Mutual Fund - PRWCX Tax ?

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OneWorld111
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Joined: Tue Mar 20, 2012 9:59 am

Mutual Fund - PRWCX Tax ?

Post by OneWorld111 »

BHs:

I have been invested (Non Retirement Account) in TRP- PRWCX fund over past few years N it has done pretty good so far. Its only 1 way deposits and no withdrawals till date. Why do I see Long Term and Short Term Capital Gains in FORM 1099 DIV every year?

Is this the main reason to replace it with similar ETF ? Expense Ratio is high compared to Vanguard or Fidelity similar funds, I can live with it.

thanks,
OneWorld
livesoft
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Re: Mutual Fund - PRWCX Tax ?

Post by livesoft »

You see realized capital gains because the fund managers trade stocks and realize capital gains. By law, those have to be passed on to shareholders, so that the shareholders can pay income tax on them if the shareholders hold the shares in a so-called non-qualified taxable account.

Some of this is explained in IRS Publication 550.
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sycamore
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Re: Mutual Fund - PRWCX Tax ?

Post by sycamore »

OneWorld111 wrote: Fri Jul 30, 2021 3:38 pm BHs:

I have been invested (Non Retirement Account) in TRP- PRWCX fund over past few years N it has done pretty good so far. Its only 1 way deposits and no withdrawals till date. Why do I see Long Term and Short Term Capital Gains in FORM 1099 DIV every year?

Is this the main reason to replace it with similar ETF ? Expense Ratio is high compared to Vanguard or Fidelity similar funds, I can live with it.

thanks,
OneWorld
+1 to livesoft's answer about why you get capital gain distributions.

Avoiding capital gain distributions is one big reason to invest in ETFs, or in Vanguard index mutual funds, which -- because of a patented process that lets them avoid capital gains -- also don't distribute capital gains.

Another reason to use ETFs is that they're portable - you can more easily / cheaply move your assets from one financial custodian/broker to another. With mutual funds, some brokers may not hold specific funds, or if they do they may charge a transaction fee for selling shares.

PRWCX is an actively managed fund with high turnover. As noted by the wiki article Tax-efficient fund placement, the fund is best suited in a tax-advantaged account[/url] like a Traditional or Roth IRA.

I don't know if you can find a "similar" ETF. To be like PRWCX, an ETF would need to allow for a mix of stocks and bonds and cash, and follow a strategy of investing " primarily in the common stocks of established U.S companies believed to have above-average potential for capital growth."

If you want to stick with T. Rowe Price management, they now offer ETFs. See https://www.troweprice.com/financial-in ... /etfs.html
Topic Author
OneWorld111
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Joined: Tue Mar 20, 2012 9:59 am

Re: Mutual Fund - PRWCX Tax ?

Post by OneWorld111 »

Thanks for the replies.

I can exit the mutual fund and open an ETF. I will face a tax payment as I will exit the fund or can it be in kind transfer if its with the TRP ETF?
sycamore
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Re: Mutual Fund - PRWCX Tax ?

Post by sycamore »

OneWorld111 wrote: Fri Jul 30, 2021 4:28 pm Thanks for the replies.

I can exit the mutual fund and open an ETF. I will face a tax payment as I will exit the fund or can it be in kind transfer if its with the TRP ETF?
You'll face taxes on the capital gains from selling.

Selling is the only way to "get out of" the fund. In-kind transfer just refers to transferring a security from one custodian to another.
mkc
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Re: Mutual Fund - PRWCX Tax ?

Post by mkc »

OneWorld111 wrote: Fri Jul 30, 2021 3:38 pm BHs:

I have been invested (Non Retirement Account) in TRP- PRWCX fund over past few years N it has done pretty good so far. Its only 1 way deposits and no withdrawals till date. Why do I see Long Term and Short Term Capital Gains in FORM 1099 DIV every year?
Fund distributions. Even if you are reinvesting them, the fund kicks off dividends, ST and LT gains each December. Those show up on your 1099.

There is no ETF equivalent for PRWCX (T.Rowe Price Capital Appreciation). You cannot convert it to an ETF.
Topic Author
OneWorld111
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Re: Mutual Fund - PRWCX Tax ?

Post by OneWorld111 »

In this situation, should I avoid investing further in Mutual fund (will withdraw at later date) and open closest ETF?

Thanks again,
Oneworld
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grabiner
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Re: Mutual Fund - PRWCX Tax ?

Post by grabiner »

OneWorld111 wrote: Fri Jul 30, 2021 4:28 pm I can exit the mutual fund and open an ETF. I will face a tax payment as I will exit the fund or can it be in kind transfer if its with the TRP ETF?
You will owe a tax bill on your capital gains, but the gain will be the difference between the sale price and the total amount invested, including reinvested dividends and capital gains. If you bought the fund for $10K, and you used $1K in dividends and $2K in capital gain distributions to buy more shares, your basis is $13K. If you sell now for $15K, your capital gain is $2K, not $5K, because $3K in gains was already taxed.
OneWorld111 wrote: Fri Jul 30, 2021 9:10 pm In this situation, should I avoid investing further in Mutual fund (will withdraw at later date) and open closest ETF?
Taxable stock investments should be in ETFs (or Vanguard stock index funds, which have an ETF share class and thus share the tax benefits of the ETF) to minimize taxes. Mutual funds which generate capital gains are fine in IRAs, where this is not an issue.

Whether it should be the most similar ETF depends on your needs. If you are going to sell this fund, you should look at your portfolio and decide on what ETFs are appropriate. The default choices are usually a total US market ETF and a total international stock ETF, so that you get as well-diversified a portfolio as possible. But you might not hold those both in your taxable account; if your 401(k) has better US than international stock options, you might hold all US stock in the 401(k) and hold only an international ETF in your taxable account.
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