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Large Short-Term Cap Gains Distribution
Old 06-14-2010, 08:07 AM   #1
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Large Short-Term Cap Gains Distribution

I just received a large short-term cap gains distribution in the Big Bond Fund (BBF) I use to generate the dividends to fund most of my ER.

As you probably know, a STCG distribution is treated like a dividend and taxed as ordinary income. So this dividend which represents 3% of the BBF's value (quite large for a bond fund cap gains distribution) will result in some extra income taxes, both state and federal, despite my being in the 15% federal bracket.

This BBF had never paid a cap gains distribution this large before, not even late last year when the BBF's value grew a lot. And it had never paid a cap gains distribution midyear before although I knew June was its midyear month for paying them. I was a bit surprised that the cap gains distribution was not a long-term one, however. That would have resulted in a lower income tax bill. The BBF's manager, I suppose, is not concerned with the tax bills of its investors.

I reinvested the cap gains distribution in additional shares even while I take as cash the regular monthly dividends, so I will need to use other money sources to pay the taxes. Some of the added taxes I will pay in the 3rd quarter estimated taxes, some in the 4th quarter, and the rest next April. I estimate that it will take me about 4 years to recover these taxes through the added dividends I will receive from the extra shares I got from this. But at the same time I received a whole bunch of new shares for about 21% of the BBF's NAV, a good deal.
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Old 06-14-2010, 09:14 AM   #2
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I have to ask why you own this in a taxable account. Why do you own this in a taxable account? If you have ANY equities in a tax-advantaged account, then you have room for a bond fund in your tax-advantaged accounts by replacing those equities with a bond fund. But maybe you don't have any tax-advantaged accounts? Or they are already full of fixed income?

See also: Bogleheads :: View topic - Three Boglehead Myths
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Old 06-14-2010, 09:33 AM   #3
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This is a taxable account because I am living off the nice monthly dividends from this BBF. I am 47 years old so I can't tap into my IRA yet (nor am I eligible for SS or my pension). I have a stock mutual fund in a taxable account and another stock mutual fund in my IRA. I have another bond fund in my IRA and other, smaller bond funds in my taxable account.
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Old 06-14-2010, 10:57 AM   #4
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I think you are paying more taxes than you need to. There is this neat trick explained here: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads
where you can harvest your income from your tax-deferred bonds without any penalty and use the income to pay your expenses. Instead of ordinary income taxed at your marginal income tax rate from bonds in taxable, you "convert" that income to long-term capital gains or losses at a very favorable tax rate (as low as 0%).
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Old 06-14-2010, 11:30 AM   #5
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I think you are paying more taxes than you need to. There is this neat trick explained here: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads
where you can harvest your income from your tax-deferred bonds without any penalty and use the income to pay your expenses. Instead of ordinary income taxed at your marginal income tax rate from bonds in taxable, you "convert" that income to long-term capital gains or losses at a very favorable tax rate (as low as 0%).
This won't work for me. I have different AA in my taxable versus IRA accounts and I need to keep them that way. The former is providing me monthly income from the BBF's dividends even though I have some money in a stock mutual fund, too. The latter is more growth oriented because I won't (and can't) tap into it until I am around 60 years old, 13 years from now. Also, the stock and bond funds within the taxable and IRA accounts are different from each other's counterparts.

One year ago, this same BBF did not have a cap gains distribution in June, and that was after considerable growth from its lows in late 2008 and early 2009. It had a small ST cap gains distribution (about 0.7% of NAV) at the end of 2009 but that did not have a big impact on my taxes.

If I knew there was going to be a huge ST cap gains distribution a few days ago, I would have sold a chunk of shares at a profit (LT cap gains), taken a smaller ST cap gains distribution, then bought back the same shares at a lower NAV this week. I have done this with my stock mutual funds over the years to save on taxes. Who expects a bond fund to have a big ST cap gains distribution which is 3% of its NAV?

When this BBF has another cap gains distribution in December, I will do this strategy. I guess I had to get blindsided by this once in order to better anticipate it happening again.
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Old 06-14-2010, 12:06 PM   #6
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This won't work for me. I have different AA in my taxable versus IRA accounts and I need to keep them that way.
OK. I guess you have some annuities with early-redemption penalties. Otherwise, it is very easy to change investments in both taxable and tax-advantaged accounts. When I started using this strategy, my taxes dropped by several thousand dollars per year.

Suppose I have $100K in taxable and $50K in tax-advantaged. I want $50K in bonds and want to use the bond income for expenses. I buy $50K of a bond fund in my tax-advantaged. I buy $100K of stock funds in my taxable.

Suppose I get $1K of bond income in my tax-advantaged. I use the $1K of bond income in tax-advantaged to buy $1K of stock fund. At the same time, I sell $1K of stock fund in taxable and spend it. Net result: I still have $50K of bond fund and $100K of stock fund, but the stock fund is split $99K in taxable and $1K in tax-advantaged.

