Re: Divs and Cap Gains are killing me - personal

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NotWhoYouThink
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Re: Divs and Cap Gains are killing me

Post by NotWhoYouThink »

I was reading the capital gains entries as capital gain distributions (taxable) not unrealized capital gains. Maybe.
dbr
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Re: Divs and Cap Gains are killing me

Post by dbr »

NotWhoYouThink wrote: Tue Nov 28, 2017 7:26 pm I was reading the capital gains entries as capital gain distributions (taxable) not unrealized capital gains. Maybe.
Actually you might be right. I wish people would be precise in use of language rather than offhand when confusion can result.
randomguy
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Re: Divs and Cap Gains are killing me

Post by randomguy »

Admiral wrote: Tue Nov 28, 2017 7:10 pm
ps56k wrote: Tue Nov 28, 2017 4:42 pm
Electron wrote: Tue Nov 28, 2017 2:19 pm Identify higher turnover actively managed funds in taxable accounts that make large distributions. Think about a plan to move those assets to more tax efficient funds in the future. I have done that with several mutual funds in the past and taken advantage of market declines when they present themselves.

In the meantime, take all distributions in those funds as cash and reinvest in more tax efficient mutual funds. Also identify your current capital gains tax exposure should you decide to sell some or all of the shares.
Thanks all - for the replies and discussion....
Like has been mentioned, many years ago - I basically was looking for Div paying funds (Vanguard) and stocks (Schwab) to replace any CD type investments. Put the chips on the table, and let it ride.... and here we are -
I'll have to take a look at my mutual funds, and see how to tell what to expect in the CG area - and if it would make any sense to migrate...

Here are the big CG mutual fund holdings -
the other CG comes from some Schwab stock selling slices of very long term holds of ... Apple, Cisco, Starbucks, Amazon, McD, etc -

Vanguard LT Corp - $180 - Div $1,200
Vanguard Wellesley - $1,322 - Div $1,700
Vanguard Windsor - $15,234 - Div $4,700
T.Rowe Health Sciences - $10,419 - Div $2,500
T.Rowe Media - $1,855 - Div $460
T.Rowe New Horizons - $6,300 - Div --

and these Vanguard, with little/no CG - just Div -
Mid-Cap Stock index
Total Intl Stock index
Total Intl Bond index
Total Bond index
Total Stock index
Wha? Maybe I'm not understanding your post. So the largest CG you're sitting on is $15,234? I was thinking you were talking tens of thousands. I don't know the ER on these TRowe funds but if you don't like them just sell them, pay the tax, and move on.
I would assume those are the yearly LTGC distributions that most active funds have. So something like 40k of LTGC and 12k of divs + the vanguard dividends gets you 70k of income and the 10k that we are talking about. And of course this would need to be on top of filling up the 15% bracket.
dbr
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Re: Divs and Cap Gains are killing me

Post by dbr »

randomguy wrote: Tue Nov 28, 2017 8:30 pm

I would assume those are the yearly LTGC distributions that most active funds have. So something like 40k of LTGC and 12k of divs + the vanguard dividends gets you 70k of income and the 10k that we are talking about. And of course this would need to be on top of filling up the 15% bracket.
Yes, that seems clear now. But if there is anything actionable in this situation a necessary starting point is numbers for the unrealized gains and a little information about tax brackets. I guess the question is whether this is a lament or a request for suggestions regarding how to increase after tax wealth, reduce tax costs, whatever.
WildBill
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Re: Divs and Cap Gains are killing me

Post by WildBill »

ps56k wrote: Tue Nov 28, 2017 4:42 pm
Electron wrote: Tue Nov 28, 2017 2:19 pm Identify higher turnover actively managed funds in taxable accounts that make large distributions. Think about a plan to move those assets to more tax efficient funds in the future. I have done that with several mutual funds in the past and taken advantage of market declines when they present themselves.

In the meantime, take all distributions in those funds as cash and reinvest in more tax efficient mutual funds. Also identify your current capital gains tax exposure should you decide to sell some or all of the shares.
Thanks all - for the replies and discussion....
Like has been mentioned, many years ago - I basically was looking for Div paying funds (Vanguard) and stocks (Schwab) to replace any CD type investments. Put the chips on the table, and let it ride.... and here we are -
I'll have to take a look at my mutual funds, and see how to tell what to expect in the CG area - and if it would make any sense to migrate...

Here are the big CG mutual fund holdings -
the other CG comes from some Schwab stock selling slices of very long term holds of ... Apple, Cisco, Starbucks, Amazon, McD, etc -

Vanguard LT Corp - $180 - Div $1,200
Vanguard Wellesley - $1,322 - Div $1,700
Vanguard Windsor - $15,234 - Div $4,700
T.Rowe Health Sciences - $10,419 - Div $2,500
T.Rowe Media - $1,855 - Div $460
T.Rowe New Horizons - $6,300 - Div --

and these Vanguard, with little/no CG - just Div -
Mid-Cap Stock index
Total Intl Stock index
Total Intl Bond index
Total Bond index
Total Stock index
Howdy

Apologies if I misunderstand, but this looks a lot more like a minor flesh wound rather than something that is killing you.

Happy tax gain harvesting.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
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Electron
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Re: Divs and Cap Gains are killing me

Post by Electron »

Dividends in a taxable account shouldn't be an issue as long as they are Qualified Dividends and are receiving favorable tax treatment. Note that the dividends paid by Wellesley Income are generated by both stocks and bonds and only a portion of the dividend is Qualified. Wellesley may be better suited to a tax deferred account. As already noted, large capital gains distributions are generally not desirable in taxable accounts.

