a muni bond fund. I assume Vanguard has a muni bond fund. The S&P payout would be greatly reduced, and the muni fund is federal tax free. If you live in the right state, the muni fund might be state tax free.

 

[N02L84ER]

We have owned shares of VIGAX in a taxable account since 1998. Around 2006, we had deductible losses on sales. At the time we were thinking "what a lousy investment", but we held onto our shares hoping the sector was just out of favor. Now, 82%+ of any sale would be long term capital gains. The dividends have trended down from 1.6% to 0.9% over the past decade. The NAV has doubled in the last 5 years, so we won't be buying any shares until there is a correction. Just our 2 cents.

 

[Telly]

Can you just use Total US (VTSAX) and Total International (VTIAX) in a mix of say 80/20 and then increase bonds/fixed in other pre-tax accounts?

Without the full picture it is hard to give advice. Even though this is separate, still consider your portfolio as a whole being. Growth index is a slice of the Total US market. I'd go with the Total US index 9/10 times. Season with a bit of Total International for diversity.

We have kept our separates as totally separate and not included in any balancing actions. As it is, they have been balanced funds, so they have taken care of themselves. DW's upcoming inheritance will most likely be a departure from balanced funds if we are to have any hope of continuing conversions from my big IRA. Our separates are unlikely to be spent by either us in our lifetimes, other than what income they throw off that we must take.

I don't have VIGAX. You might look at VTSAX, which is total market. It looks to have a slightly lower dividend rate than VFIAX in 2020, plus in theory it should have fewer capital gains because it doesn't have to buy/sell as stocks enter/leave the S&P500.

But probably a bigger concern than tax efficiency is what your wife feels comfortable with in terms of asset allocation and volatility. VTSAX is probably much more volatile than VBIAX.

VTSAX will now be in our possibilities to consider. It looks like the SECOND least-current-income-gaining of any of the ones I've looked at so far. Yeah, definitely more volatile than any balanced fund! Which may not be an issue at all if her goal is to pass it on to our children upon her death. But a goal to be reasonably certain of before implementing! It WOULD be a back-off in volatility compared to VIGAX.

You could split it between the S&P and a muni bond fund. I assume Vanguard has a muni bond fund. The S&P payout would be greatly reduced, and the muni fund is federal tax free. If you live in the right state, the muni fund might be state tax free.

Good thought!... but you made me realize I left out an important point in describing the background in my OP... IRMAA! We are both over 65. The "income" used for IRMAA thresholds is MAGI, not AGI, MAGI being AGI plus tax-exempt income, which we already have in a muni fund. Any additional tax-exempt income puts IRMAA's thresholds dollar-for-dollar closer, thereby reducing or making more painful the Roth conversions.

We have owned shares of VIGAX in a taxable account since 1998. Around 2006, we had deductible losses on sales. At the time we were thinking "what a lousy investment", but we held onto our shares hoping the sector was just out of favor. Now, 82%+ of any sale would be long term capital gains. The dividends have trended down from 1.6% to 0.9% over the past decade. The NAV has doubled in the last 5 years, so we won't be buying any shares until there is a correction. Just our 2 cents.

The low dividends would be good in our case. It would seem that any sale or rearrangement of the taxable separate once established, over time, is going to be a taxable event that may be large. Unless I recommend that DW put it into a Money Market... no, I won't do that If the goal is truly to pass it on to the next generation, then a step-up in basis will occur on death, and heirs can decide at that point how/what they want to invest it in.
I think this all is making it clear that DW needs to think over the goal for her upcoming separate. If after more thought she wants some of it to be withdrawable "fun money", then it might be best to split it up or something. I prefer it to be in a state that she understands and can administer herself without me. Without killing our ability to do Roth conversions. Decisions, decisions...