Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

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scrooge-mcduck
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Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by scrooge-mcduck »

I have roughly 3M in DFEOX. 1.7M in unrealized gains. Worth it to sell now and eat the tax to move into a similar vanguard fund? I was thinking VTSAX. Or should I hold it and let it grow despite slightly higher fees?

DFEOX fees are 0.15% whereas VTSAX fees are 0.04%. I know we can't predict what taxes will be in the future, but I don't know if it's worth it to pay taxes now or the slightly higher management fees now.

Any suggestions? I have an account at an investment advisor that I draw money from, my personal account is my retirement money that I plan on letting sit there for 25-30 years.
psteinx
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

Let's say your tax rate (fed + state + local) if you sell, on the portion that's gains, is 25% (adjust for your own figures)

Of the overall investment, 1.7/3.0 = 56.67% is gains.

So the tax you'd pay is 56.67% * 25% = 14.17%.

You can look at that 14.17% as a sort of indefinite-term loan, at 0% interest, from the various taxing agencies.

What do you think the expected nominal returns (CAGR) on your investments will be? Maybe 6%?

If so, then the expected value of that free loan is about 14.17% * 6% = 0.85%/year.

You're only paying an extra 0.11%/year in expenses. So unless there's another reason (better alpha or whatever) to prefer VTSAX over DFEOX, then you should probably keep the DFEOX, albeit redirect dividends into a cash account so you can invest as you see fit, going forward, and also perhaps liquidate a small portion of the DFEOX each year, to fill any available lower tax bracket space, for charitable donations, etc. And of course, if you see your tax situation changing in the future, that would impact the analysis too. Also, I don't know what DFEOX is, but assume it's a similar fund to VTSAX.
Last edited by psteinx on Wed Oct 27, 2021 2:14 pm, edited 2 times in total.
Pickles_Ice_Cream
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by Pickles_Ice_Cream »

See Wiki:
https://www.bogleheads.org/wiki/Paying_ ... itch_funds

0.15% Expense Ratio is still rather low. You'll be paying about an extra $3,300 per year if you don't exchange. Capital gains tax on $1.7M completely dwarves that even if you spread it out over a number of years. I personally wouldn't sell.

Probably wouldn't reinvest dividends, though.
AA: 80% Equities / 20% Fixed Income | 25% of Equities in International. | 25% of Equities in Small Cap Blend. | 50% of Fixed Income in TSP G Fund, 50% in Total Bond | Two Pensions Expected (Federal and State)
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by increment »

psteinx wrote: Wed Oct 27, 2021 1:52 pm Also, I don't know what DFEOX is, but assume it's a similar fund to VTSAX.
It does not appear to be an index fund, at any rate. Its prospectus says
The Portfolio invests in companies of all sizes, with increased exposure to smaller capitalization, lower relative price, and higher profitability companies as compared to their representation in the U.S. Universe. ... The Portfolio’s increased exposure to smaller capitalization, lower relative price, and higher profitability companies may be achieved by decreasing the allocation of the Portfolio’s assets to larger capitalization, higher relative price, or lower profitability companies relative to their weight in the U.S. Universe. ... In assessing relative price, the Advisor may consider additional factors such as price to cash flow or price to earnings ratios. In assessing profitability, the Advisor considers different ratios, such as that of earnings or profits from operations relative to book value or assets. The criteria the Advisor uses for assessing relative price and profitability are subject to change from time to time.
Topic Author
scrooge-mcduck
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by scrooge-mcduck »

Thanks, according to vanguard's calculator I'd save about $500k-$1M over 30 years in fees and loss of compounded growth, assuming 6-7% returns, in the current dimensional fund vs. if I switched to a similar Vanguard fund. The dimensional fund tracks the Russell 3000.

So I'm weighing saving, best guess $500k-$1M after 30 years vs paying $400k in taxes now. Am I thinking about it correctly in that the present value of that $1M after 30 years would be only roughly $135k ? Therefore better to *NOT (Typo fixed) pay taxes now?
Last edited by scrooge-mcduck on Wed Oct 27, 2021 3:02 pm, edited 1 time in total.
Radiata
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by Radiata »

Here's a comparison of the two funds:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

That's a lot in capital gains. Using the spreadsheet that was linked above and the averages from PV, even if the current fund continues to under perform by 0.4%, you wouldn't make up the tax losses in 30 years.