Windsor is one of the funds that I eliminated quite a few years ago as the portfolio turnover is typically quite high. Morningstar is a good site to check portfolio turnover, recent distributions, and potential capital gains exposure. It's a great resource once you learn what information is provided on each of the available tabs.
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dratkinson
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Re: Divs and Cap Gains are killing me

Post by dratkinson »

BH Divs and Cap Gains are killing me


OP, you don't have a problem until your distributions push you into the next higher tax bracket. :)


I joined the forum with a similar problem, except my distributions were pushing me into next tax bracket.

A forum review explained how to invest for total return (price appreciation + distributions (dividends + capital gains)) and tax efficiency.

It required a couple of years for me to unwind my old investments as I only did enough in one year so I didn't advance tax brackets. (It’s okay to pay more in tax this year, without going into the next tax bracket, if the result is to improve your tax situation going forward.)


Tax efficiency.
--See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _placement

--See Wiki topic: https://www.bogleheads.org/wiki/Three-fund_portfolio
--See forum discussion: viewtopic.php?f=10&t=88005

See: https://www.bogleheads.org/wiki/Municipal_bonds
I remember "tax efficient fund placement" Wiki topic being light on muni bond funds, so read this too.


Your advice to use TSM (total stock market index fund: VTSMX) in taxable is because it's total distributions for many years has be 100% QDI. Which means you will be taxed at 0% (<25% fed tax bracket), 15% (=>25% tax bracket), or 18.8% (=>25% tax bracket if Medicare surtax applies). QDI taxation is easy to live with.


Muni bond dividends are 100% fed tax exempt, but do affect MAGI calculations (as do all bond dividends). As you are already using a LT corp bond, I'd recommend using Vanguard LT national muni bond fund (VWLTX) because it'll give you a 2+% SEC yield (higher after tax). Why? Muni bonds are less risky than corp bonds of the same duration/credit quality. And because LT muni pays more dividends than IT muni. Muni TE dividends are easy to live with.

If appropriate, can use a 50% allocation to a single-state muni fund for possible triple tax benefits (fed, state, city).


If you want to keep any of your specialty stocks/funds, can do that in your tax-advantaged accounts. But there again, thinking about total return investing, if a specialty stock/fund is not returning as much/better total return than TSM, then it's just a play money investment (gamble).


Bottom line. Gifting of appreciated shares (to lower your tax on Sch A, if this is what you would normally do), and converting to tax-efficient total return investing (while staying under the next higher tax bracket during the conversion years) should get you where you want to be.

N.B. Selling stocks/funds before dividends are paid, means the embedded dividends will be recognized as CGs (CG rate applies), not as ordinary dividends. This is justification to act before the dividend record date.



Forum review. If you would like, can post your total financial situation for the forum to review. There might be other opportunities to improve your situation, but the forum would need to see everything to improve upon everything.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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Leif
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Re: Divs and Cap Gains are killing me

Post by Leif »

ps56k wrote: Tue Nov 28, 2017 4:42 pm I'll have to take a look at my mutual funds, and see how to tell what to expect in the CG area - and if it would make any sense to migrate...
I hope you let us know your decision, and your analysis. I think many would find is interesting and possibly useful.
WhyNotUs
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Re: Divs and Cap Gains are killing me

Post by WhyNotUs »

I wonder if this isn't a tongue in cheek or boast post. Paying 15-20% on qualified dividends is about as easy as it gets.
Congrats on your success.
I own the next hot stock- VTSAX
Da5id
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Re: Divs and Cap Gains are killing me

Post by Da5id »

WhyNotUs wrote: Wed Nov 29, 2017 8:31 am I wonder if this isn't a tongue in cheek or boast post. Paying 15-20% on qualified dividends is about as easy as it gets.
Congrats on your success.
Doesn't read like that to me. Seems more like regrets for going for a dividend strategy and perhaps for not using some tax efficient fund placement. If OP has tax free/tax deferred space and somehow wanted a dividend rather than a total return strategy (not a good plan IMHO), many of these holdings should presumably have been in tax free/tax deferred space.
dbr
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Re: Divs and Cap Gains are killing me

Post by dbr »

Da5id wrote: Wed Nov 29, 2017 8:46 am
WhyNotUs wrote: Wed Nov 29, 2017 8:31 am I wonder if this isn't a tongue in cheek or boast post. Paying 15-20% on qualified dividends is about as easy as it gets.
Congrats on your success.
Doesn't read like that to me. Seems more like regrets for going for a dividend strategy and perhaps for not using some tax efficient fund placement. If OP has tax free/tax deferred space and somehow wanted a dividend rather than a total return strategy (not a good plan IMHO), many of these holdings should presumably have been in tax free/tax deferred space.
The explicit statement in the OP is

"At this point - the Cap Gains and Divs are really killing me -
What should I do - any suggestions ????"

