Sell due to Capital Gains or Not?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
LISD
Posts: 2
Joined: Sun Feb 10, 2019 8:52 pm

Sell due to Capital Gains or Not?

Post by LISD » Sun Feb 10, 2019 9:01 pm

Hello,

I have a number of T.Rowe Price funds that generated 8-11% capital gains last year, mostly long term capital gains. This is not out-of-the-ordinary for these funds but last year seems a little higher than normal. The performance of the funds is not the issue, they are doing pretty well, especially in the long term.

I’m wondering what to do, if anything.

My Left Brain tells me to sell the funds. Reinvested in an index fund they would generate minimal tax burden, reducing my yearly taxes and allowing the money to compound tax free in the future. Since I’m retired (59 y/o) my tax bracket is not going to be any lower in the future, so it’s not a bad time to pay these taxes - if I’m ever going to pay them. BUT: I’ve had the funds for over 25 years, and that would generate a HUGE tax burden (much more than just the capital gains).

My Right Brain tells me to keep the funds. Their overall performance is pretty good, and although the capital gains do generate a lot of yearly taxes (tens of thousands of $ a year), they also reduce my tax basis on the funds. So when I do sell the funds in the future, my taxes will be lower.

Assuming my logic above is sound (?), which side of my head should I listen to?

BTW: the funds I’m referring to are the T. Rowe Price Mid Cap, Equity Income, and New Horizon funds.

Thanks for your thoughts.

User avatar
dodecahedron
Posts: 3969
Joined: Tue Nov 12, 2013 12:28 pm

Re: Sell due to Capital Gains or Not?

Post by dodecahedron » Sun Feb 10, 2019 9:25 pm

If you have substantial charitable giving plans, you could contribute (all or some of) the appreciated securities to a Donor Advised Fund and eventually direct grants to the charitable organizations of your choice.

If you have plans for significant gifts to family members in lower tax brackets than you, you could give them shares of appreciated securities instead of cash.

prd1982
Posts: 29
Joined: Sun Jan 08, 2017 4:43 pm

Re: Sell due to Capital Gains or Not?

Post by prd1982 » Sun Feb 10, 2019 9:39 pm

I'm in a similar boat, although my amounts are less than yours. Here is what I'm doing:

* Turn off reinvestment of Year End dividends. Have them go to your checking account, and then reinvest in index funds. Even if you keep the TRP funds, you want to do this. While the value might continue to grow if the stock market does well, the real (non-inflated amt) should decrease.

* Determine the cost basis for each mutual fund. I assume you have been reinvesting the distributions, The TRP web site will give you the cost basis for your covered and non-covered shares.

* Hopefully you are using a tax program such as H&R Block on your PC. If so, do an estimate for selling your funds. I would suggest simulating selling 1 fund each year. Compare to a 2019 estimate where you keep your TRP fund. Also do an estimate for the following year for both scenarios. This will give you an idea of the cost for the first year, and the savings for future years.

* You didn't mention an IRA or 401K, but suspect you might have them. If so, you might want to do a tax estimate for the year you take your first RMD. The RMD could really affect your tax rate a lot.

My analysis showed a slight saving by selling the funds and reinvesting in index funds. But I have a balanced TRP fund, so it has a lot of dividends taxed as standard income. I also wanted to sell now in case the AMT values are lowered again. When I looked at selling before, AMT added a lot to the initial taxes.

My greatest fear: A week after selling, there will be a major market drop which will have allowed me to sell with no gains!

typical.investor
Posts: 514
Joined: Mon Jun 11, 2018 3:17 am

Re: Sell due to Capital Gains or Not?

Post by typical.investor » Sun Feb 10, 2019 9:41 pm

prd1982 wrote:
Sun Feb 10, 2019 9:39 pm
My greatest fear: A week after selling, there will be a major market drop which will have allowed me to sell with no gains!
In that case, won't you have holdings with capital losses that can be harvested to offset your realized gains?

riverguy
Posts: 467
Joined: Sun May 23, 2010 10:33 pm

Re: Sell due to Capital Gains or Not?

