Jason Zweig's tax bomb example

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bob_m10
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Jason Zweig's tax bomb example

Post by bob_m10 » Mon Sep 04, 2017 12:19 am

I was re-reading my Bogleheads Guide to Investing today and came across the section concerning tax bombs that could sneak up on investors. The book referenced a column by Jason Zweig, (link below) where he explains that a new investor (Dr. X) having to pay an unsuspected tax bill of $9K shortly after he invested $50K into a mutual fund. Just want to understand this correctly, the tax event was generated by a payout of $22K in capital gains. In this case would did Dr. X have received the $22K? Thus if he was reinvesting he would have about $72K in the account, considering no other internal transactions? -thanks

"Mutual funds are supposed to be a bit dull; when they get interesting, watch out. On Nov. 11 of last year, a 67-year-old physician in San Francisco invested $50,000 in a mutual fund called BT Investment Pacific Basin Equity. (Since he has asked me to keep his name confidential, let’s call him Dr. X.) Then, early this January — scarcely seven weeks after he had bought the BT fund — Dr. X opened an innocent-looking envelope and got the shock of his investing life. On his original $50,000 investment ($50,363.48, to be exact), BT Pacific Basin had paid out $22,211.84 in taxable capital gains."

http://jasonzweig.com/mutual-fund-tax-bombs/

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Re: Jason Zweig's tax bomb example

Post by sport » Mon Sep 04, 2017 12:40 am

bob_m10 wrote:
Mon Sep 04, 2017 12:19 am
In this case would did Dr. X have received the $22K? Thus if he was reinvesting he would have about $72K in the account, considering no other internal transactions?
No. Some, or most of that 22K was a return of his principle. He bought the shares just before the distribution, and thus received the distribution. However, he gets to pay the tax on that distribution even though he did not participate fully in the gains. The moral of this story is to pay attention to unrealized capital gains and distribution dates before buying into a mutual fund. This is especially true if you are making a large purchase.

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Re: Jason Zweig's tax bomb example

Post by bob_m10 » Mon Sep 04, 2017 6:34 am

sport wrote:
Mon Sep 04, 2017 12:40 am
No. Some, or most of that 22K was a return of his principle. He bought the shares just before the distribution, and thus received the distribution. However, he gets to pay the tax on that distribution even though he did not participate fully in the gains. The moral of this story is to pay attention to unrealized capital gains and distribution dates before buying into a mutual fund. This is especially true if you are making a large purchase.
Let me see if I understand. He purchased his shares, fund distributes $22k, share price goes down such that he would have to reinvest $22K in the fund in order to bring his holding back to $50K?

dkturner
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Re: Jason Zweig's tax bomb example

Post by dkturner » Mon Sep 04, 2017 6:39 am

bob_m10 wrote:
Mon Sep 04, 2017 6:34 am
sport wrote:
Mon Sep 04, 2017 12:40 am
No. Some, or most of that 22K was a return of his principle. He bought the shares just before the distribution, and thus received the distribution. However, he gets to pay the tax on that distribution even though he did not participate fully in the gains. The moral of this story is to pay attention to unrealized capital gains and distribution dates before buying into a mutual fund. This is especially true if you are making a large purchase.
Let me see if I understand. He purchased his shares, fund distributes $22k, share price goes down such that he would have to reinvest $22K in the fund in order to bring his holding back to $50K?
That's right.

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Re: Jason Zweig's tax bomb example

Post by bob_m10 » Mon Sep 04, 2017 8:00 am

dkturner wrote:
Mon Sep 04, 2017 6:39 am
bob_m10 wrote:
Mon Sep 04, 2017 6:34 am
sport wrote:
Mon Sep 04, 2017 12:40 am
No. Some, or most of that 22K was a return of his principle. He bought the shares just before the distribution, and thus received the distribution. However, he gets to pay the tax on that distribution even though he did not participate fully in the gains. The moral of this story is to pay attention to unrealized capital gains and distribution dates before buying into a mutual fund. This is especially true if you are making a large purchase.
Let me see if I understand. He purchased his shares, fund distributes $22k, share price goes down such that he would have to reinvest $22K in the fund in order to bring his holding back to $50K?
That's right.
So this could really happen at any time after you purchase a mutual fund? In this example is happened right away but it could have occurred the following year or at any time as long as the fund had unrealized capital gains on the books before your purchase?