What kind of management fee do you pay the advisor? Is it an assets under managment (AUM) fee? Moving the account to Vanguard would improve the performance by whatever the AUM fee is since you would no longer be paying an advisor. Expense ratios only drag down the performance. You don't pay it directly like the advisor fee. Higher expense ratios are an indicator that the overall performance will be lower. That said, 0.15% is a lot lower than most active funds.
psteinx
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

scrooge-mcduck wrote: Wed Oct 27, 2021 2:16 pm Thanks, according to vanguard's calculator I'd save about $500k-$1M over 30 years in fees and loss of compounded growth, assuming 6-7% returns, in the current dimensional fund vs. if I switched to a similar Vanguard fund. The dimensional fund tracks the Russell 3000.
I don't know about Vanguard's calculator, but I gave you the math up above. It's not too hard. Yeah, my #s are guesses - use better numbers of your own estimation. But, barring tax changes or the like, it's not close - keep the DFA fund.

Note that if you redirect dividends from the DFA fund, then of the combined position (original shares in the DFA fund, plus shares of VTSAX bought with the dividends), the portion represented by the DFA holding will shrink slowly over time.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by Stinky »

scrooge-mcduck wrote: Wed Oct 27, 2021 2:16 pm So I'm weighing saving, best guess $500k-$1M after 30 years vs paying $400k in taxes now. Am I thinking about it correctly in that the present value of that $1M after 30 years would be only roughly $135k ? Therefore better to now pay taxes now?
I think you’ve got it backwards.

Why would you pay $400k in taxes now for a future gain with a present value of roughly $135k?

As others have said - keep the fund, direct its dividends to a lower cost fund elsewhere, maybe harvest some gains when prudent or donate some shares to charity.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
scrooge-mcduck
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by scrooge-mcduck »

Right, I typed now instead of not. Typo fixed, just wanted to gut check this decision, thanks everyone!
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by mikejuss »

Stinky wrote: Wed Oct 27, 2021 2:44 pm
scrooge-mcduck wrote: Wed Oct 27, 2021 2:16 pm So I'm weighing saving, best guess $500k-$1M after 30 years vs paying $400k in taxes now. Am I thinking about it correctly in that the present value of that $1M after 30 years would be only roughly $135k ? Therefore better to now pay taxes now?
I think you’ve got it backwards.

Why would you pay $400k in taxes now for a future gain with a present value of roughly $135k?

As others have said - keep the fund, direct its dividends to a lower cost fund elsewhere, maybe harvest some gains when prudent or donate some shares to charity.
Beginner's query: if one elects to not reinvest the dividends generated by an index fund (and instead to have them directed to a money market-fund), can the dividends be used to purchase a different index fund, without tax consequence?
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by ShadowRegent »

mikejuss wrote: Wed Oct 27, 2021 3:31 pm Beginner's query: if one elects to not reinvest the dividends generated by an index fund (and instead to have them directed to a money market-fund), can the dividends be used to purchase a different index fund, without tax consequence?
Dividends are taxable whether you automatically reinvest them or receive them in cash. There's no tax benefit either way.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by mikejuss »

ShadowRegent wrote: Wed Oct 27, 2021 3:37 pm
mikejuss wrote: Wed Oct 27, 2021 3:31 pm Beginner's query: if one elects to not reinvest the dividends generated by an index fund (and instead to have them directed to a money market-fund), can the dividends be used to purchase a different index fund, without tax consequence?
Dividends are taxable whether you automatically reinvest them or receive them in cash. There's no tax benefit either way.
Thank you. And what if one redirects one's capital gains in an index fund to another index fund--those amounts are fully taxable as income, no?
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

mikejuss wrote: Wed Oct 27, 2021 3:43 pm
ShadowRegent wrote: Wed Oct 27, 2021 3:37 pm
mikejuss wrote: Wed Oct 27, 2021 3:31 pm Beginner's query: if one elects to not reinvest the dividends generated by an index fund (and instead to have them directed to a money market-fund), can the dividends be used to purchase a different index fund, without tax consequence?
Dividends are taxable whether you automatically reinvest them or receive them in cash. There's no tax benefit either way.
Thank you. And what if one redirects one's capital gains in an index fund to another index fund--that's a taxable event, no?
There are capital gains DISTRIBUTIONS, which actually act pretty much like dividends, and can be distributed in cash, reinvested, etc. They're taxable regardless of what you do with them.

