How much are capital gains taxes from mutual funds?

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Trance
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How much are capital gains taxes from mutual funds?

Post by Trance »

I've seen many times that ETFs are better in a brokerage accounts than mutual funds because mutual funds can trigger capital gains taxes. But I've never seen how much this actually is. Assuming I'm only ever using passively managed index funds (Like the S&P 500 Fidelity FXAIX), what percentage am I looking at? Like 10% of its value? 1%?

Like I know the mutual fund will pay out a dividend of 1.5%, will capital gains be great enough that it will be greater than that?
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Brianmcg321
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Re: How much are capital gains taxes from mutual funds?

Post by Brianmcg321 »

Index funds like VTSAX have almost the exact same tax advatage as their equivalent ETF.

However, if you have an actively trading mutual fund you could easily have capital gains distributions of 20-30%. Here is a list on Morningstar with some more popular companies and their distributions. https://www.morningstar.com/articles/10 ... 21-edition
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Trance
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Re: How much are capital gains taxes from mutual funds?

Post by Trance »

Brianmcg321 wrote: Thu Aug 04, 2022 11:34 pm Index funds like VTSAX have almost the exact same tax advatage as their equivalent ETF.

However, if you have an actively trading mutual fund you could easily have capital gains distributions of 20-30%. Here is a list on Morningstar with some more popular companies and their distributions. https://www.morningstar.com/articles/10 ... 21-edition
Thank you that helps a ton!
Morik
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Re: How much are capital gains taxes from mutual funds?

Post by Morik »

If you search for Tax Efficiency 2021 (or maybe there is a 2022 version now) on the for you'll find a spreadsheet. It isn't hard to add new data to it. You put in your tax rates and then the distribution data from whatever funds you are interested in and it will tell you how much tax drag each fund would have had for you in 2020.
If you add distribution data for 2021 make sure to update the googlefinance calls which are set to get closing prices on December 31 2020. You'll want to change it to 2021 to get accurate numbers. (You can search inside formulas for "googlefinance" to find the right place to update)
You will need the fund company's report on their distributions to enter the data (like percentage of dividends that were qualified, etc). Vanguard and ishares are easy to find on their websites. Other fund companies can be somewhat difficult to track the report down but if you poke around enough it's generally available somewhere.
rich126
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Re: How much are capital gains taxes from mutual funds?

Post by rich126 »

Many years ago I used to invest in a variety of mutual funds including some big name ones like Dodge and Cox but I didn't like the capital gains I would get taxed on, especially on down years so I either buy individual stocks or index funds. I rarely see a need for mutual funds but if you do, it might be best to keep them in a tax advantaged account.
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typical.investor
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Re: How much are capital gains taxes from mutual funds?

Post by typical.investor »

Trance wrote: Thu Aug 04, 2022 11:16 pm I've seen many times that ETFs are better in a brokerage accounts than mutual funds because mutual funds can trigger capital gains taxes. But I've never seen how much this actually is. Assuming I'm only ever using passively managed index funds (Like the S&P 500 Fidelity FXAIX), what percentage am I looking at? Like 10% of its value? 1%?

Like I know the mutual fund will pay out a dividend of 1.5%, will capital gains be great enough that it will be greater than that?
No, capital gains won't be that much.

You should be able to find the data for the fund.

Someone was saying Fidelity was more tax efficient and Schwab were silly for having distributions in the past couple of years, so I looked because I use Schwab. It turns out, they are about the same but the timing is different. I think it was two total market funds but I didn't put their names in my spreadsheet. I found 2017-2021 that the percentages of distributions were:

DIV 88.4% LTCG 10.2% STCG 1.4%. (Fidelity)
DIV 86.8% LTCG 11.5% STCG 1.7% (Schwab)

Don't judge one as being better on that data. The preceding years for Fidelity very well might be larger...
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Cheez-It Guy
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Re: How much are capital gains taxes from mutual funds?