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Re: Jason Zweig's tax bomb example

Post by JW-Retired » Mon Sep 04, 2017 8:04 am

Big time "buying the dividend".
https://investor.vanguard.com/investing ... nd?lang=en

If the fund does a lot of active trading and makes lots of capital gains distributions you pay tax (unless below the 25% bracket). Typically, you would have all such "earnings" reinvested back into the fund. This increases your cost basis in the fund so the net effect is just paying tax this year rather then some time in the distant future.

Easiest to just stick to tax efficient index funds. :beer
JW
Last edited by JW-Retired on Mon Sep 04, 2017 8:20 am, edited 1 time in total.
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Da5id
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Re: Jason Zweig's tax bomb example

Post by Da5id » Mon Sep 04, 2017 8:15 am

JW-Retired wrote:
Mon Sep 04, 2017 8:04 am
Big time "buying the dividend".
https://investor.vanguard.com/investing ... nd?lang=en

Easiest to just stick to tax efficient index funds. :beer
JW
This isn't just a buying the dividend though. It is also the risk that a fund with large unrealized capital gains on the books may sell the appreciated stocks and have to distribute the capital gains.

Mind you, Vanguard Total Stock Market Admiral/Investor mutual fund shares have a 34% unrealized capital gain on the books. Just no reason to think they will be forced to distribute it. And I believe that they have rules that if there are large redemptions they can give you shares of underlying appreciated stocks rather than cash as I understand it, which will avoid the distributions to non-redeeming shareholders anyway. I'm not losing sleep over that, I'm in 3 fund almost exclusively anyway using mutual funds. But that is an ETF advantage in that you don't get these unrealized gains when you buy the ETF.

Other message is that if you choose to buy funds that distribute lots of gains (not my cup of tea) you should have them in tax deferred/tax free space.

sambb
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Re: Jason Zweig's tax bomb example

Post by sambb » Mon Sep 04, 2017 8:18 am

if there is an unrealized gain of 34% in total stock, that doesnt sound good for new investments.

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Re: Jason Zweig's tax bomb example

Post by Da5id » Mon Sep 04, 2017 8:20 am

sambb wrote:
Mon Sep 04, 2017 8:18 am
if there is an unrealized gain of 34% in total stock, that doesnt sound good for new investments.
You say "if", have a look here if you have doubts: https://personal.vanguard.com/us/funds/ ... 0085#tab=4

Again, the risk of it being distributed seems small.

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Re: Jason Zweig's tax bomb example

Post by SGM » Mon Sep 04, 2017 8:24 am

Be cautious about buying a mutual fund late in the year before capital gains are reported. 40 years ago I bought an active mutual fund and the value of the fund went down and I still had to pay tax on a significant capital gain. At the time I got out of active funds and into very low cost dividend reinvestment plans (drips). Drips have additional expenses these days and index funds are a better choice.

student
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Re: Jason Zweig's tax bomb example

Post by student » Mon Sep 04, 2017 8:25 am

But isn't it true that the mistake can be corrected? Now that the share price is lowered accordingly, one can sell the shares to claim the capital loss against the capital gain.
Last edited by student on Mon Sep 04, 2017 8:45 am, edited 2 times in total.

livesoft
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Re: Jason Zweig's tax bomb example

Post by livesoft » Mon Sep 04, 2017 8:30 am

bob_m10 wrote:
Mon Sep 04, 2017 8:00 am
So this could really happen at any time after you purchase a mutual fund? In this example is happened right away but it could have occurred the following year or at any time as long as the fund had unrealized capital gains on the books before your purchase?
No! No! No!