Then there are unrealized capital gains. The stocks that your fund holds have gone up in value, and so your fund's share price goes up in value, say, from $70/sh to $73/sh. But you don't have more shares. Those are not taxed until you sell some shares.

Note that ETFs and many Vanguard non-ETF funds that have ETF share classes tend to generate few if any capital gains distributions. But a relatively active conventional mutual fund will tend to have sizeable cap gains distros in an up market like we've recently had.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by mikejuss »

psteinx wrote: Wed Oct 27, 2021 3:47 pm
mikejuss wrote: Wed Oct 27, 2021 3:43 pm
ShadowRegent wrote: Wed Oct 27, 2021 3:37 pm
mikejuss wrote: Wed Oct 27, 2021 3:31 pm Beginner's query: if one elects to not reinvest the dividends generated by an index fund (and instead to have them directed to a money market-fund), can the dividends be used to purchase a different index fund, without tax consequence?
Dividends are taxable whether you automatically reinvest them or receive them in cash. There's no tax benefit either way.
Thank you. And what if one redirects one's capital gains in an index fund to another index fund--that's a taxable event, no?
There are capital gains DISTRIBUTIONS, which actually act pretty much like dividends, and can be distributed in cash, reinvested, etc. They're taxable regardless of what you do with them.

Then there are unrealized capital gains. The stocks that your fund holds have gone up in value, and so your fund's share price goes up in value, say, from $70/sh to $73/sh. But you don't have more shares. Those are not taxed until you sell some shares.

Note that ETFs and many Vanguard non-ETF funds that have ETF share classes tend to generate few if any capital gains distributions. But a relatively active conventional mutual fund will tend to have sizeable cap gains distros in an up market like we've recently had.
Thank you; this is helpful. Like many here, I use Vanguard, which allows for clients with a brokerage account to either reinvest or be paid out on both dividends and capital gains. My understanding is that either option is tax-neutral when it comes to dividends, because dividends are taxed regardless of whether they are reinvested or not. But should I elect to, say, receive a check for my capital gains, I'm assuming the check amount would be subject to the short-term capital gains tax, no?
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psteinx
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

mikejuss wrote: Wed Oct 27, 2021 3:51 pm
psteinx wrote: Wed Oct 27, 2021 3:47 pm
mikejuss wrote: Wed Oct 27, 2021 3:43 pm
ShadowRegent wrote: Wed Oct 27, 2021 3:37 pm
mikejuss wrote: Wed Oct 27, 2021 3:31 pm Beginner's query: if one elects to not reinvest the dividends generated by an index fund (and instead to have them directed to a money market-fund), can the dividends be used to purchase a different index fund, without tax consequence?
Dividends are taxable whether you automatically reinvest them or receive them in cash. There's no tax benefit either way.
Thank you. And what if one redirects one's capital gains in an index fund to another index fund--that's a taxable event, no?
There are capital gains DISTRIBUTIONS, which actually act pretty much like dividends, and can be distributed in cash, reinvested, etc. They're taxable regardless of what you do with them.

Then there are unrealized capital gains. The stocks that your fund holds have gone up in value, and so your fund's share price goes up in value, say, from $70/sh to $73/sh. But you don't have more shares. Those are not taxed until you sell some shares.

Note that ETFs and many Vanguard non-ETF funds that have ETF share classes tend to generate few if any capital gains distributions. But a relatively active conventional mutual fund will tend to have sizeable cap gains distros in an up market like we've recently had.
Thank you; this is helpful. Like many here, I use Vanguard, which allows for clients with a brokerage account to either reinvest or be paid out on both dividends and capital gains. My understanding is that either option is tax-neutral when it comes to dividends, because dividends are taxed regardless of whether they are reinvested or not. But should I elect to, say, receive a check for my capital gains, I'm assuming the check amount would be subject to the short-term capital gains tax, no?
The form that you receive the distribution in should generally not affect the taxes you pay on it. (There may be exceptions in the case, say, corporate actions like spinoffs, or for certain less common funds, but not for the typical Vanguard fund).

