SMH - huge surprise capital gains in taxable

[Masquernom]

What's the advantage of moving a mutual fund you've held for 30 years to an ETF?

 

[disneysteve]

What's the advantage of moving a mutual fund you've held for 30 years to an ETF?

I suppose you can pay the gains over time in a controlled manner and reduce the year-end surprises.

 

[Masquernom]

If you move a mutual fund you've held for years to an identical ETF, I assume your cost basis is still the same. You won't pay any tax until you sell the ETF I assume. The same as the original mutual fund? I don't own any ETF's so I don't know how they handle capital gains and dividends.

 

[Out-to-Lunch]

Sorry for your pain, but thank you for sharing your cautionary tale.

 

[Exchme]

+1 I will look into this. I have VG index MF in taxable and assumed I was stuck.

For Vanguard, you do have to call them, can't be done on their website. When I did mine a couple months ago, I had the usual routine where the lines are "unusually busy", so they call you back. But once on the phone, they were fast, clear and efficient. The switch was posted by the end of the day (I think if you do it in the last part of the day, it isn't completed until the following morning).

No more surprise CGDs!

 

[RetMD21]

We detest MF's in regular accounts. I would complain about them yearly, but DW didn't mind as I do the tax return.

Then one year, I'm out of the country and she gets her tax statement from a MF, and in it she has $70K CG. She phoned me in shock

We sold our actively managed MFs after about 10 years due to tax inefficiency. Index funds have been much better in terms of cgd. I used to think that my stock portfolio was more tax efficient until one of my larger holdings was merged and I got cash rather than nontaxable shares.

 

[audreyh1]

That's interesting. I get they may be equivalent, but the fact they are separate identified investments doesn't trigger and actual sale (gain/loss)?? Wow! Who else, other than Vanguard does this? It would be great if there was a way to look up a MFs ETF equivalent to do this kind of nontaxable swap. For me (any many of us, I'm sure), these long accumulated gains from holding MFs from years past is the main driver to often keep them as long as you can.

I think Vanguard is the only way to do this, and you need to tell them to do an exchange from MF to the equivalent ETF. And it’s only that direction that can be accomplished without it being a taxable event.

But the Vanguard MFs don’t pay out any more cap gains than their equivalent ETF, so you aren’t saving anything tax wise by making the exchange.

 

[audreyh1]

We detest MF's in regular accounts. I would complain about them yearly, but DW didn't mind as I do the tax return.

Then one year, I'm out of the country and she gets her tax statement from a MF, and in it she has $70K CG. She phoned me in shock

Now she agrees, no more MF in taxable accounts, and we are working on converting to all ETF's over the years.

That $70K CG was not normal, but I even hated the $5K ones as I can't plan and have no control over them.

But “converting to ETFs” means realizing all the unrealized capital gains at once and paying the taxes anyway. So you don’t gain anything unless you want for a down market to minimize your unrealized cap gains.

 

[audreyh1]

What's the advantage of moving a mutual fund you've held for 30 years to an ETF?

It depends on the MF, but if you are at Vanguard, the MFs with equivalent ETFs don’t have higher cap gains, so I don’t see any benefit.

If there is not an equivalent ETF or it’s non-Vanguard, then by selling the MF you get the tax bill for all the unrealized gains even if what you buy later is far more tax efficient.

 

[Sue J]

I appreciate you posting about your OOPS, and including the details. I've only been investing since 2010 and up until 2021 it was all in IRAs- Trad, Roth and Inherited. So I could make changes or buy funds without having to think about the issues of capital gains and dividends. I knew that it was all going to be taxable at withdrawl in the Trad and Inherited and never taxable in the Roth. Nice and clear.

Now that we also have a regular taxable brokerage account I'm learning while doing. I know we have plenty of room in the 0% capital gains space and as the funds post dividends and capital gains I'm seeing how this all works out. My taxes are ready to go except for the forms from the brokerage account. I haven't sold anything in 2021.

Learning by doing is fun, especially if it's a 0% tax rate. From what I've learned so far, I will pay tax on the very small short term gains and the portion of the dividends that are not qualified.

Up next is learning about ETFs.

 

[Midpack]

Similar warning?

https://youtu.be/CxAEi42U3gU

 

[Katiek]

If the capital gains rates go up a lot in the future, you may eventually be glad you made this "mistake".

 

[Sunset]

But “converting to ETFs” means realizing all the unrealized capital gains at once and paying the taxes anyway. So you don’t gain anything unless you want for a down market to minimize your unrealized cap gains.

