Wellesley Income fund Admiral

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Ritzola
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Wellesley Income fund Admiral

Post by Ritzola » Fri Apr 12, 2019 4:19 pm

I have the Wellesley fund in a taxable account for past 10-15 years. Every year in December there is a capital gain declared. The 2018 Capital gain on the fund is twice what it was in 2017. Along with the income tax bill.
My CPA suggested that if I bought an Opportunity Zone Fund, IE a REIT in a distressed area within 180 days of 1.1.19 for the same amount, that capital gain would be deferred.

On looking into it, there is no simple shelf product that can be bought, without large fees and tieing the money up for 10 years.
Does anyone have a suggestion of other ways I can defer or reduce this capital gain within the existing Vanguard funds structure? This happens every year. It appears the only option is to sell the fund and take the capital gains hit in 2019 and replace the funds with index funds of the same percentage split. Any other suggestions welcome.

Many thanks. :-)

mhalley
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Re: Wellesley Income fund Admiral

Post by mhalley » Fri Apr 12, 2019 5:50 pm

There is no magic formula to get out of the fund. You can stop reinvesting dividends, but there is no way to stop the yearly capital gains except to sell the fund and go into something more tax friendly. The plan you mention stinks imho.

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bilperk
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Re: Wellesley Income fund Admiral

Post by bilperk » Fri Apr 12, 2019 9:46 pm

Why are you in Wellesley if you are not retired? And if you are retired, spend the dividends and cap gains for expenses and pay the taxes at div and CG rates.
BTW, looks like you just joined today. Welcome to the Forum!
Bill

Topic Author
Ritzola
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Re: Wellesley Income fund Admiral

Post by Ritzola » Sun Apr 14, 2019 5:00 pm

Hi, I had some money to park, and my CPA suggested Wellesley until I could find a better home for it, I never did. I’m retiring in a couple of years. If I sell Wellesley and replace it with index funds I won’t get the December capital gain, correct? As they are not buying and selling.
Any suggestions for index funds that would mirror the Wellesley fund?
Many thanks.

Lafder
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Re: Wellesley Income fund Admiral

Post by Lafder » Sun Apr 14, 2019 5:12 pm

Question, what is your cost basis versus current value?

Wellesley pays out dividends that can be convenient if you need additional income. You pay capital gains income tax on the dividends each year. That is likely the tax you are referring to.

If the dividends are reinvested, it does increase your cost basis.

That is why I am asking your cost basis versus current value of the account. You have to pay tax on growth at some time. On dividends you pay capital gains taxes every year. On growth of the holdings, you pay capital gains tax only if you sell the holdings.

So if you sell your entire Wellesley account and put it in something else, you may owe some additional capital gains taxes even though you have been taxed on the dividends all along.

If you log into your account their should be a option to see "cost basis" and "unrealized gains" to see what growth you would owe taxes on if you sell.

If you are reinvesting dividends, your current cost basis will be more than your initial investment.

Paying taxes on dividends is not bad, it means your had a profit and your cost basis is being reset.

These dividends are a reason people are saying do not hold in a taxable account if you do not need the income, since it makes taxes due. Versus a fund without dividends that you do not owe tax on until you choose to sell your holdings.

lafder

tibbitts
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Re: Wellesley Income fund Admiral

Post by tibbitts » Sun Apr 14, 2019 5:13 pm

I have no knowledge of what the CPA is referring to but I'm not sure that's been directly addressed in any of the replies. I assume there must be something specific about the investment he suggested and that he must have had a recommendation for a product to buy and procedure to accomplish this tax deferral?

Trader Joe
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Re: Wellesley Income fund Admiral

Post by Trader Joe » Sun Apr 14, 2019 5:18 pm

Ritzola wrote:
Fri Apr 12, 2019 4:19 pm
I have the Wellesley fund in a taxable account for past 10-15 years. Every year in December there is a capital gain declared. The 2018 Capital gain on the fund is twice what it was in 2017. Along with the income tax bill.
My CPA suggested that if I bought an Opportunity Zone Fund, IE a REIT in a distressed area within 180 days of 1.1.19 for the same amount, that capital gain would be deferred.