I can't remember if ST gains distributions are a thing anymore. I kinda think they can be, but are rare. Anyways, if you take your 1099s and give them to an accountant and/or properly get them into your tax software, it should do the computations. I doubt standard Vanguard funds (index or active) have much if anything in the way of ST gains distributions.
mikejuss
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by mikejuss »

psteinx wrote: Wed Oct 27, 2021 3:56 pm
mikejuss wrote: Wed Oct 27, 2021 3:51 pm
psteinx wrote: Wed Oct 27, 2021 3:47 pm
mikejuss wrote: Wed Oct 27, 2021 3:43 pm
ShadowRegent wrote: Wed Oct 27, 2021 3:37 pm

Dividends are taxable whether you automatically reinvest them or receive them in cash. There's no tax benefit either way.
Thank you. And what if one redirects one's capital gains in an index fund to another index fund--that's a taxable event, no?
There are capital gains DISTRIBUTIONS, which actually act pretty much like dividends, and can be distributed in cash, reinvested, etc. They're taxable regardless of what you do with them.

Then there are unrealized capital gains. The stocks that your fund holds have gone up in value, and so your fund's share price goes up in value, say, from $70/sh to $73/sh. But you don't have more shares. Those are not taxed until you sell some shares.

Note that ETFs and many Vanguard non-ETF funds that have ETF share classes tend to generate few if any capital gains distributions. But a relatively active conventional mutual fund will tend to have sizeable cap gains distros in an up market like we've recently had.
Thank you; this is helpful. Like many here, I use Vanguard, which allows for clients with a brokerage account to either reinvest or be paid out on both dividends and capital gains. My understanding is that either option is tax-neutral when it comes to dividends, because dividends are taxed regardless of whether they are reinvested or not. But should I elect to, say, receive a check for my capital gains, I'm assuming the check amount would be subject to the short-term capital gains tax, no?
The form that you receive the distribution in should generally not affect the taxes you pay on it. (There may be exceptions in the case, say, corporate actions like spinoffs, or for certain less common funds, but not for the typical Vanguard fund).

I can't remember if ST gains distributions are a thing anymore. I kinda think they can be, but are rare. Anyways, if you take your 1099s and give them to an accountant and/or properly get them into your tax software, it should do the computations. I doubt standard Vanguard funds (index or active) have much if anything in the way of ST gains distributions.
So I guess that I didn't understand the distinction between straight capital gains and capital-gains distributions, if I'm following you correctly. Straight capital gains can be realized only when one sells shares in an index fund, and those gains are taxed according to either the short- or long-term tax table. So do capital-gains distributions appear on one's 1099-DIV each year whether they are reinvested or cashed out?

FYI: the context for all of my questions is that I want to shift some money from stocks to bonds, but I do not want to trigger an otherwise routine taxable event.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

CG distributions appear on the 1099. There are a few categories of taxable distributions that show up on the 1099. You pay taxes on these whether you reinvest or not, and basically every fund SHOULD give you the option to receive these in cash, or perhaps reinvest. You get these whether you want them or not, through no direct action of your own (other than owning the fund in question). I *think* there are ST and LT versions of these, but the ST may just show up as ordinary (non-qualified) distributions. There are some other kinds of distributions, too, but for simplicity I'll ignore them.

Basically, a fund has cap gains distributions when it has been selling stuff internally. A fund holds a bunch of shares of Tesla, Tesla goes to the moon, the fund sells some, now it must issue CG distros to the fund's shareholders. The fund probably hopes most shareholders will reinvest them back into the fund, but generally the fund's shareholders have the option not to.