It's not as bad as I had first thought because the MF's don't have gigantic capital gains as they have been [-]imposed[/-] declared to a large extent each year, which is of course the issue with MF's.

For the ones now in ETF's, going forward for the next few decades there is no declared capital gain each year.

These were not at Vanguard, so couldn't do a simple taxfree trade.

 

[disneysteve]

It's not as bad as I had first thought because the MF's don't have gigantic capital gains as they have been [-]imposed[/-] declared to a large extent each year, which is of course the issue with MF's.

Ah, you're lucky then. Our taxable MF accounts have substantial gains over our cost basis if we were to sell them despite also paying out large gains each year.

 

[Out-to-Lunch]

A Our taxable MF accounts have substantial gains over our cost basis

Well, THAT sounds pretty fortunate to me!

 

[Time2]

Thank you Audreyh1,

Messages have been sent to VG and our CPA.

I'll try to post back the more accurate determination from the experts and estimate of my mistake so that others can learn.

If there is not one already - we might ought to start a "I Messed Up" Thread.....
Who know's - I may dubiously be in the lead for 2022 worst / costliest error...

This guy goes over some stuff Vangaurd did triggering LTCGs for it's customers, but toward the end goes over some Vanguard literature about
what transfers are tax free and what aren't. It fits right in here.

 

[disneysteve]

Well, THAT sounds pretty fortunate to me!

Not that lucky really. I would certainly hope that a fund we've been in for 30 years would be worth a whole lot more today than it was back then.

 

[RetMD21]

It's not as bad as I had first thought because the MF's don't have gigantic capital gains as they have been [-]imposed[/-] declared to a large extent each year, which is of course the issue with MF's.

It's really an issue of active management and turnover isn't it?

 

[kgtest]

It could always be worse. You could not have a tax problem, rather an income problem...

Some wise man on this forum posted a playbook of strict rules for investing a while back...more tips and guidelines and I recall one of them was to only buy and hold long term equities that were high flyers and solid long term growth companies in taxable. So far, I basically own AAPL in our broker and some ETFs that I need to stay diversified and in my appropriate MIX of Small/mid/largecaps. This is working well in the accumulation stage as I know I will always only buy more ETFs in our IRAs to offset the high-flying AAPL gains in the broker.

So lesson learned for folks...don't own MF in taxable, only equities with long term growth.

 

[Out-to-Lunch]

Not that lucky really. I would certainly hope that a fund we've been in for 30 years would be worth a whole lot more today than it was back then.

So, I am confused. Why did you think that Sunset was lucky?

 

[audreyh1]

It's not as bad as I had first thought because the MF's don't have gigantic capital gains as they have been [-]imposed[/-] declared to a large extent each year, which is of course the issue with MF's.

For the ones now in ETF's, going forward for the next few decades there is no declared capital gain each year.

These were not at Vanguard, so couldn't do a simple taxfree trade.

Sure, if you have little in unrealized capital gains in your MFs then exchanging to a different investment isn’t very painful tax-wise.

Not in my case - my few remaining active funds have quite large unrealized gains in spite of paying out significant capital gains distributions the past few years due to the unbelievably long bull market we’ve experienced. I probably have to wait for a strong down market to get out of them.

 

[NW-Bound]

I would rather get out in a strong market and pay taxes on a $2M cap gain than to wait to get out in a down market and pay taxes on a $1M cap gain.

 

[Sunset]

It's really an issue of active management and turnover isn't it?

The difference is the structure of MF vs ETF's is different. So redemption of shares is handled differently.

MF generate CGs for everyone when a bunch of people redeem, even if you don't redeem any, but ETF's don't as each ETF owner redeems their own shares just like a stock, not affecting the other owners.

The other annoying thing is I've never noticed a MF declaring a Capital Loss that a person could claim/carryover. They keep the losses internal.

 

[disneysteve]

So, I am confused. Why did you think that Sunset was lucky?

Oh, I meant they are lucky they could get out of the fund without a big tax hit.


In our case, I feel kind of trapped in the two funds we have because selling them would incur substantial CG taxes.

 

[disneysteve]

MF generate CGs for everyone when a bunch of people redeem, even if you don't redeem any

MFs also generate CGs when they sell holdings at a profit. Not a big issue for index funds but it can be significant for actively managed funds. The higher the turnover, the more CGs they potentially generate.