I think it strictly applies to actively-managed mutual funds and DOES NOT APPLY to passively-managed tax-efficient index funds such as those often recommended here on the forum. Over time index funds will have unrealized capital gains, but that should not be an excuse to not invest in them.

Furthermore, places like Vanguard have diminished the effects of "buying the dividend" for many of their index funds. Instead of one big distribution in December, now mutual funds are paying four quarterly dividends of about one-fourth the size of one big one.

And, of course, this distribution thing does not apply to tax-advantaged accounts..

So one should be aware of this effect, but also one should figure out that it applies to others and not to oneself.
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Re: Jason Zweig's tax bomb example

Post by Church Lady » Mon Sep 04, 2017 8:45 am

So this could really happen at any time after you purchase a mutual fund? In this example is happened right away but it could have occurred the following year or at any time as long as the fund had unrealized capital gains on the books before your purchase?
Yes, it could. Some event forced the fund in Jason Zweig's example to realize and distribute a lot of gains.
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kaneohe
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Re: Jason Zweig's tax bomb example

Post by kaneohe » Mon Sep 04, 2017 8:53 am

student wrote:
Mon Sep 04, 2017 8:25 am
But isn't it true that the mistake can be corrected? Now that the share price is lowered accordingly, one can sell the shares to claim the capital loss against the capital gain.
good idea.

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Re: Jason Zweig's tax bomb example

Post by JW-Retired » Mon Sep 04, 2017 9:15 am

livesoft wrote:
Mon Sep 04, 2017 8:30 am
I think it strictly applies to actively-managed mutual funds and DOES NOT APPLY to passively-managed tax-efficient index funds such as those often recommended here on the forum. Over time index funds will have unrealized capital gains, but that should not be an excuse to not invest in them.
Yes!
What you don't want to own tax-wise are high turnover actively trading mutual funds that often want to realize a lot of gains selling winners in order to buy some other hot stock hope.

I have still have one fund like this from long ago that I'm trapped in. It has 10 times the turnover of a Vanguard Total Stock Market fund and consequently lots of realized cap gains distributions I don't want.
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Re: Jason Zweig's tax bomb example

Post by House Blend » Mon Sep 04, 2017 10:54 am

kaneohe wrote:
Mon Sep 04, 2017 8:53 am
student wrote:
Mon Sep 04, 2017 8:25 am
But isn't it true that the mistake can be corrected? Now that the share price is lowered accordingly, one can sell the shares to claim the capital loss against the capital gain.
good idea.
It may be a good idea, having learned the lesson not to buy actively managed, high turnover funds in taxable, but remember these repercussions:

1. If the age of your shares when sold was 60 days or less and those shares produced qualified dividends, then you must re-classify those dividends as non-qualified, and pay regular income tax on it.

2. If the big distribution included short term capital gains, then those are taxed the same as ordinary interest, and cannot be cancelled by capital losses. This isn't a reason not to sell, it's just an obstruction that prevents you from negating all of the ill effects.

3. Also, less likely to be an issue, but still a record-keeping annoyance is that if your shares were held for less than 6 months and those shares distributed LT cap gains, then you must reclassify that portion of the loss on the sale of those shares as LT, not ST. For example, if the fund distributes $0.10 of LT gains on 1 share, and you sell at a loss of $0.12, then you will claim $0.10 in LT losses and $0.02 in ST losses. Likely an issue only if you were hoping to cancel ST gains from some other sale.

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Re: Jason Zweig's tax bomb example

Post by kaneohe » Mon Sep 04, 2017 11:59 am

House Blend wrote:
Mon Sep 04, 2017 10:54 am
kaneohe wrote:
Mon Sep 04, 2017 8:53 am
student wrote:
Mon Sep 04, 2017 8:25 am
But isn't it true that the mistake can be corrected? Now that the share price is lowered accordingly, one can sell the shares to claim the capital loss against the capital gain.
good idea.
It may be a good idea, having learned the lesson not to buy actively managed, high turnover funds in taxable, but remember these repercussions:

1. If the age of your shares when sold was 60 days or less and those shares produced qualified dividends, then you must re-classify those dividends as non-qualified, and pay regular income tax on it.

