Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Hi All,
I'm getting a large unexpected mutual fund capital gain distribution at the end of the year. I have no losses to offset it with. I will need to sell stock/mutual fund at a gain in order to come up with the money to pay the tax on the distribution. Is there any downside to NOT reinvesting the large year-end capital gains distribution and using the distribution $ to pay the hefty tax bill? I could reinvest whatever is leftover after setting aside the amount for the tax.
Thanks!
I'm getting a large unexpected mutual fund capital gain distribution at the end of the year. I have no losses to offset it with. I will need to sell stock/mutual fund at a gain in order to come up with the money to pay the tax on the distribution. Is there any downside to NOT reinvesting the large year-end capital gains distribution and using the distribution $ to pay the hefty tax bill? I could reinvest whatever is leftover after setting aside the amount for the tax.
Thanks!
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
I see only upsides from not reinvesting.
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Yes, just take the distribution, retain enough to pay the tax and reinvest the rest.
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- FrugalInvestor
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Have a plan, stay the course and simplify. Then ignore the noise!
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Yes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.FrugalInvestor wrote: ↑Fri Nov 26, 2021 6:41 pm This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Some of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…Makefile wrote: ↑Fri Nov 26, 2021 7:07 pmYes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.FrugalInvestor wrote: ↑Fri Nov 26, 2021 6:41 pm This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
I guess we should be glad that bogleheads don't invest in actively managed funds, so this will only be a problem for non-bogleheads.anon_investor wrote: ↑Fri Nov 26, 2021 7:28 pmSome of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…Makefile wrote: ↑Fri Nov 26, 2021 7:07 pmYes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.FrugalInvestor wrote: ↑Fri Nov 26, 2021 6:41 pm This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
And the index fund Vanguard International Dividend Achievers, which has an ETF class, estimates a 6% distribution. I would be interested in seeing what happened in the annual report.anon_investor wrote: ↑Fri Nov 26, 2021 7:28 pmSome of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…Makefile wrote: ↑Fri Nov 26, 2021 7:07 pmYes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.FrugalInvestor wrote: ↑Fri Nov 26, 2021 6:41 pm This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
That is wild, it is higher than the actively managed Dividend Growth fund.grabiner wrote: ↑Fri Nov 26, 2021 9:09 pmAnd the index fund Vanguard International Dividend Achievers, which has an ETF class, estimates a 6% distribution. I would be interested in seeing what happened in the annual report.anon_investor wrote: ↑Fri Nov 26, 2021 7:28 pmSome of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…Makefile wrote: ↑Fri Nov 26, 2021 7:07 pmYes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.FrugalInvestor wrote: ↑Fri Nov 26, 2021 6:41 pm This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
I do this with my Contrafund and then reinvest in VTSAX
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Anyone able to share a link or name of funds?
I have Wellington in my taxable account but do not automatically reinvest the dividends and gains.
Was thinking about selling before year end to avoid a large distribution. Probably sitting on $3k in gains on 25k balance.
I have Wellington in my taxable account but do not automatically reinvest the dividends and gains.
Was thinking about selling before year end to avoid a large distribution. Probably sitting on $3k in gains on 25k balance.
Mid-40’s
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Selling before year-end won't avoid the capital gain. The fund price decreases by the amount of the capital gain distribution, so if you sell after the distribution, the capital gain on your own sale is reduced by an equal amount. (Selling before rather than after may have a minor benefit if your own capital gain is all long-term while the gain distributed by the fund would be mostly short-term).mortfree wrote: ↑Sat Nov 27, 2021 3:33 am Anyone able to share a link or name of funds?
I have Wellington in my taxable account but do not automatically reinvest the dividends and gains.
Was thinking about selling before year end to avoid a large distribution. Probably sitting on $3k in gains on 25k balance.
And not selling at all (until you need to sell for some other reason, such as spending the money or rebalancing) is likely still better for taxes, as your own shares are likely to have a capital gain even after the distribution, so the total gain on which you pay tax will be lower if you don't sell.
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Which funds do you mean, the ones from the OP or something else?
