Burned by Capital Gain Return

[ImaCheesehead]

I have a couple of small mf’s at Hartford funds that declared 2018 capital gains at the very end of the year at approx 22-23% of NAV. I was really surprised and it messed up my taxes big time, bye-bye refund. The 2 funds together were valued at about 54k at the end of 2017, and that year had about $3,500 in gains. At the end of 2018 the funds were down about 3-4 k to about 51k and the cap gains were $12,500. NOT expecting that, and I don’t remember it happening like that before.

Is there a way I could have known this was about to happen

Clearly I don’t know enough about these funds, they are just some old mf’s that I got back in the mid 90’s and never really thought about again, they have just been sitting out there.

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.

Jeez this is ticking me off, both because of the actual surprise of it, and the fact that I was stupid enough to be in a position that it surprised me.

 

[fh2000]

I have a couple of small mf’s at Hartford funds that declared 2018 capital gains at the very end of the year at approx 22-23% of NAV. I was really surprised and it messed up my taxes big time, bye-bye refund. The 2 funds together were valued at about 54k at the end of 2017, and that year had about $3,500 in gains. At the end of 2018 the funds were down about 3-4 k to about 51k and the cap gains were $12,500. NOT expecting that, and I don’t remember it happening like that before.

Is there a way I could have known this was about to happen

Clearly I don’t know enough about these funds, they are just some old mf’s that I got back in the mid 90’s and never really thought about again, they have just been sitting out there.

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.

Jeez this is ticking me off, both because of the actual surprise of it, and the fact that I was stupid enough to be in a position that it surprised me.

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

 

[MarieIG]

Yeah, I totally get it. I got my tax statement from Dreyfus. The stupid fund was way down for the year, but was vomiting capital gains all over the place. I hate it. I inherited it from my Mom and never really paid attention to it.

 

[ERD50]

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

 

[MarieIG]

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

Thank you. I guess I can take the dividends/gains and move them elsewhere. Something like Vanguard Total Stock Fund? I don't think I can sell the whole position at this point due to the tax hit.

 

[scrabbler1]

I have a fund like this with Fidelity. For the last 2 year, it has paid out some huge cap gain distributions, enough to send me way over the ACA subsidy cliff. The percent of NAV isn't nearly as big as the one CheeseHead has (mine has been in the 7%-11% range).


I did opt out of automatic reinvestment of the big cap gain his time, taking it in cash and investing it elsewhere, a backhanded rebalancing move.


As for dumping the fund and investing in an index fund, I would do it but I have a large, unrealized cap gain in the fund (despite recent market fluctuations), one which, if taken will throw me over the ACA cliff again in 2019. Maybe it is worth going over the cliff again in 2019 just to be rid of the fund and reducing the cap gain distributions in future years if I am in an index fund?

 

[robnplunder]

Is there a way I could have known this was about to happen

The fund company will likely publish estimated per share dividend/cap gain distribution before the year. At this point, you can assess if selling the fund in question will give you a better tax efficiency. I have done this at the end of 2018 to make sure my 2018 MAGI does not exceed $65k. My MAGI ended up being $59k which allowed us (me & DW) to qualify for ACA subsidy.

 

[Sunset]

We had this happen to us a few years ago. DW was SHOCKED...
Really screwed over our taxes.

This is why I avoid MF's and instead buy ETF's and even stocks as it does not seem to happen as much with them.

The other thing that really bugged me about MF's was getting to pay tax on Capital gain declarations, but the $$ value didn't actually go up. Dangerous if you lose track of the basis as a person could end up double taxed.

 

[audreyh1]

It’s a bit tough if you have no idea what your cost basis/current gain in the fund is. You need that to know whether selling now would incur an additional capital gain or let you realize a capital loss. My brokerage tracks cost basis for all my mutual fund holdings and shows me my transaction history for all lots purchased. Did you buy directly from the fund company?

Moving to a more tax efficient vehicle would be best if that doesn’t cause more gains to be realized. If the funds were bought in the 90s you might still have significant unrealized cap gains.

Definitely turn off automatic reinvestment. Direct distributions somewhere more tax efficient.

I always review estimated cap gains distributions from my mutual funds each year. It’s not always end of year either but funds will follow similar timing each year. Even if you know a month or so in advance, there is not much you can do about it other than decide to sell in advance of the dividend date.

When a fund starts having very large % cap gains distributions it’s often a sign that investors are fleeing the fund for whatever reason. Although it can mean that a new fund manager decided to “reposition” the fund holdings and wasn’t concerned with tax consequences.

 

[DrRoy]

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

 

[foxfirev5]

This seems to have been a common occurrence last year. When doing DM's taxes I saw a healthy distribution from Wellesley Income Fund. The fund was flat but the cap gain distribution significant. Fortunately it didn't cost her anything, simply due to luck rather than good planning.

 

[steelyman]

When a fund starts having very large % cap gains distributions it’s often a sign that investors are fleeing the fund for whatever reason. Although it can mean that a new fund manager decided to “reposition” the fund holdings and wasn’t concerned with tax consequences.