The $1K of stock fund I sold in taxable could be taxed at 0% if I am in a low tax bracket and some of it is long-term capital gains (the rest is return of capital which is tax-free).

Anyways, I can buy any investment in my taxable account and any investment in my IRA. I am not restricted by annuities or my broker in what I can buy, so I can change my assets any which way I want. It reads like you are somehow stuck, but maybe others reading this won't have the same problem and can save thousands of dollars on their taxes.
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Old 06-14-2010, 03:00 PM   #7
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Originally Posted by scrabbler1 View Post

If I knew there was going to be a huge ST cap gains distribution a few days ago, I would have sold a chunk of shares at a profit (LT cap gains), taken a smaller ST cap gains distribution, then bought back the same shares at a lower NAV this week. I have done this with my stock mutual funds over the years to save on taxes. Who expects a bond fund to have a big ST cap gains distribution which is 3% of its NAV?

Didn't they announce the dividend prior to paying You can take a look at what dividends are coming up in Vanguard and plan accordingly... I do not do anything like you say... but I guess I could...
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Old 06-14-2010, 04:42 PM   #8
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Didn't they announce the dividend prior to paying You can take a look at what dividends are coming up in Vanguard and plan accordingly... I do not do anything like you say... but I guess I could...
They (Fidelity) did not announce it in their website. In fact, it still is not in their general (recent) distributions page - only those from the prior week are there. I did not call them on the phone, as usually all their phone reps have done when I ask them about December distributions is to call up their web page like I do - they have been more mum about announcing the amount of their non-monthly distributions. And, I'd have no general week of the month as a reference point because they have never issued a June cap gains distribution before.
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Old 06-14-2010, 05:39 PM   #9
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Originally Posted by scrabbler1 View Post
They (Fidelity) did not announce it in their website. In fact, it still is not in their general (recent) distributions page - only those from the prior week are there. I did not call them on the phone, as usually all their phone reps have done when I ask them about December distributions is to call up their web page like I do - they have been more mum about announcing the amount of their non-monthly distributions. And, I'd have no general week of the month as a reference point because they have never issued a June cap gains distribution before.
Since it looks like you own it as an ETF, it is not Fidelity's job to tell you.. but, it was announced on the first.. not trying to say you would have known anything about it... and it does look like this is just the income distribution... and I can not find a prospectus for them even on their site... I know that Vanguard funds list the dates they will make distributions.. so you know that they will distribute income... say quarterly and gains at the end of the year... OR gains in the middle and end etc...

I don't pay that much attention... but do know that info is out there.. just sounds like you got blindsided...

Dividend Dates and Distribution Amounts Announced for Certain BlackRock Closed-End Funds - Yahoo! Finance
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Old 06-14-2010, 09:46 PM   #10
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Since it looks like you own it as an ETF, it is not Fidelity's job to tell you.. but, it was announced on the first.. not trying to say you would have known anything about it... and it does look like this is just the income distribution... and I can not find a prospectus for them even on their site... I know that Vanguard funds list the dates they will make distributions.. so you know that they will distribute income... say quarterly and gains at the end of the year... OR gains in the middle and end etc...

I don't pay that much attention... but do know that info is out there.. just sounds like you got blindsided...

Dividend Dates and Distribution Amounts Announced for Certain BlackRock Closed-End Funds - Yahoo! Finance
Fidelity makes it well known that they distribute their monthly income distributions at the turn of each month. In ther website for each fund, they indicate the month for dividend and cap gains distributions, not the exact date (until it is actually posted, except for December distributions which are sometimes known on a preliminary basis).

I own a Fidelity stock mutual fund which distributes quarterly dividends and a maximum of two cap gain distributions each year. From prior years' distributions, I know within a week when they will be distributed. But this BBF is fairly new and never had a cap gains distribution in its midyear month (June) so I had no point of reference. And the amount would have been a surprise even if I knew the exact date within a week.

Fidelity does have its prospectuses available on its website. I have viewed many of them over the years.

I think I will be maing a call to Fidelity to get an explanation.
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

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Old 06-15-2010, 11:05 AM   #11
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Fidelity makes it well known that they distribute their monthly income distributions at the turn of each month. In ther website for each fund, they indicate the month for dividend and cap gains distributions, not the exact date (until it is actually posted, except for December distributions which are sometimes known on a preliminary basis).

I own a Fidelity stock mutual fund which distributes quarterly dividends and a maximum of two cap gain distributions each year. From prior years' distributions, I know within a week when they will be distributed. But this BBF is fairly new and never had a cap gains distribution in its midyear month (June) so I had no point of reference. And the amount would have been a surprise even if I knew the exact date within a week.

Fidelity does have its prospectuses available on its website. I have viewed many of them over the years.

I think I will be maing a call to Fidelity to get an explanation.
Even if you get an explanation... I don't think there is much you can do about the distribution... it is a done deal... you now have to manage the rest of the year with this distribution in mind... hope you have some losses to cull....
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