Burned by Capital Gain Return

[copyright1997reloaded]

Another benefit of index funds. They don't trade unless the index changes.

Another benefit of individual securities. YOU get to time when to take the capital gain/loss. (With the exception of a takeover in cash, and even then it is announced well in advance of deal closing so you can do some tax preparation.)

 

[steelyman]

Another benefit of individual securities. YOU get to time when to take the capital gain/loss. (With the exception of a takeover in cash, and even then it is announced well in advance of deal closing so you can do some tax preparation.)

I like that one and it’s one reason I’m moving toward having only individual stocks (boring but solid ones) and selling all mutual fund holdings in taxable accounts over the next couple of years.

 

[kaneohe]

.........................................
Yes, you almost certainly could have known. I googled "hartford funds estimated capital gains" and found a pdf document of estimated CGs and divs as of Oct 31, released in early December. .......................

With this knowledge in hand you could've sold before the distribution and taken whatever gain or loss you have on the fund over the years. Or perhaps done some tax loss harvesting elsewhere. ..........................................

Not sure knowing would have helped................my experience, at least on funds I've held for a long time, and w/ reinvestment turned off for some yrs, is that the value of the fund includes the coming CG distribution and so selling all the shares might produce an even larger gain. The choice seems to be to standstill and get hit by a large CG distrib. or sell and get hit by an even bigger CG. Of course in the latter case,the problem might be permanently solved.

We should remember to remind ourselves and others to rethink what we hold when the market tanks.........not only to TLH but to sell the junk funds when the gains might be smaller.

 

[kaneohe]

First step. make sure you are not reinvesting dividends/gains.

Then decide if you can move to a broad-based index fund that rarely (if ever) has cap gain distributions, if you can do the move w/o a significant tax hit.

-ERD50

and realize that step 1) only keeps the problem from getting worse......so you need to balance recurring large CG distributions vs a one-time hit. Generally I've tended to avoid the latter so I know my end result has been recurring large CG distributions and perhaps someday I'll regret not getting rid of all of it.......
tough for me because you are balancing a known tax hit at one pt in time vs unknown CG distrib in the future.

 

[scrabbler1]

I like that one and it’s one reason I’m moving toward having only individual stocks (boring but solid ones) and selling all mutual fund holdings in taxable accounts over the next couple of years.

Of course, an advantage of mutual funds is the diversification versus individual stocks. If you can buy stocks from enough individual companies to be reasonably well diversified, mimicking a mutual fund to some degree, then you would have the advantages of both without the drawback of a mutual fund. Otherwise, you are more exposed to risk by buying individual stocks.

 

[scrabbler1]

and realize that step 1) only keeps the problem from getting worse......so you need to balance recurring large CG distributions vs a one-time hit. Generally I've tended to avoid the latter so I know my end result has been recurring large CG distributions and perhaps someday I'll regret not getting rid of all of it.......
tough for me because you are balancing a known tax hit at one pt in time vs unknown CG distrib in the future.

+1

 

[steelyman]

Of course, an advantage of mutual funds is the diversification versus individual stocks. If you can buy stocks from enough individual companies to be reasonably well diversified, mimicking a mutual fund to some degree, then you would have the advantages of both without the drawback of a mutual fund. Otherwise, you are more exposed to risk by buying individual stocks.

That’s right. I’m currently at 15 stocks spread across all sectors except energy (sold OXY last year but will fill that hole). I do have a small amount in the iShares PFF ETF (thanks to the Mulligan band!).

 

[kaneohe]

I also had one of those funds years ago. I sold it and replaced with S&P 500 index fund.

and realize that simply have Index in the name does not mean , the fund is efficient and has low CG distrib.............I'm going to find out what kind of Index Fund that *&*&@# WF Index Fund is.

 

[audreyh1]

Another benefit of individual securities. YOU get to time when to take the capital gain/loss. (With the exception of a takeover in cash, and even then it is announced well in advance of deal closing so you can do some tax preparation.)

I choose not to own individual securities. Low-cost index funds such as Total Stock Market are reasonably tax efficient if you are withdrawing income from your taxable investments, so they are a good solution.

Of course, an advantage of mutual funds is the diversification versus individual stocks. If you can buy stocks from enough individual companies to be reasonably well diversified, mimicking a mutual fund to some degree, then you would have the advantages of both without the drawback of a mutual fund. Otherwise, you are more exposed to risk by buying individual stocks.

And that’s what I want - broad diversification without having to even look at individual securities.