The magnitude of the damage is about $10,000 a year though we don't know to what it can be reduced. There have been no obvious solutions other than some itself costly reorganization of the portfolio. It could be changing the investments would be worthwhile in the long run, but there is no easy out.
soupcxan
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Re: Divs and Cap Gains are killing me

Post by soupcxan »

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Artsdoctor
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Re: Divs and Cap Gains are killing me

Post by Artsdoctor »

dbr wrote: Wed Nov 29, 2017 9:20 am
Da5id wrote: Wed Nov 29, 2017 8:46 am
WhyNotUs wrote: Wed Nov 29, 2017 8:31 am I wonder if this isn't a tongue in cheek or boast post. Paying 15-20% on qualified dividends is about as easy as it gets.
Congrats on your success.
Doesn't read like that to me. Seems more like regrets for going for a dividend strategy and perhaps for not using some tax efficient fund placement. If OP has tax free/tax deferred space and somehow wanted a dividend rather than a total return strategy (not a good plan IMHO), many of these holdings should presumably have been in tax free/tax deferred space.
The explicit statement in the OP is

"At this point - the Cap Gains and Divs are really killing me -
What should I do - any suggestions ????"

The magnitude of the damage is about $10,000 a year though we don't know to what it can be reduced. There have been no obvious solutions other than some itself costly reorganization of the portfolio. It could be changing the investments would be worthwhile in the long run, but there is no easy out.
I don't think there is a tongue-in-cheek boast going on here. Some of those funds are inappropriate to be held in a taxable account unless you're paying very little tax in general (long-term corporate bond fund??).

There's no easy out but there's a hierarchy on what can be done. The bond funds and hybrid funds should just be sold. For example, the long-term corporate fund should be sold now; there's just no reason to have it and the non-qualified dividends would be shut off immediately.

The other Vanguard funds, like Wellesley and Windsor, belong in a tax-advantaged account. The OP sounds relatively young so just chucking the funds is easy to do without a lot of pain, and the long-term advantages would be significant.

The Schwab stocks are far more difficult. If I'm reading the post correctly, they're throwing off quite a few dividends and the imbedded capital gains are not that small. Still, the concept of learning about tax-loss harvesting and then strategically selling in the future would hold.

I agree with DBR that there's no easy out, but sometimes just pulling off the Band-Aid quickly is the way to go.
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Re: Divs and Cap Gains are killing me

Post by avalpert »

soupcxan wrote: Wed Nov 29, 2017 9:25 am
whodidntante wrote: Tue Nov 28, 2017 1:47 pm Dividends are not a source of return.
Dividends are most definitely a source of return.

Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.

Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.


https://www.investopedia.com/terms/t/totalreturn.asp
No, dividends are not a source of return - corporate earnings are the source of return and dividends are one vehicle for delivering those returns to shareholders. The distinction is very important because mistakenly thinking that dividends are the source of the return leads people to chase dividend yield.
Da5id
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Re: Divs and Cap Gains are killing me

Post by Da5id »

avalpert wrote: Wed Nov 29, 2017 9:57 am No, dividends are not a source of return - corporate earnings are the source of return and dividends are one vehicle for delivering those returns to shareholders. The distinction is very important because mistakenly thinking that dividends are the source of the return leads people to chase dividend yield.
While I agree with your point of view on dividends, I think the standard way to discuss return of a stock or mutual fund is "price appreciation + dividends paid". While stock buybacks move the dividend paid part to price appreciation, if a dividend is actually paid surely it must be considered.
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Re: Divs and Cap Gains are killing me

Post by triceratop »

Da5id wrote: Wed Nov 29, 2017 10:00 am
avalpert wrote: Wed Nov 29, 2017 9:57 am No, dividends are not a source of return - corporate earnings are the source of return and dividends are one vehicle for delivering those returns to shareholders. The distinction is very important because mistakenly thinking that dividends are the source of the return leads people to chase dividend yield.
While I agree with your point of view on dividends, I think the standard way to discuss return of a stock or mutual fund is "price appreciation + dividends paid". While stock buybacks move the dividend paid part to price appreciation, if a dividend is actually paid surely it must be considered.
This is undoubtedly true, but the standard way to discuss total return can be misleading if one does not remember that dividend policy is merely a vehicle to return capital. This (and the following two images) is one of my favorite articles to dispel dividend misthinking: Shareholder Yields Are Higher Than You Think

Image

Image
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
avalpert
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Re: Divs and Cap Gains are killing me

Post by avalpert »

Da5id wrote: Wed Nov 29, 2017 10:00 am
avalpert wrote: Wed Nov 29, 2017 9:57 am No, dividends are not a source of return - corporate earnings are the source of return and dividends are one vehicle for delivering those returns to shareholders. The distinction is very important because mistakenly thinking that dividends are the source of the return leads people to chase dividend yield.
While I agree with your point of view on dividends, I think the standard way to discuss return of a stock or mutual fund is "price appreciation + dividends paid". While stock buybacks move the dividend paid part to price appreciation, if a dividend is actually paid surely it must be considered.
Yes, but neither of those are the source of the return - they are how the return is manifested for the investor.
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Re: Divs and Cap Gains are killing me

Post by Da5id »

triceratop wrote: Wed Nov 29, 2017 10:04 am This is undoubtedly true, but the standard way to discuss total return can be misleading if one does not remember that dividend policy is merely a vehicle to return capital. This (and the following two images) is one of my favorite articles to dispel dividend misthinking: [url=https://www.bloomberg.com/view/articles ... -you-think]Shareholder Yields Are Higher Than You
Recently was a front page article in WSJ that buyback yields are actually falling. https://www.wsj.com/articles/saying-bye ... 1511438400 (paywall). Says buybacks are likely to be back to 2012 levels. Just an interesting side note.
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Re: Divs and Cap Gains are killing me

Post by triceratop »