Post by riverguy » Sun Feb 10, 2019 10:46 pm

prd1982 wrote:
Sun Feb 10, 2019 9:39 pm
My greatest fear: A week after selling, there will be a major market drop which will have allowed me to sell with no gains!
Why would this be a fear?? You’d rather the value of your holdings go down instead of pay tax on gains?

Shallowpockets
Posts: 936
Joined: Fri Nov 20, 2015 10:26 am

Re: Sell due to Capital Gains or Not?

Post by Shallowpockets » Mon Feb 11, 2019 8:58 am

Can you tell me what TRP funds are returning capitol gains of 8-11% in 2018 which was not a good year for overall returns?

NotWhoYouThink
Posts: 2216
Joined: Fri Dec 26, 2014 4:19 pm

Re: Sell due to Capital Gains or Not?

Post by NotWhoYouThink » Mon Feb 11, 2019 9:10 am

What is the cost basis for the account? If you have been receiving and paying taxes on capital gains distributions for years you may have a higher cost basis than you think, so you may owe less tax than you expect on the sale.
Shallowpockets wrote:
Mon Feb 11, 2019 8:58 am
Can you tell me what TRP funds are returning capitol gains of 8-11% in 2018 which was not a good year for overall returns?
Looks like OP is talking about capital gains distributions for the funds, not growth in fund value.

aristotelian
Posts: 5237
Joined: Wed Jan 11, 2017 8:05 pm

Re: Sell due to Capital Gains or Not?

Post by aristotelian » Mon Feb 11, 2019 9:19 am

What is the expense ratio of the funds? You can calculate how long it will take to break even on the tax hit versus the fee drag. If your funds have gone up 50% and you are in the 15% capital gains bracket, you would be paying about 7.5% of the balance in tax. If TRP is charging .75% ER, you would break even in 10 years.

I have also been a long term T Rowe Price investor since the 1990's transitioning to index funds. I got rid of my last active TRP fund last year. I still have a couple of their index funds that are higher expense than Vanguard but low enough that it would take a long time to break even on the tax hit, so I continue to hold those.

RudyS
Posts: 1469
Joined: Tue Oct 27, 2015 10:11 am

Re: Sell due to Capital Gains or Not?

Post by RudyS » Mon Feb 11, 2019 9:22 am

If you hold on, and leave the shares to your heirs, they get stepped-up basis. Have you considered this possibility?

User avatar
Wiggums
Posts: 114
Joined: Thu Jan 31, 2019 8:02 am

Re: Sell due to Capital Gains or Not?

Post by Wiggums » Mon Feb 11, 2019 9:28 am

aristotelian wrote:
Mon Feb 11, 2019 9:19 am
I have also been a long term T Rowe Price investor since the 1990's transitioning to index funds. I got rid of my last active TRP fund last year. I still have a couple of their index funds that are higher expense than Vanguard but low enough that it would take a long time to break even on the tax hit, so I continue to hold those.
I have the exact same scenario. Its not a significant amount but I don’t care for the ER. I do like their retirement tool so I hate to close the account.

Shallowpockets
Posts: 936
Joined: Fri Nov 20, 2015 10:26 am

Re: Sell due to Capital Gains or Not?

Post by Shallowpockets » Mon Feb 11, 2019 9:34 am

NotWhoYouThink wrote:
Mon Feb 11, 2019 9:10 am
What is the cost basis for the account? If you have been receiving and paying taxes on capital gains distributions for years you may have a higher cost basis than you think, so you may owe less tax than you expect on the sale.
Shallowpockets wrote:
Mon Feb 11, 2019 8:58 am
Can you tell me what TRP funds are returning capitol gains of 8-11% in 2018 which was not a good year for overall returns?
Looks like OP is talking about capital gains distributions for the funds, not growth in fund value.
I understand that the capitol gains were distributions. Maybe I have it wrong. It does not seem too clear. Still, an 8-11% payout just on distributions seems high.

OP states
"I have a number of T.Rowe Price funds that generated 8-11% capital gains last year, mostly long term capital gains."

