January 9, 2019 at 1:29 pm #1970HootzParticipant
I am somewhat familiar with the “6-month rule” on selling shares at a loss on a tax-exempt bond fund (if the shares produced any tax-exempt interest, then the loss is reduced, dollar for dollar, by that interest).
However, my understanding is that Vanguard bond funds (and others) are not subject to the 6-month rule because of the way they accrue and payout interest (dividends). Specifically, if the fund, like this one, declares dividends daily and pays them monthly or more frequently. Is this correct?
At the end of December, I sold shares in Vanguard High-Yield Tax-Exempt Bond Fund, which included losses on reinvested dividends within the prior 6 months. If this fund is not subject to the preceding 6-month rule, then my loss will not need to be reduced, dollar for dollar, by that interest.
HootzJanuary 9, 2019 at 5:47 pm #1971Kaye ThomasModerator
Yes, that’s correct. I’ll add this information to our guidance on this rule. Here’s the language from Internal Revenue Code section 852(b)(4)(E)(i):
Except as otherwise provided by regulations, subparagraph (B) [the loss reduction rule] shall not apply with respect to a regular dividend paid by a regulated investment company which declares exempt-interest dividends on a daily basis in an amount equal to at least 90 percent of its net tax-exempt interest and distributes such dividends on a monthly or more frequent basis.
January 9, 2019 at 9:41 pm #1983kaneoheParticipant
- This reply was modified 3 years ago by Kaye Thomas.
So is this practice (in italics above) the exception or the general practice for name brand TE funds?January 9, 2019 at 10:22 pm #1984HootzParticipant
Kaye, thank you.
Kaneohe, I am going to take a crack at answering your question. One needs to look in the fund’s prospectus to see whether a fund is exempt from the 6-month rule. You are looking for the statement, “dividends are declared daily and paid monthly”. If it says “dividends are declared monthly” (or quarterly), the 6-month rule applies. I do not know how the likes of Fidelity (“name brand”) handle their tax-exempt bond funds.
To my understanding, ETFs and the Tax-Exempt Bond Index Fund (which is the mutual fund class of an ETF) are subject to the 6-month rule, because they declare dividends monthly, not daily.
And we are back to the prospectus.
HootzJanuary 9, 2019 at 10:32 pm #1985Kaye ThomasModerator
I don’t know. I saw a posting on the Bogleheads forum indicating most but not all Vanguard bond funds follow this practice. This is just a guess, but it may be that for certain types of TE funds it’s hard to justify the admin costs of declaring daily dividends and making monthly payments. If you potentially have this issue you really have to check the particular mutual fund. The answer may not be in the summary prospectus, but it should be in the full prospectus.January 10, 2019 at 9:20 pm #1995KAWillParticipant
Vanguard introduced quite a few new bond funds in recent years. These funds appear to have moved from declaring dividends daily to including daily income in NAV and going ex-dividend at the end of the month. These funds also typically have an ETF as an available share class. That may be a factor in making the change. The list of new bond funds includes many taxable funds and one tax-exempt index fund.
Here are examples of the two types of funds. Vanguard bond funds that declare dividends daily provide a distribution yield in the fund profile. That is not the case for the funds that include daily income in NAV.
Including daily income in NAV would seem to be a more efficient and lower cost approach. In the case of the daily dividend funds, Vanguard calculates daily accrued dividends every trading day and provides that information to the shareholder. The daily accrued dividends can be viewed online under Balances and Holdings by selecting the tab labeled Balances by Date. This information is also provided for Vanguard Money Market funds.
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