But, let's say the fund did not sell the Tesla, but held it. The Tesla has still gone way up, so the value of the fund, per share, has also increased (obviously the fund will have other stuff besides Tesla, but assume it's up in general). As a fund shareholder, you'll see that the price per share of the fund is higher - like my example, perhaps it has gone from $70 to $73 (or much higher). If you take no action, you face no immediate tax liability for that $3/share increase. But if you sell some shares, you have a capital gain - the difference between what you sell those shares for and your basis - generally what you paid for the shares. If you've been reinvesting dividends, basis can get trickier, as you likely bought shares at different times and prices.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by mikejuss »

psteinx wrote: Wed Oct 27, 2021 4:12 pm CG distributions appear on the 1099. There are a few categories of taxable distributions that show up on the 1099. You pay taxes on these whether you reinvest or not, and basically every fund SHOULD give you the option to receive these in cash, or perhaps reinvest. You get these whether you want them or not, through no direct action of your own (other than owning the fund in question). I *think* there are ST and LT versions of these, but the ST may just show up as ordinary (non-qualified) distributions. There are some other kinds of distributions, too, but for simplicity I'll ignore them.

Basically, a fund has cap gains distributions when it has been selling stuff internally. A fund holds a bunch of shares of Tesla, Tesla goes to the moon, the fund sells some, now it must issue CG distros to the fund's shareholders. The fund probably hopes most shareholders will reinvest them back into the fund, but generally the fund's shareholders have the option not to.

But, let's say the fund did not sell the Tesla, but held it. The Tesla has still gone way up, so the value of the fund, per share, has also increased (obviously the fund will have other stuff besides Tesla, but assume it's up in general). As a fund shareholder, you'll see that the price per share of the fund is higher - like my example, perhaps it has gone from $70 to $73 (or much higher). If you take no action, you face no immediate tax liability for that $3/share increase. But if you sell some shares, you have a capital gain - the difference between what you sell those shares for and your basis - generally what you paid for the shares. If you've been reinvesting dividends, basis can get trickier, as you likely bought shares at different times and prices.
Thanks again--a very informative 4,000th post. :beer
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

It's pretty common, I think, for folks to realize that certain funds they hold in taxable aren't what they'd choose if they could painlessly reconfigure things, NOW.

Fund ERs may be high, or the fund may pitch an investment strategy that the investor is no longer so keen on, or whatever.

But if the fund is taxable and the investor's marginal tax rates are high, the investor should do the math on whether it's really worth taking the tax hit to reallocate.

But commonly, even if you don't want to take the tax hit, you can turn off reinvestments, and at least put that cash from dividends, cap gains distributions, etc., into your preferred vehicle.

Balanced against that, reinvestments are simple - generally set and forget, and if the alternative was to have that cash sit in a 0.01% money market for a long time, or a lot of analysis paralysis or whatever, then sometimes reinvestment is ok.

My wife and I have SPY in a taxable account. Big unrealized gains. I now think VOO (similar ETF from Vanguard) is significantly better, mainly because E.R. is about 0.06% less/year. But that's dwarfed by the tax hit we'd get from switching.

Wife has, in a solo account that I basically help her with, a couple of other Vanguard funds. I think at least one, and possibly both, are not what I'd recommend today. But this account is basically on auto-pilot, and it's simpler to let things compound, and let the cash be reinvested, so that's how it is...
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by invest2bfree »

scrooge-mcduck wrote: Wed Oct 27, 2021 12:34 pm I have roughly 3M in DFEOX. 1.7M in unrealized gains. Worth it to sell now and eat the tax to move into a similar vanguard fund? I was thinking VTSAX. Or should I hold it and let it grow despite slightly higher fees?

DFEOX fees are 0.15% whereas VTSAX fees are 0.04%. I know we can't predict what taxes will be in the future, but I don't know if it's worth it to pay taxes now or the slightly higher management fees now.

Any suggestions? I have an account at an investment advisor that I draw money from, my personal account is my retirement money that I plan on letting sit there for 25-30 years.
Is this a joke?

You want to reduce from .15 to 0.04 so you pay $1.7m in capital gains.

I paid that last year and had to write a check for $500k to both federal and state governments.

Dont get carried away by fees, anything under 0.25% is decent enough.

If this was 1%, I would say then it is lot closer to moving but at .15 just stay put.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by EdNorton »

Are you sure your basis is correct? Don't forget all reinvested dividends increase your basis.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

EdNorton wrote: Wed Oct 27, 2021 5:35 pm Don't forget all reinvested dividends increase your basis.
Not really.