Da5id wrote: Wed Nov 29, 2017 10:08 am
triceratop wrote: Wed Nov 29, 2017 10:04 am This is undoubtedly true, but the standard way to discuss total return can be misleading if one does not remember that dividend policy is merely a vehicle to return capital. This (and the following two images) is one of my favorite articles to dispel dividend misthinking: [url=https://www.bloomberg.com/view/articles ... -you-think]Shareholder Yields Are Higher Than You
Recently was a front page article in WSJ that buyback yields are actually falling. https://www.wsj.com/articles/saying-bye ... 1511438400 (paywall). Says buybacks are likely to be back to 2012 levels. Just an interesting side note.
Right, it's a side note because of the last paragraph:
To be sure, companies are still returning cash to investors in other ways. Dividend payments by S&P 500 companies are poised to set a sixth consecutive record in 2017, according to S&P Dow Jones Indices.
I would like to reconstruct that data series in the plots above to extend to the present.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
dbr
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Re: Divs and Cap Gains are killing me

Post by dbr »

I think it would be better for a discussion of the financial nature of dividends and returns to be taken elsewhere -- but I am not a moderator, so ignore at will.
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Re: Divs and Cap Gains are killing me

Post by Admiral »

dbr wrote: Wed Nov 29, 2017 10:18 am I think it would be better for a discussion of the financial nature of dividends and returns to be taken elsewhere -- but I am not a moderator, so ignore at will.
+1. The OP's question was how to unwind dividend-paying holdings in a taxable account that have appreciated. Still need clarification on how much money we're talking about but really there's no magic bullet here. Sometimes one must pay the piper for one's investment decisions. This may be one of those times. Charitable donations may be the only way to avoid it. Selling piecemeal will of course lessen the pain.
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Re: Divs and Cap Gains are killing me

Post by soupcxan »

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avalpert
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Re: Divs and Cap Gains are killing me

Post by avalpert »

soupcxan wrote: Wed Nov 29, 2017 10:31 am
avalpert wrote: Wed Nov 29, 2017 9:57 am
soupcxan wrote: Wed Nov 29, 2017 9:25 am
whodidntante wrote: Tue Nov 28, 2017 1:47 pm Dividends are not a source of return.
Dividends are most definitely a source of return.

Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.

Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.


https://www.investopedia.com/terms/t/totalreturn.asp
No, dividends are not a source of return - corporate earnings are the source of return and dividends are one vehicle for delivering those returns to shareholders. The distinction is very important because mistakenly thinking that dividends are the source of the return leads people to chase dividend yield.
Many other things besides corporate earnings affect security prices and therefore investor returns, e.g. interest rates. Plenty of people have made money on stocks where companies had negative earnings.

You can make up your own definition of return I suppose but total return = price appreciation + dividends is accepted in the financial community.
And you can make up your own definition of source - but if you aren't differentiating between how outcomes manifest and what causes them you are going to make many, many mistakes and not even be able to diagnose why because you refuse to think critically of your actions.
soupcxan
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Re: Divs and Cap Gains are killing me

Post by soupcxan »

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Re: Divs and Cap Gains are killing me

Post by triceratop »

soupcxan wrote: Wed Nov 29, 2017 10:31 am
avalpert wrote: Wed Nov 29, 2017 9:57 am No, dividends are not a source of return - corporate earnings are the source of return and dividends are one vehicle for delivering those returns to shareholders. The distinction is very important because mistakenly thinking that dividends are the source of the return leads people to chase dividend yield.
Many other things besides corporate earnings affect security prices and therefore investor returns, e.g. interest rates. Plenty of people have made money on stocks where companies had negative earnings because expectations of the future changed.

You can make up your own definition of return I suppose but total return = price appreciation + dividends is accepted in the financial community.
But avalpert didn't mention anything about security prices.

Anyway, to bring things back to the OP: are there unresolved questions you'd like answered before you can make a decision to reduce tax drag in the future? Do you generally know your options and the drawbacks of each?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
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Re: Divs and Cap Gains are killing me

Post by avalpert »

soupcxan wrote: Wed Nov 29, 2017 10:35 am
avalpert wrote: Wed Nov 29, 2017 10:33 am
soupcxan wrote: Wed Nov 29, 2017 10:31 am
avalpert wrote: Wed Nov 29, 2017 9:57 am
soupcxan wrote: Wed Nov 29, 2017 9:25 am

Dividends are most definitely a source of return.

Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.

Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.


https://www.investopedia.com/terms/t/totalreturn.asp
No, dividends are not a source of return - corporate earnings are the source of return and dividends are one vehicle for delivering those returns to shareholders. The distinction is very important because mistakenly thinking that dividends are the source of the return leads people to chase dividend yield.
Many other things besides corporate earnings affect security prices and therefore investor returns, e.g. interest rates. Plenty of people have made money on stocks where companies had negative earnings.

You can make up your own definition of return I suppose but total return = price appreciation + dividends is accepted in the financial community.
And you can make up your own definition of source - but if you aren't differentiating between how outcomes manifest and what causes them you are going to make many, many mistakes and not even be able to diagnose why because you refuse to think critically of your actions.
Ok you are clearly smarter than me.
So true.
But you think the fundamental driver of "return" is earnings and again what the finance community actually values is free cash flow, for which GAAP earnings are just a proxy (requiring many adjustments to get back to FCF).
Your right, I didn't give an intro course on security pricing in my quick response - I used a shorthand proxy. I apologize for that.

