Selling Bond funds to purchase Vanguard Wellesley?

[freetodream]

I have been thinking about selling 2 Fidelity bond funds and making one purchase into VWINX (Wellesley). There will be a $75 fee to Fidelity in order to make the purchase. The funds I would be selling are FBNDX Fidelity Investment Grade bond fund (currently $23,000) and FSITX Fidelity Spartan bond index fund (currently $26,00).

I am a long term buy and hold investor. I know - I am late to the party and will be selling in a down bond market. I am considering the loss a serious matter vs thinking VWINX may make up the loss in a year or so.
Would you sell and take the loss or continue to hold the present funds I currently own? Looking for advice.

And one other question or two: How do fund dividends offset YTD losses (received a dividend of approximately .020889)? Is that dividend reflected in the YTD gain or loss of a fund?

 

[ziggy29]

For tax purposes the dividends you have received are added to the cost basis.

Example: You buy a fund for $10, it pays a 20 cent dividend, you sell it for $9.50. In this case, when the dividend is paid the NAV drops by 20 cents. That 20 cents is taxable as a dividend, and your cost basis in the fund becomes $10.20. So when you sell for $9.50, you have a capital loss of 70 cents per share.

 

[LOL!]

Wellesley is about 63% bonds and those bonds are the same bonds that you already have in your Fidelity bond funds.

So for at least 63% of this proposed exchange you are going from "a down bond market" to "a down bond market".

For the other 37% of this proposed exchange, you are increasing your risk drastically by going from fixed income (bonds) to equities (stocks). And those are US stocks as well which have had a very good year. That is, this proposed exchange is a sell-low/buy-high move, but it is only with 37% of the exhange.

As to the question of take the loss or continue to hold the previous funds, I would not chase performance of stocks here. Instead, I would just follow my asset allocation plan which tells me what percentages of stocks and bonds I have decided that I want to own.

Presumably you have funds that already hold stocks. If you have an asset allocation plan, it may be time to sell high and buy low. That is, sell some of the equity funds and buy more of the bond funds in order to restore the balance in your asset allocation. That is, I would probably do the opposite of what you are suggesting.

Reinvested dividends of bond funds and stock funds are included in the "total return" performance numbers for funds.

 

[Rustward]

For tax purposes the dividends you have received are added to the cost basis.

Example: You buy a fund for $10, it pays a 20 cent dividend, you sell it for $9.50. In this case, when the dividend is paid the NAV drops by 20 cents. That 20 cents is taxable as a dividend, and your cost basis in the fund becomes $10.20. So when you sell for $9.50, you have a capital loss of 70 cents per share.

I don't see where you will have a basis of $10.20 or a capital loss of $0.70.

The payment of a dividend does not change the cost basis of the original investment.

In your scenario, the shares will still have a basis of $10. If you sell the shares at $9.50, you end up with that $0.20 dividend, $9.50 proceeds from the sale, and a net capital loss (long term or short term) of $0.50.

Your scenario seems to have assumed that dividends are reinvested, and average cost is used for basis, but nowhere is that stated. If you reinvested the dividend, that would change the cost basis of the investment (all the shares collectively -- because you bought more shares when you reinvested the dividend, not just because the fund paid a dividend), but the cost basis of the original shares is still $10.

This statement:

For tax purposes the dividends you have received are added to the cost basis.

is not always necessarily true in every case.

Basis is what you paid for the shares, period. It is best to think of each share having its own basis. Whether you use average cost, specific share identification, LIFO, or FIFO to determine basis when you sell is another topic.

 

[Gatordoc50]

I don't see where you will have a basis of $10.20 or a capital loss of $0.70.

The payment of a dividend does not change the cost basis of the original investment.

In your scenario, the shares will still have a basis of $10. If you sell the shares at $9.50, you end up with that $0.20 dividend, $9.50 proceeds from the sale, and a net capital loss (long term or short term) of $0.50.

Your scenario seems to have assumed that dividends are reinvested, and average cost is used for basis, but nowhere is that stated. If you reinvested the dividend, that would change the cost basis of the investment (all the shares collectively -- because you bought more shares when you reinvested the dividend, not because the fund paid a dividend), but the cost basis of the original shares is still $10.

This statement: is not always necessarily true in every case.

Basis is what you paid for the shares, period. It is best to think of each share having its own basis. Whether you use average basis, specific share identification, LIFO, or FIFO, when you sell is another topic.

It seems that the cost basis would be increased by the tax paid on the reinvested dividend and not the dividend itself. Otherwise aren't you being taxed on the dividend twice? Once when it's paid and once when it's sold? Confusing.