FYI, there's more discussion of Vanguard year-end fund distributions in two other threads:
viewtopic.php?f=10&t=362445
viewtopic.php?f=1&t=362699
Vanguard's various tax-related documents are here: https://advisors.vanguard.com/tax-cente ... rrent-year
The 2021 preliminary cap gains estimates are here: https://advisors.vanguard.com//iwe/pdf/ ... PYEEST.pdf
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
You mean that you now expect to receive a large mutual fund distribution?JMS3272 wrote: ↑Fri Nov 26, 2021 6:29 pm Hi All,
I'm getting a large unexpected mutual fund capital gain distribution at the end of the year. I have no losses to offset it with. I will need to sell stock/mutual fund at a gain in order to come up with the money to pay the tax on the distribution. Is there any downside to NOT reinvesting the large year-end capital gains distribution and using the distribution $ to pay the hefty tax bill? I could reinvest whatever is leftover after setting aside the amount for the tax.
Thanks!
Now that I have the habit of investing my savings, the wisdom of reinvesting dividends and capital gains escapes me.
It doesn't matter as much in tax advantaged accounts, and may be required for some accounts,
but in taxable accounts, reinvesting can lead to short term gains, non-qualified dividends, and wash-sale rule violations.
You do have to pay capital gain taxes, presumably at 15% rate, so would have at least 85% of the distribution to invest in a better mutual fund, maybe rebalance your asset allocation in an index fund, ETF, or a Tesla.
- arcticpineapplecorp.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
but even index funds can issue a cap gain distribution, for instance, target date retirement funds. So it's not just about whether it's index or active, but also whether the funds are standalone or all in one type products. Of course this would only be a problem for non-bogleheads who put a target date retirement index fund in their taxable acct.UpperNwGuy wrote: ↑Fri Nov 26, 2021 7:50 pmI guess we should be glad that bogleheads don't invest in actively managed funds, so this will only be a problem for non-bogleheads.anon_investor wrote: ↑Fri Nov 26, 2021 7:28 pmSome of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…Makefile wrote: ↑Fri Nov 26, 2021 7:07 pmYes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.FrugalInvestor wrote: ↑Fri Nov 26, 2021 6:41 pm This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
https://investor.vanguard.com/mutual-fu ... ions/vlxvx
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
What do Bogleheads put in their taxable accounts? If I want to keep it simple.arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 11:45 ambut even index funds can issue a cap gain distribution, for instance, target date retirement funds. So it's not just about whether it's index or active, but also whether the funds are standalone or all in one type products. Of course this would only be a problem for non-bogleheads who put a target date retirement index fund in their taxable acct.UpperNwGuy wrote: ↑Fri Nov 26, 2021 7:50 pmI guess we should be glad that bogleheads don't invest in actively managed funds, so this will only be a problem for non-bogleheads.anon_investor wrote: ↑Fri Nov 26, 2021 7:28 pmSome of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…Makefile wrote: ↑Fri Nov 26, 2021 7:07 pmYes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.FrugalInvestor wrote: ↑Fri Nov 26, 2021 6:41 pm This post emphasizes a benefit of VTSAX that has not to my knowledge distributed capital gains in over two decades. This may not last forever but as long as it does it is a significant tax benefit for those who hold it, which includes many of not the majority of Boglehead 3-funders (or 2-funders).
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
https://investor.vanguard.com/mutual-fu ... ions/vlxvx
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
That's like putting the cart before the horse as they used to say.JMS3272 wrote: ↑Sat Nov 27, 2021 4:44 pmWhat do Bogleheads put in their taxable accounts? If I want to keep it simple.arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 11:45 am ...
but even index funds can issue a cap gain distribution, for instance, target date retirement funds. So it's not just about whether it's index or active, but also whether the funds are standalone or all in one type products. Of course this would only be a problem for non-bogleheads who put a target date retirement index fund in their taxable acct.
https://investor.vanguard.com/mutual-fu ... ions/vlxvx
First decide on your asset allocation. Even better is to write up an Investment policy statement. It should include your objectives and preferences, so you can decide between things like simplicity and tax-efficiency. And even decide what "keep it simple" means to you -- what does it mean to you? For some people, 20 different funds across 8 accounts is simple because they're comfortable using a spreadsheet to track things. For other people, only an all-in-one Target fund will do.