 

[audreyh1]

I was looking back at the CG distributions for the stock fund I have owned since 1996. I had some fairly big years in the late 1990s, up through 2000 when it had a big one (just over 20%). I owned only bout 1/3 as many shares as I own in it today, and there was no ACA or its subsidy to worry about at the time.


The fund paid out 10% or less in CG distributions in the mid-2000s, some years paying out very little or zero because it was burning through its own cap loss carryover after the 2001-2002 downturn. This info was available, with some difficulty, in the fund's annual report as a footnote (I did a search of the pdf file to speed it up).


After the 2008-10 downturn which included more cap loss carryovers, the fund went 6 years (2009-2014) without any CG distributions, while the NAV doubled. After two average CG years in 2015 and 2016 (not enough to send me over the ACA cliff), the fund went bananas in 2017 and 2018. So, what's normal and what's abnormal for this fund?

Well, that does seem to follow fairly normal patterns of a larger cap gain after a strong market run up, and years with no cap gains after a major selloff.

But still, large payouts aren’t desirable in taxable accounts. So transitioning over to a more tax efficient fund may be a good idea.

 

[audreyh1]

Not sure knowing would have helped................my experience, at least on funds I've held for a long time, and w/ reinvestment turned off for some yrs, is that the value of the fund includes the coming CG distribution and so selling all the shares might produce an even larger gain. The choice seems to be to standstill and get hit by a large CG distrib. or sell and get hit by an even bigger CG. Of course in the latter case,the problem might be permanently solved.

We should remember to remind ourselves and others to rethink what we hold when the market tanks.........not only to TLH but to sell the junk funds when the gains might be smaller.

That is correct. I used the recent market selloff to get rid of some less tax efficient funds as their gain had shrunk considerably.

I look at a large estimated cap gain payout compared to the unrealized gain I hold in the fund. If my fund gain will go negative after the distribution, I will likely sell ahead.

 

[RE2Boys]

I have a MF that I've owned since about 2008. In early Dec I realized that it was going to throw off a lot of CG but also realized that the share price right after the ex-dividend date would drop, sending many of the purchased lots into a loss category. Day after the ex-dividend date, did capital loss harvesting selling only those lots. Cut my holdings by 80%. While I couldn't control the CG distribution timing, some of the gain was mitigated by the tax loss harvesting.

Of course, I tracked every transaction since 2008 and so did the brokerage. I never use average cost for mutual funds (use FIFO) or this would not have been possible.

Average cost is for people who find math hard and was permitted by the IRS for folks who can't track their own investments.

 

[ERD50]

Originally Posted by ERD50 View Post
First step. make sure you are not reinvesting dividends/gains.

Then decide if you can move to a broad-based index fund that rarely (if ever) has cap gain distributions, if you can do the move w/o a significant tax hit.

-ERD50

and realize that step 1) only keeps the problem from getting worse......so you need to balance recurring large CG distributions vs a one-time hit. Generally I've tended to avoid the latter so I know my end result has been recurring large CG distributions and perhaps someday I'll regret not getting rid of all of it.......
tough for me because you are balancing a known tax hit at one pt in time vs unknown CG distrib in the future.

Correct. I should have elaborated, that since she was considering moving out of those funds, she might as well turn off re-investments while that's being pondered. Yes, cap gains will only be affected by the amount that recent contribution goes up (or down), but it can also trigger a wash sale and other complications in reporting if you do sell. Not a major thing, but simple, so just do it.

In the accumulation phase, I prefer to not auto re-invest divs anyhow, I like to invest when/where I see fit. In the draw-down phase, they go into my 'spend' pile, and would be reinvested at my discretion if/when they exceeded my spending (they won't).

-ERD50

 

[RunningBum]

Not sure knowing would have helped................my experience, at least on funds I've held for a long time, and w/ reinvestment turned off for some yrs, is that the value of the fund includes the coming CG distribution and so selling all the shares might produce an even larger gain. The choice seems to be to standstill and get hit by a large CG distrib. or sell and get hit by an even bigger CG. Of course in the latter case,the problem might be permanently solved.

True, there might not have been much that could've been done, other than to prepare for the $1875 tax hit. Seems like it's the surprise that was the big deal. Like I said, that's just a matter of being forced to pay some taxes now vs. when you choose to sell.

OP says:

I figure I should probably sell them because with this huge CG, and with all the years I have been paying CG taxes, I cannot imagine I have anything but a loss there. I can’t find any transaction history in either fund before 2016 on the Hartford site, but I would imagine I have most of the paper year end statements somewhere in storage.