Post by Cheez-It Guy »

But what is objectively better is 0.0%. Thanks, VTSAX!
Last edited by Cheez-It Guy on Fri Aug 05, 2022 7:34 pm, edited 1 time in total.
rkhusky
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Re: How much are capital gains taxes from mutual funds?

Post by rkhusky »

Trance wrote: Thu Aug 04, 2022 11:16 pm I've seen many times that ETFs are better in a brokerage accounts than mutual funds because mutual funds can trigger capital gains taxes. But I've never seen how much this actually is. Assuming I'm only ever using passively managed index funds (Like the S&P 500 Fidelity FXAIX), what percentage am I looking at? Like 10% of its value? 1%?

Like I know the mutual fund will pay out a dividend of 1.5%, will capital gains be great enough that it will be greater than that?
First off, dividends from stock funds are not extra money. The share price goes down at the same time the dividend is paid, such that you have the same amount before and after the dividend. Dividends from bond funds are extra money, like interest from a savings account or CD.

Dividends from bond funds, like from CD's and savings accounts, are taxed at your income tax rate. Dividends from stock funds are taxed either at your income tax rate (non-qualified dividends) or the long term (LT) capital gains rate (qualified dividends (QD)). Funds will list what percentage of the dividends were qualified during the past year.

Distributed capital gains (not from selling) are taxed at either the short term (ST) rate, which is the same are your income tax rate, or the LT rate, which is lower. LT rates for the lower income tax brackets is 15%, while LT rates for higher income tax brackets is 20%. The brokerage will break down the capital gains into ST and LT.

Capital gains from selling shares have the same tax rates: ST rate (shares held for one year or less) = income tax rate, and LT rate (shares held for more than a year) = 15% and 20%.

VTSAX is very tax-efficient. It hasn't distributed capital gains in many years, its QD percentage was 95% last year, and the current SEC yield for dividends is 1.41%.

An S&P 500 index fund should be just about or slightly more tax efficient. Vanguard's 500 Index fund hasn't distributed cap gains for many years, had a QD percentage of 97% last year, and the current SEC yield is 1.48%.

Note that Vanguard has a patent that allows them to offer an ETF class of their mutual funds. That makes their mutual funds just as tax efficient as the associated ETF.

I would expect that FXAIX has the same QD percentage and dividend yield as Vanguard's 500 Index fund, but I don't know where to find that info on Fidelity's web site to know for sure. FXAIX hasn't distributed cap gains since 2019.
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retiredjg
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Re: How much are capital gains taxes from mutual funds?

Post by retiredjg »

Very nice explanation, rkhusky :happy
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typical.investor
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Re: How much are capital gains taxes from mutual funds?

Post by typical.investor »

rkhusky wrote: Fri Aug 05, 2022 9:57 am
VTSAX is very tax-efficient. It hasn't distributed capital gains in many years, its QD percentage was 95% last year, and the current SEC yield for dividends is 1.41%.

An S&P 500 index fund should be just about or slightly more tax efficient. Vanguard's 500 Index fund hasn't distributed cap gains for many years, had a QD percentage of 97% last year, and the current SEC yield is 1.48%.
The reason why VTSAX hasn't distributed capital gains in that it is tied to VTI which is an ETF and washes them out in heartbeat trades. Vanguard's 500 Index fund has the ETF VOO to do that.

Hmnnn, interestingly Fidelity's total market does issue capital gains (that's what I posed earlier) but the S&P500 fund hasn't. The many have to do with inflows in the past few years. With major outflows, I suspect it will have to pay dividends. Same with VTSAX (but to a lesser degree since VTI is washing out the gains). And theoretically the same with VTI because VTSAX gains might flow over there. However, it might be pretty doubtful if outflows would ever reach those levels. Vanguard Total market investors don't typically trade to market time.

See (under the Dividends & Distributions tab in Fund Performance)

Fidelity® Total Market Index Fund FSKAX https://www.schwab.com/research/mutual- ... mary/fskax

Fidelity® 500 Index Fund FXAIX https://www.schwab.com/research/mutual- ... mary/FXAIX
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