I was hit by this too. I wonder if the free fall that happened in Q4 2018 helped cause excessive redemption by fund shareholders.

 

[audreyh1]

I was hit by this too. I wonder if the free fall that happened in Q4 2018 helped cause excessive redemption by fund shareholders.

Sometimes investors will panic and sell equity funds during a sudden market drop, and yes this will initially cause a larger capital gain distribution if the fund had appreciated a lot before the market drop. This will affect many funds, not just one. The next year or even several the fund may pay out much smaller cap gain distributions, so it can average out.

You do have to compare similar funds payouts to determine if it’s a situation specific to a given fund. A couple years excessive distributions in a row is a red flag.

 

[marko]

MFs, announce preliminary estimates of Cap Gains usually around the end of October. You should have plenty of time to make adjustments.

OTOH, we LOVE our MF Cap Gains. We re-invest some but some of them go into our spending bucket to supplement our dividends as dividends and CGs provide 100% of our spending.

We're paying taxes on them anyway so we may as well spend them vs taking the money from elsewhere.

 

[audreyh1]

Mine go towards rebalancing (to other funds) as well as fulfilling my annual withdrawal. But no, I don’t like it if they exceed what I need.

 

[marko]

You do have to compare similar funds payouts to determine if it’s a situation specific to a given fund. A couple years excessive distributions in a row is a red flag.

This is true but from what I saw, many (most?) MFs had extraordinary CGs in '18. It may have been due to MF managers rebalancing and/or taking profits for reasons beyond my pay grade.

Just my guess.

 

[audreyh1]

This is true but from what I saw, many (most?) MFs had extraordinary CGs in '18. It may have been due to MF managers rebalancing and/or taking profits for reasons beyond my pay grade.

Just my guess.

I did not see this. I saw more excessive cap gains distributions in 2017 after the big 2017 market run up. I had a few funds pay out largish cap gains but they were less than prior years percentage-wise. And the two worst culprits had already paid their large cap gains distributions in June or September, well before the end of year severe market correction.

 

[zinger1457]

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.

Does your annual statement show the 'Cost Basis Method' for that fund? I have some older funds and they indicate both a 'Covered Basis' (shares acquired after 1 Jan 2012) and an 'Uncovered Basis' (shares acquired before 31 Dec 2011). With that information you can come up with a good estimate of what your taxable gain would be if you sold the MF.

 

[COcheesehead]

I learned a long time ago to only keep tax efficient equity funds in a taxable account. Which means index ETF’s. You can take it one step further and make sure they are lower dividend paying ETF’s which usually means growth oriented ones.

 

[marko]

I did not see this. I saw more excessive cap gains distributions in 2017 after the big 2017 market run up.

For my 10 MFs, 2018 had the largest CG distributions since I started tracking them 15 years ago. Not sure what the driver was.
#2 was 2013 and #3 was 2017.

 

[Amethyst]

We have a modest amount of a MF that tends to throw off large gains. I consider the CG to be income, and plan for it in our tax withholding. Doesn't mean there can't be surprises of course.

 

[grasshopper]

I learned a long time ago to only keep tax efficient equity funds in a taxable account. Which means index ETF’s. You can take it one step further and make sure they are lower dividend paying ETF’s which usually means growth oriented ones.

+1, best advice for taxable accounts. I like to take capital gains when I chose to not when the fund requires it.

 

[utrecht]

Thank you. I guess I can take the dividends/gains and move them elsewhere. Something like Vanguard Total Stock Fund? I don't think I can sell the whole position at this point due to the tax hit.

For the record, that wont stop you from having to pay taxes on those dividends/capital gains. You still have to pay tax on those distributions no matter what you do with the money.


I assume people are saying to turn off auto reinvest so that at least some money is moved somewhere else, if you cant sell the fund and move all of the money somewhere else.

 

[scrabbler1]

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?

 

[RunningBum]

I have a couple of small mf’s at Hartford funds that declared 2018 capital gains at the very end of the year at approx 22-23% of NAV. I was really surprised and it messed up my taxes big time, bye-bye refund.

If all it cost you was a refund, that doesn't seem like a big deal. When I read the title about getting burned, I figured you went over the ACA subsidy cliff, which really can be huge and you never get that back. $12.5K in CGs @15% is $1875 in taxes. Not a small amount but not huge, and it'll all even out when you sell. You'll either get it back as a loss, or if there are still gains over the years they'll be reduced by these distributions. Just trying to put it in perspective that you didn't really get burned unless I'm missing something.

Is there a way I could have known this was about to happen

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. I assume it was posted here: https://www.hartfordfunds.com/resources/taxcenter.html It's not there any more since the actuals are out and still showing estimates would probably just be confusing. I think Vanguard sends an email to me when they have posted their estimates. If Hartford did the same, then not only could you have known, but you should have known. Maybe they didn't send an email though.

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. In my case I look at the VG estimates to start preparing for how much Roth conversion I can do, though I don't do anything until I see the actual distributions in mid/late December.