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Vanguard announced new annual fees on legacy mutual-fund-only accounts to start September 1, 2023, so this convinced me at long last to transition all my Vanguard legacy accounts to brokerage accounts, which will have no annual fees. The transition is now complete. But there’s a catch.

One of my taxable mutual-fund-only accounts had always been set up to direct all dividends and capital gain distributions from all holdings in that account to a Vanguard Federal Money Market mutual fund in the same account, VMFXX, where funds would accumulate for a few months at a time until I decided that it’s time to rebalance fund percentages or reinvest dividends. This made it easy to coordinate tax loss harvesting on short notice without wash sale worries caused by a recent automatic dividend reinvestment.

But VMFXX is also Vanguard’s default fund for brokerage settlement accounts.

Problem: Now that the transition to brokerage accounts is complete, I have all my former funds including VMFXX, plus I have a new settlement account in VMFXX that currently has a zero balance. As soon as dividends sweep into the settlement account, I’ll own VMFXX twice in the same brokerage account, some as a regular holding, some in the settlement account.

I tried experimentally setting up a SELL transaction for all shares of VMFXX with the proceeds going to the settlement account as VMFXX, and the transaction input was accepted. I canceled it for now. There are no tax implications, no capital gains, because the share price is always $1 per share.

Question: Is there any reason to continue keeping VMFXX as a separate holding when it could be in the settlement account as the same fund? It seems like a no brainer: just put the dollars in the settlement account as VMFXX. Am I missing something?

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  • Do you have a link to Vanguard's announcement? I didn't find anything on the Vanguard site. Commented Jul 28, 2023 at 2:59
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    @DilipSarwate For staying on the legacy platform with less than $5 million total, it's $25 per year for each mutual fund in each account. So for example 4 accts with 5 funds in each is 4 x 5 x $25=$500. The announcement came as email. See discussion at bogleheads.org/forum/viewtopic.php?p=7293732#p7293732 but for relevant Vanguard fee schedule see "Mutual fund-only accounts" at investor.vanguard.com/client-benefits/account-fees P.S. Fee waived if you use Vanguard Advisory Services (for a different fee).
    – MTA
    Commented Jul 28, 2023 at 4:03

3 Answers 3

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I've encountered this before. It's better to sell VMFXX and get it converted into the settlement fund, because that can be withdrawn immediately, whereas a mutual fund holding (even if it's the same as your settlement fund) will have to be sold on a business day before it can be withdrawn. I don't see any advantage to holding VMFXX separately. If you were going to do this you might as well go with VMRXX which generally gives a slightly higher yield (ignoring possible state and local tax considerations).

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    With the added info on funds availability, I choose this answer as the most useful. As a final check, I spoke with a rep at Vanguard today, and they confirmed all, including the desirability of keeping any VMFXX assets in the settlement fund for quicker access. They also pointed out that a brokerage account is allowed to exist with no investments except a balance in the settlement fund, and even with no balance at all. Unlike legacy accounts, brokerage accounts are never purged for low or no balance and are only closed upon request. Good for future reference.
    – MTA
    Commented Jul 28, 2023 at 17:06
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Is there any reason to continue keeping VMFXX as a separate holding when it could be in the settlement account as the same fund?

No.

The sweep fund will show up as balance available for trading, the separate holding will not, so if you want to explicitly own shares in that fund then you'd want the distinction. But it doesn't sound like you do.

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  • In fact I don't want to explicitly own shares of that fund, but if I do in the future, I could simply "own" it in the settlement account. It pays the same dividends either way, so I don't see a reason not to liquidate the holding into the settlement fund. But maybe there's something else I'm not considering, which is why I'm asking here.
    – MTA
    Commented Jul 27, 2023 at 20:05
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I don't see any reason to change what you're doing. The sweep is a fairly small amount compared to the portfolio. What you want to reinvest how much of it in depends on where your portfolio is departing from your plan. The fact that they're now putting it in a separate account in this fund for you, rather than a money-marker if whatever they were using before is a minor detail that doesn't change this significantly.

Personally, I'd just have them reinvest dividends from each fund directly in that fund rather than take this side jaunt. Then you don't have to do anything but rebalance in your usual schedule.

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  • To clarify, on this particular account I'm intentionally not reinvesting dividends automatically so as to avoid violating wash sale rules if I want to tax-loss-harvest a fund that declared a dividend within the past 30 days.
    – MTA
    Commented Jul 27, 2023 at 20:00
  • @mta: Ok, your choice. The rest still holds, I think. I would stick with the process you're comfortable with and ignore what form the cash is temporarily stored in. Or I'd be explicit about where I wanted it to go rather than taking the default.
    – keshlam
    Commented Jul 27, 2023 at 20:21

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