2. If the big distribution included short term capital gains, then those are taxed the same as ordinary interest, and cannot be cancelled by capital losses. This isn't a reason not to sell, it's just an obstruction that prevents you from negating all of the ill effects.

3. Also, less likely to be an issue, but still a record-keeping annoyance is that if your shares were held for less than 6 months and those shares distributed LT cap gains, then you must reclassify that portion of the loss on the sale of those shares as LT, not ST. For example, if the fund distributes $0.10 of LT gains on 1 share, and you sell at a loss of $0.12, then you will claim $0.10 in LT losses and $0.02 in ST losses. Likely an issue only if you were hoping to cancel ST gains from some other sale.
good points, thanks. For 2) if OP has no other CGs (unlikely if owns 1 actively managed fund, likely owns more), then capital loss (<3K) will
be used against other income so indirectly against the ST Cap gain?

3) is confusing to me.....could you lead me to an IRS form/pub that discusses this. Thanks.

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Re: Jason Zweig's tax bomb example

Post by House Blend » Mon Sep 04, 2017 12:21 pm

kaneohe wrote:
Mon Sep 04, 2017 11:59 am
For 2) if OP has no other CGs (unlikely if owns 1 actively managed fund, likely owns more), then capital loss (<3K) will
be used against other income so indirectly against the ST Cap gain?
Yes, it could work out favorably that way. Not as favorably if the loss harvested is smaller than the total distribution.
3) is confusing to me.....could you lead me to an IRS form/pub that discusses this. Thanks.
It's in Pub. 550, page 56:
The IRS wrote:Loss on mutual fund or REIT stock held 6 months or less. If you hold stock in a mutual fund (or other regulated investment company) or real estate investment trust (REIT) for 6 months or less and then sell it at a loss (other than under a periodic liquidation plan), special rules may apply.

Capital gain distributions received. The loss (after reduction for any exempt-interest dividends you received, as explained later) is treated as a long-term capital loss up to the total of any capital gain distributions you received and your share of any undistributed capital gains. Any remaining loss is short-term capital loss.
Reading it now, I'm not sure what is meant by "your share of any undistributed capital gains." However, the example provided is reasonably clear:
Example. On April 4, 2016, you bought a mutual fund share for $20. On June 20, 2016, the mutual fund paid a capital gain distribution of $2 a share, which is taxed as a long-term capital gain. On July 18, 2016, you sold the share for $17.50. If it were not for the capital gain distribution, your loss would be a short-term loss of $2.50 ($20 − $17.50). However, the part of the loss that is not more than the capital gain distribution ($2) must be reported as a long-term capital loss. The remaining $0.50 of the loss can be reported as a short-term capital loss.

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Re: Jason Zweig's tax bomb example

Post by student » Mon Sep 04, 2017 12:48 pm

House Blend wrote:
Mon Sep 04, 2017 12:21 pm
kaneohe wrote:
Mon Sep 04, 2017 11:59 am
For 2) if OP has no other CGs (unlikely if owns 1 actively managed fund, likely owns more), then capital loss (<3K) will
be used against other income so indirectly against the ST Cap gain?
Yes, it could work out favorably that way. Not as favorably if the loss harvested is smaller than the total distribution.
I am confused. I thought the scenario is along the following: A person purchased shares in mutual funds worth $50,000. The next day there is a distribution of $20,000. The person sells the fund at $30,000 and do not buy it back. So

1) The person has a short term capital loss of $20,000.
2) The person has a long term/short term capital gain of $A and interests of $B where $A+$B=$20,000.

If $B <= $3,000, then there is no issue as $20,000 gain will cancel with the $20,000 loss. If $B>$3,000, then only $A+$3,000 will be cancelled and $B-$3,000 will be carried over.

Is this correct?

