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I have 2 minor custodial accounts; one for each of my children. They still have each 5 and 7 years before college. If I raise them properly, they will use these money only for college, I hope. :)

I started these about 10 years ago, and each month I deposited money and purchased some shares of mutual funds. I have been paying taxes on the dividends, and distributions. From asking the board experts here, I learned that I will begin filing individual tax returns this year because the amount of dividends and distributions have exceeded certain amount. But, that is not my question today.

My question is, by the time we are ready to sell some of the mutual funds and withdraw cash for their colleges, do I need to go way back and start calculating the cost bases? I am afraid I have not kept all monthly statements for all these years.

Thanks
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I started these about 10 years ago, and each month I deposited money and purchased some shares of mutual funds. I have been paying taxes on the dividends, and distributions. From asking the board experts here, I learned that I will begin filing individual tax returns this year because the amount of dividends and distributions have exceeded certain amount. But, that is not my question today.

I know that's not your question, but with custodial accounts the money is the children's. It's usually better for the family for them to report any income on their own returns. If you do elect to report it on yours, there is a certain form (8516 or something like that - I'm too lazy to look it up at the moment) to calcualt the tax correctly. And if you have not filed that form, you have overpaid your taxes. You could amend the last three years to correct that error if necessary.

My question is, by the time we are ready to sell some of the mutual funds and withdraw cash for their colleges, do I need to go way back and start calculating the cost bases? I am afraid I have not kept all monthly statements for all these years.

Start dusting off the files. Ideally, you'll go back to the first purchase and start accumulating data. You need to inclue all of your purchases PLUS all of the reinvested dividends in your cost basis.

If you're lucky, the mutual fund will give you a year-end summary of all of your activity in the fund. So you'll only need to find one particular report. If you have most of the monthly statements, you could estimate the missing information. And one more option is to contact the mutual fund and see if they can provide the old statements. I've had some clients do that successfully for statements 10 to 15 years old.

And one more option that doesn't require any digging - stop contributing to these particular funds, and start in with some other fund. Then each year sell enough of the fund so that the purchase price is irrelevant. The kids can have something like $800 of income without paying any tax. If they have $200 of dividends, they can sell $600 worth of the fund and not have to prove any basis. This might not work if they have too much money and not enough time, but it's worth a thought. And once they get old enough to get out of the kiddie tax rules (currently that would be 18 or older), that $800 jumps up to something a bit over $3000.

--Peter
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Peter,

Thanks for the reply. Well, that is what I worry the most, getting all the old statements back, but it is what I have to deal with, looks like. Thanks. :-)

Both accounts are in some decent sum and your suggestion of selling off small amount at a time each year won't work anymore. But, I will call the brokerage firm and stop contributing to the same funds at least.

I do have another question. This might be investment question than tax. I just received 1099 from both of these accounts. Last year, both showed around $3000-$4000 distribution. This year, that amount has gone up to more than $10,000 each. I think I am in for a large unpaid tax this year, even if I file individual returns for each of them.

So, am I better off selling the fund and move to index fund or stocks to minimize the annual distribution and its tax?

Tax question:
When I eventually sell the fund and recalculate the cost base, should I deduct the tax that I have already paid over the years, from the gain? Otherwise, I would be double taxed, right?
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But, I will call the brokerage firm and stop contributing to the same funds at least.

That should be more of an investment decision than a tax decision. However, with your need for the money approaching, it is reasonable to consider allocating new money to a different investment.

You might also consider what to do with the dividends from the funds - reinvesting vs. getting them in cash or investing them in a different fund. Reinvesting the dividends leaves you with the same recordkeeping problems that you already have.

I do have another question. This might be investment question than tax. I just received 1099 from both of these accounts. Last year, both showed around $3000-$4000 distribution. This year, that amount has gone up to more than $10,000 each. I think I am in for a large unpaid tax this year, even if I file individual returns for each of them.

Yep. That's a good-sized distribution. And that means a good-sized tax bill.

So, am I better off selling the fund and move to index fund or stocks to minimize the annual distribution and its tax?

Well, I thought the whole point of investing was to get some nice, big distributions. ;-) However, there is an issue of being tax-efficient with the investing. Depending on your personal tax situation, you might want to consider looking at funds that are more tax-efficient. Index funds are often more efficient than actively managed funds.

When I eventually sell the fund and recalculate the cost base, should I deduct the tax that I have already paid over the years, from the gain? Otherwise, I would be double taxed, right?

No. There is no double-tax issue here.

The easiest way to consider all of this is just as if you received the dividends in cash and immediately purchased more shares of the mutual fund. (Because that is actually what you did - you just skipped the administrative issues with sending you a check and then sending it back to purchase the additional shares.) The taxes paid don't enter into this picture. To the extent there were any taxes on the dividends each year, those were paid with some other money.

--Peter
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Thank you very much, Peter, for your answers.
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I just called Charles Schwab with which I have my two children's custodial accounts. It turns out they have a nice feature that keeps track of my cost bases via their Gain/Loss column for each investment since day one.

This will save me a lot of paper work.
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I just called Charles Schwab with which I have my two children's custodial accounts. It turns out they have a nice feature that keeps track of my cost bases via their Gain/Loss column for each investment since day one.

This will save me a lot of paper work.


Only until they screw up, and every broker that I've dealt with over the years screws up at some point. It's your responsibility to track your cost basis, not theirs. If they make a mistake, they probably won't correct it, and may not even acknowledge it. Don't just accept their numbers blindly.

Ira
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