Either way this is spoken of as a gain last year, 2018. Which is a year not known for such a gain.
That is why I was interested in what funds they are.

cherijoh
Posts: 5159
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Sell due to Capital Gains or Not?

Post by cherijoh » Mon Feb 11, 2019 9:34 am

LISD wrote:
Sun Feb 10, 2019 9:01 pm
Hello,

I have a number of T.Rowe Price funds that generated 8-11% capital gains last year, mostly long term capital gains. This is not out-of-the-ordinary for these funds but last year seems a little higher than normal. The performance of the funds is not the issue, they are doing pretty well, especially in the long term.

I’m wondering what to do, if anything.

My Left Brain tells me to sell the funds. Reinvested in an index fund they would generate minimal tax burden, reducing my yearly taxes and allowing the money to compound tax free in the future. Since I’m retired (59 y/o) my tax bracket is not going to be any lower in the future, so it’s not a bad time to pay these taxes - if I’m ever going to pay them. BUT: I’ve had the funds for over 25 years, and that would generate a HUGE tax burden (much more than just the capital gains).

My Right Brain tells me to keep the funds. Their overall performance is pretty good, and although the capital gains do generate a lot of yearly taxes (tens of thousands of $ a year), they also reduce my tax basis on the funds. So when I do sell the funds in the future, my taxes will be lower.

Assuming my logic above is sound (?), which side of my head should I listen to?

BTW: the funds I’m referring to are the T. Rowe Price Mid Cap, Equity Income, and New Horizon funds.
It wasn't quite clear to me - are you still reinvesting these capital gains and dividends distributions in the same funds? If you don't need the money to cover expenses, start taking the distributions and reinvest them in a tax-efficient index fund like total stock market index at Vanguard or Fidelity. This will at least mitigate the issue of unexpected distributions in the future.

I am also confused by your statement about the HUGE tax burden being much more than just capital gains. What other tax burden is there from selling the funds? If you were reinvesting dividends and cap gains then you have already paid the tax on those distributions and only owe capital gains on the difference between current share value and what you paid for them when you reinvested the CG distribution or dividend. I'm not familiar with the T Rowe Price web portal, but if it is anything like Vanguard's you should easily be able to determine how much you would owe in capital gains if you sold everything today. Don't just assume you will owe a bundle in taxes - FIND OUT!

Also, how are you currently covering expenses - pension, selling taxable investments, or taking withdrawals from tax-advantaged plans like a traditional 401k or IRA? This can make a difference about your best approach.

FYI - if you think unexpected capital gains distributions are annoying now, just consider that they could make more of your SS taxable in the future or push you over the cliff for a Medicare surcharge (do a Google search on Bogleheads for IRMAA). Since you haven't mentioned your tax bracket one or the other could apply as well as paying higher capital gains rates.

dodecahedron wrote:
Sun Feb 10, 2019 9:25 pm
If you have substantial charitable giving plans, you could contribute (all or some of) the appreciated securities to a Donor Advised Fund and eventually direct grants to the charitable organizations of your choice.

If you have plans for significant gifts to family members in lower tax brackets than you, you could give them shares of appreciated securities instead of cash.
Just to make it clear - if you gift shares while you are alive, the recipient takes on the original cost basis. If they receive them after you die. they get a step-up in basis to the date of death.

cherijoh
Posts: 5159
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Sell due to Capital Gains or Not?

Post by cherijoh » Mon Feb 11, 2019 9:34 am

LISD wrote:
Sun Feb 10, 2019 9:01 pm
Hello,

I have a number of T.Rowe Price funds that generated 8-11% capital gains last year, mostly long term capital gains. This is not out-of-the-ordinary for these funds but last year seems a little higher than normal. The performance of the funds is not the issue, they are doing pretty well, especially in the long term.

I’m wondering what to do, if anything.

My Left Brain tells me to sell the funds. Reinvested in an index fund they would generate minimal tax burden, reducing my yearly taxes and allowing the money to compound tax free in the future. Since I’m retired (59 y/o) my tax bracket is not going to be any lower in the future, so it’s not a bad time to pay these taxes - if I’m ever going to pay them. BUT: I’ve had the funds for over 25 years, and that would generate a HUGE tax burden (much more than just the capital gains).