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Re: Jason Zweig's tax bomb example

Post by MnD » Mon Sep 04, 2017 1:08 pm

JW-Retired wrote:
Mon Sep 04, 2017 8:04 am
If the fund does a lot of active trading and makes lots of capital gains distributions you pay tax (unless below the 25% bracket). Typically, you would have all such "earnings" reinvested back into the fund. This increases your cost basis in the fund so the net effect is just paying tax this year rather then some time in the distant future.

Easiest to just stick to tax efficient index funds. :beer
https://us.spdrs.com/en/resources/distr ... ticker=GWX

The index ETF SPDR S&P international small cap (GWX) distributed $3.70 in 2014, most of it in December in ST and LT capital gains off a ~$30 share price (~12% distribution). This fund was very popular with global indexers trying to get the small cap slice before the latest generation of small cap international funds like VSS and SCHC came out, and some people preferred it because unlike VSS it didn't have emerging market small cap.
Ouch!

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Re: Jason Zweig's tax bomb example

Post by House Blend » Mon Sep 04, 2017 1:16 pm

student wrote:
Mon Sep 04, 2017 12:48 pm
House Blend wrote:
Mon Sep 04, 2017 12:21 pm
kaneohe wrote:
Mon Sep 04, 2017 11:59 am
For 2) if OP has no other CGs (unlikely if owns 1 actively managed fund, likely owns more), then capital loss (<3K) will
be used against other income so indirectly against the ST Cap gain?
Yes, it could work out favorably that way. Not as favorably if the loss harvested is smaller than the total distribution.
I am confused. I thought the scenario is along the following: A person purchased shares in mutual funds worth $50,000. The next day there is a distribution of $20,000. The person sells the fund at $30,000 and do not buy it back. So

1) The person has a short term capital loss of $20,000.
2) The person has a long term/short term capital gain of $A and interests of $B where $A+$B=$20,000.

If $B <= $3,000, then there is no issue as $20,000 gain will cancel with the $20,000 loss. If $B>$3,000, then only $A+$3,000 will be cancelled and $B-$3,000 will be carried over.

Is this correct?
Looks correct.

What I was referring to is the case where market movements on that day (or several days, if the "error" of buying this fund is not realized until later) result in a capital loss of less than $20,000.

Let's say the market is up that day and you net a loss of only $19,000. And that $2,000 of the $20,000 distribution was ST gains taxed as interest. Then the net outcome of these transations is a $1,000 LT loss, and $2,000 taxable interest. If you have no other gains/losses/carryovers, that's tax on $1,000 interest.

You can still be happy that the market gave you gains of $1,000; your damage is limited to the tax on $1,000 of interest.

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Re: Jason Zweig's tax bomb example

Post by LadyGeek » Mon Sep 04, 2017 1:59 pm

This thread is now in the Personal Finance (Not Investing) forum (taxes).
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Re: Jason Zweig's tax bomb example

Post by kaneohe » Mon Sep 04, 2017 2:22 pm

House Blend wrote:
Mon Sep 04, 2017 12:21 pm
kaneohe wrote:
Mon Sep 04, 2017 11:59 am
...............................
3) is confusing to me.....could you lead me to an IRS form/pub that discusses this. Thanks.
It's in Pub. 550, page 56:
The IRS wrote:Loss on mutual fund or REIT stock held 6 months or less. If you hold stock in a mutual fund (or other regulated investment company) or real estate investment trust (REIT) for 6 months or less and then sell it at a loss (other than under a periodic liquidation plan), special rules may apply.

Capital gain distributions received. The loss (after reduction for any exempt-interest dividends you received, as explained later) is treated as a long-term capital loss up to the total of any capital gain distributions you received and your share of any undistributed capital gains. Any remaining loss is short-term capital loss.
Reading it now, I'm not sure what is meant by "your share of any undistributed capital gains." However, the example provided is reasonably clear:
Example. On April 4, 2016, you bought a mutual fund share for $20. On June 20, 2016, the mutual fund paid a capital gain distribution of $2 a share, which is taxed as a long-term capital gain. On July 18, 2016, you sold the share for $17.50. If it were not for the capital gain distribution, your loss would be a short-term loss of $2.50 ($20 − $17.50). However, the part of the loss that is not more than the capital gain distribution ($2) must be reported as a long-term capital loss. The remaining $0.50 of the loss can be reported as a short-term capital loss.
HB........thanks for the link.....had never heard about that one before. I know there's a special rule for tax exempt funds if you sell within 6 mos
and that QDIV thing if you don't hold 60 days but this is a new one for me.

