Question on Selling After Tax Funds

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Rob54keep
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Question on Selling After Tax Funds

Post by Rob54keep »

I am finally doing some after-tax investing and want to understand the ground rules and how the IRS treats the transfer of after-tax funds from one mutual fund to another.

Obviously in a tax-deferred situation there are no tax consequences but if one simply transfer funds from one fund to another are there tax consequences?

Let's say you buy Fund A (Bond fund) and hold it for one month and then transfer it to Fund B (Bond B). The short term gain is minimal however is this a taxable event that triggers tax on the full amount transferred?
Last edited by Rob54keep on Sat Oct 25, 2014 7:47 am, edited 1 time in total.
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ResearchMed
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Re: Question on transferring After Tax Funds

Post by ResearchMed »

I think you are mis-using the term "transfer", when you mean "sell A and then buy B".

"Transferring" would be to have Fund A moved from Brokerage Firm X (maybe Fidelity, for example) to Brokerage Firm Y (say, Vanguard or Schwab).

So the answer, IF I understand your question correctly lies in the action verbs "sell" and "buy".

You would be "transferring" the proceeds from the sale, in that sense of the word "transfer".

Yes, in a taxable account, tax consequences. Could be taxable profit, even if modest, or a loss, perhaps to be used for tax loss harvesting.

In a tax-deferred account, these "moves" are similar in their tax effects (none), but still the same two actions are occurring.

Note: If moving from a Vanguard "Investor" share class to an "Admiral" share class, there is not any taxable event, as you aren't really changing to a "different" fund, to the best of my knowledge.

RM
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user5027
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Re: Question on transferring After Tax Funds

Post by user5027 »

Only the gain is taxable.

If you hold the shares for less than one year it is a short term gain, more than one year is a long term gain. There are different rates.
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Rob54keep
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Re: Question on transferring After Tax Funds

Post by Rob54keep »

Thanks. Let me try and be clearer on my example.
So if it all the activity is within Vanguard funds and you are selling Fund A to buying Fund B. And let's say Fund A has $10k in it. Also, selling Fund A gives you a short term gain of say $10. Is the full $10k taxable event or only the short term gain of $10?
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retiredjg
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Re: Question on transferring After Tax Funds

Post by retiredjg »

Agreed. In a taxable account, if you move money from one fund to another, you are actually selling one and buying another. The sale will most likely be a taxable event - either a gain or a loss. It won't be a taxable event if there is no gain or loss, but this will likely only happen if you sell money market funds.

If you have held the first fund for one year or less, the gain or loss is considered short term and a gain is taxed at your ordinary tax rate. If the fund is held for more than a year, the gain or loss is long term and a gain is taxed at the capital gains rate which is lower than your ordinary rate.
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retiredjg
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Re: Question on transferring After Tax Funds

Post by retiredjg »

Rob54keep wrote:Thanks. Let me try and be clearer on my example.
So if it all the activity is within Vanguard funds and you are selling Fund A to buying Fund B. And let's say Fund A has $10k in it. Also, selling Fund A gives you a short term gain of say $10. Is the full $10k taxable event or only the short term gain of $10?
The $10k has already been taxed when it went into the taxable account (roughly speaking). In this example, only the short term gain of $10 is included in your future taxes.
livesoft
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Re: Question on Selling After Tax Funds

Post by livesoft »

I'm confused because one can do "after-tax" investing in a Roth 401(k), a Roth IRA, a traditional 401(k), a non-deductible traditional IRA, and a taxable account. Tax treatment varies in these accounts for one's contributions and one's gains. And it depends on whether one exchanges within the account, transfers in-kind to another account, sells, etc.
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Rob54keep
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Re: Question on Selling After Tax Funds

Post by Rob54keep »

Yes it can be confusing.
In my example, I am only referring to an After-Tax Fund...period. If I sell Fund A and buy Fund B, my understanding of the answers are that the tax consequence is on the short or long term gain of the sale and NOT the full amount that was sold or subsequently bought.
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ResearchMed
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Re: Question on Selling After Tax Funds

Post by ResearchMed »

Rob54keep wrote:Yes it can be confusing.
In my example, I am only referring to an After-Tax Fund...period. If I sell Fund A and buy Fund B, my understanding of the answers are that the tax consequence is on the short or long term gain of the sale and NOT the full amount that was sold or subsequently bought.
That is correct.

However, livesoft raised an important distinction.

You mean a "taxable" account, correct?

(A Roth is also an "after-tax" account, but no taxable events occur in one.)

Also, you are perhaps mixing the usage of "fund" and "account". The mutual FUNDS (or etf's, or stocks) are held within "accounts".
(The only time I'm aware this usage differs is for the TREA at TIAA-CREF. Although it sort of acts/behaves/is considered a "fund", it's name is an "Account". Occasionally someone here at BH chooses to pounce if the wrong terminology is used on that particular holding. How's that, "holding", to avoid any of that? :wink: )

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livesoft
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Re: Question on Selling After Tax Funds

Post by livesoft »

Rob54keep wrote:Yes it can be confusing.
In my example, I am only referring to an After-Tax Fund...period.
There is probably no such thing as an "After-Tax Fund", since the same fund can be held in any of various kinds of accounts.
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runner9
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Re: Question on Selling After Tax Funds

Post by runner9 »

Yes, please clarify. Among others, Roth is funded "After Tax" but is treated totally differently than a Taxable, which is also "After Tax"
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Rob54keep
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Re: Question on Selling After Tax Funds

Post by Rob54keep »

I can see I need to be very careful on my use of words. I meant that the funds (being sold & bought) are held in a mutual fund that is not tax deferred or tax free.
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ResearchMed
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Re: Question on Selling After Tax Funds

Post by ResearchMed »

Rob54keep wrote:I can see I need to be very careful on my use of words. I meant that the funds (being sold & bought) are held in a mutual fund that is not tax deferred or tax free.
I think you mean that your "funds" are held in an ACCOUNT that is not tax-deferred or tax free.

And the easiest way to describe that would be as "a taxable account", regardless of whether it holds only cash in a money market fund, or stocks, or mutual funds/etf's.

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livesoft
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Re: Question on Selling After Tax Funds

Post by livesoft »

Rob54keep wrote:I can see I need to be very careful on my use of words. I meant that the funds (being sold & bought) are held in a mutual fund [an account] that is not tax deferred or tax free.
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livesoft
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Re: Question on Selling After Tax Funds

Post by livesoft »

Rob54keep wrote:Let's say you buy Fund A (Bond fund) and hold it for one month and then transfer it to Fund B (Bond B). The short term gain is minimal however is this a taxable event that triggers tax on the full amount transferred?
Any net realized short-term gains are taxed as ordinary income. So the full amount exchanged is not taxed. And any gains may be offset by realized capital losses in other transactions in taxable accounts.
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Rob54keep
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Re: Question on Selling After Tax Funds

Post by Rob54keep »

Thank you all for these clarifications. Your expertise is awesome.
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