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Investor Tax Holiday
Old 09-12-2009, 10:02 AM   #1
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Investor Tax Holiday

Here is another interesting article by Scott Burns. This one shows how to become a virtually tax free investor for the next several years.

If nothing else this quote is spot on:

"Indeed, in our new upside-down world, there is a new brag for investors: I lost less than you lost."
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Old 09-12-2009, 11:11 AM   #2
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We can make mutual fund investments today that will be tax-free for years simply because the fund has large capital losses on its books. As a consequence, the stock market can rise substantially, but many funds are unlikely to realize and distribute a taxable capital gain until they have worked off their losses.

Let me give you an example. According to the Morningstar mutual fund database, the average large blend domestic equity fund had losses equal to 48 percent of its assets at the end of June. This means the average fund could gain nearly 10 percent a year for more than 4 years before it would be likely to distribute a taxable capital gain.
Wow, I wonder if funds like Wellington and Wellesly will not have capital gains distributions this year?
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Old 09-12-2009, 11:20 AM   #3
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Wow, I wonder if funds like Wellington and Wellesly will not have capital gains distributions this year?
Wellesley was the only one of my funds to still have a capital gain distribution in 2008, so it could very well have another one this year.
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Old 09-12-2009, 11:24 AM   #4
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Wow, I wonder if funds like Wellington and Wellesly will not have capital gains distributions this year?
This is what happened to me 2001-2003 or so. By 2001, most mutual funds had so many losses on their books they didn't pay out any capital gains for a couple of years. Still paid out dividend distributions though - don't forget about those.

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Old 09-12-2009, 11:27 AM   #5
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Wellesley was the only one of my funds to still have a capital gain distribution in 2008, so it could very well have another one this year.
Doubtful.

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Realized capital gain/loss as a % of NAV 6.71%
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Old 09-12-2009, 11:30 AM   #6
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Yes that's right. ...Yrs to Go reminds me that the current capital gain/loss exposure of a mutual fund is available as data from Morningstar. You can to the the fund's page to find out what their current situation is.

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Old 09-12-2009, 11:35 AM   #7
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Still paid out dividend distributions though - don't forget about those.

Audrey
Yup, Burn's article isn't entirely accurate when he says "We can make mutual fund investments today that will be tax-free for years". Even though the fund may not pay capital gains distributions, it will make dividend and/or interest payments that will be fully taxable. And when you buy a fund with large realized losses, you don't get to claim those losses as your own when you sell the fund. Any appreciation in NAV will be taxable as a capital gain to you even if the underlying portfolio still has realized losses.

So the crappy, high turnover, actively managed tax pigs will be less crappy over the next few years. That doesn't mean I want to buy them.
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Old 09-12-2009, 11:48 AM   #8
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Thanks for the replies guys and gals - good info.
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Old 09-12-2009, 01:32 PM   #9
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I believe most of those capital loses are potential, not realized. The fund would have to sell some of it's losers to match any capital gains for the year. If they didn't want to do that, they could still have a capital gain. Still, it's nice to buy into that situation.
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Old 09-12-2009, 02:03 PM   #10
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Nothing new or useful in Mr Burns' article. Passively managed index funds/ETFs of equities have always been tax efficient and that doesn't change whether the stock market goes up or down. Plus they have low annual expense ratios as well.

Now your chance to get out of actively-managed high fee funds without paying capital gains taxes and getting the IRS to help pay for it may have passed already.
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Old 09-12-2009, 02:56 PM   #11
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I think that buying a mutual fund for its ability to lose money should be #11 or #12 on a top-ten priority list.

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Now your chance to get out of actively-managed high fee funds without paying capital gains taxes and getting the IRS to help pay for it may have passed already.
Yup, spouse had a "really sweet" Roth IRA conversion last December. Taxes on that would be a lot higher now.
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Old 09-15-2009, 09:19 AM   #12
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And add to that that many of us have years worth of realized capital losses to offset future capital gains (or CG distros), plus take $3000 a year loss against ordinary income.

Unfortunately the timing of these losses is really poor. I was planning on selling some assets for a gain to take advantage of the 0% CG rates in effect right now. Plan foiled for the most part thanks to Mr. Market.
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Old 09-15-2009, 09:31 AM   #13
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Look at the Vanguard funds - they publish updated realized and unrealized gains by fund. In March the sum of the two was in the -50% range for many of their active funds, enough to offset years of distributions. Now, they are just over -10%, mostly realized, some even less.

The early '03 unrealized losses lasted for a number of years. This time around, either due to the sharp recovery or dilution (or both), the tax holiday looks like it will be short. If the market stays on course, Vanguard managed funds will have taxable distributions next year.

Of course, my grandfather used to say it's better to make money and pay taxes than it is to not pay taxes 'cause you're not making money.
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