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Re: Jason Zweig's tax bomb example

Post by student » Mon Sep 04, 2017 2:46 pm

House Blend wrote:
Mon Sep 04, 2017 1:16 pm
student wrote:
Mon Sep 04, 2017 12:48 pm
House Blend wrote:
Mon Sep 04, 2017 12:21 pm
kaneohe wrote:
Mon Sep 04, 2017 11:59 am
For 2) if OP has no other CGs (unlikely if owns 1 actively managed fund, likely owns more), then capital loss (<3K) will
be used against other income so indirectly against the ST Cap gain?
Yes, it could work out favorably that way. Not as favorably if the loss harvested is smaller than the total distribution.
I am confused. I thought the scenario is along the following: A person purchased shares in mutual funds worth $50,000. The next day there is a distribution of $20,000. The person sells the fund at $30,000 and do not buy it back. So

1) The person has a short term capital loss of $20,000.
2) The person has a long term/short term capital gain of $A and interests of $B where $A+$B=$20,000.

If $B <= $3,000, then there is no issue as $20,000 gain will cancel with the $20,000 loss. If $B>$3,000, then only $A+$3,000 will be cancelled and $B-$3,000 will be carried over.

Is this correct?
Looks correct.

What I was referring to is the case where market movements on that day (or several days, if the "error" of buying this fund is not realized until later) result in a capital loss of less than $20,000.

Let's say the market is up that day and you net a loss of only $19,000. And that $2,000 of the $20,000 distribution was ST gains taxed as interest. Then the net outcome of these transations is a $1,000 LT loss, and $2,000 taxable interest. If you have no other gains/losses/carryovers, that's tax on $1,000 interest.

You can still be happy that the market gave you gains of $1,000; your damage is limited to the tax on $1,000 of interest.
Thanks.

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Re: Jason Zweig's tax bomb example

Post by curmudgeon » Mon Sep 04, 2017 3:09 pm

I have been considering this issue in the context of Wellington fund. I personally see some benefit to a fund which tightly controls expenses without sticking to a pure index approach. Now that I'm retired, I don't have a big objection to the fund paying out a modest amount of cap gains each year. The challenge is that I'm trying to manage income around ACA subsidy thresholds. Unplanned cap gains can mess that up, though next year I should have some more headroom. While I think the fund managers try to avoid sudden gains, a big merger or buyout in their holdings may be beyond their control.

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Re: Jason Zweig's tax bomb example

Post by bob_m10 » Mon Sep 04, 2017 4:01 pm

Da5id wrote:
Mon Sep 04, 2017 8:15 am
JW-Retired wrote:
Mon Sep 04, 2017 8:04 am
Big time "buying the dividend".
https://investor.vanguard.com/investing ... nd?lang=en

Easiest to just stick to tax efficient index funds. :beer
JW
This isn't just a buying the dividend though. It is also the risk that a fund with large unrealized capital gains on the books may sell the appreciated stocks and have to distribute the capital gains.

Mind you, Vanguard Total Stock Market Admiral/Investor mutual fund shares have a 34% unrealized capital gain on the books. Just no reason to think they will be forced to distribute it. And I believe that they have rules that if there are large redemptions they can give you shares of underlying appreciated stocks rather than cash as I understand it, which will avoid the distributions to non-redeeming shareholders anyway. I'm not losing sleep over that, I'm in 3 fund almost exclusively anyway using mutual funds. But that is an ETF advantage in that you don't get these unrealized gains when you buy the ETF.