My Right Brain tells me to keep the funds. Their overall performance is pretty good, and although the capital gains do generate a lot of yearly taxes (tens of thousands of $ a year), they also reduce my tax basis on the funds. So when I do sell the funds in the future, my taxes will be lower.

Assuming my logic above is sound (?), which side of my head should I listen to?

BTW: the funds I’m referring to are the T. Rowe Price Mid Cap, Equity Income, and New Horizon funds.
It wasn't quite clear to me - are you still reinvesting these capital gains and dividends distributions in the same funds? If you don't need the money to cover expenses, start taking the distributions and reinvest them in a tax-efficient index fund like total stock market index at Vanguard or Fidelity. This will at least mitigate the issue of unexpected distributions in the future.

I am also confused by your statement about the HUGE tax burden being much more than just capital gains. What other tax burden is there from selling the funds? If you were reinvesting dividends and cap gains then you have already paid the tax on those distributions and only owe capital gains on the difference between current share value and what you paid for them when you reinvested the CG distribution or dividend. I'm not familiar with the T Rowe Price web portal, but if it is anything like Vanguard's you should easily be able to determine how much you would owe in capital gains if you sold everything today. Don't just assume you will owe a bundle in taxes - FIND OUT!

Also, how are you currently covering expenses - pension, selling taxable investments, or taking withdrawals from tax-advantaged plans like a traditional 401k or IRA? This can make a difference about your best approach.

FYI - if you think unexpected capital gains distributions are annoying now, just consider that they could make more of your SS taxable in the future or push you over the cliff for a Medicare surcharge (do a Google search on Bogleheads for IRMAA). Since you haven't mentioned your tax bracket one or the other could apply as well as paying higher capital gains rates.

dodecahedron wrote:
Sun Feb 10, 2019 9:25 pm
If you have substantial charitable giving plans, you could contribute (all or some of) the appreciated securities to a Donor Advised Fund and eventually direct grants to the charitable organizations of your choice.

If you have plans for significant gifts to family members in lower tax brackets than you, you could give them shares of appreciated securities instead of cash.
Just to make it clear - if you gift shares while you are alive, the recipient takes on the original cost basis. If they receive them after you die. they get a step-up in basis to the date of death.

The Wizard
Posts: 12863
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Sell due to Capital Gains or Not?

Post by The Wizard » Mon Feb 11, 2019 9:39 am

NotWhoYouThink wrote:
Mon Feb 11, 2019 9:10 am
...Looks like OP is talking about capital gains DISTRIBUTIONS for the funds, not growth in fund value.
I was wondering about this also.
CGDs increase your taxes in the current year compared to unrealized Capital Gains in an index fund.

In fact, an actively managed fund that just had big CGDs *might* have lower unrealized gains compared to same amount of $$$ invested in an index fund.
So the cost of exchanging to an index fund might not be too large...
Attempted new signature...

cherijoh
Posts: 5159
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Sell due to Capital Gains or Not?

Post by cherijoh » Mon Feb 11, 2019 9:56 am

Shallowpockets wrote:
Mon Feb 11, 2019 9:34 am
NotWhoYouThink wrote:
Mon Feb 11, 2019 9:10 am
What is the cost basis for the account? If you have been receiving and paying taxes on capital gains distributions for years you may have a higher cost basis than you think, so you may owe less tax than you expect on the sale.
Shallowpockets wrote:
Mon Feb 11, 2019 8:58 am
Can you tell me what TRP funds are returning capitol gains of 8-11% in 2018 which was not a good year for overall returns?
Looks like OP is talking about capital gains distributions for the funds, not growth in fund value.
I understand that the capitol gains were distributions. Maybe I have it wrong. It does not seem too clear. Still, an 8-11% payout just on distributions seems high.

OP states
"I have a number of T.Rowe Price funds that generated 8-11% capital gains last year, mostly long term capital gains."

