I recently sold off 2 mutual funds to pay thedownpayment on a house I just bought. For argumentssake, lets say I have 3 other funds that I currentlyhave money invested in. I sold the two worstperfoming funds of the 5. However, 1 of theremaining 3 is also doing terribly (and has been forawhile). My questions: Is it worthwhile to sell this 1 fundand reinvest elsewhere now...or should I waituntil next year to avoid additional taxes? Also, how are taxes figured on mutual funds whenI have been paying taxes yearly on the funds? (is there an easy way to calculate what I willbe paying?)Also throw in the fact that I'm getting marriedin October and have no clue how that will impactall of this....I apologize if this has been covered elsewhere....I did look though...couldn't find anything....(And yes, I know I should probably dump all the Mutual funds....had 'em a long time though...hardto get rid of!) Thanks!
I recently sold off 2 mutual funds to pay thedownpayment on a house I just bought. For argumentssake, lets say I have 3 other funds that I currentlyhave money invested in. I sold the two worstperfoming funds of the 5. However, 1 of theremaining 3 is also doing terribly (and has been forawhile). My questions: Is it worthwhile to sell this 1 fundand reinvest elsewhere now...or should I waituntil next year to avoid additional taxes? ##############I would say this would depend on whether or not you have any unrecognized gains in the fund - IE will it sell at a net gain or loss; and whether the first two sales in fact have generated a gain. If there is a net gain from the first two sales and a potential loss from the third you should be able to offset your losses against the gains.Also, how are taxes figured on mutual funds whenI have been paying taxes yearly on the funds? (is there an easy way to calculate what I willbe paying?)#####################The capital gains distributions you have been receiving on an annual basis have increased your cost basis in the funds as long as you have elected to reinvest those dividends in additional shares (most likely). The mutual fund company should be able to give you your cost basis - ask them for an "average cost basis report" on your shares soldAlso throw in the fact that I'm getting marriedin October and have no clue how that will impactall of this....#################Depends on your total combined joint incomes - the 28% bracket starts at approx 42.5k taxable income for joint filers so you will likely pay a higher tax at the joint rates if both spouses have relatively equal incomes. This is called the marriage penalty - and it Stinks.I apologize if this has been covered elsewhere....I did look though...couldn't find anything....(And yes, I know I should probably dump all the Mutual funds....had 'em a long time though...hardto get rid of!) ##################The big transition - Jump in, the water is not too cold and once you get used to it, its a lot of fun.(as long as the market goes up!!)PETE
ChrisPRocks writes (in part):I recently sold off 2 mutual funds to pay the downpayment on a house I just bought. For arguments sake, lets say I have 3 other funds that I currently have money invested in. I sold the two worst perfoming funds of the 5. However, 1 of the remaining 3 is also doing terribly (and has been for awhile). My questions: Is it worthwhile to sell this 1 fund and reinvest elsewhere now...or should I wait until next year to avoid additional taxes?Also, how are taxes figured on mutual funds when I have been paying taxes yearly on the funds? (is there an easy way to calculate what I will be paying?)I reply:Welcome to the board! And thanks for checking whether the topic's already been covered. As it happens, it has been, but it's the thought that counts. You might check out the Taxes FAQ, which is linked at the bottom of every message on the board.To answer your timing question, we would need to know more. The question you need to ask is whether one year's use of the additional tax payment is worth more than the additional returns you would expect in an alternative investment.As to how taxes are figured, you "simply" need to compute your basis. Reinvested dividends and capital gains are treated like any other purchase. For each mutual fund from which you have made no previous sales, you have four options: FIFO, single-category cost average, double-category cost average, and specific identification. If you have made a sale from that fund, you have no choice -- you must continue to use the method used when you first reported the sale. If you made no election, you defaulted to FIFO. The bad news is that to use specific identification, you must do some paperwork before the sale (I know that this is discussed in the Taxes FAQ), so I doubt that it's available to you for the funds that you've already sold. The