 

[steelyman]

It seems that the cost basis would be increased by the tax paid on the reinvested dividend and not the dividend itself. Otherwise aren't you being taxed on the dividend twice? Once when it's paid and once when it's sold? Confusing.

I think the word "reinvested" is important.

Yes, if you get a dividend it may be taxed. If you reinvest, your total investment (cost) increases. But not by the earlier tax, instead by the amount of the dividend.

The dividend reinvest buys you more shares, which may (or not) increase in value but their cost remains the same.

I am no pro though.

 

[Gatordoc50]

I think the word "reinvested" is important.

Yes, if you get a dividend it may be taxed. If you reinvest, your total investment (cost) increases. But not by the earlier tax, instead by the amount of the dividend.

The dividend reinvest buys you more shares, which may (or not) increase in value but their cost remains the same.

I am no pro though.

Got it. I would guess that the same would hold true for capital gains declared in a mutual fund? Short and long term?

 

[steelyman]

Got it. I would guess that the same would hold true for capital gains declared in a mutual fund? Short and long term?

As I understand it, yes. I'm a bit uncomfortable talking about these things because there are many who know more than I do here.

The basic idea is that the X dollars you initially put in an investment increase if you reinvest. So your cost is higher (and less subject to tax).

 

[Rustward]

It seems that the cost basis would be increased by the tax paid on the reinvested dividend and not the dividend itself. Otherwise aren't you being taxed on the dividend twice? Once when it's paid and once when it's sold? Confusing.

When you reinvest the dividend, that amount becomes the basis for the shares newly purchased with the dividend money. If it is done correctly, no further tax will be paid on that money (the dividend that was reinvested), because it is the basis of the new shares. It works 100% the same way as when you purchase new shares with money from outside the account.

Think of reinvested dividends this way: The fund pays the shareholders a dividend. The shareholders are taxed on that dividend. The shareholder immediately invests the amount of the dividend back into the fund -- purchases new shares. The amount reinvested becomes the basis for the newly purchased shares.

It would work the same if the money came from the shareholder's checking account, from under a mattress, or from selling aluminum cans.

This is not really that difficult, but when you see wording like "the dividend is added to the basis", that is when it gets confusing.

 

[Animorph]

So the example is:

You have 1 share you bought for $10
You receive a dividend of $0.20 per share
With you $0.20 you can reinvest and buy a fraction of a share. Let's say you reinvest at a share price of $9.80, you can buy 0.20/9.80 = 0.020 of a share.
You now have 1 share with a basis of $10/share and 0.020 share with a basis of $9.80/share, for a total basis of $10.20 .
You sell everything for $9.50/share. You receive 1 x $9.50 + 0.020 x $9.50 = $9.69. You have a loss of $10 - $9.50 = $0.50 on the 1 share and a loss of $0.20 - $9.50 x 0.020 = $0.01 on the 0.020 share, for a total capital loss of $0.51 for everything.

 

[Gatordoc50]

When you reinvest the dividend, that amount becomes the basis for the shares newly purchased with the dividend money. If it is done correctly, no further tax will be paid on that money (the dividend that was reinvested), because it is the basis of the new shares. It works 100% the same way as when you purchase new shares with money from outside the account.

Think of reinvested dividends this way: The fund pays the shareholders a dividend. The shareholders are taxed on that dividend. The shareholder immediately invests the amount of the dividend back into the fund -- purchases new shares. The amount reinvested becomes the basis for the newly purchased shares.

It would work the same if the money came from the shareholder's checking account, from under a mattress, or from selling aluminum cans.

This is not really that difficult, but when you see wording like "the dividend is added to the basis", that is when it gets confusing.

Thanks. I need to do some research and keep track of these. Thankfully I've saved my tax records for the last 25 years. Now that I'm not working I plan on selling some gains at 0%. Yay!

 

[Gatordoc50]

So the example is:

You have 1 share you bought for $10
You receive a dividend of $0.20 per share
With you $0.20 you can reinvest and buy a fraction of a share. Let's say you reinvest at a share price of $9.80, you can buy 0.20/9.80 = 0.020 of a share.
You now have 1 share with a basis of $10/share and 0.020 share with a basis of $9.80/share, for a total basis of $10.20 .
You sell everything for $9.50/share. You receive 1 x $9.50 + 0.020 x $9.50 = $9.69. You have a loss of $10 - $9.50 = $0.50 on the 1 share and a loss of $0.20 - $9.50 x 0.020 = $0.01 on the 0.020 share, for a total capital loss of $0.51 for everything.

That's a lot to keep track of. It's going to take me hours to get my act together. It's times like these that I'm glad I'm retired!