Implications of closing out an account?

[baseballcb95]

Hey,

I have a fund that was started for me a while ago, I am turning 18 soon and finally getting into investing. The fund is just awful, it has a 1.3+% expense ratio and is not diversified at all. I have just over $5,000 in the fund with New york Life investments and would like to reinvest this into some vanguard funds. By closing out the account (not an ira), and reinvesting that money with vanguard, do I face any tax implications? I already maxed out what I can contribut to my Roth IRA for this year for what its worth.

[FinancialDave]

It depends on the original cost basis of the investment and the gain that is made on the sale.

The cost basis of the account is essentially the total dollars put into the account + any dividends, interest, or capital gains distributions paid to cash in the account or reinvested into the account (which should have shown up on your yearly statements and or 1099-DIV, or 1099-INT forms every year). Once you total all that up you would subtract that "cost" total from what I would call the total liquidation cost. If this number is positive, then that is your tax liability - barring of course any other distributions from the account.

If you have had more than one fund over the years it could get a little more difficult, but the idea is the same, each fund you sell you need to calculate the cost basis and subtract that from the sale price to come up with your gain on the sale. I am sure there may be many more elegant explanations elsewhere on the forum as well, but that is the general idea.

There may also be fees to close the account which you should check on with the company holding the funds.

If the account was gifted to you with the funds in it, then that is another whole "can of worms" in that the basis has to be determined from the giver.

Hopefully this is not some type of insurance product like a variable annuity, as there could be other fees involved.

fd

[damjam]

FinancialDave is correct. However you should keep in mind that if you fall into the 10% or 15% federal tax brackets there is 0% federal capital gains tax owed on long-term capital gains. If you are in a higher bracket long-term capital gains are taxed at 15% on the federal level. Short-term capital gains are taxed at your marginal tax rate on the federal level. I don't know the laws in every state, you'll have to look that up.

Edited for clarification.

[baseballcb95]

FinancialDave is correct. However you should keep in mind that if you fall into the 10% or 15% federal tax brackets there is 0% federal capital gains tax owed on long-term capital gains. If you are in a higher bracket long-term capital gains are taxed at 15% on the federal level. Short-term capital gains are taxed at your marginal tax rate on the federal level. I don't know the laws in every state, you'll have to look that up.

Edited for clarification.

So as long as I made less than $36,250 my concern is irrelevant?

[damjam]

FinancialDave is correct. However you should keep in mind that if you fall into the 10% or 15% federal tax brackets there is 0% federal capital gains tax owed on long-term capital gains. If you are in a higher bracket long-term capital gains are taxed at 15% on the federal level. Short-term capital gains are taxed at your marginal tax rate on the federal level. I don't know the laws in every state, you'll have to look that up.

Edited for clarification.

So as long as I made less than $36,250 my concern is irrelevant?

You concerns are never irrelevant, but they might be unnecessary.

But don't forget short-term capital gains which will be taxed at your marginal tax rate.

[Epsilon Delta]

FinancialDave is correct. However you should keep in mind that if you fall into the 10% or 15% federal tax brackets there is 0% federal capital gains tax owed on long-term capital gains. If you are in a higher bracket long-term capital gains are taxed at 15% on the federal level. Short-term capital gains are taxed at your marginal tax rate on the federal level. I don't know the laws in every state, you'll have to look that up.

Edited for clarification.

So as long as I made less than $36,250 my concern is irrelevant?

Unfortunately not.

Just because the capital gains is taxed at 0% does not mean it has no effect on your taxes.
There are credits (e.g. EIC, Savers Credit) that affect taxes for people in the low brackets. Many of these are based on AGI or MAGI, which includes capital gains. In some cases a few extra dollars of AGI can increase your taxes by several hundred dollars.

[BL]

If you are a full-time student for 5 months out of the calendar year, you are not eligible for the saver's credit.

according to http://20somethingfinance.com/savers-credit-2011-2012/

I would check it out with IRA.gov if it applies.

[FinancialDave]

One suggestion would be to go to TurboTax on-line where you can "run" the scenarios for free. Put in your expected salary, education costs, any other income or expenses, then see if your expected gain from the sale will affect it.

Granted the taxes and credits in 2013 may not be exactly like what they were for last year but this will give you an idea.

The other thing to watch out for is if you are still living at home and parents are claiming you as a deduction, this does change the situation, so you just need to be aware of that. Good reason to "practice" a tax return.

[Watty]

One suggestion would be to go to TurboTax on-line where you can "run" the scenarios for free. Put in your expected salary, education costs, any other income or expenses, then see if your expected gain from the sale will affect it.

Granted the taxes and credits in 2013 may not be exactly like what they were for last year but this will give you an idea.

The other thing to watch out for is if you are still living at home and parents are claiming you as a deduction, this does change the situation, so you just need to be aware of that. Good reason to "practice" a tax return.

+1


You should also double check the fund to see if the fund has a back end load if you take the money out before a certain date.

Holding the fund until it qualifies for the long term capital gains tax rate is about the only other thing I would be worried about. With that expense ratio, and likely other hiden costs, you will need to move it sooner or later and sooner is better.

Even if you have to pay some capital gain taxes when you sell the fund you will also get a tax deduction when you deposit the money into an IRA so you could actually come out ahead on your taxes this year.

[Epsilon Delta]

And then theres the kiddie tax. Lots of complications, not a lot of true 0% marginal rates.

[kaneohe]

Is this an annuity? If so closing it out will give you ordinary gains (not capital gains) which be taxed at higher rates.
If this is the case, consider a 1035 exchange for a lower cost annuity (VG?) w/ no tax consequences. Check to see if there
are any closeout fees too.

http://www.investopedia.com/terms/s/sec1035ex.asp