Each share bought with a reinvested dividend has a DIFFERENT* basis from the original lot.

*Assuming the price has moved at least a little.

If the price has been drifting down, the shares bought with reinvested dividends may in fact have a lower basis, per share, than the original lot.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by exodusNH »

invest2bfree wrote: Wed Oct 27, 2021 4:29 pm
scrooge-mcduck wrote: Wed Oct 27, 2021 12:34 pm I have roughly 3M in DFEOX. 1.7M in unrealized gains. Worth it to sell now and eat the tax to move into a similar vanguard fund? I was thinking VTSAX. Or should I hold it and let it grow despite slightly higher fees?

DFEOX fees are 0.15% whereas VTSAX fees are 0.04%. I know we can't predict what taxes will be in the future, but I don't know if it's worth it to pay taxes now or the slightly higher management fees now.

Any suggestions? I have an account at an investment advisor that I draw money from, my personal account is my retirement money that I plan on letting sit there for 25-30 years.
Is this a joke?

You want to reduce from .15 to 0.04 so you pay $1.7m in capital gains.

I paid that last year and had to write a check for $500k to both federal and state governments.

Dont get carried away by fees, anything under 0.25% is decent enough.

If this was 1%, I would say then it is lot closer to moving but at .15 just stay put.
They won't pay $1.7MM in capital gains. They'd pay some amount between $300K and $400K.
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scrooge-mcduck
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by scrooge-mcduck »

invest2bfree wrote: Wed Oct 27, 2021 4:29 pm
Is this a joke?

You want to reduce from .15 to 0.04 so you pay $1.7m in capital gains.

I paid that last year and had to write a check for $500k to both federal and state governments.
No, $1.7M in cap gains with taxes roughly $400k since I live in a no state income tax state. I already consulted a CPA but wanted to see if there was anything else I was missing, which is why people ask on forums.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by jarjarM »

scrooge-mcduck wrote: Wed Oct 27, 2021 6:36 pm
invest2bfree wrote: Wed Oct 27, 2021 4:29 pm
Is this a joke?

You want to reduce from .15 to 0.04 so you pay $1.7m in capital gains.

I paid that last year and had to write a check for $500k to both federal and state governments.
No, $1.7M in cap gains with taxes roughly $400k since I live in a no state income tax state. I already consulted a CPA but wanted to see if there was anything else I was missing, which is why people ask on forums.
But that's locking in $400k in taxes vs. future reduced potential CG of $500k (or more even stock goes up faster). With inflation and opportunity cost, $400k is more (could be much more) than $500k in the next 10-20 years.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by EdNorton »

psteinx wrote: Wed Oct 27, 2021 5:37 pm
EdNorton wrote: Wed Oct 27, 2021 5:35 pm Don't forget all reinvested dividends increase your basis.
Not really.

Each share bought with a reinvested dividend has a DIFFERENT* basis from the original lot.

*Assuming the price has moved at least a little.

If the price has been drifting down, the shares bought with reinvested dividends may in fact have a lower basis, per share, than the original lot.
What do you mean not really? Any reinvested dividend increases your basis by the amount of the dividend, the dollar amount, regardless of what the share price does.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by increment »

scrooge-mcduck wrote: Wed Oct 27, 2021 2:16 pm The dimensional fund tracks the Russell 3000.
The summary prospectus mentions the Russell 3000, but only for comparison purposes. My understanding is that every fund is required to mention a benchmark index for comparison. Here the fund had to state clearly in their materials that they underperformed their benchmark, in this case over the 1, 5, and 10 years that ended in December.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

EdNorton wrote: Wed Oct 27, 2021 6:39 pm
psteinx wrote: Wed Oct 27, 2021 5:37 pm
EdNorton wrote: Wed Oct 27, 2021 5:35 pm Don't forget all reinvested dividends increase your basis.
Not really.

Each share bought with a reinvested dividend has a DIFFERENT* basis from the original lot.

*Assuming the price has moved at least a little.