Looking at Hartford's distributions, there were 3 funds that paid more than 20% distributions last year:
https://www.hartfordfunds.com/funds/smide.html
https://www.hartfordfunds.com/funds/grwop.html
https://www.hartfordfunds.com/funds/scpgr.html

All have done well. I'll bet there still is a gain. OP will have to dig out those records at some point to find the basis, might as well do it now and see. Unless they want to set themselves up for yet another surprise and kick themselves again for not knowing about it, when they certainly could and should know. Learn from mistakes and don't let yourself be surprised again. When the funds threw decent distributions in 2017 that should've been another clue to be prepared for 2018.

I've made mistakes and had surprises like this with large distributions. First time for me was in my kid's college fund. It went over the income limit for a youngster (under 14 or something like that) and had to be included in parent's return, which in this case was my ex-, and that was less than pleasant to deal with. Later on VG Primecap was threatening to push me over the ACA subsidy cliff so I took action to take a big CG hit one year and sell it off and preserve the subsidy for the future. There won't be a third time I have to learn from CG distributions experiences.

 

[scrabbler1]

I have a MF that I've owned since about 2008. In early Dec I realized that it was going to throw off a lot of CG but also realized that the share price right after the ex-dividend date would drop, sending many of the purchased lots into a loss category. Day after the ex-dividend date, did capital loss harvesting selling only those lots. Cut my holdings by 80%. While I couldn't control the CG distribution timing, some of the gain was mitigated by the tax loss harvesting.

Of course, I tracked every transaction since 2008 and so did the brokerage. I never use average cost for mutual funds (use FIFO) or this would not have been possible.

Average cost is for people who find math hard and was permitted by the IRS for folks who can't track their own investments.

I use FIFO, too, so my cap gain or loss from selling shares often depends on which shares I am selling. For instance, redemptions I made a few years ago came from selling high-priced shares I bought in the late 1990s and into 2000. I had some cap losses there. But my next few sales will include the lower-priced shares I bought in 2001 and 2002, so I will realize some cap gains. I think of these groups of unusually priced shares like the proverbial rodent moving through the belly of a snake.

 

[MBAustin]

As part of my (admittedly snail's-paced) portfolio simplification process, I recently wanted to sell a fund we'd owned since the 90s. Although I had most of the year-end statements, I didn't have all of them. So I called the fund company for some information and it turned out they had the full cost basis info immediately available. Would have saved me a lot of time if I'd just called first. Turns out I had a long-term capital loss so no issue to sell.

Two other long term fund holdings I had all the info for and calculated cost basis on my own a few years back. One had a small long term gain so no issue to sell it (used it to fund our retirement home renovation and a new car). The other has a huge long term gain so we are using it for contributions to our donor advised fund and other charitable contributions.

 

[RunningBum]

I'll also note that in the intro thread http://www.early-retirement.org/forums/f26/dipping-my-toes-in-65481.html, OP said they were considering consolidating funds into Vanguard, and was encouraged to do so by other posters. I guess that never happened.

It's really not that hard to manage your own investments, but you do have to follow through on actions to get to where investments can pretty much be on autopilot. Leaving them unorganized but treating them like they are on autopilot isn't good.

 

[ImaCheesehead]

True, there might not have been much that could've been done, other than to prepare for the $1875 tax hit. Seems like it's the surprise that was the big deal. Like I said, that's just a matter of being forced to pay some taxes now vs. when you choose to sell.

OP says:
Looking at Hartford's distributions, there were 3 funds that paid more than 20% distributions last year:
https://www.hartfordfunds.com/funds/smide.html
https://www.hartfordfunds.com/funds/grwop.html
https://www.hartfordfunds.com/funds/scpgr.html

All have done well. I'll bet there still is a gain. OP will have to dig out those records at some point to find the basis, might as well do it now and see. Unless they want to set themselves up for yet another surprise and kick themselves again for not knowing about it, when they certainly could and should know. Learn from mistakes and don't let yourself be surprised again. When the funds threw decent distributions in 2017 that should've been another clue to be prepared for 2018.

I've made mistakes and had surprises like this with large distributions. First time for me was in my kid's college fund. It went over the income limit for a youngster (under 14 or something like that) and had to be included in parent's return, which in this case was my ex-, and that was less than pleasant to deal with. Later on VG Primecap was threatening to push me over the ACA subsidy cliff so I took action to take a big CG hit one year and sell it off and preserve the subsidy for the future. There won't be a third time I have to learn from CG distributions experiences.

Yes, exactly. Only three were that high and I had two of them, Growth Opportunities and Small Cap Growth.