At least you now understand that dividends aren't a source of returns and seeing them as one may lead you to the unfortunate future problem of paying taxes on forced distributions you don't want.
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Re: Divs and Cap Gains are killing me

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Re: Divs and Cap Gains are killing me

Post by Electron »

Preliminary Capital Gains Distribution estimates are available from most fund groups.

Here you can see the estimates for Vanguard Windsor, Wellesley and Wellington. As a percentage of NAV, they show 2.85%, 1.04%, and 3.79% respectively.

https://investornews.vanguard/upcoming- ... formation/

The next link provides information on the T. Rowe Price Funds. Health Sciences, Media, and New Horizons are all making sizeable distributions. Note that Health Sciences and New Horizons also show short term capital gains. You may want to calculate all the distributions as a percentage of NAV or convert to dollar amounts based on your share balances.

https://individual.troweprice.com/publi ... tributions

If you at some point decide to sell any higher turnover funds, note that NAV is held down somewhat over the years. That is because the price is dropped every time the fund goes ex-dividend. As a result, the tax hit on selling may be less than expected. In a significant correction or bear market, some higher turnover funds may show a capital loss even though your overall total return may still have been positive.
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ps56k
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Re: Divs and Cap Gains are killing me

Post by ps56k »

Staying on the orig topic and intent....

I only have an IRA for any taxing considerations.
I was building my taxable portfolio with growth, income, and a cushion of bonds against any equity downturns.
SO - I was adding things with bonds, dividends, and things like Wellesley... though Windsor was my first mutual funds - decades ago :)

I had never even looked at, or thought about CG until a couple of years ago, when I started selling small slices of my stock portfolio.
Not only did I get bumped up in tax bracket, I had to pay an additional $15,000...
Now, things have just continued along the same path - with CG from the mutual funds, and CG from the selling of long term held stocks.
Sure, the CG stocks are a given... but I had never even thought about the effects of my mutual funds on the CG speed bump.
At this point, I will look at the high contributors to CG, and their cost basis to see what CG might be incurred from selling.
And I just went back to M* and looked at the "turnover" number, and will keep that in mind for future browsing.

So - here are the funds I listed way above - now with the addition of the "turnover" number - which would imply how the CG might crop up.

Here are the big CG mutual fund holdings -
the other CG comes from some Schwab stock selling slices of very long term holds of ... Apple, Cisco, Starbucks, Amazon, McD, etc -

the Schwab stocks are from decades ago - selling small slices at a time....

Schwab - CG $46,000 and Divs $49,000

Vanguard LT Corp ----------------- CG $180 - Div $1,200 - Turnover 24%
Vanguard Wellesley ------------- CG $1,322 - Div $1,700 - Turnover 31%
Vanguard Windsor ------------ CG $15,234 - Div $4,700 - Turnover 26%
T.Rowe Health Sciences ------ CG $10,419 - Div $2,500 - Turnover 25%
T.Rowe Media ------------------- CG $1,855 - Div $460 - Turnover 16%
T.Rowe New Horizons ---------- CG $6,300 - Div - $0 - Turnover 42%

and these Vanguard funds, with little/no CG - just Divs -

Mid-Cap Stock index
Total Intl Stock index
Total Intl Bond index
Total Bond index - Turnover 0%
Total Stock index - Turnover 4%

Lots of moving puzzle pieces.....
Wondering what metrics I should mentally use to look at my table.... just try and reduce those with high turnover ?
Currently, the mutual funds have their CG and Divs re-invested - and I'm paying taxes anyway.... so... maybe just reset some to pay in cash ?
Last edited by ps56k on Wed Apr 11, 2018 4:26 pm, edited 1 time in total.
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Re: Divs and Cap Gains are killing me

Post by Artsdoctor »

^ You're still not going to get specific information because you never really outlined your goals, your marginal tax rate on investments, asset allocation, etc.

However, there are some general steps you can take.

A long-term corporate bond fund should be jettisoned. It won't cost you much in capital gains and it's the least tax-efficient of all of your funds.

Along those lines, get rid of Wellesley for similar reasons.

I'm not sure what your goals are with the T. Rowe funds but remember that relatively small percentages of holdings are not going to make any difference in your portfolio performance. You can easily sell the Media fund.

At the very least, you should turn off any reinvestment options.

The other funds on your list could be sold now or sold strategically. If you want to make any donations, transfer over Health Sciences, for example, to your DAF.
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Re: Divs and Cap Gains are killing me

Post by ps56k »

Artsdoctor wrote: Wed Nov 29, 2017 2:30 pm However, there are some general steps you can take.
A long-term corporate bond fund should be jettisoned.
It won't cost you much in capital gains and it's the least tax-efficient of all of your funds.
Along those lines, get rid of Wellesley for similar reason.
If I get rid of the LT Bond, and the Wellesley - How do I balance against the equity portion....
Just put the proceeds into our Vanguard Total Bond Index
That was the initial reason to go with Wellesley - to have a fund that balances Bonds/Stocks - BUT it has 31% turnover
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Re: Divs and Cap Gains are killing me

Post by NotWhoYouThink »

It is really hard to give thoughtful answers without the whole picture. Why don't you start a new thread using this format?
viewtopic.php?f=1&t=6212
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Re: Divs and Cap Gains are killing me

Post by Artsdoctor »

^ Agree with the above. We need more information.

