Specific Fund Transaction Advice

[TromboneAl]

We have some money in the Vanguard GNMA fund in our taxable account. I'm considering converting that to the Vanguard California Intermediate Term Tax Exempt fund.

I'd generate a loss for the year of about $1000, and even in the 20% tax bracket the equivalent yields of those two funds have been very close in the long run.

Any comments?

 

[ats5g]

Hey Al,

Not a bad idea. Both are intermediate term bond funds.

- Alec

 

[dex]

If the tax equivalent yields are the same why make the switch?

Do you have there investment income that the loss can offset? That is the only benefit I can see.

 

[TromboneAl]

If the tax equivalent yields are the same why make the switch?

I guess I just don't like paying taxes. I know it's not totally rational.

Do you have there investment income that the loss can offset? That is the only benefit I can see.

I need help here, because I'm pretty ignorant regarding taxable accounts.

Question 1: You're saying I need to have investment income in the taxable account in order to benefit? For example, if this were my only account, couldn't I just deduct the loss from my general income?

Question 2: On the Cost Basis page of my Vanguard Accounts and Activity, it shows a Realized Gain for another fund that is higher than the loss. However, that fund is a short-term treasury account.

 

[brewer12345]

Al, GNMAs are very different from plain old intermediate bonds. I think the transaction makes sense on two levels: 1) you generate a tax loss and don't give up yield on the underlying 2) I'd not be happy with a lot of GNMA exposure right now.

 

[TromboneAl]

What are your concerns about GNMAs?

 

[brewer12345]

If rates continue to rise and refi and purchase activity slows in the mortgage market, the duration of GNMAs increases while the coupon stays the same. At the exact same time, rates are rising. All of this means that GNMAs take a beating when rates rise, much more so than true intermediate term bonds. To compensate for this, investors get a slightly higher yield than treasuries. Given what appears to be going on in the RE and mortgage markets, switching to a high quality muni portfolio which doesn't cost you anything in after-tax yield looks like a no-brainer.

 

[plattj1]

Al -

I have been in the CA Int and CA Lt bond funds for more than a year in my taxable account. Even though they may show a loss due to share price flucuation they are both positive if you include dividends. The Int is running about 1% positive over 12 months and the Lt is running about 3%.

If you are a Californian the tax break is substantial. I am thinking about switching my MM fund over to the CA dedicated version at Vanguard as well. This year the CA MM fund would have outperformed the Int fund, next year who knows? If you should get a vision while dreaming please share it 

You could probably do a little better with I bonds, but this is simple and easy. So far so good.