On looking into it, there is no simple shelf product that can be bought, without large fees and tieing the money up for 10 years.
Does anyone have a suggestion of other ways I can defer or reduce this capital gain within the existing Vanguard funds structure? This happens every year. It appears the only option is to sell the fund and take the capital gains hit in 2019 and replace the funds with index funds of the same percentage split. Any other suggestions welcome.

Many thanks. :-)
In a taxable account, I highly recommend that you use either of the following funds:

Vanguard 500 Index Fund Admiral Shares (VFIAX), or

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

mhalley
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Re: Wellesley Income fund Admiral

Post by mhalley » Sun Apr 14, 2019 5:28 pm

The idea is to be more tax effecient, if you replace the fund with similar funds you still would get dividends and interest. Do you want bonds in taxable? They do give taxable interest, unless your tax bracket would justify muni bonds. The best thing in taxable would be the total stock market index fund if you don’t want the tax burden. A closer match to the stocks would be a large cap value fund like vviax.
https://investor.vanguard.com/mutual-fu ... file/VVIAX

suemarkp
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Re: Wellesley Income fund Admiral

Post by suemarkp » Sun Apr 14, 2019 10:36 pm

These recommendations are changing his asset allocation quite a bit. Wellesley is 63% bonds and 37% stock. Not sure if he wants to change to all stocks.

If 50/50 is tolerable, there is the Tax Managed Balanced Fund (VTMFX) which uses tax free municipal bonds and I think total stock market. Depending on your tax bracket, muni bonds may be better or worse for you. If you want more control of asset allocation and taxable -vs- tax free bonds, then use total stock market (VTSAX) and some bond fund (choose short/intermediate/long and muni -vs- non-muni) depending on the after tax returns and the duration you desire.
Mark | Kent, WA

dbr
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Re: Wellesley Income fund Admiral

Post by dbr » Mon Apr 15, 2019 9:06 am

suemarkp wrote:
Sun Apr 14, 2019 10:36 pm
These recommendations are changing his asset allocation quite a bit. Wellesley is 63% bonds and 37% stock. Not sure if he wants to change to all stocks.
Yes, what is missing is discussion of where all the rest of a person's money is invested. The issue should be about tax efficient fund location after an appropriate asset allocation is decided. In short there would be bonds in retirement accounts. If there are no retirement accounts then that has to be addressed.

Admiral
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Re: Wellesley Income fund Admiral

Post by Admiral » Mon Apr 15, 2019 9:58 am

Ritzola wrote:
Fri Apr 12, 2019 4:19 pm
I have the Wellesley fund in a taxable account for past 10-15 years. Every year in December there is a capital gain declared. The 2018 Capital gain on the fund is twice what it was in 2017. Along with the income tax bill.
My CPA suggested that if I bought an Opportunity Zone Fund, IE a REIT in a distressed area within 180 days of 1.1.19 for the same amount, that capital gain would be deferred.

On looking into it, there is no simple shelf product that can be bought, without large fees and tieing the money up for 10 years.
Does anyone have a suggestion of other ways I can defer or reduce this capital gain within the existing Vanguard funds structure? This happens every year. It appears the only option is to sell the fund and take the capital gains hit in 2019 and replace the funds with index funds of the same percentage split. Any other suggestions welcome.

Many thanks. :-)
Welcome to the forum. Have you read the Wiki on tax efficient fund placement?

1) Why do you hold a highly tax-inefficient fund in a taxable account?
2) Why are you considering holding an even MORE tax-inefficient fund (a REIT) in a taxable account?

In the vast majority of cases (there are some exceptions) those funds should be held in tax-advantaged retirement account.

If you need to reduce gains then your only option is to harvest some losses. What does the rest of your portfolio look like?

HEDGEFUNDIE
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Re: Wellesley Income fund Admiral

Post by HEDGEFUNDIE » Mon Apr 15, 2019 10:04 am

Admiral wrote:
Mon Apr 15, 2019 9:58 am
1) Why do you hold a highly tax-inefficient fund in a taxable account?
Let’s say I had some money to park in taxable and didn’t want to expose myself to 100% equity risk.

Wellesley after-tax returns still beat money market, at much lower risk than VTSAX.

