New to VG. Tax hit on trsfr of proprietary fund?

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sarta
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New to VG. Tax hit on trsfr of proprietary fund?

Post by sarta » Sun Jun 17, 2018 6:26 pm

Just started with VG. I'm a low income retiree with a small nest egg which was managed before by a "retirement planner" (may he rest in peace, soon, I hope) who parks at credit unions and puts you into funds with high expense ratios. One mutual fund I tried to transfer to VG, MFS Moderate Allocation Fund Class C, was refused by VG because they said, it was "proprietary." I've since learned what this means. Anyway, I followed instructions and liquidated the fund into cash so VG could scoop it up. Then I saw somewhere that when you liquidate a fund during a transfer, it drops to earth into your taxable income, even if you don't see a dime of it. This probably happened about a month ago. Is there any way I can convince the IRS not to tax it? It seems rather unfair under the circumstances.

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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by retiredjg » Sun Jun 17, 2018 6:51 pm

If the fund in question was in a taxable account...and if the fund in question was sold at a gain rather than a loss....and if you are not in one of the lower tax brackets...there could be tax because you sold it. It does not matter why you sold it.

The IRS does its business on what you did. That is based on law, not on what seems "fair". They don't decide what to do, they base their actions on what they are told to do by law.

If you sold it and if you sold at a gain and if you are not in a very low tax bracket, there may be some tax on the gain.

That's a whole lot of "ifs". You need to tell us more.

Welcome to the forum :happy

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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by grabiner » Sun Jun 17, 2018 7:11 pm

Welcome to the forum!

You owe tax when you sell a mutual fund, but this is a tax you are going to owe anyway, as the fund will be sold at some time. Getting out of a high-cost mutual fund quickly is worthwhile, as the longer you hold it, the more you lose to the high costs, which may be more than any tax cost from selling.

The tax will only be on the capital gain, which is the amount you received minus the amount you paid (including any reinvested dividends). Since you are a "low-income" retiree, you probably won't owe any tax directly on a long-term capital gain (on shares held more than one year). Short-term gains (on shares bought within the last year) are taxed as ordinary income.

However, the additional income might increase the amount of Social Security on which you pay tax. If you are in the phase-in range and in the 12% tax bracket, every $1 of long-term gain makes either 50 or 85 cents of Social Security taxable, leading to 6 or 11 cents of tax.
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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by pkcrafter » Sun Jun 17, 2018 7:29 pm

sarta wrote:
Sun Jun 17, 2018 6:26 pm
Just started with VG. I'm a low income retiree with a small nest egg which was managed before by a "retirement planner" (may he rest in peace, soon, I hope) who parks at credit unions and puts you into funds with high expense ratios. One mutual fund I tried to transfer to VG, MFS Moderate Allocation Fund Class C, was refused by VG because they said, it was "proprietary."


Yes, that means Vanguard does not (cannot) carry the fund. Was the fund in a tax-deferred account like an IRA? If so, you should have been able to sell it, leaving the cash in the tax-deferred account and transfer the account to a new IRA account which you set up before the transfer. It sounds like it was in a tax-deferred account, but maybe you pulled it out?


Anyway, I think you have 60 days to get all the money back into an IRA if that is where it was.
If the account was liquidated taxes would have been withheld and that money must also be replaced. The best way to make a transfer is a custodian to custodian transfer which Vanguard would initiate, but it sounds like it was done in another way.
I've since learned what this means. Anyway, I followed instructions and liquidated the fund into cash so VG could scoop it up. Then I saw somewhere that when you liquidate a fund during a transfer, it drops to earth into your taxable income, even if you don't see a dime of it.
No, that should not happen if the transfer was done properly. If it was a taxable account, then there was no other way to do it but to sell the fund. Even if you could transfer it, it sounds like you would have had to sell it anyway. The expense ratio on class C funds is terrible. Call Vanguard and explain what happened and find out what you need to do to get the money into an IRA or Roth if that's what you had. If it was taxable, use the cash to buy a low cost tax-efficient fund(s) and move on.

Paul
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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by dbr » Sun Jun 17, 2018 8:22 pm

sarta wrote:
Sun Jun 17, 2018 6:26 pm
Then I saw somewhere that when you liquidate a fund during a transfer, it drops to earth into your taxable income, even if you don't see a dime of it. This probably happened about a month ago. Is there any way I can convince the IRS not to tax it? It seems rather unfair under the circumstances.
Can you explain what "drops to earth" is supposed to mean? If you held this fund in a taxable account the sale might have generated a capital gain, which is taxable at a rate depending on your overall tax situation. If you mean this fund was in an IRA and the money somehow got withdrawn from the IRA thus creating a taxable distribution, then that could get complicated but there may be a way to get the money back into an IRA. It could matter a lot if you are within sixty days of them handing you the money.

sarta
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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by sarta » Mon Jun 18, 2018 4:12 pm

The fund was in a taxable account, not an IRA. When I said it "dropped to earth", I meant that according to my new understanding, it became a taxable event when liquidated. I was not expecting that. I'm in a low tax bracket with a gross income of $34,000, including Social Security.

