Sell before or after dividend?

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nirvines88
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Sell before or after dividend?

Post by nirvines88 » Sun Dec 08, 2013 8:15 am

In a taxable account, I'm planning on exchanging the proceeds from a Vanguard Target Retirement fund to Vanguard Total Stock Market (the goal being to own the underlying funds in more tax efficient locations). Would it be better to go ahead and sell it now? Or wait until after the distribution? Theoretically it should be the same either way since the NAV adjusts, right?

Some other relevant facts:
1) I'm in the 15% bracket in 2013 (so 0% for long term gains/dividends, I believe!).
2) The TR fund has long term capital gains that I would prefer to realize in 2013 rather than in 2014.
3) The TR fund distribution occurs in late December, which might hinder point #2 being accomplished.
4) The total stock market fund will also distribute in December, but it has distributions 4x a year (smaller distribution in Dec.), whereas the TR fund only has a distribution 1x a year (larger distribution in Dec.).
"Beware of little expenses, a small leak will sink a great ship" - Poor Richard

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JamesSFO
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Re: Sell before or after dividend?

Post by JamesSFO » Sun Dec 08, 2013 9:36 am

My guess is this is mostly a wash.

That said, you left out to my mind important facts roughly how much of the fund do you own? e.g. $1K, $10K, $100K, $500K, >$500K? And how much cap gains irrespective of the distribution, e.g. $10K owned about 30% of which is growth?

If irrespective of the distribution you were going to have $30K of cap gains then the distributions may be the tail wagging the dog on taxes.

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JamesSFO
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Re: Sell before or after dividend?

Post by JamesSFO » Sun Dec 08, 2013 9:38 am

Also the distributions are scheduled for 12/24 for TR and 12/20 or so for TS, that gives you ~4 or so trading days anyhow and mutual funds can be same-day exchanged with each other in the same account, so just enter the trades for 12/26.

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dratkinson
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Re: Sell before or after dividend?

Post by dratkinson » Sun Dec 08, 2013 10:25 am

There have been past threads on this topic. Seem to recall the conventional wisdom was:

*Sell before a distribution. Takes NAV appreciation as CG, instead of ordinary income (distribution).
*Buy after a distribution. Avoids buying (taxable) distribution, instead buys (~more) shares at lower NAV.

**Any CG on TR fund owned less than one year taxed as ST. Might simplify your tax accounting to sell TR shares as two lots: LT and ST. That way, your (1) transactions and what (2) you and (3) Vanguard report for tax purposes will all be the same.

CG will increase your AGI (adjusted gross income). Below the 15% AGI cap, LTCG may be taxed at 0%, but any above will be taxed at 15%.

With small CGs, above is probably not an issue. With large CGs, and wanting to keep them taxed at 0%, would need to break up this exchange (TR --> TSM) over mulitiple years.

If timing of distributions is not favorable, could maybe: TR --> MMkt --> TSM.

Of course, too much over-thinking the issue can hurt the mind, so might be just simpler to do it all at once and get it over with. Example: If next year you are in the 25% tax bracket, your LTCG would be taxed at 15% anyway, so why delay the exchange if the tax rate is the same?



**Serious suggestion*. Create a checklist of the transactions (to ensure you keep everything straight when you call the CSR to make your trades). Double-check your checklist a few days later with a clear mind. Correct any mistakes. (*You would be surprised how many of us, knowing what we wanted to do, did it wrong off the top of our heads. Following a double-checked checklist would have avoided the problem. Also doing it by phone with a CSR adds another layer of checking your intentions/actions vs. online.)
  • Day 1, Triple-check your checklist. Then call CSR and make your trades.
    Transaction #1: sell TR, LT shares (total), date range bought; buy MMkt or TSM.
    Transaction #2: sell TR, ST shares (total), dates range bought; buy MMkt or TSM.

    Day 2, (if needed) Triple-check your checklist. Then call CSR and make your trade.
    Transaction #3; sell MMkt; buy TSM.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

livesoft
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Re: Sell before or after dividend?

Post by livesoft » Sun Dec 08, 2013 10:57 am

Because of your stated tax bracket, it seems to me like you will not pay any taxes on the TSM distribution because it will be mostly qualified dividends. You will not pay any taxes on the TR long-term capital gains. So I would just exchange from TR to TSM as soon as you can.

Note that you will not own the TSM fund shares for the requisite 60 days when the dividend is issued to you that is necessary make the dividend qualified, so don't sell those shares until you have held them well into February. And watch when your 1099DIV appears that Vanguard has designated your dividends as qualified or at least consistent with your holding the shares for more than 60 days across the year-end boundary). Otherwise you may need to get a corrected 1099DIV.
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tibbitts
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Re: Sell before or after dividend?

Post by tibbitts » Sun Dec 08, 2013 12:12 pm

4) The total stock market fund will also distribute in December, but it has distributions 4x a year (smaller distribution in Dec.), whereas the TR fund only has a distribution 1x a year (larger distribution in Dec.).
I don't understand - it looks to me that TR had 4 distributions in the past 12 months.

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Taylor Larimore
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Avoid the Distribution.

Post by Taylor Larimore » Sun Dec 08, 2013 12:23 pm

Nirvines:
Would it be better to go ahead and sell it now? Or wait until after the distribution?
A good general rule when buying or selling funds in a taxable account is: Avoid the distribution.

In other words: "sell it now."

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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nirvines88
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Re: Sell before or after dividend?

Post by nirvines88 » Wed Dec 11, 2013 8:19 pm

Thanks for the feedback everyone. I pulled the trigger and exchanged today. One step closer to simplicity!

It had about $900 in capital gains on a ~$2500 investment. One of my best performers over the last couple years!
"Beware of little expenses, a small leak will sink a great ship" - Poor Richard

marco1910
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Re: Sell before or after dividend?

Post by marco1910 » Thu Dec 12, 2013 12:47 am

what if the funds are in a tax advantage account. Does it matter? I need to rebalance some stock funds and adjust to a more cash position.

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Taylor Larimore
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Rebalancing

Post by Taylor Larimore » Thu Dec 12, 2013 8:38 am

marco1910 wrote:what if the funds are in a tax advantage account. Does it matter? I need to rebalance some stock funds and adjust to a more cash position.
Marco:

Two good ways to rebalance:

1. Use new contributions to add to under-performing funds.

2. Exchange shares within tax-advantaged accounts (the answer to your question).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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