If the price has been drifting down, the shares bought with reinvested dividends may in fact have a lower basis, per share, than the original lot.
What do you mean not really? Any reinvested dividend increases your basis by the amount of the dividend, the dollar amount, regardless of what the share price does.
:sharebeer
Your basis of the position as a whole goes up by the amount reinvested. But you'll have more shares, and those shares each have an individual basis, determined by what was paid for them.

Example:

You buy 100 shares of IBM for $140/sh. Your basis for your overall position in IBM is $14,000, but it's really the $140/sh that matters.

Later, you get a dividend payment of $160, which is reinvested, and coincidentally, the reinvestment price is exactly $160 (IBM has gone up). So now you own 101 shares, with a total position basis of $14,160. But what really matters is that 100 of those shares have a basis of $140 each (still), and the 1 new share has a basis of $160.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by LadyGeek »

I removed an off-topic post. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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billfromct
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by billfromct »

According to Schwab, the DFEOX 15 year average return, as of 10/26/2021, was 10.24% while the S&P 500 15 year average return was 10.52%.

Pretty close.

I assume the S&P 500 average return includes reinvested dividends.

Of course, past performance is no guarantee of future results.

bill
Last edited by billfromct on Wed Oct 27, 2021 8:27 pm, edited 1 time in total.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by finite_difference »

psteinx wrote: Wed Oct 27, 2021 1:52 pm Let's say your tax rate (fed + state + local) if you sell, on the portion that's gains, is 25% (adjust for your own figures)

Of the overall investment, 1.7/3.0 = 56.67% is gains.

So the tax you'd pay is 56.67% * 25% = 14.17%.

You can look at that 14.17% as a sort of indefinite-term loan, at 0% interest, from the various taxing agencies.

What do you think the expected nominal returns (CAGR) on your investments will be? Maybe 6%?

If so, then the expected value of that free loan is about 14.17% * 6% = 0.85%/year.

You're only paying an extra 0.11%/year in expenses. So unless there's another reason (better alpha or whatever) to prefer VTSAX over DFEOX, then you should probably keep the DFEOX, albeit redirect dividends into a cash account so you can invest as you see fit, going forward, and also perhaps liquidate a small portion of the DFEOX each year, to fill any available lower tax bracket space, for charitable donations, etc. And of course, if you see your tax situation changing in the future, that would impact the analysis too. Also, I don't know what DFEOX is, but assume it's a similar fund to VTSAX.
The 3-year tax cost ratios of the two funds are:

DFEOX (0.76)
VTSAX (0.42)

So VTSAX is almost twice as tax efficient.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by EdNorton »

psteinx wrote: Wed Oct 27, 2021 5:37 pm
EdNorton wrote: Wed Oct 27, 2021 5:35 pm Don't forget all reinvested dividends increase your basis.
Not really.

Each share bought with a reinvested dividend has a DIFFERENT* basis from the original lot.

*Assuming the price has moved at least a little.

If the price has been drifting down, the shares bought with reinvested dividends may in fact have a lower basis, per share, than the original lot.
Not really? Please give an example where reinvested dividends does not increase basis (in a taxable account).

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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by EdNorton »

psteinx wrote: Wed Oct 27, 2021 7:19 pm
EdNorton wrote: Wed Oct 27, 2021 6:39 pm
psteinx wrote: Wed Oct 27, 2021 5:37 pm
EdNorton wrote: Wed Oct 27, 2021 5:35 pm Don't forget all reinvested dividends increase your basis.
Not really.

Each share bought with a reinvested dividend has a DIFFERENT* basis from the original lot.

*Assuming the price has moved at least a little.

If the price has been drifting down, the shares bought with reinvested dividends may in fact have a lower basis, per share, than the original lot.
What do you mean not really? Any reinvested dividend increases your basis by the amount of the dividend, the dollar amount, regardless of what the share price does.
:sharebeer
Your basis of the position as a whole goes up by the amount reinvested. But you'll have more shares, and those shares each have an individual basis, determined by what was paid for them.

Example:

You buy 100 shares of IBM for $140/sh. Your basis for your overall position in IBM is $14,000, but it's really the $140/sh that matters.