Admiral
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Re: Wellesley Income fund Admiral

Post by Admiral » Mon Apr 15, 2019 10:09 am

HEDGEFUNDIE wrote:
Mon Apr 15, 2019 10:04 am
Admiral wrote:
Mon Apr 15, 2019 9:58 am
1) Why do you hold a highly tax-inefficient fund in a taxable account?
Let’s say I had some money to park in taxable and didn’t want to expose myself to 100% equity risk.

Wellesley after-tax returns still beat money market, at much lower risk than VTSAX.
There's already another thread going on about this fund in a taxable account to which I think we've both replied. The OP has had this fund for 10 years. That seems like a long time to park it and pay the tax drag.

It's only lower risk than TSM because it holds bonds. The OP could hold a combo of TSM and Munis and pay less tax.

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Socrates
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Re: Wellesley Income fund Admiral

Post by Socrates » Mon Apr 15, 2019 10:11 am

Why are you in Wellesley if you are not retired?
Huh?
“Don't waste your time looking back. You're not going that way.” ― Ragnar Lothbrok.

Admiral
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Re: Wellesley Income fund Admiral

Post by Admiral » Mon Apr 15, 2019 10:50 am

Socrates wrote:
Mon Apr 15, 2019 10:11 am
Why are you in Wellesley if you are not retired?
Huh?
Prob. the point was that it's (generally considered) an income fund. I own it and am not retired. However I hold it in a retirement account.

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BL
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Re: Wellesley Income fund Admiral

Post by BL » Mon Apr 15, 2019 11:20 am

This is why the suggestion is to tell more about your situation, as shown in Asking Portfolio Questions thread at top of Help topics.

Your tax bracket makes a difference. If taxable income is under $77k +, Capital Gains rate is 0%. Above is 15% and still farther above is more. Actually dividends are taxed at your own rate which is higher than your CG rate. Most of us here don't particularly like dividends, due to taxes.

If you have room for bonds in tax-advantaged accounts, that would be a good place for the bond part. If your tax rate is in the 30's%, munis might make sense.

I agree that index funds may not have as much capital gains distribution. Haven't had any at all in Total Stock Market in the dozen years I have owned it. But the bonds would have dividends even if in index funds. Life Strategy Conservative is about 40/60 stock bond ratio, not far from Wellesley. The bonds throw off dividends. (I don't think it has as good a record as W over time, but who knows the future?) I-Bonds can defer interest until you cash them in, but you can only do 10k/year/person (or IRS refund paper bonds), and have to hold at least 1 year before cashing in and paying tax on the interest.

I wouldn't take investing advice from the person who suggested a specific REIT. Either he doesn't know what he's talking about or he has something to gain from convincing someone to invest in it.

Meanwhile, turn off reinvesting so you don't compound the problem.

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Electron
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Re: Wellesley Income fund Admiral

Post by Electron » Mon Apr 15, 2019 4:48 pm

Ritzola wrote:
Sun Apr 14, 2019 5:00 pm
Any suggestions for index funds that would mirror the Wellesley fund?
Here is a recent thread that might be of interest.

viewtopic.php?f=10&t=275852
Electron

HEDGEFUNDIE
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Re: Wellesley Income fund Admiral

Post by HEDGEFUNDIE » Mon Apr 15, 2019 5:12 pm

Admiral wrote:
Mon Apr 15, 2019 10:09 am
HEDGEFUNDIE wrote:
Mon Apr 15, 2019 10:04 am
Admiral wrote:
Mon Apr 15, 2019 9:58 am
1) Why do you hold a highly tax-inefficient fund in a taxable account?
Let’s say I had some money to park in taxable and didn’t want to expose myself to 100% equity risk.

Wellesley after-tax returns still beat money market, at much lower risk than VTSAX.
There's already another thread going on about this fund in a taxable account to which I think we've both replied. The OP has had this fund for 10 years. That seems like a long time to park it and pay the tax drag.

It's only lower risk than TSM because it holds bonds. The OP could hold a combo of TSM and Munis and pay less tax.
Actually I think it’s been hashed out in plenty of prior threads that Wellesley actually brings some alpha to the table beyond a simple combo of TSM and bonds.

And the tax drag is tax bracket dependent. OP may not be in a high bracket.

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