Selling mutual fund that has made a significant gain

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Topic Author
Eurookat
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Selling mutual fund that has made a significant gain

Post by Eurookat »

A few years ago I was working at a job that didn't offer 401k. Instead of sitting on the money, I ended up contributing every month to a brokerage account with Schwab as if I was contributing to a 401k, hence putting in close to 18k for the year. This account has now made a significant profit. What I'm interesting in doing is selling about $5k in order to divert that money elsewhere. Is it possible to sell and not pay taxes or pay as little as possible because I'm not selling all my shares? Basically I'm looking to take out part of what my initial investment was.
colddeadfish
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Re: Selling mutual fund that has made a significant gain

Post by colddeadfish »

It depends on your income and tax bracket. Also, not the entirety of the sold amount will be gains. The cost basis is not taxed.

Cheers
DSInvestor
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Re: Selling mutual fund that has made a significant gain

Post by DSInvestor »

If the fund distributes dividends, turn off dividend distributions. This will reduce the need to sell shares to raise that 5K. Using specific share identification may allow you to select shares with the highest cost basis (smallest gains).

Here is a link to Fairmark's page on taxation of Investments:
https://fairmark.com/investment-taxation/
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smectym
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Re: Selling mutual fund that has made a significant gain

Post by smectym »

DSInvestor wrote: Wed Jan 19, 2022 11:41 pm If the fund distributes dividends, turn off dividend distributions. This will reduce the need to sell shares to raise that 5K. Using specific share identification may allow you to select shares with the highest cost basis (smallest gains).
An excellent tip. Of course, to be clear, dividends are taxed whether distributed as income or reinvested in the fund. But cherry-picking the shares to sell is a smart strategy.
MrJedi
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Re: Selling mutual fund that has made a significant gain

Post by MrJedi »

Each share has an original cost basis to it. When you sell a share, the cost basis is returned to you with no tax, but any gain over the original cost is taxable.

For example, you buy a share for $100. You later sell it for $150. The original $100 is not taxable but the gain of $50 is taxable.
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Nate79
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Re: Selling mutual fund that has made a significant gain

Post by Nate79 »

Cost method selection at Schwab is complicated for mutual funds. Make you you investigate thoroughly before making any sales. This topic has been discussed many times on Bogleheads and you can contact Schwab directly.
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grabiner
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Re: Selling mutual fund that has made a significant gain

Post by grabiner »

The only way to avoid the capital-gains tax of the fund is to dispose of it without selling. If you are charitably inclined, you could donate the fund to charity. (Don't do this just for the monetary benefit, but if you want to donate $5000 to charity anyway, it's better to get rid of a capital gain at the same time.)

But if you need to sell the fund to max out your 401(k) or IRA, then it is probably worth selling anyway. You will pay capital-gains tax when you sell, but you avoid future taxes on the capital gains or dividends.
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Eurookat
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Re: Selling mutual fund that has made a significant gain

Post by Eurookat »

MrJedi wrote: Thu Jan 20, 2022 6:19 am Each share has an original cost basis to it. When you sell a share, the cost basis is returned to you with no tax, but any gain over the original cost is taxable.

For example, you buy a share for $100. You later sell it for $150. The original $100 is not taxable but the gain of $50 is taxable.
Looks like Schwab is using average cost for their mutual fund. It also looks like my cost basis is $47/share. If the share is currently $68, does the following math seem right?

Sell 150 shares which gives me proceeds of 10,200. Would I only be taxed on the $21 in gains? So 3150? (150 x 21)
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22twain
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Re: Selling mutual fund that has made a significant gain

Post by 22twain »

Eurookat wrote: Thu Jan 20, 2022 11:13 pm Looks like Schwab is using average cost for their mutual fund.
Schwab probably simply set the cost basis method to "average cost" by default when you opened your account or first bought that specific fund.

You should be able to change it to "specific ID" if you want. I can't tell you where to look for that setting because I don't have a Schwab account.

If you leave it at "average cost", your math is correct.
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Eurookat
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Re: Selling mutual fund that has made a significant gain

Post by Eurookat »

22twain wrote: Fri Jan 21, 2022 12:13 am
Eurookat wrote: Thu Jan 20, 2022 11:13 pm Looks like Schwab is using average cost for their mutual fund.
Schwab probably simply set the cost basis method to "average cost" by default when you opened your account or first bought that specific fund.

You should be able to change it to "specific ID" if you want. I can't tell you where to look for that setting because I don't have a Schwab account.

If you leave it at "average cost", your math is correct.
I believe I needed to change it within the first year I held the funds, but I could be wrong. If that math is somewhat correct then it gives me an ideal of a number. Thanks
Bud
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Re: Selling mutual fund that has made a significant gain

Post by Bud »

You should be able to change your sale method (specific lot, FIFO, LIFO, etc) anytime before your first sale.

All the best.
increment
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Re: Selling mutual fund that has made a significant gain

Post by increment »

Bud wrote: Fri Jan 21, 2022 8:11 am You should be able to change your sale method (specific lot, FIFO, LIFO, etc) anytime before your first sale.
According to Schwab's cost basis disclosure statements, you must change it within the first year in order to affect past purchases.
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Eurookat
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Re: Selling mutual fund that has made a significant gain

Post by Eurookat »

increment wrote: Fri Jan 21, 2022 9:03 am
Bud wrote: Fri Jan 21, 2022 8:11 am You should be able to change your sale method (specific lot, FIFO, LIFO, etc) anytime before your first sale.
According to Schwab's cost basis disclosure statements, you must change it within the first year in order to affect past purchases.
Yeah so I'm out of luck.
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