Later, you get a dividend payment of $160, which is reinvested, and coincidentally, the reinvestment price is exactly $160 (IBM has gone up). So now you own 101 shares, with a total position basis of $14,160. But what really matters is that 100 of those shares have a basis of $140 each (still), and the 1 new share has a basis of $160.
The total basis increased by the reinvested dividend amount. Before the dividend, the basis was $14,000, after the dividend, the basis was $14,160., the share price is irrelevant to total basis.
:sharebeer
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by LiveSimple »

Do not sell and pay tax to change funds. If you have real life expense then sell and pay tax. Stay the course.

This is one reason to buy total index fund in taxable, no need to think or alter later.
Invest when you have the money, sell when you need the money, for real life expenses...
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

EdNorton wrote: Thu Oct 28, 2021 4:45 am
psteinx wrote: Wed Oct 27, 2021 7:19 pm Your basis of the position as a whole goes up by the amount reinvested. But you'll have more shares, and those shares each have an individual basis, determined by what was paid for them.

Example:

You buy 100 shares of IBM for $140/sh. Your basis for your overall position in IBM is $14,000, but it's really the $140/sh that matters.

Later, you get a dividend payment of $160, which is reinvested, and coincidentally, the reinvestment price is exactly $160 (IBM has gone up). So now you own 101 shares, with a total position basis of $14,160. But what really matters is that 100 of those shares have a basis of $140 each (still), and the 1 new share has a basis of $160.
The total basis increased by the reinvested dividend amount. Before the dividend, the basis was $14,000, after the dividend, the basis was $14,160., the share price is irrelevant to total basis.
:sharebeer
Total basis (of all the shares) is up, yes. I think I was clear about that.

If you later sell the total position, that matters. But if you only sell a portion, the basis per share is what matters.
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by mikejuss »

LiveSimple wrote: Thu Oct 28, 2021 5:23 am Do not sell and pay tax to change funds. If you have real life expense then sell and pay tax. Stay the course.

This is one reason to buy total index fund in taxable, no need to think or alter later.
+1.

What about stopping the reinvesting of dividends and capital gains, and using those amounts, as well as whatever new money you want to invest, to purchase shares of VTSAX?
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by EdNorton »

psteinx wrote: Thu Oct 28, 2021 10:10 am
EdNorton wrote: Thu Oct 28, 2021 4:45 am
psteinx wrote: Wed Oct 27, 2021 7:19 pm Your basis of the position as a whole goes up by the amount reinvested. But you'll have more shares, and those shares each have an individual basis, determined by what was paid for them.

Example:

You buy 100 shares of IBM for $140/sh. Your basis for your overall position in IBM is $14,000, but it's really the $140/sh that matters.

Later, you get a dividend payment of $160, which is reinvested, and coincidentally, the reinvestment price is exactly $160 (IBM has gone up). So now you own 101 shares, with a total position basis of $14,160. But what really matters is that 100 of those shares have a basis of $140 each (still), and the 1 new share has a basis of $160.
The total basis increased by the reinvested dividend amount. Before the dividend, the basis was $14,000, after the dividend, the basis was $14,160., the share price is irrelevant to total basis.
:sharebeer
Total basis (of all the shares) is up, yes. I think I was clear about that.

If you later sell the total position, that matters. But if you only sell a portion, the basis per share is what matters.
I said reinvested dividends increase your basis, you said "not really". Please give an instance where this is not true.
Outside a dog, a book is man's best friend, inside a dog, it's too dark to read - Groucho
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Re: Sell Dimensional index fund and pay taxes now on $1.7M or hold and save on tax?

Post by psteinx »

EdNorton wrote: Thu Oct 28, 2021 5:30 pmI said reinvested dividends increase your basis, you said "not really". Please give an instance where this is not true.
I think I've clearly laid out math and logic on this numerous times. Feels like you're just being argumentative. As I think I've said a few times - you're acquiring new share(s) with new basis, not increasing the basis of what you already have. If you want to think of all of the shares (old and new) together, yeah, the total basis is higher. But the basis hasn't actually changed on your originally owned shares.

If you don't follow or otherwise disagree with the math and/or logic I've laid out, be more specific with your question or dispute.

If you just post another glib "you're wrong" one sentence post, don't expect a further response from me.
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