Help me understand tax on mutual fund

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NKOTB
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Joined: Mon Aug 25, 2014 6:43 pm

Help me understand tax on mutual fund

Post by NKOTB » Thu May 21, 2020 9:24 am

Quiet a number of people I know ( both friends and colleagues) have been bragging about how they sold at market high and how they’re buying stocks at the bottom. Here are some examples:
1. Some claim to have sold at the peak (No way!)
2. Some claim they started picking stocks in March n April and are sharing stock tips. Funny when I quietly listen when they value certain stocks to be very cheaply priced, some claim the S&P could go below 1500 and they’re waiting with a pile of cash to jump in. I’m sure a lot of you have been in the situation where you’re sitting next to someone who’s a successful stock picker but at the same time is worried about furlough or lay-off and even working overtime to pay their bills.

My question is, even if you sold your retirement account holdings at the peak and staying with Cash you probably made a 15-16% profit as of now ( short term and if you went all in today). However if you did that on your taxable account ( assuming you were invested in mutual funds only) wouldn’t the 15% minimum capital gain tax wash off all the gain you possibly made? Now you’re sitting on the side with a pile of cash, trying to time getting back in and missed the run back up, missed any dividends you could have received On your funds last quarter and probably also did not invest anything in the retirement or taxable accounts all this while while missing out on the potential gains.
Am I missing something here?

alex_686
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Joined: Mon Feb 09, 2015 2:39 pm

Re: Help me understand tax on mutual fund

Post by alex_686 » Thu May 21, 2020 9:27 am

The tax would be on the gains. i.e. a 15% tax on a 15% gain would be 2.25% (.15*.15), so your total after tax return would be 12.75%.

retired@50
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Re: Help me understand tax on mutual fund

Post by retired@50 » Thu May 21, 2020 7:30 pm

NKOTB wrote:
Thu May 21, 2020 9:24 am

Am I missing something here?
What you're hearing is cocktail party chatter. It's discussions like this that drive people to make mistakes when investing. It's like speaking to a gambler that tells you about his full house in poker that won him a bundle. What you don't hear about is the twenty losing hands that preceded the full house.

My advice is to ignore it.

Regards,
This is one person's opinion. Nothing more.

Longdog
Posts: 1467
Joined: Sun Feb 09, 2014 6:56 pm
Location: Philadelphia

Re: Help me understand tax on mutual fund

Post by Longdog » Thu May 21, 2020 8:25 pm

NKOTB wrote:
Thu May 21, 2020 9:24 am
My question is, even if you sold your retirement account holdings at the peak and staying with Cash you probably made a 15-16% profit as of now ( short term and if you went all in today). However if you did that on your taxable account ( assuming you were invested in mutual funds only) wouldn’t the 15% minimum capital gain tax wash off all the gain you possibly made? Now you’re sitting on the side with a pile of cash, trying to time getting back in and missed the run back up, missed any dividends you could have received On your funds last quarter and probably also did not invest anything in the retirement or taxable accounts all this while while missing out on the potential gains.
Am I missing something here?
You would owe tax on the gain. If it is a short term gain (less than a year between when you bought and sold it) then the tax would be at your marginal tax rate, not the lower long-term capital gain tax rate.
Steve

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abuss368
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Re: Help me understand tax on mutual fund

Post by abuss368 » Thu May 21, 2020 8:31 pm

NKOTB wrote:
Thu May 21, 2020 9:24 am
Quiet a number of people I know ( both friends and colleagues) have been bragging about how they sold at market high and how they’re buying stocks at the bottom. Here are some examples:
1. Some claim to have sold at the peak (No way!)
2. Some claim they started picking stocks in March n April and are sharing stock tips. Funny when I quietly listen when they value certain stocks to be very cheaply priced, some claim the S&P could go below 1500 and they’re waiting with a pile of cash to jump in. I’m sure a lot of you have been in the situation where you’re sitting next to someone who’s a successful stock picker but at the same time is worried about furlough or lay-off and even working overtime to pay their bills.

My question is, even if you sold your retirement account holdings at the peak and staying with Cash you probably made a 15-16% profit as of now ( short term and if you went all in today). However if you did that on your taxable account ( assuming you were invested in mutual funds only) wouldn’t the 15% minimum capital gain tax wash off all the gain you possibly made? Now you’re sitting on the side with a pile of cash, trying to time getting back in and missed the run back up, missed any dividends you could have received On your funds last quarter and probably also did not invest anything in the retirement or taxable accounts all this while while missing out on the potential gains.
Am I missing something here?
I would consider buying and reading a few good investment books. I certainly gained form the knowledge. May I suggest anything by Jack Bogle or The Bogleheads. Jack Bogle's 'The Little Book of Common Sense Investing" is an excellent book.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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FrugalInvestor
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Re: Help me understand tax on mutual fund

Post by FrugalInvestor » Thu May 21, 2020 8:33 pm

It's noise, ignore it. Don't let these people sway you, have a long-term plan and stick to it. Don't try to argue, there is no convincing. You are thinking clearly and they are in emotional gambling mode. Emotions are the enemy of the investor.

P.S. All of my taxable equities consist of the Vanguard Total Stock Market Fund. When conversations about stock picking start and someone mentions a hot stock I say "I have that" because in all likelihood I do. Most of the time someone is excited about that. Then I explain that I index and own the entire market most likely including that stock. Of course that automatically shuts me out of the conversation because most people have no clue what I'm talking about. I'm perfectly fine with that, I can just listen, smile and be content with my plan (and past and prospective future performance). :D
Last edited by FrugalInvestor on Thu May 21, 2020 8:50 pm, edited 1 time in total.
IGNORE the noise!

livesoft
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Re: Help me understand tax on mutual fund

Post by livesoft » Thu May 21, 2020 8:37 pm

I have some friends who do talk about their investing escapades. It actually is a lot of fun to listen to because a little probing tells the rest of the story.

For instance, a friend was using limit orders with TSLA and selling / buying at all these great prices. Upon further inquiry they were just trading shares in the single digits. Sure, they made some money, but maybe only a week's worth of sushi lunches. There is no way they would commit to doing this with any bucks to make any material difference to their net worth. So hobby-trading is fun. Hobbies are supposed to be fun and they usually cost you a little bit of money.
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livesoft
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Re: Help me understand tax on mutual fund

Post by livesoft » Thu May 21, 2020 8:43 pm

With free trades, I could buy one share of VTI every other day and sell it the next day. I could also sell/buy ITOT. So I would be buying a total stock market index fund share every day and selling one every day. I could do this in an IRA, so no tax consequences. I could do this without violating any free-riding or pattern day-trader rules, too.

If I did that, then I could say truthfully that I sold at the market high. And I could say truthfully that I bought at the market low. I could leave out all the other buys and sells that were meaningless. I could even produce transaction records that I actually did buy at the low and sold at the high.

All this trading would have no effect on my material wealth.
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