Tax Consequences of Vanguard Mutual Fund Share Conversions

by Michael on May 21, 2013

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A reader recently wrote in to ask the following about Vanguard Admiral Share conversions:

“We’re getting close to being able to convert our Vanguard mutual funds to Admiral Shares. We’re pretty excited about this, but I’m also a little worried. Are there any tax consequences that I should be aware of? I’d hate to get a huge tax bill at the end of the year.”

That’s an excellent question. In fact, I wondered the same thing before we were eligible to convert to Admiral Shares a few years back.

Obviously, if you’re holding your funds in a retirement account, this is a complete non-issue. But what about taxable accounts? The good news is that conversions between share classes are completely tax-free.

And guess what? This tax-free treatment actually extends to conversions between Vanguard mutual funds and their equivalent ETFs.

Yes, they have a handful of bond index funds that don’t allow conversions to ETF shares, but the rest of their funds do. This assumes, of course, that there is an ETF equivalent — not all Vanguard funds have an ETF share class.

Just keep in mind that ETF conversions are a one-way street. You can convert from mutual fund to ETF shares but not vice versa.


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