Is it Smart to Reallocate Before Capital Gains Distribution?

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Topic Author
DisplacedHoosier
Posts: 42
Joined: Sat Jun 09, 2018 1:30 pm

Is it Smart to Reallocate Before Capital Gains Distribution?

Post by DisplacedHoosier »

Hello! I need your help in checking my logic...

I have a few funds in my Vanguard taxable account I got into well before I understood the pains of annual capital gains distributions. I'm trying to understand the implications of rebalancing out of some of these before the 2021 CGD are paid in December and moving into more tax efficient funds.

An example is that I have some money in Vanguard Target Retirement 2035 Fund (VTTHX) that is scheduled to pay out about 14.23% of NAV in December. If I'm doing my math right then my Annual CGD on this account will be about $10K!

I'm also looking at my basis and cost in this fund and see my overall current gain in VTTHX is about $30K.

I'm thinking it might be "smart" to reallocate some/all of those funds out of the fund, but am wondering what the implications would be? If I am out of the fund before the annual distribution is paid do I avoid any of the annual taxable distribution? I know I would still need to pay the Capital Gains on my gain on the sale, but it seems like a way to avoid at least a portion of the pain of getting out and it also avoid the on-going annual hit.

Capital Gain on Sale: $30K
Avoidance of 2021 Annual Distribution -$10K
Net impact $20K

Is this the right thinking or am I missing something?

Thanks!
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anon_investor
Posts: 15122
Joined: Mon Jun 03, 2019 1:43 pm

Re: Is it Smart to Reallocate Before Capital Gains Distribution?

Post by anon_investor »

DisplacedHoosier wrote: Sat Nov 27, 2021 8:10 am Hello! I need your help in checking my logic...

I have a few funds in my Vanguard taxable account I got into well before I understood the pains of annual capital gains distributions. I'm trying to understand the implications of rebalancing out of some of these before the 2021 CGD are paid in December and moving into more tax efficient funds.

An example is that I have some money in Vanguard Target Retirement 2035 Fund (VTTHX) that is scheduled to pay out about 14.23% of NAV in December. If I'm doing my math right then my Annual CGD on this account will be about $10K!

I'm also looking at my basis and cost in this fund and see my overall current gain in VTTHX is about $30K.

I'm thinking it might be "smart" to reallocate some/all of those funds out of the fund, but am wondering what the implications would be? If I am out of the fund before the annual distribution is paid do I avoid any of the annual taxable distribution? I know I would still need to pay the Capital Gains on my gain on the sale, but it seems like a way to avoid at least a portion of the pain of getting out and it also avoid the on-going annual hit.

Capital Gain on Sale: $30K
Avoidance of 2021 Annual Distribution -$10K
Net impact $20K

Is this the right thinking or am I missing something?

Thanks!
You will have to pay taxes on $30k regardless, since the annual distribution just increases your cost basis by $10k. So whether you sell before or after the distribution, you end up with the same $30k subject to tax.
Topic Author
DisplacedHoosier
Posts: 42
Joined: Sat Jun 09, 2018 1:30 pm

Re: Is it Smart to Reallocate Before Capital Gains Distribution?

Post by DisplacedHoosier »

Yes - I know that, but do I avoid the annual distribution and essentially offset the capital gains for the year by the $10K I'd get hit with in December if I hold the funds?

As I see my options...
1) Hold the funds - and get the $10K hit in December
2) Sell the funds NOW- and pay the $30K Capital Gain (and no Annual Distribution)
3) Sell the funds LATER - and pay the $10K annual Capital gains AND the $30K Capital Gains I'd need to pay later

So essentially If I plan on selling the funds any way, doesn't it make sense to do it sooner if I'm faced with a large annual Capital Gain?

I'm also thinking I might sell just enough of my less appreciated shares that the CG on the sale offsets some of the CG I receive on the annual distribution...
cas
Posts: 2255
Joined: Wed Apr 26, 2017 8:41 am

Re: Is it Smart to Reallocate Before Capital Gains Distribution?

Post by cas »

DisplacedHoosier wrote: Sat Nov 27, 2021 8:49 am
3) Sell the funds LATER - and pay the $10K annual Capital gains AND the $30K Capital Gains I'd need to pay later
That isn't how it works.

See here and here for previous recent discussions on the same topic.
sycamore
Posts: 6359
Joined: Tue May 08, 2018 12:06 pm

Re: Is it Smart to Reallocate Before Capital Gains Distribution?

Post by sycamore »

Presumably, you selling the shares would be a Long Term cap gain?

By contrast, how much of the cap gains distribution will be Short Term, Long Term, or a mixture of both? We don't know the answer and unfortunately I don't think we'll find until it's too late for you to sell before the record date.

If you were to assume the distribution is mostly STCG, it could be better to sell shares beforehand because LTCG tax rate is less than STCG tax rate (treated as income). Try running the numbers - will you pay more in taxes if the distributions are mostly STCG?
Topic Author
DisplacedHoosier
Posts: 42
Joined: Sat Jun 09, 2018 1:30 pm

Re: Is it Smart to Reallocate Before Capital Gains Distribution?

Post by DisplacedHoosier »

The shares I'd sell would be only LTCG.
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