Depending on your tax situation, a municipal bond fund (or funds) might be appropriate. If your marginal rates are relatively low, Total Bond could also be reasonable.
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Re: Divs and Cap Gains are killing me

Post by Electron »

It's also helpful to review the current tax system especially in terms of the 15% bracket where Qualified Dividends and Capital Gains may be taxed at 0%.

Take a look at recent tax returns and determine if you were able to take advantage of the 0% bracket. Note that ordinary income and short term gains can displace Qualified Dividends and Capital Gains in the 0% bracket and push them into a higher Capital Gains tax bracket. It's helpful to know how much of the 15% bracket is filled with Ordinary Income after exemptions and deductions and how much is Qualified Dividends and Capital Gains.
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Re: Divs and Cap Gains are killing me

Post by wrongfunds »

Just don't get completely carried over to the tax efficient fund. You will save on taxes now but unless you plan on leaving this earthly existence before taking those gains, you will eventually be paying the deferred taxes later. Of course your current marginal rate vs your future marginal rate all plays in to it but sometimes having different buckets of assets gives you flexibility.

Recall how it has been drilled in to your head that parts of your 401K belongs to the government because of the deferred taxes? Same thing is applicable when you use the tax efficient funds in your taxable account. Part of that asset would be taken by IRS.

Nobody likes paying taxes either now or later but if you are paying taxes now, your later taxes will be less.
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Re: Divs and Cap Gains are killing me

Post by nedsaid »

itstoomuch wrote: Mon Nov 27, 2017 7:07 pm
BTW, the taxes on cap gains and divs are far smaller than the taxes on IRA distributions/withdrawals. :oops: :moneybag
That, my friend is a very good point. Of course, in a taxable account, you take the haircut every year, whereas an IRA left alone for years will get the benefits of compounding.
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Re: Divs and Cap Gains are killing me

Post by Sandtrap »

wrongfunds wrote: Thu Nov 30, 2017 9:51 pm Just don't get completely carried over to the tax efficient fund. You will save on taxes now but unless you plan on leaving this earthly existence before taking those gains, you will eventually be paying the deferred taxes later. Of course your current marginal rate vs your future marginal rate all plays in to it but sometimes having different buckets of assets gives you flexibility.

Recall how it has been drilled in to your head that parts of your 401K belongs to the government because of the deferred taxes? Same thing is applicable when you use the tax efficient funds in your taxable account. Part of that asset would be taken by IRS.

Nobody likes paying taxes either now or later but if you are paying taxes now, your later taxes will be less.
Please explain this? Don't you mean "non taxable" space?
thanks
j :D
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Re: Divs and Cap Gains are killing me

Post by randomguy »

Sandtrap wrote: Thu Nov 30, 2017 11:15 pm
wrongfunds wrote: Thu Nov 30, 2017 9:51 pm Just don't get completely carried over to the tax efficient fund. You will save on taxes now but unless you plan on leaving this earthly existence before taking those gains, you will eventually be paying the deferred taxes later. Of course your current marginal rate vs your future marginal rate all plays in to it but sometimes having different buckets of assets gives you flexibility.

Recall how it has been drilled in to your head that parts of your 401K belongs to the government because of the deferred taxes? Same thing is applicable when you use the tax efficient funds in your taxable account. Part of that asset would be taken by IRS.

Nobody likes paying taxes either now or later but if you are paying taxes now, your later taxes will be less.
Please explain this? Don't you mean "non taxable" space?
thanks
j :D
Pretty sure he means taxable. Imagine 2 cases
a) tax efficient fund: 25k cost basis 100k value. When you liquidate if you would end up with 25k+75k-(.15*75k) = 88.75k spendable money
b)Worst most tax inefficent fund possible : You have 70k with a cost basis of 70k because you paid so much in taxes over the years = 70k spendable money

You normally think of B being worth 30k less than a (100k versus 70k). In reality it is worth 18.75k less (88.75 versus 70k). People tend to ignore this aspect when talking about money but it can matter. The person with 2 million in cash has more spendable money than the person with 2 million in an IRA.
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Re: Divs and Cap Gains are killing me

Post by Sandtrap »

randomguy wrote: Fri Dec 01, 2017 12:25 am
Sandtrap wrote: Thu Nov 30, 2017 11:15 pm
wrongfunds wrote: Thu Nov 30, 2017 9:51 pm Just don't get completely carried over to the tax efficient fund. You will save on taxes now but unless you plan on leaving this earthly existence before taking those gains, you will eventually be paying the deferred taxes later. Of course your current marginal rate vs your future marginal rate all plays in to it but sometimes having different buckets of assets gives you flexibility.

Recall how it has been drilled in to your head that parts of your 401K belongs to the government because of the deferred taxes? Same thing is applicable when you use the tax efficient funds in your taxable account. Part of that asset would be taken by IRS.