Good answers. You folks sound like you know what you're doing. Wish I had heard about Bogleheads earlier and saved myself a lot of grief.

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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by retiredjg » Mon Jun 18, 2018 4:41 pm

You may be in a low enough tax bracket that there will be little to no tax.

Depending on how much the gains (if any) add to your taxable income, the short term gains should be taxed at 12% and the long term gains taxed at 0%.

You have not given us a lot to work with - this is my best guess.

Well, if you consider that the extra income may make more of your SS taxable, those number may not be exactly right.

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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by grabiner » Mon Jun 18, 2018 5:00 pm

sarta wrote:
Mon Jun 18, 2018 4:12 pm
The fund was in a taxable account, not an IRA. When I said it "dropped to earth", I meant that according to my new understanding, it became a taxable event when liquidated. I was not expecting that. I'm in a low tax bracket with a gross income of $34,000, including Social Security.
This makes it look like you may be in the phase-in of SS taxation. If your other income, plus half your SS, is between $25,000 and $32,000 (single), then every additional $1 of income makes 50 cents of SS taxable; if it is over $32,000, each additional $1 of income makes 85 cents of SS taxable, until you pay tax on 85% of the total (which you are nowhere near).
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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by Longdog » Mon Jun 18, 2018 5:15 pm

grabiner wrote:
Mon Jun 18, 2018 5:00 pm
sarta wrote:
Mon Jun 18, 2018 4:12 pm
The fund was in a taxable account, not an IRA. When I said it "dropped to earth", I meant that according to my new understanding, it became a taxable event when liquidated. I was not expecting that. I'm in a low tax bracket with a gross income of $34,000, including Social Security.
This makes it look like you may be in the phase-in of SS taxation. If your other income, plus half your SS, is between $25,000 and $32,000 (single), then every additional $1 of income makes 50 cents of SS taxable; if it is over $32,000, each additional $1 of income makes 85 cents of SS taxable, until you pay tax on 85% of the total (which you are nowhere near).
To clarify your point, yes it makes it taxable, but that doesn’t mean that half of it goes to taxes. With the new increased standard deduction, it’s possible that the actual tax owed could be very small.

Sarta, what was the basis for the mutual fund you sold? When did you buy it?
Steve

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grabiner
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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by grabiner » Mon Jun 18, 2018 5:59 pm

Longdog wrote:
Mon Jun 18, 2018 5:15 pm
grabiner wrote:
Mon Jun 18, 2018 5:00 pm
sarta wrote:
Mon Jun 18, 2018 4:12 pm
The fund was in a taxable account, not an IRA. When I said it "dropped to earth", I meant that according to my new understanding, it became a taxable event when liquidated. I was not expecting that. I'm in a low tax bracket with a gross income of $34,000, including Social Security.
This makes it look like you may be in the phase-in of SS taxation. If your other income, plus half your SS, is between $25,000 and $32,000 (single), then every additional $1 of income makes 50 cents of SS taxable; if it is over $32,000, each additional $1 of income makes 85 cents of SS taxable, until you pay tax on 85% of the total (which you are nowhere near).
To clarify your point, yes it makes it taxable, but that doesn’t mean that half of it goes to taxes. With the new increased standard deduction, it’s possible that the actual tax owed could be very small.
If $1 of capital gain makes 50 cents of SS taxable, the tax rate on the capital gain will be 5% in the 10% tax bracket, or 6% in the 12% bracket; even if it makes 85 cents of SS taxable, the tax rate is 10.2% in the 12% bracket. Thus, at worst, you would pay $1020 tax on a $10,000 capital gain.
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Re: New to VG. Tax hit on trsfr of proprietary fund?

Post by livesoft » Fri Jun 29, 2018 7:39 pm

Longdog wrote:
Mon Jun 18, 2018 5:15 pm
Sarta, what was the basis for the mutual fund you sold? When did you buy it?
@sarta, Your basis is probably similar to what you paid for your fund which I will guess was more than $30,000. So if you sold for more than you paid, then the difference are your gains and that will be income. The entire $34,000 cannot be income and taxed. Based on your other thread, I might even guess that you sold this fund for a loss. That is, you paid more than $34,000 for this fund and sold it for just $34,000. In that case, you will get a tax deduction for the loss.

See Form 1040 and its instructions for help with taxes.
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