Either way this is spoken of as a gain last year, 2018. Which is a year not known for such a gain.
That is why I was interested in what funds they are.
That is how it works with actively managed mutual funds. If they sell appreciated securities, the mutual funds have to distribute the realized capital gains to their customers unless they have previously accrued capital losses which they can use to offset the gains. After years of a bull market, I'm sure there are no capital losses to balance out any gains.

There are a couple of circumstances that can make the capital gains distributions larger than normal:
  • A change in manager can lead to the sale of securities as they put their own stamp on the fund
  • Narrowly defined funds may have to sell stocks that no longer meet the fund's criteria (e.g., size of company).
  • When there is a stock market correction and suddenly people get anxious and redeem their shares. The funds keep some cash to cover normal redemptions but when there is a spike in redemptions they have to sell the underlying securities thus generating capital gains for everyone
The latter circumstance can lead to large capital gains distributions when your fund has actually lost money for the year - as might have happened in 2018. Conversely, during a recovery in the market a fund could be going like gangbusters and not pay out any capital gains distributions at all because of previously accrued losses.

When this happens in a taxable account, you no longer have control over when you take your capital gains leading to considerable tax drag. That's one reason why I switched over to index funds (in addition to lower expense ratios).

aristotelian
Posts: 5237
Joined: Wed Jan 11, 2017 8:05 pm

Re: Sell due to Capital Gains or Not?

Post by aristotelian » Mon Feb 11, 2019 10:09 am

Shallowpockets wrote:
Mon Feb 11, 2019 9:34 am
NotWhoYouThink wrote:
Mon Feb 11, 2019 9:10 am
What is the cost basis for the account? If you have been receiving and paying taxes on capital gains distributions for years you may have a higher cost basis than you think, so you may owe less tax than you expect on the sale.
Shallowpockets wrote:
Mon Feb 11, 2019 8:58 am
Can you tell me what TRP funds are returning capitol gains of 8-11% in 2018 which was not a good year for overall returns?
Looks like OP is talking about capital gains distributions for the funds, not growth in fund value.
I understand that the capitol gains were distributions. Maybe I have it wrong. It does not seem too clear. Still, an 8-11% payout just on distributions seems high.

OP states
"I have a number of T.Rowe Price funds that generated 8-11% capital gains last year, mostly long term capital gains."

Either way this is spoken of as a gain last year, 2018. Which is a year not known for such a gain.
That is why I was interested in what funds they are.
A lot of active funds realized tons of gains last year when the market dipped. Investors used the dip as an opportunity to get rid of a lot of their undesired funds and as a result there was a lot of selling activity within the funds. My mom is a long term Fidelity investor with their active funds and she was complaining about some major hits she was taking this year. Some discussed in this article were looking to pay out in the 20% range!
https://www.morningstar.com/articles/89 ... rs-in.html

dbr
Posts: 27884
Joined: Sun Mar 04, 2007 9:50 am

Re: Sell due to Capital Gains or Not?

Post by dbr » Mon Feb 11, 2019 10:33 am

Holding funds that generate costs whether in the ER or due to turnover causing tax costs is a bad and a certainly bad idea. I think one should work through a good strategy to get out of that kind of investment. Don't forget that turnover also generates trading costs inside the fund that are not reported in the ER or in the tax cost. It is a triple whammy.

02nz
Posts: 1297
Joined: Wed Feb 21, 2018 3:17 pm

Re: Sell due to Capital Gains or Not?

Post by 02nz » Mon Feb 11, 2019 11:02 am

I looked up the New Horizons fund (PRNHX) - according to Morningstar 1-year return was 9.12%, but after taxes 5.74% (these are based on certain assumptions about tax rate; it's quite possible your tax hit is even bigger). For Vanguard index funds the spread is usually much narrower (though none I know has performed that well over the past year). Can you "move" these to your tax-advantaged accounts, by selling in taxable and buying the same in tax-advantaged? That's what I did with the one active fund that I still hold - I wanted to keep the fund but avoid the tax drag. With the amounts you have, you might want to do it in stages to manage the tax hit. Take advantage of your window of opportunity before IRMAA and taxes on Social Security benefits become issues.

