Moving American Funds

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ultra2006mg
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Joined: Thu Feb 18, 2016 8:51 pm

Moving American Funds

Post by ultra2006mg » Mon Mar 20, 2017 11:56 am

Hi I have 3 American funds that I transferred to Vanguard in kind and would like to move them into the VTSAX total stock fund. I have Investment company of America , 31,336.00 with a long term cap. gain of11,266.00, Washington Mutual investors 31,437.00 with LT cap. gain of 13,556.00 and Growth fund of America 13,043.00 with LT cap. gain 5,419.00. I'm in 25% tax bracket so in Illinois its going to cost approximately 5,200.00 in capital gains tax. Is it worth the tax bill to move them or should just keep the American funds?

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving American Funds

Post by retiredjg » Mon Mar 20, 2017 12:44 pm

I don't know the answer, but this link my help you decide.

https://www.bogleheads.org/wiki/Paying_ ... itch_funds

Sometimes people think the capital gains is the difference in the current value and what they paid. However, if you have been paying annual taxes on the distributions from these funds, the unrealized capital gains may be less. Be sure the numbers you have given are actually unrealized capital gains.

NancyABQ
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Joined: Thu Aug 18, 2016 3:37 pm

Re: Moving American Funds

Post by NancyABQ » Mon Mar 20, 2017 12:55 pm

While you are deciding what to do, make sure you turn dividend reinvesting off. And then re-invest dividends and other distributions from those funds into VTSAX.

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Moving American Funds

Post by mhalley » Mon Mar 20, 2017 12:58 pm

If I did the calculation right, you would recoup the taxes via the lower fees in 10 years. That is not taking into account that you would have to pay more in dividend and capital gains tax each year on the American funds. So the break even point would be less than 10 years, but I am not sure how much as I am unsure how to calculate the tax drag off the top of my head.
I used
http://apps.finra.org/fundanalyzer/1/fa.aspx With a return of 5% to do the calculation.
You can also use the one at vanguard, I tried it and changed the load to zero as those are sunk cost. Looks like about 9 years there.

https://personal.vanguard.com/us/FundsC ... lyId1=6083

aristotelian
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Re: Moving American Funds

Post by aristotelian » Mon Mar 20, 2017 1:43 pm

mhalley wrote:If I did the calculation right, you would recoup the taxes via the lower fees in 10 years. That is not taking into account that you would have to pay more in dividend and capital gains tax each year on the American funds. So the break even point would be less than 10 years, but I am not sure how much as I am unsure how to calculate the tax drag off the top of my head.
I used
http://apps.finra.org/fundanalyzer/1/fa.aspx With a return of 5% to do the calculation.
You can also use the one at vanguard, I tried it and changed the load to zero as those are sunk cost. Looks like about 9 years there.

https://personal.vanguard.com/us/FundsC ... lyId1=6083


Except if he keeps the funds where they are, he would have to pay capital gains in the future whenever they are cashed in. It's not just a question of fees over time vs capital gains right now. The break even point is arguably today since he will eventually have to pay capital gains (unless he could somehow liquidate in retirement while staying in the 15% bracket without going over).

ultra2006mg
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Joined: Thu Feb 18, 2016 8:51 pm

Re: Moving American Funds

Post by ultra2006mg » Mon Mar 20, 2017 1:48 pm

Thanks for the responses. I'm leaning toward transferring its going to move me closer to a 3 fund portfolio and as stated I will have to pay the cap.gains eventually.

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nedsaid
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Re: Moving American Funds

Post by nedsaid » Mon Mar 20, 2017 2:09 pm

I am in a minority here in that I actually like the American funds. There are a lot worse things a person can do rather than going to an advisor and paying a load and buying and holding American Funds. They tend to have good performance with lower volatility. They have a deep bench of fund managers and analysts so you aren't dependent on a superstar fund manager. They are also believers in team management. These guys do a very good job.

You can buy similar active funds at Vanguard for even lower expense ratios and no-load. I understand that there are brokerages where you can buy American Funds with no sales charge. They are often available in 401k plans with even lower expense ratios than their "A" shares.

What I would do is transfer the funds in kind to Vanguard. These American Funds could be kept for the rest of your life and you would be pleased with the returns. If you want to eventually get out and go all-in with Vanguard funds, I would space the sales over several years to minimize your capital gains taxes. Again, Vanguard has excellent active funds with very low expense ratios.
A fool and his money are good for business.

NancyABQ
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Re: Moving American Funds

Post by NancyABQ » Mon Mar 20, 2017 2:25 pm

nedsaid wrote:I am in a minority here in that I actually like the American funds. There are a lot worse things a person can do rather than going to an advisor and paying a load and buying and holding American Funds.


I also don't think American Funds are the worst thing in the world. I inherited some in a trust and an IRA, and so far I am keeping them (part of that is because I am not yet ready to break ties with my parents' broker, though). In my case I am able to buy Class A shares with no load. I don't think I would ever buy them with the front-end load.

But for new investments I am going all Boglehead index funds. If I was giving somebody advice, that's what I would tell them to do.

But to pay a bunch of capital gains just to divest of American Funds? I wouldn't necessarily advise that.

retiredjg
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Re: Moving American Funds

Post by retiredjg » Mon Mar 20, 2017 2:41 pm

I too think the American Funds are good funds once you get past the load (which is already a sunk cost in this case). The problem with keeping the American Funds is that they are not very tax-efficient because they are actively managed. They also have higher expense ratios. Overall, the costs are higher than index funds.

I don't think keeping them is a fatal flaw in an otherwise good portfolio. I don't think getting rid of them, even with a tax cost, is a mistake either. If you hold them long enough, the tax cost of getting rid of them will be offset. After that, it's gravy.

One way to approach this is wait till a market crash and dump them then when the value is lower (and capital gains will be less).

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nedsaid
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Re: Moving American Funds

Post by nedsaid » Mon Mar 20, 2017 3:24 pm

retiredjg wrote:I too think the American Funds are good funds once you get past the load (which is already a sunk cost in this case). The problem with keeping the American Funds is that they are not very tax-efficient because they are actively managed. They also have higher expense ratios. Overall, the costs are higher than index funds.

I don't think keeping them is a fatal flaw in an otherwise good portfolio. I don't think getting rid of them, even with a tax cost, is a mistake either. If you hold them long enough, the tax cost of getting rid of them will be offset. After that, it's gravy.

One way to approach this is wait till a market crash and dump them then when the value is lower (and capital gains will be less).


You raised an excellent point, active funds are not tax efficient and if you decide to hold any, they should be held in tax deferred retirement accounts. I learned this the hard way, I only have one such fund in a taxable account and I have been taking the annual distributions to help fund my IRA at the same company. The distributions can also happen at the worst possible time. This is one more reason to index.
A fool and his money are good for business.

mhalley
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Re: Moving American Funds

Post by mhalley » Mon Mar 20, 2017 5:02 pm

I mentioned the tax drag in my post, perhaps you could figure that out by looking at your 1099 and adding that to the to the yearly costs. I also thought of another option. Nothing has to be 100%, you could always sell one of the funds now, and hope for a correction as you sell the rest over the next couple of years.

ultra2006mg
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Joined: Thu Feb 18, 2016 8:51 pm

Re: Moving American Funds

Post by ultra2006mg » Mon Mar 20, 2017 5:53 pm

Looks like a lot of pros and cons on American funds. I will think more on it and research the tax side. I didn't know that they were not tax efficient. I was looking at the expenses and trying to stream line my portfolio. I really appreciate this forum and the knowledgeable people on it. Thanks again for all the responses.

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