As I have read through the responses on this thread I am very glad that it was just an unexpected reduction in my refund and not the kind of situation that would put me over the ACA cliff, that would have been awful. We may be going on ACA within a year or two and we will have to VERY CAREFULLY manage our income and I am glad I am learning this lesson in a slightly less painful way.

Even worse, I don’t even remember why I bought these particular funds and cannot explain why I own them now. Some years ago I moved almost all the assets I was in control of to Vanguard but for some reason, probably laziness because I didn’t want to try to figure out what the cost basis was, I never did anything with these two funds. I have another +20 year old account at Franklin Templeton that is in the same category of higher ER funds that I have no reason to own.

I found some additional transaction history of the Growth Opportunity fund on Hartford’s site and see that this fund, which is valued at about 33k today, has thrown off more than $16,400 in capital gains in the last 5 years. Half of it was just incurred in December. I am betting that there will be few additional CG’s.

As soon as I can get to my records in May (in storage at my mom’s - we are full timer travelers in our motorhome) I am going to sell these funds and get the money invested at Vanguard in an index fund in accordance with our investment plan.

In the end I will count this as a positive- I have become a bit more educated on how investments can behave in unexpected (to me) ways and it is motivating me to get rid of some funds I have no reason to have.

 

[ImaCheesehead]

I'll also note that in the intro thread http://www.early-retirement.org/forums/f26/dipping-my-toes-in-65481.html, OP said they were considering consolidating funds into Vanguard, and was encouraged to do so by other posters. I guess that never happened.

It's really not that hard to manage your own investments, but you do have to follow through on actions to get to where investments can pretty much be on autopilot. Leaving them unorganized but treating them like they are on autopilot isn't good.

It did happen! Well, mostly.

These two Hartford funds now represent less than 2% of our investments and we currently have over 2 million invested at Vanguard! The advice I had received was fantastic and it has really helped us down the path to financial independence. I will admit that inertia and laziness did take over here and it took a little shock to get me to take care of this, and the Franklin Templeton funds(another 2%) but I will take care of them now. I regret letting autopilot take over on these.

 

[wanaberetiree]

I also had one of those funds years ago. I sold it and replaced with S&P 500 index fund.

I had Wellington fund with the same problem also sold and replaced with total stock market + muni bonds

 

[RunningBum]

It did happen! Well, mostly.

These two Hartford funds now represent less than 2% of our investments and we currently have over 2 million invested at Vanguard! The advice I had received was fantastic and it has really helped us down the path to financial independence. I will admit that inertia and laziness did take over here and it took a little shock to get me to take care of this, and the Franklin Templeton funds(another 2%) but I will take care of them now. I regret letting autopilot take over on these.

Great! That action probably kept the surprises down to a manageable level.

As another poster suggested, a phone call to each company may get you the basis information if it isn't online.

 

[Bir48die]

Have $30k in CG's every year. Good problem to have.

 

[steelyman]

It’s worth glancing at the “after-tax return” section in fund literature when making comparisons. I think they are based on being in the highest tax bracket, but are a data point.

 

[sengsational]

Another benefit of index funds. They don't trade unless the index changes.

Mostly true. If a mutual fund gets more people selling than buying, that will trigger gains that must be distributed. This same scenario with an ETF doesn't cause the underlying shares to be sold, so no capital gains need to be distributed on the part of this mechanism.

 

[ImaCheesehead]

As part of my (admittedly snail's-paced) portfolio simplification process, I recently wanted to sell a fund we'd owned since the 90s. Although I had most of the year-end statements, I didn't have all of them. So I called the fund company for some information and it turned out they had the full cost basis info immediately available. Would have saved me a lot of time if I'd just called first.

Yup. I usually avoid calling any company at any time because of the phone tree, wait times, transfers, and the representative knowledge roulette, but I did call and was able to get the cost basis quickly, so thanks for the suggestion!

I asked for a copy of the account history and the rep said he could mail a 10 year history for free, but would charge $20 for one from inception, grrrrrrr. I also discovered that, in addition to the operating expenses of 1.14%, Hartford is charging me $30 per year as a “Direct Account fee”. Buh-bye Hartford!

Between the two funds there, I still will have about $7500 in CGs but I am going to bite the bullet and close the account. I am also going to get rid of the Franklin Templeton accounts that I opened in 1994 as well. I actually have a $1500 loss on one of those funds (yippie?). As has been mentioned, it’s pay me now or pay me later if you make money on an investment, which of course is the goal of the whole thing.

I have read each response in this thread carefully and at least 3 times so I want to thank everyone that contributed to it. I learned a lot. After I get rid of these funds I will have my simplified portfolio complete, so every cloud has a silver lining.