User avatar
goingup
Posts: 3436
Joined: Tue Jan 26, 2010 1:02 pm

Re: Sell due to Capital Gains or Not?

Post by goingup » Mon Feb 11, 2019 11:17 am

It's hard to know what to advise without knowing about imbedded capital gains and how large the positions are. I was able to get rid of our TRP funds in 2008 when they were all underwater and exchange them for index funds.

At 59 you may need to use your taxable accounts to bridge to pensions and SS. In that case, you may want to sell some of these funds anyways. Choose to sell the least tax efficient, or the fund that least suits your desired asset allocation.

Other possibilities include donating appreciated shares, if you're so inclined. You could hold them forever, paying the annual tax burden, and allow your heirs to enjoy the stepped up basis. I do agree that 2018 distributions were particularly onerous for managed funds, but there's no way to know the long-term future of those distributions.

Topic Author
LISD
Posts: 2
Joined: Sun Feb 10, 2019 8:52 pm

Re: Sell due to Capital Gains or Not?

Post by LISD » Mon Feb 11, 2019 7:50 pm

OP Here:

As Aristotelian requested, below are some stats on these 3 funds:

.................................Turnover.....ER.....Morningstar.....CGD (long +short)
Mid Cap Growth: rpmgx .....26%........0.76%......5 star...........10.3%
New Horizons: prnhx.........39..........0.78........5 star...........11.6
Equity Income: prfdx........20...........0.65........3 star............7.6

Also, to answer a question, I am reinvesting the capital gains and distributions back into these funds. Good idea PRD1982 & Cherijoh, about changing that, so they aren’t reinvested. At a minimum I’ll do that. But I’ll also determine what my actual tax basis is and go from there.

Wizzard: good point about paying CGD annually in a managed fund vs later when you sell it – and this is a point I was trying to make also. Assuming I sell eventually, then I’m going to pay the taxes one way or the other, either now (yearly) or later. Paying them now just decreases my tax basis later when I do sell. So given that fact, annual CGD don’t appear to be a negative – right? I think this is true for two funds with equal performance. But generally, the funds that pay high annual CGD have a high turnover rate, and thus higher expenses. But as long as the after-expense performance of the funds are good (roughly equivalent to a passive fund, or better) – then paying taxes on CGD doesn’t seem to be such a bad thing.

I’ll definitely calculate my basis for these funds – thanks for pointing out that this is on the TRP website.

Seeing that I don’t need this money now, it may go to heirs eventually, but I still would like to limit my tax burden now if it makes sense to do so.

Appreciate your time and ideas.

lowcost
Posts: 3
Joined: Sun Feb 10, 2019 2:08 pm

Re: Sell due to Capital Gains or Not?

Post by lowcost » Tue Feb 12, 2019 1:28 am

I also have the T Rowe Price Mid Cap Growth (RPMGX) and it performed well for over 15 years. I reinvested capital gains and dividends for the entire time I owned the fund. I started selling some shares off many years ago when I noticed the huge tax hit on CG.

I posted a similar question yesterday regarding what to do about the large capital gains and if I should sell. I was concerned about the tax efficiency, ER, and lack of diversification. RPMGX only holds 134 mid cap companies.

Here's my post: viewtopic.php?f=1&t=272525&p=4375036&hi ... x#p4375036

I was torn about selling it since it had beat the numerous index funds (total market, small cap , and mid cap) over 1,3,5,10, and 15 year periods. I also have the fear of missing out on the future stellar returns by getting out of the fund.

After thinking about it a lot over the weekend, I decided to sell it and I will distribute the funds per my asset allocation into index funds (total market and international).

The index funds can provide similar returns (possibly smaller), smaller ERs, better tax efficiency and diversification.

I have 2 other T Row Price funds: Blue Chip Growth Fund (TRBCX) and Communications and Tech Fund (PRMTX) that i have held for 15+ years. I am going to retain these two, but stop the automatic reinvesting of CG and distributions. These two funds have performed even better than the Mid Cap Growth Fund.

Post Reply