Then decide which asset class goes in which account type, for example using tax efficiency criteria, assuming that's your main preference.
If you prefer simplicity, and are willing to pay a price in terms of sub-optimal tax-efficiency, then your choices might be a tax-managed balanced fund - like Vanguard's Tax Managed Balanced fund with 49% stocks and 51% muni bonds.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
total stock market index fund (US), total international stock market index fund generally and have tax loss harvesting partners for each ready to go when needed.JMS3272 wrote: ↑Sat Nov 27, 2021 4:44 pmWhat do Bogleheads put in their taxable accounts? If I want to keep it simple.arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 11:45 ambut even index funds can issue a cap gain distribution, for instance, target date retirement funds. So it's not just about whether it's index or active, but also whether the funds are standalone or all in one type products. Of course this would only be a problem for non-bogleheads who put a target date retirement index fund in their taxable acct.UpperNwGuy wrote: ↑Fri Nov 26, 2021 7:50 pmI guess we should be glad that bogleheads don't invest in actively managed funds, so this will only be a problem for non-bogleheads.anon_investor wrote: ↑Fri Nov 26, 2021 7:28 pmSome of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…Makefile wrote: ↑Fri Nov 26, 2021 7:07 pm
Yes, the Vanguard mutual funds that also have an ETF as a share class can use in-kind redemptions to ETF shareholders in order to flush out low-basis shares from the fund to make those capital gains disappear.
Even for other index mutual funds that don't have this feature, there tend to be low to no capital gain distributions. It looks like Fidelity's Total Market fund doesn't expect to make a distribution this year, and Schwab's will be about 0.3% of NAV, compared to the 5%+ that might happen for an active fund.
https://investor.vanguard.com/mutual-fu ... ions/vlxvx
Last edited by arcticpineapplecorp. on Sat Nov 27, 2021 5:12 pm, edited 1 time in total.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Consider using the large year end distributions to seed a January contribution to your IRA's.
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Just to clarify, are you saying Bogleheads would go 100% stock fund? I'm just thinking long-term, one fund to buy (if Target Retirement is not a good option in a taxable account). I'm 50 y/o, prob could retire in 5 years, but likely work longer. Thanks!arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 5:10 pmtotal stock market index fund (US), total international stock market index fund generally and have tax loss harvesting partners for each ready to go when needed.JMS3272 wrote: ↑Sat Nov 27, 2021 4:44 pmWhat do Bogleheads put in their taxable accounts? If I want to keep it simple.arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 11:45 ambut even index funds can issue a cap gain distribution, for instance, target date retirement funds. So it's not just about whether it's index or active, but also whether the funds are standalone or all in one type products. Of course this would only be a problem for non-bogleheads who put a target date retirement index fund in their taxable acct.UpperNwGuy wrote: ↑Fri Nov 26, 2021 7:50 pmI guess we should be glad that bogleheads don't invest in actively managed funds, so this will only be a problem for non-bogleheads.anon_investor wrote: ↑Fri Nov 26, 2021 7:28 pm
Some of Vanguard’s actively managed funds announced 8-10% capital gains distributions for this year…
https://investor.vanguard.com/mutual-fu ... ions/vlxvx
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Already impartial now...and you have a nice day.
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
A lot of Bogleheads, even those who hold bonds, have all-stock taxable accounts. This doesn't create a liquidity problem; if you need money and want to sell bonds, you can sell stock in your taxable account, and move an equal amount from bonds to stock in your IRA or 401(k).JMS3272 wrote: ↑Sat Dec 11, 2021 7:43 pmJust to clarify, are you saying Bogleheads would go 100% stock fund? I'm just thinking long-term, one fund to buy (if Target Retirement is not a good option in a taxable account). I'm 50 y/o, prob could retire in 5 years, but likely work longer. Thanks!arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 5:10 pmtotal stock market index fund (US), total international stock market index fund generally and have tax loss harvesting partners for each ready to go when needed.
Depending on the size of your taxable account, you might be able to hold just one fund in your taxable account as part of a three-fund portfolio. That one fund would likely be Total Stock Market Index.
