I was intrigued by TMF Taxes idea of selling a mutual fund to create capital gains instead of ordinary income. We have a collection of actively-managed mutual funds opened in 12/96. After taking a closer look at the expense ratios (~1.15%!), I realize that we need to eventually make a change to an index fund.I am tempted to sell before the payout date of Dec. 1, although I am nervous about it. This is a regular brokerage account that we hope to tap until our pension plans kick in (15 years or so).We need to choose a tax efficient vehicle for managing this nest egg until we need it. Has anyone had success with selling out prior to payout?What is a good rule of thumb for timing the transition from growth-oriented account to an income-producing account?Does one typically open a single Index fund with a lump sum of money, or open a couple? Thanks for the assistance!
Absolutely correct, if you have owned shares in an index fund for over a year and you sell those shares at a profit, the profit is long term capital gains. If the fund is going to make a payout Dec. 1, that payout will probably be partly ordinary income from dividends, partly short term capital gainst which resulted from the fund selling investments at a profit that the fund had held less than a year, and partly long term capital gains. You might be able to get an estimate as to how much is each. If the fund has a high expense ratio and you want to get rid of it anyway, before it pays that dividend is definitely the time to do it, as for you ALL the gain will be long term, but if you wait, part will be taxed at a higher rate. Nothing tricky about this--it is absolutely straight forward and in accordance with the law. Best wishes, Chris
Timing question:If I sold the mutual funds prior to Dec. 1, should I then wait until Jan. 1 or later to open the new index fund (or does that even matter)? This is all after-tax money.
<<If I sold the mutual funds prior to Dec. 1, should I then wait until Jan. 1 or later to open the new index fund (or does that even matter)? This is all after-tax money. >>The decision to wait or not will depend on the payout date of the NEW mutual fund or index fund that you select. What you don't want to do is to "buy" yourself a bunch of taxable distributions by making the purchase immediately before the payout date, but without increasing the equity in the account. So it certainly does matter. But the specific date would be mandated by the mutual fund you are going to purchase. And I'm sure that they will give you information on their payout dates to help you with your decision. TMF TaxesRoy
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