Nobody likes paying taxes either now or later but if you are paying taxes now, your later taxes will be less.
Please explain this? Don't you mean "non taxable" space?
thanks
j :D
Pretty sure he means taxable. Imagine 2 cases
a) tax efficient fund: 25k cost basis 100k value. When you liquidate if you would end up with 25k+75k-(.15*75k) = 88.75k spendable money
b)Worst most tax inefficent fund possible : You have 70k with a cost basis of 70k because you paid so much in taxes over the years = 70k spendable money

You normally think of B being worth 30k less than a (100k versus 70k). In reality it is worth 18.75k less (88.75 versus 70k). People tend to ignore this aspect when talking about money but it can matter. The person with 2 million in cash has more spendable money than the person with 2 million in an IRA.
Why?
Isn't the whole point of the IRA to be in a lower tax bracket when withdrawing than when it was earned?
Thanks,
j :D
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Re: Divs and Cap Gains are killing me

Post by itstoomuch »

^in theory yes.
In practicable terms and with inflation; Not always.
I call this a "Qwack", Qualified Withdrawal Account aCK.
In theory, an IwRA, will return more $$$ to the Treasury, than $ was collected at wage time.
Interesting legislation history.
Ymmv :greedy
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Re: Divs and Cap Gains are killing me

Post by wrongfunds »

Isn't the whole point of the IRA to be in a lower tax bracket when withdrawing than when it was earned?
For few of "very lucky" retirees, it might become difficult to have that! But generally, those would be rare cases. If you find yourself in that situation, you will be then glad that you have some tax inefficent funds in your portfolio!
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Re: Divs and Cap Gains are killing me

Post by Electron »

ps56k wrote: Wed Nov 29, 2017 4:11 pm That was the initial reason to go with Wellesley - to have a fund that balances Bonds/Stocks - BUT it has 31% turnover
The 31% turnover in Wellesley may not be a problem since the fund is 60% in bonds which typically don't generate a lot of capital gains. The bigger issue depending on your tax bracket is that approximately 60% of Wellesley dividends are Ordinary Income and not Qualified Dividends.
Sandtrap wrote: Fri Dec 01, 2017 1:00 am Isn't the whole point of the IRA to be in a lower tax bracket when withdrawing than when it was earned?
That is the desired case, but note that many people early in their careers contribute to deductible IRAs and 401Ks when in a relatively low tax bracket. Those contributions may not see as much benefit as later contributions when earnings are higher. Even so, there is still the benefit from many years of tax deferred compounding.
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Re: Divs and Cap Gains are killing me

Post by avalpert »

Electron wrote: Fri Dec 01, 2017 1:22 pm
ps56k wrote: Wed Nov 29, 2017 4:11 pm That was the initial reason to go with Wellesley - to have a fund that balances Bonds/Stocks - BUT it has 31% turnover
The 31% turnover in Wellesley may not be a problem since the fund is 60% in bonds which typically don't generate a lot of capital gains.
That's not typically true. Bond fund do lots of buying and selling to maintain desired duration exposure and very frequently have to distribute capital gains as a result.
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Re: Divs and Cap Gains are killing me

Post by itstoomuch »

Also, W funds throw off interest from bonds that are taxed at marginal rates :oops:
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Re: Divs and Cap Gains are killing me

Post by triceratop »

randomguy wrote: Fri Dec 01, 2017 12:25 am
Sandtrap wrote: Thu Nov 30, 2017 11:15 pm
wrongfunds wrote: Thu Nov 30, 2017 9:51 pm Just don't get completely carried over to the tax efficient fund. You will save on taxes now but unless you plan on leaving this earthly existence before taking those gains, you will eventually be paying the deferred taxes later. Of course your current marginal rate vs your future marginal rate all plays in to it but sometimes having different buckets of assets gives you flexibility.

Recall how it has been drilled in to your head that parts of your 401K belongs to the government because of the deferred taxes? Same thing is applicable when you use the tax efficient funds in your taxable account. Part of that asset would be taken by IRS.

Nobody likes paying taxes either now or later but if you are paying taxes now, your later taxes will be less.
Please explain this? Don't you mean "non taxable" space?
thanks
j :D
Pretty sure he means taxable. Imagine 2 cases
a) tax efficient fund: 25k cost basis 100k value. When you liquidate if you would end up with 25k+75k-(.15*75k) = 88.75k spendable money
b)Worst most tax inefficent fund possible : You have 70k with a cost basis of 70k because you paid so much in taxes over the years = 70k spendable money

You normally think of B being worth 30k less than a (100k versus 70k). In reality it is worth 18.75k less (88.75 versus 70k). People tend to ignore this aspect when talking about money but it can matter. The person with 2 million in cash has more spendable money than the person with 2 million in an IRA.
Excellent post. People like to say that the taxes on dividends raise your basis, reducing future tax costs. Yes, but you still lose money! Ah, I love the dividend wars.
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Re: Divs and Cap Gains are killing me

Post by itstoomuch »

Op,
I view dividends and interest as Income, not investment. Although they are part of total return, it's Income to me for use as Income or investment.

Stock holdings we have are purely Investing, to be bought and sold of for profit and risk management.
What MF/Indexes and debt (mortgage & PLUS) I have remaining are long-term, which may not be all that long.
BTW, I see debt as Investment and negative Income.
YMMV :mrgreen:
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Re: Divs and Cap Gains are killing me

Post by smitcat »

itstoomuch wrote: Fri Dec 01, 2017 1:37 am ^in theory yes.
In practicable terms and with inflation; Not always.
I call this a "Qwack", Qualified Withdrawal Account aCK.
In theory, an IwRA, will return more $$$ to the Treasury, than $ was collected at wage time.
Interesting legislation history.
Ymmv :greedy
Practically we expect to come out ahead by a good amount....
In practice our 401K deductions were mostly taken when we would be in a very high Fed rate and a pretty high state rate as well.
By utilizing Roth conversions as well as some planning we hope to have at least a 10% drop in taxes but likely larger each year.
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Re: Divs and Cap Gains are killing me

Post by ps56k »

