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If I buy a mutual fund?
Old 06-19-2022, 07:17 PM   #1
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If I buy a mutual fund?

All my investment has been in tax deferred retirement or a Roth accounts.
If I i invest some cash in a mutual fund, am I going to have to keep a ton of records for tax purposes? Or am I going to get one piece of paper, like a 1099, with all the information to file my taxes next April.
Some cash has been accumulating that I might invest but I don't want to complicate my life.
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Old 06-19-2022, 07:54 PM   #2
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You'll get a 1099-CONS (consolidated) statement (more than 1 page, but just 1 statement) each year which has your dividends, interest, and any sales. Brokerages are required to track your basis and report it to you and the IRS, so you don't have to keep records. For tax planning before you sell you might want to figure out what your gain would be when you sell, but you can find that out online at their site. Pro tip: Use SpecificID as your cost basis method, to give you better control of the tax impact.

You can import the 1099-CONS with many tax programs, but it doesn't take much to enter the info either.
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Old 06-20-2022, 06:28 AM   #3
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I keep a paper copy of all my BUY and SELL transactions in my taxable brokerage accounts. Just in case. But I have never needed them for anything. The details are also on a monthly statement, which keep as PDF files on my computer. As RunningBum indicates above, your broker tracks your cost basis for you (you will be able to see the details in your online account) and sends you tax forms for filing. It's different, but not overly difficult. If you're only talking a few mutual funds, then it is going to be easy. We can help you next year at tax time if you need it your first time.
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Old 06-20-2022, 06:42 AM   #4
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I'd recommend ETFs over mutual funds.
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Old 06-20-2022, 07:37 AM   #5
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To the OP: if one of your goals is to become Financially Independent and somewhat "wealthy" down the road, then you'll need to become conversant in dealing with a taxable brokerage account and the resulting income tax details.

As others pointed out, the brokerage now keeps track of important details and sends you a combined statement after the end of each year. If doing your own taxes with a software application, it's simple to input that data from the brokerage.

What's a bit complicated initially is learning how to avoid unwanted Capital Gains Distributions, how to do Tax Loss Harvesting, and how to decide which shares to sell when you need a sum of money.

You should set up your taxable account to use Specific Identification as your cost basis method and also set distributions NOT to automatically reinvest. And you should understand why you want those choices.

You'll also need to decide whether to invest using mutual funds or exchange-traded funds and what the advantages of the two choices are.

I feel it's better to get started with your taxable account sooner rather than later so you can get through the learning curve experience.
After a few years, it will all seem quite simple...
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Old 06-20-2022, 08:59 AM   #6
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I'd recommend ETFs over mutual funds.
An ETF is a mutual fund, just with some minor feature differences. For the OP's question, the differences are quite ignorable.

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Originally Posted by TheWizard View Post
To the OP: if one of your goals is to become Financially Independent and somewhat "wealthy" down the road, then you'll need to become conversant in dealing with a taxable brokerage account and the resulting income tax details.

As others pointed out, the brokerage now keeps track of important details and sends you a combined statement after the end of each year. If doing your own taxes with a software application, it's simple to input that data from the brokerage.

What's a bit complicated initially is learning how to avoid unwanted Capital Gains Distributions, how to do Tax Loss Harvesting, and how to decide which shares to sell when you need a sum of money.

You should set up your taxable account to use Specific Identification as your cost basis method and also set distributions NOT to automatically reinvest. And you should understand why you want those choices.

You'll also need to decide whether to invest using mutual funds or exchange-traded funds and what the advantages of the two choices are.

I feel it's better to get started with your taxable account sooner rather than later so you can get through the learning curve experience.
After a few years, it will all seem quite simple...
Excellent post. @thatguy, you do not have to get into the deep end of the pool right away. Just start simply, as @TheWizard suggests. One or two equity funds is all you will ever need unless you want to make sector bets. (Which is not a good idea but that's a different thread.)
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Old 06-20-2022, 12:25 PM   #7
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Just thinking one fund to try to ride the market back up. Sorta like gambling. So if it recovers, I might put it back in cash.
We're 12 and 21 years into retirement. We can live off pensions & SS. 3/4 of our networth is in retirement accounts. We've just left them alone and they've done well enough. We've had the sense to not get out at the bottom.
We don't have kids & family so eventually the extra retirement money may have to take care of us.
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Old 06-20-2022, 12:47 PM   #8
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Just thinking one fund to try to ride the market back up. Sorta like gambling. ...
Jump in. The water's fine!

And, really, it is not like gambling at all. Over more than 100 years every single decline in the market has been followed by a recovery, some quick and some not so quick, And the steady increase in the market value has blown away any alternative investments. You'll want to invest money that you don't expect to need for five years, though, as that kind of period (and longer) is needed to smooth out market variations and ride the average.
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Old 06-20-2022, 02:14 PM   #9
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... You'll want to invest money that you don't expect to need for five years, though, as that kind of period (and longer) is needed to smooth out market variations and ride the average.
I'm not sure I agree with the five-year thing, but it depends on your situation.

I'm in my tenth year of retirement and have more than enough retirement income coming in each month. So I toss the excess, beyond $10k in checking, into my taxable account each month, where eventually it gets into various stock index funds.

I have no cash bucket and no savings account, just that $10k checking account buffer.