Other message is that if you choose to buy funds that distribute lots of gains (not my cup of tea) you should have them in tax deferred/tax free space.
I am confused on one point, well maybe many points but just one question for now. :) The NAV is adjusted for Stocks paying dividends or a capital gains distribution but what about a bond fund. Does the NAV get adjusted for dividends paid because of interest?

That is interesting on ETFs. In my limited experience on the board I am surprised they are not recommended more because of the tax advantage. Seems like it is cleaner.

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Re: Jason Zweig's tax bomb example

Post by House Blend » Mon Sep 04, 2017 4:39 pm

^A cap gain distribution always lowers the share price, regardless of what types of assets the fund invests in.

For dividend distributions, AFAIK all bond ETFs behave like stock ETFs--the price also drops. But the distributions tend to be more frequent (monthly is common), so the tax consequences are smaller.

For dividend distributions from bond mutual funds, it's a different story.

There is an alternative allowed type of bookkeeping used by most, but not all, bond mutual funds. For those, bond interest is accrued and tracked separately, and is not reflected in the share price. When dividends are distributed, this has no effect on share price, and if the fund posts a $0.30/share dividend for August, you will receive *less* than that if you bought your shares in mid-August. This way it is impossible to be adversely affected by the tax consequences of buying a dividend.

The wiki has a discussion of the advantages of mutual funds vs. ETFs.
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

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Re: Jason Zweig's tax bomb example

Post by bob_m10 » Tue Sep 05, 2017 12:05 am

House Blend wrote:
Mon Sep 04, 2017 4:39 pm
^A cap gain distribution always lowers the share price, regardless of what types of assets the fund invests in.

For dividend distributions, AFAIK all bond ETFs behave like stock ETFs--the price also drops. But the distributions tend to be more frequent (monthly is common), so the tax consequences are smaller.

For dividend distributions from bond mutual funds, it's a different story.

There is an alternative allowed type of bookkeeping used by most, but not all, bond mutual funds. For those, bond interest is accrued and tracked separately, and is not reflected in the share price. When dividends are distributed, this has no effect on share price, and if the fund posts a $0.30/share dividend for August, you will receive *less* than that if you bought your shares in mid-August. This way it is impossible to be adversely affected by the tax consequences of buying a dividend.

The wiki has a discussion of the advantages of mutual funds vs. ETFs.
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
Thanks for the great info.

I was lookin at the tax distribution tab for a few of the vanguard funds. For example if you look at Wellesley it lists dividends and ST/LT. How can I tell which of the dividends shown are qualified? I assume some of those dividends will be from the stocks held in the fund and show be qualified.

Nate79
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Re: Jason Zweig's tax bomb example

Post by Nate79 » Tue Sep 05, 2017 12:13 am

bob_m10 wrote:
Tue Sep 05, 2017 12:05 am
House Blend wrote:
Mon Sep 04, 2017 4:39 pm
^A cap gain distribution always lowers the share price, regardless of what types of assets the fund invests in.

For dividend distributions, AFAIK all bond ETFs behave like stock ETFs--the price also drops. But the distributions tend to be more frequent (monthly is common), so the tax consequences are smaller.

For dividend distributions from bond mutual funds, it's a different story.

There is an alternative allowed type of bookkeeping used by most, but not all, bond mutual funds. For those, bond interest is accrued and tracked separately, and is not reflected in the share price. When dividends are distributed, this has no effect on share price, and if the fund posts a $0.30/share dividend for August, you will receive *less* than that if you bought your shares in mid-August. This way it is impossible to be adversely affected by the tax consequences of buying a dividend.

The wiki has a discussion of the advantages of mutual funds vs. ETFs.
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
Thanks for the great info.

I was lookin at the tax distribution tab for a few of the vanguard funds. For example if you look at Wellesley it lists dividends and ST/LT. How can I tell which of the dividends shown are qualified? I assume some of those dividends will be from the stocks held in the fund and show be qualified.
Check out this page for qualified dividends for Vanguard funds.

https://personal.vanguard.com/us/insigh ... -2016?Sc=1

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