Avoiding capital gains tax on reinvestments

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
michaelcarr123
Posts: 6
Joined: Tue Nov 10, 2020 5:32 pm

Avoiding capital gains tax on reinvestments

Post by michaelcarr123 »

I have most of my investment in the Vanguard Growth Index Fund. I have it set so that any returns are automatically reinvested into that fund. I would like for the returns to instead be reinvested into a different vanguard fund. However, I was told by a Vanguard representative that there is no way to do that except for selling some of the Growth fund and using those proceeds to purchase another fund. Of course though selling would create a capital gains tax.

I keep thinking I was told wrong because it doesn’t make sense why I can freely reinvest my returns into the fund that created those returns but can’t use those returns to purchase another fund without having to first sell the fund and pay capital gains tax.

Am I missing something? Thanks
Makefile
Posts: 713
Joined: Fri Apr 22, 2016 11:03 pm

Re: Avoiding capital gains tax on reinvestments

Post by Makefile »

michaelcarr123 wrote: Mon May 03, 2021 8:47 pm I have most of my investment in the Vanguard Growth Index Fund. I have it set so that any returns are automatically reinvested into that fund. I would like for the returns to instead be reinvested into a different vanguard fund. However, I was told by a Vanguard representative that there is no way to do that except for selling some of the Growth fund and using those proceeds to purchase another fund. Of course though selling would create a capital gains tax.

I keep thinking I was told wrong because it doesn’t make sense why I can freely reinvest my returns into the fund that created those returns but can’t use those returns to purchase another fund without having to first sell the fund and pay capital gains tax.

Am I missing something? Thanks
The representative must have misunderstood your question. It depends whether you have a "mutual fund only" account or a brokerage account. If you have a former, you can automatically redirect the dividends to be reinvested in any other Vanguard fund you already own. If it's a brokerage account, you simply stop dividend reinvestment, and it goes to your settlement fund instead for you to reinvest manually (though I've read there is some hack with automatic transactions you can do to try and simulate the automatic redirection).
User avatar
climber2020
Posts: 1877
Joined: Sun Mar 25, 2012 8:06 pm

Re: Avoiding capital gains tax on reinvestments

Post by climber2020 »

You can redirect dividends if that's what you mean by "returns". Just direct them to your settlement fund instead of auto-reinvesting, then buy whatever you want with the money.

Most of the returns on stocks tend to be capital appreciation instead of dividends, and you can't transfer that amount to a different fund without selling.
DSInvestor
Posts: 11473
Joined: Sat Oct 04, 2008 11:42 am

Re: Avoiding capital gains tax on reinvestments

Post by DSInvestor »

I have Vanguard mutual fund accounts (not the new brokerage accounts). With Mutual fund accounts I can elect to send the distributions (capital gains distributions and dividends) of one fund to another fund. The other fund position must already exist. I do not know if this is possible with Vanguard Brokerage accounts.

If redirecting distributions is not possible for you, you can simply stop reinvesting the dividends and then collect them in cash in your sweep and then use the to buy other funds.
Wiki
UpperNwGuy
Posts: 5146
Joined: Sun Oct 08, 2017 7:16 pm

Re: Avoiding capital gains tax on reinvestments

Post by UpperNwGuy »

Two clarifications:

In a taxable account, you already pay tax on those dividends that are reinvested into the same fund. The tax comes from the dividend being issued, not from what you do with the dividend after you receive it.

You always have the option of not reinvesting. The dividends will then dump into your settlement fund. You can then invest them in another fund. In a brokerage account, you do not "reinvest" in a different fund. It's an investment, not a reinvestment.
Topic Author
michaelcarr123
Posts: 6
Joined: Tue Nov 10, 2020 5:32 pm

Re: Avoiding capital gains tax on reinvestments

Post by michaelcarr123 »

Makefile wrote: Mon May 03, 2021 8:49 pm
michaelcarr123 wrote: Mon May 03, 2021 8:47 pm I have most of my investment in the Vanguard Growth Index Fund. I have it set so that any returns are automatically reinvested into that fund. I would like for the returns to instead be reinvested into a different vanguard fund. However, I was told by a Vanguard representative that there is no way to do that except for selling some of the Growth fund and using those proceeds to purchase another fund. Of course though selling would create a capital gains tax.

I keep thinking I was told wrong because it doesn’t make sense why I can freely reinvest my returns into the fund that created those returns but can’t use those returns to purchase another fund without having to first sell the fund and pay capital gains tax.

Am I missing something? Thanks
The representative must have misunderstood your question. It depends whether you have a "mutual fund only" account or a brokerage account. If you have a former, you can automatically redirect the dividends to be reinvested in any other Vanguard fund you already own. If it's a brokerage account, you simply stop dividend reinvestment, and it goes to your settlement fund instead for you to reinvest manually (though I've read there is some hack with automatic transactions you can do to try and simulate the automatic redirection).
Thanks for the reply. I’m not talking so much about reinvesting dividends but instead investing the capital gains from the growth fund and putting it into another fund instead of having it reinvested into the growth fund. It doesn’t seem like I can do that without first paying capital gains tax on the money from the growth fund.
sailaway
Posts: 3087
Joined: Fri May 12, 2017 1:11 pm

Re: Avoiding capital gains tax on reinvestments

Post by sailaway »