- arcticpineapplecorp.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
no, not saying that.JMS3272 wrote: ↑Sat Dec 11, 2021 7:43 pmJust to clarify, are you saying Bogleheads would go 100% stock fund? I'm just thinking long-term, one fund to buy (if Target Retirement is not a good option in a taxable account). I'm 50 y/o, prob could retire in 5 years, but likely work longer. Thanks!arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 5:10 pmtotal stock market index fund (US), total international stock market index fund generally and have tax loss harvesting partners for each ready to go when needed.JMS3272 wrote: ↑Sat Nov 27, 2021 4:44 pmWhat do Bogleheads put in their taxable accounts? If I want to keep it simple.arcticpineapplecorp. wrote: ↑Sat Nov 27, 2021 11:45 ambut even index funds can issue a cap gain distribution, for instance, target date retirement funds. So it's not just about whether it's index or active, but also whether the funds are standalone or all in one type products. Of course this would only be a problem for non-bogleheads who put a target date retirement index fund in their taxable acct.UpperNwGuy wrote: ↑Fri Nov 26, 2021 7:50 pm
I guess we should be glad that bogleheads don't invest in actively managed funds, so this will only be a problem for non-bogleheads.
https://investor.vanguard.com/mutual-fu ... ions/vlxvx
you "could" go 100% stock IN TAXABLE, while you have bonds in tax deferred.
You have to make sure your overall asset allocation is what you want it to be. It's the portfolio as a whole, not the individual pieces that matter.
you "could" have a mix of stock and bonds in taxable while interest rates are low, but not while rates are higher if you're trying to reduce taxable income.
there are different options. here's some thoughts on tax efficient placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
This may be a good example of how confused people can get when pursuing the illusion of simplicity in holding one fund.
Once there is more than one type of account to deal with one fund assets are more rather than less complicated.
So, the answer to the question is that much of the time it makes sense to hold only stocks (and maybe an emergency fund*) in taxable and to hold stocks and bonds in tax deferred accounts. A Roth might hold only stocks as well because the growth is tax free. A person can hold bonds in taxable if they want, but life is a lot easier if that is done in its own fund.
*The emergency fund can also be all stocks because if you sell when stocks are down you can sell bonds and buy stocks in tax deferred to balance out. This assumes there is enough altogether to still have the need money if stocks crash.
Note at current conditions bonds are not at a tax disadvantage in taxable because the yields are so low. One should not assume that is a permanent condition.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
One of my wrong high cost fund had such a large distribution this year that they split it in to two separate transactions! It was never done like that before. My calculations says over 25% in year end distribution!
Micro Cap Fund - WMICX
ST Cap Gain $ 0.999664
LT Cap Gains 1.897454
Total Cap Gain $ 2.897118
Re-investment price 8.80
Micro Cap Fund - WMICX
ST Cap Gain $ 0.999664
LT Cap Gains 1.897454
Total Cap Gain $ 2.897118
Re-investment price 8.80
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
The split is short-term (shares held one year or less) versus long-term; you pay tax at different rates on the two types of gains.wrongfunds wrote: ↑Thu Dec 23, 2021 12:08 pm One of my wrong high cost fund had such a large distribution this year that they split it in to two separate transactions! It was never done like that before. My calculations says over 25% in year end distribution!
Micro Cap Fund - WMICX
ST Cap Gain $ 0.999664
LT Cap Gains 1.897454
Total Cap Gain $ 2.897118
Re-investment price 8.80
That's what you would expect for a micro-cap fund. Micro-cap funds get most of their return from companies that do very well and are no longer micro-caps. When the market goes up, they will have huge capital gains for selling those stocks.
Small-cap and micro-cap ETFs can avoid much of these distributions because of the ETF structure. But any small-cap mutual fund will have this problem with capital gains, even an index fund (except for Vanguard's funds with ETF share classes).
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
I suspect when investors panic on a down turn and then cash their chips which ends up fund declaring large distribution. But that is just my guess.
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Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
I got absolutely crushed by distributions this year. Goodbye ACA subsidy.
Re: Large year-end Mutual Fund Distribution - Don't reinvest to pay taxes?
Sorry to hear about that. At least your username checks out.Cautionary Tale wrote: ↑Thu Dec 23, 2021 8:16 pm I got absolutely crushed by distributions this year. Goodbye ACA subsidy.