NotWhoYouThink wrote: Wed Nov 29, 2017 4:37 pm It is really hard to give thoughtful answers without the whole picture.
Why don't you start a new thread using this format?
viewtopic.php?f=1&t=6212
Artsdoctor wrote: Wed Nov 29, 2017 5:02 pm ^ Agree with the above. We need more information.
Depending on your tax situation, a municipal bond fund (or funds) might be appropriate.
If your marginal rates are relatively low, Total Bond could also be reasonable.
ok... back -
Not sure what exactly you'll find here that might change how to handle the large CG problem.
Let me echo my basic thoughts from the beginning....
Married - both retired and over 55+ and have small Traditional IRAs - most of net worth is in taxable portfolio.
Sure, I could swap around everything in the IRA - but it is only 1/10th the size of my taxable portfolio.
SO - Had bought funds (and stocks) to generate Divs to create income later when needed... had not thought about CG issue.

SO - here are the basic numbers - from our latest tax filing -
I view the CG as an invisible penalty for generating the mutual fund Divs -

W2 = $9,200
Interest = $2,100
Dividends = $78,000
QDI = $61,000
CG = $96,000 (mutual funds + some stock selling)
Pension 1099 = $92,000

AGI = $269,000
Taxable = $244,000
Tot Tax = $37,000
Eff Rate = 13%

My overall objectives are -
- totally ignore any IRA discussion, as it is only 1/10 the size of taxable portfolio.
- generate future income stream for when we might need it - turns out, we really don't
- increase and grow portfolio for future
- diversify portfolio to balance equity positions in down market or crash, with safety net of bond funds in taxable portfolio

SO - Had not really counted on the Pension being there,
and had bought stocks and mutual funds that would create a Divs income stream in the future.

Wonder if selling the funds, and buying their ETF twins (if they have one) would reduce/eliminate the CG in my taxable portfolio
--
Schwab stocks - CG $46,000 (from selling) and Divs $49,000

Vanguard LT Corp ---- $100k ------------- CG $180 - Div $1,200 - Turnover 24%
Vanguard Wellesley ---- $100k --------- CG $1,322 - Div $1,700 - Turnover 31%
Vanguard Windsor ---- $330k -------- CG $15,234 - Div $4,700 - Turnover 26%
T.Rowe Health Sciences -- $164k ---- CG $10,419 - Div $2,500 - Turnover 25%
T.Rowe Media ----- $50k ------------- CG $1,855 - Div $460 - Turnover 16%
T.Rowe New Horizons --- $150k ------- CG $6,300 - Div - $0 - Turnover 42%

and these Vanguard funds, with little/no CG - just Divs -

Mid-Cap Stock index --- $50k ---
Total Intl Stock index --- $85k ---
Total Intl Bond index ---- $40k ---
Total Bond index ---- $120k ---- Turnover 0%
Total Stock index ---- $140k ---- Turnover 4%
Last edited by ps56k on Fri Apr 13, 2018 2:37 pm, edited 2 times in total.
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Re: Divs and Cap Gains are killing me

Post by Electron »

ps56k wrote: Fri Apr 13, 2018 11:17 amWonder if selling the funds, and buying their ETF twins would reduce/eliminate the CG in my taxable portfolio.
Comparable ETFs may not be available for all the funds listed. I would suggest moving over time to only stock index funds which should eliminate the capital gains distributions in most cases. Note that capital gains distributions vary from year to year and tend to rise when stock prices have been rising. Capital gains distributions can also be expected to decline following a bear market.

Besides identifying higher turnover funds that distribute capital gains, you also need to review all of your holdings and determine the capital gains exposure strictly from selling your shares. Compare your cost basis in each fund with the current value.

One other option is to hold a diversified selection of individual stocks for share appreciation and/or dividend growth. Your expense ratio can approach zero and you would have full control over when any shares are sold.
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Re: Divs and Cap Gains are killing me

Post by aristotelian »

ps56k wrote: Fri Apr 13, 2018 11:17 am

Wonder if selling the funds, and buying their ETF twins (if they have one) would reduce/eliminate the CG in my taxable portfolio
--
Schwab stocks - CG $46,000 (from selling) and Divs $49,000

Vanguard LT Corp ---- $100k ------------- CG $180 - Div $1,200 - Turnover 24%
Vanguard Wellesley ---- $100k --------- CG $1,322 - Div $1,700 - Turnover 31%
Vanguard Windsor ---- $330k -------- CG $15,234 - Div $4,700 - Turnover 26%
T.Rowe Health Sciences -- $164k ---- CG $10,419 - Div $2,500 - Turnover 25%
T.Rowe Media ----- $50k ------------- CG $1,855 - Div $460 - Turnover 16%
T.Rowe New Horizons --- $150k ------- CG $6,300 - Div - $0 - Turnover 42%

and these Vanguard funds, with little/no CG - just Divs -

Mid-Cap Stock index --- $50k ---
Total Intl Stock index --- $85k ---
Total Intl Bond index ---- $40k ---
Total Bond index ---- $120k ---- Turnover 0%
Total Stock index ---- $140k ---- Turnover 4%
You can see for yourself that the real culprits are the distributions being thrown off by the active funds, TR Health Sciences ($10K), TR New Horizons ($6K) and Vnaguard Windsor ($15K). You could eliminate all of that taxable income and have the same expected return by investing in a tax efficient index fund such as Total Stock Index. If you believe in active management, you pay a premium in taxes as well as fund expenses.
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