good news, though, is that if you sell your entire position, there is no difference between FIFO and specific identification.Single-category cost averaging will give you the same basis as the other methods, but it might change the allocation between short-term and long-term shares, thereby affecting the characterization of your capital gains. You simply spread your basis evenly across all shares of the fund. Calculate your gains/losses both ways, and choose the method that moves more of your basis to short-term shares. If the fund has been rising, you'll probably find that FIFO is better for you. There is probably no reason to learn double-category cost averaging -- if you have sold your entire position, it will give you the same result as FIFO, and if not, you will be better off choosing specific identification, if you still can.By the way, if you're having trouble taking the big jump, I suggest a compromise alternative. Move into an index fund. Your results will probably be significantly better, and when you gain more confidence, you can take the next step. Good luck! --Bob
re: capital gains taxes on mutual fundsin PETE's reply, he suggests that you can increase your basis in mutual funds for annual capital gain distributions "as long as you have elected to reinvest those dividends in additional shares."to expand on this a bit... mutual funds pay dividends each year AND they "distribute" their capital gains directly to the funds owners. This "distribution" of capital gains almost always is "on paper" only & rarely, if ever, represents an actual CASH distribution. Thus, there is NO cash to reinvest with respect to annual mutual fund distributions of capital gains. Mutual funds MUST either distribute their capital gains to the fund owners (on paper - for tax purposes only!) OR PAY THE CAPITAL GAINS TAX THEMSELVES! an rather unlikely outcome!In computing gain or loss on your SALE of mutual funds, ALWAYS add in the annual capital gains distributions (see each year's Form 1099 from the fund) when computing your basis in the fund. If you have reinvested ordinary dividends, then you also add back the ordinary dividend income. But the annual capital gains from the funds (the result of those very happy brokers churning & churning, earning & earning!) are almost ALWAYS added back to your basis.As for it being "hard" to sell long-held mutual dogs, how tough is it to pick up the phone and say that magic four letter word "SELL"? Take the proceeds & plop them into the S&P500 Index fund of your choice (Vanguard, Schwab, etc.) & voila! - instant market returns, no hassle, no sweat!Hope this helps.Dale, a Foolish CPA
Thanks for all of your responses. I'm startingto get the idea. I'm still a little confused,however. I've owned these funds for the last 10 years sinceI was 13 (which makes me 23!!) Let's justsay the paperwork I have on the funds datesback to about '97. (I have no idea where therest is. My parents probably chucked it all). So my question is - can and will the mutual fundcompanies provide the information necessaryin calculating my gain/loss in order for meto determine the taxes I will owe? If so, what should I request? To be honest, I have no idea how much I initiallyinvested, how the dividends have contributed to the value of the fund over the course of 10 years,as well as the taxes I've paid thus far. Is therea convenient place to look for this type of information?Obviously these funds have at least gained a little over the course of 10 years, actually they've gained a fair amount.Where can I get each year's Form 1099 from the fund?(assuming I don't have them?)Thanks for any help you can provide...
"So my question is - can and will the mutual fund companies provide the information necessary in calculating my gain/loss in order for me to determine the taxes I will owe? "I've been dealing with this same problem recently. My husband had several mutual funds that were opened for him by generous family members. We had little to no paper work on them, so no way to calculate cost basis. We want to liquidate all the fund this year and move into stocks.I had my husband call the brokerages that were handling the funds. He told them the situation we were in and requested all the year end statements since the funds were open. The year end statements list all buys, sells, dividends, gain distributions. The brokerages were happy to oblige. One even offered to calculate the cost basis for us.As for organizing all the info once you have it, I recommend Quicken 99. I've entered all the info from the year end statements. Quicken calculates cost basis for you, and now we know exactly how much gain we will realize when we sell the funds. There are other programs like Quicken available as well.Good luck!Jennifer
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