There are dividends, capital gains distributions and the unrealized capital gains that are the result of prices going up. The first two happen when the company/fund manager decides. The last one is under your control, but can only be used by selling stocks. It sounds like you are talking about this last one?
Mike Scott
Posts: 1670
Joined: Fri Jul 19, 2013 2:45 pm

Re: Avoiding capital gains tax on reinvestments

Post by Mike Scott »

You have to sell something to get the capital gains out. Depending on your tax bracket and the capital gains, it may not be too bad or else it may be enough $ that you are willing to let this fund set and redirect dividends and new money to whatever new fund you want to buy. Perhaps wait for a down day in the future and tax loss harvest?
Katietsu
Posts: 4783
Joined: Sun Sep 22, 2013 1:48 am

Re: Avoiding capital gains tax on reinvestments

Post by Katietsu »

michaelcarr123 wrote: Mon May 03, 2021 9:11 pm

Thanks for the reply. I’m not talking so much about reinvesting dividends but instead investing the capital gains from the growth fund and putting it into another fund instead of having it reinvested into the growth fund. It doesn’t seem like I can do that without first paying capital gains tax on the money from the growth fund.
I think you are confused. As sailaway said, there are capital gains distributions that can occur in some funds without you selling any shares. But this has not happened in the Vanguard Growth Index Fund as far as I can tell.

Therefore, the only realized capital gain from this fund will be because you sell shares. When you do this, you will need to pay tax if your your tax bracket requires it. An unrealized capital gain can not be used to be anything because it is only potential earnings not real money until you sell the shares.
exodusNH
Posts: 156
Joined: Wed Jan 06, 2021 8:21 pm

Re: Avoiding capital gains tax on reinvestments

Post by exodusNH »

michaelcarr123 wrote: Mon May 03, 2021 9:11 pm Thanks for the reply. I’m not talking so much about reinvesting dividends but instead investing the capital gains from the growth fund and putting it into another fund instead of having it reinvested into the growth fund. It doesn’t seem like I can do that without first paying capital gains tax on the money from the growth fund.
If what you mean is that 1 year ago the fund was trading for $10/share and now it's $11/share, that's not a "capital gain" until you sell. These are paper gains (or losses) until you make them real by selling.

The fund may distribute "capital gains" as the result of the fund managers having sold shares for profit. It may also distribute dividends, where the companies themselves paid out $x/share.
stan1
Posts: 9999
Joined: Mon Oct 08, 2007 4:35 pm

Re: Avoiding capital gains tax on reinvestments

Post by stan1 »

michaelcarr123 wrote: Mon May 03, 2021 9:11 pm
Makefile wrote: Mon May 03, 2021 8:49 pm
michaelcarr123 wrote: Mon May 03, 2021 8:47 pm I have most of my investment in the Vanguard Growth Index Fund. I have it set so that any returns are automatically reinvested into that fund. I would like for the returns to instead be reinvested into a different vanguard fund. However, I was told by a Vanguard representative that there is no way to do that except for selling some of the Growth fund and using those proceeds to purchase another fund. Of course though selling would create a capital gains tax.

I keep thinking I was told wrong because it doesn’t make sense why I can freely reinvest my returns into the fund that created those returns but can’t use those returns to purchase another fund without having to first sell the fund and pay capital gains tax.

Am I missing something? Thanks
The representative must have misunderstood your question. It depends whether you have a "mutual fund only" account or a brokerage account. If you have a former, you can automatically redirect the dividends to be reinvested in any other Vanguard fund you already own. If it's a brokerage account, you simply stop dividend reinvestment, and it goes to your settlement fund instead for you to reinvest manually (though I've read there is some hack with automatic transactions you can do to try and simulate the automatic redirection).
Thanks for the reply. I’m not talking so much about reinvesting dividends but instead investing the capital gains from the growth fund and putting it into another fund instead of having it reinvested into the growth fund. It doesn’t seem like I can do that without first paying capital gains tax on the money from the growth fund.
The Vanguard rep seems to have accurately answered your question. There is no way to divert unrealized capital gains to another investment. You have to realize the gain (sell it) and buy something else. Unrealized gains are "paper gains". You have sell the stock to realize the gain, and you will owe capital gains tax if you do sell with a capital gain.
lazynovice
Posts: 1095
Joined: Mon Apr 16, 2012 10:48 pm

Re: Avoiding capital gains tax on reinvestments

Post by lazynovice »

You are asking two questions and it is causing some confusion.

Vanguard does not offer the option of directing dividends or capital gain distributions to another fund. They offer two choices- reinvest in same fund or send to your settlement account.

Fidelity, by way of contrast, offers three choices, reinvest in the same fund, settlement account or invest in another Fidelity fund.

To accomplish what you want at Vanguard, turn off dividend reinvestment and once a quarter log in and invest in the preferred fund.

No matter what option you choose, you will owe taxes on dividend and capital gain distributions.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
Makefile
Posts: 713
Joined: Fri Apr 22, 2016 11:03 pm

Re: Avoiding capital gains tax on reinvestments

Post by Makefile »

lazynovice wrote: Mon May 03, 2021 9:50 pm Vanguard does not offer the option of directing dividends or capital gain distributions to another fund. They offer two choices- reinvest in same fund or send to your settlement account.
Not to muddy the issue further, but you can do this at Vanguard also if you have a mutual fund only account, but the functionality is lost if you transfer your funds into a Vanguard brokerage account. This is one of the reasons there are holdouts.
Post Reply