The tax benefit difference between VTI (ETF) and VTSAX (mutual fund) for a $1,000,000 investment will depend on the realized capital gains distributions from VTSAX and how they are taxed, as VTI typically has negligible distributions due to its tax-efficient structure. Here's a step-by-step analysis:
Assumptions
Investment Amount: $1,000,000.
Average Annual Return: 7% (a reasonable long-term stock market return).
Capital Gains Distributions for VTSAX: Historically, VTSAX has distributed 0.3% to 0.5% of Net Asset Value NAV annually as taxable capital gains.
Tax Rate:
Long-term capital gains tax rate: 15% (most investors).
For higher-income investors: 20% (plus a potential 3.8% Net Investment Income Tax for very high earners).
Tax Costs for VTSAX
Capital Gains Distribution: Assume VTSAX distributes 0.4% of NAV annually as capital gains.
Taxable Amount:
$1,000,000 × 0.4% = $4,000 (annual taxable capital gains).
Tax Liability:
At 15%: $4,000 × 15% = $600.
At 20%: $4,000 × 20% = $800.
With 3.8% NIIT: $4,000 × 23.8% = $952.
Tax Costs for VTI
Capital Gains Distributions: Negligible or zero for most years due to the in-kind creation/redemption process.
Taxable Amount: Zero under typical circumstances.
Cumulative Tax Difference Over Time
For simplicity, let's calculate the 10-year cumulative tax impact assuming no changes in tax rates or distributions:
VTSAX Annual Tax Cost (at 15% tax rate): $600.
Over 10 years: $600 × 10 = $6,000.
VTSAX Annual Tax Cost (at 20% tax rate): $800.
Over 10 years: $800 × 10 = $8,000.
VTSAX Annual Tax Cost (at 23.8% tax rate): $952.
Over 10 years: $952 × 10 = $9,520.
VTI Annual Tax Cost: Essentially $0.
Over 10 years: $0.
Summary of Tax Benefit Difference
If you're in the 15% tax bracket: $6,000 saved over 10 years by holding VTI instead of VTSAX.
If you're in the 20% tax bracket: $8,000 saved over 10 years.
If you're in the 23.8% tax bracket: $9,520 saved over 10 years.
This calculation demonstrates that the tax-efficiency of VTI can result in substantial savings over time, especially for high-net-worth individuals investing in taxable accounts.
