Buying funds in December

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anna25
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Buying funds in December

Post by anna25 » Fri Dec 15, 2017 11:47 am

Hi all,

I am a newbie and could have been googling the wrong phrases and not pulling up existing relevant threads. Please let me know if this is the case!

I acquired a sum of money that meets the minimum investment for Vanguard's admiral shares funds. I have already maxed out my 2017 IRA contribution so this money would go to a brokerage account. I'm not understanding the literature I've found online regarding taxes and distributions implications of buying mutual funds in December, adding to the confusion how the tax efficiency of these funds would work in this scenario. Can someone break it down in layman's terms?

Should I wait until January 2018 to invest this money? In that case, I would probably pre-load my 2018 Roth IRA (likely with ETF equivalents), then invest the remainder in a taxable account. How does that sound?

Many thanks!
Anna

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grabiner
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Re: Buying funds in December

Post by grabiner » Fri Dec 15, 2017 10:22 pm

Welcome to the forum!

If you buy a fund before it makes a distribution, you will owe tax on the distribution.

However, with the type of investments you are likely to make, the tax will be trivial, so I wouldn't bother waiting. For example, Total Stock Market Admiral Shares have a 1.76% yield, and pay dividends quarterly, so the December dividend will be about 0.44% of your investment. On a $10,000 investment, that would be $44. If this dividend is 100% qualified (and it will be close to 100% if not 100%), the tax is 15% in most tax brackets, so it would be $7. Staying out of the market for a week is expected to cost you more than that $7.

If you won't be able to max out your Roth IRA for 2018, it makes sense to save money for that, and not invest in your taxable account in a way which would prevent it. However, if you will have enough money to contribute to your Roth IRA for 2018 eventually, it's reasonable to get the money into the stock market now, and fund your Roth IRA as you get the money.
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mhalley
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Re: Buying funds in December

Post by mhalley » Sat Dec 16, 2017 12:12 pm

I agree that the taxes would be minimal, so probably not worth delaying. Another option would be to look at the list and buy after the payable date.

https://institutional.vanguard.com/iam/pdf/STBAYED.pdf

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curiouskitty
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Re: Buying funds in December

Post by curiouskitty » Sat Dec 16, 2017 2:15 pm

grabiner makes excellent points (as usual)

I'll just add that by buying in December, you will have held for a year next December and will qualify for long term capital gains tax treatment should you want or need to sell. Better to hold much longer than a year typically, of course, but it does give you some additional tax planning options.

deltaneutral83
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Re: Buying funds in December

Post by deltaneutral83 » Sat Dec 16, 2017 2:20 pm

mhalley wrote:
Sat Dec 16, 2017 12:12 pm
I agree that the taxes would be minimal, so probably not worth delaying. Another option would be to look at the list and buy after the payable date.

https://institutional.vanguard.com/iam/pdf/STBAYED.pdf
Why not on the Ex-Div date which is before the payable date?

mhalley
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Re: Buying funds in December

Post by mhalley » Sat Dec 16, 2017 5:29 pm

Good point.

livesoft
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Re: Buying funds in December

Post by livesoft » Sat Dec 16, 2017 5:46 pm

For many index funds, the gains just yesterday were much more than any taxes one would incur by buying the December distribution.
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siamond
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Re: Buying funds in December

Post by siamond » Sat Dec 16, 2017 11:33 pm

Hi Anna! :wink:

Agreed with the previous posters, go for it.

anna25
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Re: Buying funds in December

Post by anna25 » Mon Dec 18, 2017 10:49 am

Thank you all for your wisdom! I actually hit a wall while opening a brokerage account at Vanguard, one which requires me to mail in a paper application (!) and...wait. Somehow this doesn't feel surprising given all the rhetoric I've gathered about Vanguard client ops. I've divvy'ed up my little nest and bought some Schwab funds while waiting for my Vanguard account to open. This process may well bring me into the new year anyway :oops:

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