I have some active managed mutual funds(getting hammered by yearly tax distribution) in one of my brokerage accounts. I would like to know the best tax effective way to sell these funds?
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You’ve already received some excellent suggestions. I’ve had to deal with the same situation, and was helped by some great advice from Adam Grossman here: Adding the Minuses – HumbleDollar
I recently helped a relative with this situation and here’s what we did:
We stopped all dividend/capital gains reinvestments for those funds and had them directed to the settlement fund, so they could be used to buy low-cost index funds (e.g., VOO or VTI).A couple of the funds had losses, so we sold those to help lessen the hit from the funds we sold that had gains.Accepted that his taxes were going to be expensive that year, but that it was worth the one-time hit to get out of funds that had high expenses and that were throwing off distributions that were causing a yearly tax hit.We did the selling over 2 tax years, to avoid being bumped into a higher tax bracket.We also consolidated his tax-deferred holdings, but as they were within his tIRA there was no tax implication.I’m guessing that in the long-run you’ll be saving money in reduced fees and lower taxes, but there’s no question that there was an up-front cost to doing it.
When you say hammered by tax distribution is it because thise distributions stack onto your income.and then pushes you into the higher tax bracket? That happend to me last year and it was so bad I was even bit by the the 3.8% investment surcharge!
I believe Jonathan gave some tips, another idea is using some of those highly appreciated assets and donate to a charitable account. Yes, you don’t get the use of the money but you do get the tax break to offset gains from the account. This is really about tax planning and anticipating your income brackets for the year. Another thing that bit me that I hadn’t accounted for were interest income from various cds etc. The payouts were so low in previous years, but when I checked last year, those amounts added to other gains in my taxable account, plus some options that I sold really caused me some tax pain. Planning for the whole picture is the key. A good problem to have mind you.
If you’ve been receiving large fund distributions and reinvesting them in additional fund shares, you may find your cost basis on your actively managed funds is pretty high and hence there won’t be much of a tax bill when selling. If so, I’d be inclined to rip off the Band-Aid and dump the funds.
If your unrealized gains are large, you might first start taking your distributions in cash, rather than reinvesting them. Next, set up a gradual selling program where you target the top of a particular tax bracket each year (e.g. 0% or 15% capital gains rate), as Randy suggests below.
And, of course, if you have some losers in your taxable account, you can harvest those losses to offset your realized capital gains.
The best way I can think of is to sell as much each year to get you to the top of the 0% long term capital gains bracket. If you’re already above that, it will cost you 15% or more of the gain.
You’ve already received some excellent suggestions. I’ve had to deal with the same situation, and was helped by some great advice from Adam Grossman here: Adding the Minuses – HumbleDollar
I recently helped a relative with this situation and here’s what we did:
We stopped all dividend/capital gains reinvestments for those funds and had them directed to the settlement fund, so they could be used to buy low-cost index funds (e.g., VOO or VTI).A couple of the funds had losses, so we sold those to help lessen the hit from the funds we sold that had gains.Accepted that his taxes were going to be expensive that year, but that it was worth the one-time hit to get out of funds that had high expenses and that were throwing off distributions that were causing a yearly tax hit.We did the selling over 2 tax years, to avoid being bumped into a higher tax bracket.We also consolidated his tax-deferred holdings, but as they were within his tIRA there was no tax implication.I’m guessing that in the long-run you’ll be saving money in reduced fees and lower taxes, but there’s no question that there was an up-front cost to doing it.
When you say hammered by tax distribution is it because thise distributions stack onto your income.and then pushes you into the higher tax bracket? That happend to me last year and it was so bad I was even bit by the the 3.8% investment surcharge!
I believe Jonathan gave some tips, another idea is using some of those highly appreciated assets and donate to a charitable account. Yes, you don’t get the use of the money but you do get the tax break to offset gains from the account. This is really about tax planning and anticipating your income brackets for the year. Another thing that bit me that I hadn’t accounted for were interest income from various cds etc. The payouts were so low in previous years, but when I checked last year, those amounts added to other gains in my taxable account, plus some options that I sold really caused me some tax pain. Planning for the whole picture is the key. A good problem to have mind you.
If you’ve been receiving large fund distributions and reinvesting them in additional fund shares, you may find your cost basis on your actively managed funds is pretty high and hence there won’t be much of a tax bill when selling. If so, I’d be inclined to rip off the Band-Aid and dump the funds.
If your unrealized gains are large, you might first start taking your distributions in cash, rather than reinvesting them. Next, set up a gradual selling program where you target the top of a particular tax bracket each year (e.g. 0% or 15% capital gains rate), as Randy suggests below.
And, of course, if you have some losers in your taxable account, you can harvest those losses to offset your realized capital gains.
The best way I can think of is to sell as much each year to get you to the top of the 0% long term capital gains bracket. If you’re already above that, it will cost you 15% or more of the gain.