I plan to buy a new factory ordered car a year from now and will sell enough of my investments to get around $40k for that purchase. Some of what I sell may be at a loss, which will offset up to (a whopping) $3k per year of ordinary income.

The Loss-aversion segment of my brain never developed fully. YMMV...
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Old 06-20-2022, 02:27 PM   #10
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I'm not sure I agree with the five-year thing, but it depends on your situation. ...
Well, I was more commenting to the OP who seems to be a newbie at this. I do think that 5 or even 10 years is a good horizon for equity investing.

You and I can disagree and both be right for our own situations. For example, this year we are building a house and the cash is flowing out fast. Planning for this, in the middle of last year I sold the equities I needed to sell in order to fund the house. I did not want to get caught in a market downdraft this year, needing to sell equities. As it turned out, it was a very good aka lucky move. A difference in your case is that if the market really tanks, you can defer that car purchase. In my case the train was on the tracks and rolling.
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Old 06-20-2022, 04:01 PM   #11
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I'm not sure I agree with the five-year thing, but it depends on your situation.

..
A lot of newbees have only seen market setbacks followed by a quick return to a Bull market and new highs. I expect most people under about 60 have never seen something like the market crash of 1974 plus high inflation. Investors took years to get it all back, and even more years to get it all back in real inflation-adjusted terms - well over a decade to in real terms, IIRC.

It's good that the youngsters under 60 understand that an extended laggard market can happen and has happened during the life of many who frequent this site.
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Old 06-20-2022, 08:14 PM   #12
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Just trying to figure out about tax reporting stuff if I buy a fund outside of tax deferred accounts.
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Old 06-21-2022, 08:41 AM   #13
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Just trying to figure out about tax reporting stuff if I buy a fund outside of tax deferred accounts.
As others said, reporting tax stuff is no big deal.

The problem with many MFs is the stuff youíre going to have to report.

If the fund you buy has been around a while, it probably has unrealized gains. As they buy and sell within the fund, they are required to distribute the gains they made to holders of the fund. So, you may end up paying taxes even if you have not made anything.
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Old 06-21-2022, 09:04 AM   #14
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If the fund you buy has been around a while, it probably has unrealized gains. As they buy and sell within the fund, they are required to distribute the gains they made to holders of the fund. So, you may end up paying taxes even if you have not made anything.
Sure but if they don't need to realize the gains there is no tax and they can apply capital losses to reduce the gains
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Old 06-21-2022, 01:21 PM   #15
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As others said, reporting tax stuff is no big deal.

The problem with many MFs is the stuff youíre going to have to report.

If the fund you buy has been around a while, it probably has unrealized gains. As they buy and sell within the fund, they are required to distribute the gains they made to holders of the fund. So, you may end up paying taxes even if you have not made anything.
If you buy a Total Market index fund, you will almost never have Capital Gains Distributions to report and pay taxes on.
If you buy a typical managed fund, you may have CGDs quite often...
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Old 06-22-2022, 11:00 AM   #16
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If you buy a Total Market index fund, you will almost never have Capital Gains Distributions to report and pay taxes on.
If you buy a typical managed fund, you may have CGDs quite often...
I learned from experience not to buy actively managed mutual funds in a taxable account.
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Old 06-22-2022, 11:12 AM   #17
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Just trying to figure out about tax reporting stuff if I buy a fund outside of tax deferred accounts.
If you go with a large brokerage like Fidelity, they will keep excellent records for you and supply a 1099 for each account that also detailed info about all transactions the prior year.

You’ll also have to make a decision about whether to reinvest dividends and capital gains distributions. I usually have that turned off for my taxable accounts as you owe taxes on those distributions. It also simplifies things for me as I don’t accumulate a bunch of small tax lots from various dates, plus I rebalance about once a year and usually direct any distributions elsewhere.
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Old 06-22-2022, 12:39 PM   #18
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If you go with a large brokerage like Fidelity, they will keep excellent records for you and supply a 1099 for each account that also detailed info about all transactions the prior year.

Youíll also have to make a decision about whether to reinvest dividends and capital gains distributions. I usually have that turned off for my taxable accounts as you owe taxes on those distributions. It also simplifies things for me as I donít accumulate a bunch of small tax lots from various dates, plus I rebalance about once a year and usually direct any distributions elsewhere.
It would be one fund in one taxable account. I think i'm seeing there's a advantage if it's a ETF.
Don't you have to pay tax on those distributions & CGs even if they are automatically reinvested?
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Old 06-22-2022, 07:29 PM   #19
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It would be one fund in one taxable account. I think i'm seeing there's a advantage if it's a ETF.
Don't you have to pay tax on those distributions & CGs even if they are automatically reinvested?
Yes they are taxable but if you invest in a fund that is tax efficient there is little to no dividends or capital gains. The Vanguard Total Stock Market Index and the Total International Stock Market Index are very tax efficient.
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Old Yesterday, 12:58 AM   #20
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If you buy a Total Market index fund, you will almost never have Capital Gains Distributions to report and pay taxes on.
If you buy a typical managed fund, you may have CGDs quite often...
Yes. Now that I have retired, I'm working at cleaning up my portfolio a bit more. The current move is to jettison an actively managed mutual fund that I invested in as a youngin' and stopped a number of years ago when I realized that the expenses were high. It periodically spews an amazing amount of long and short term capital gains, while the overall value has barely moved, and of course this year decreased.

The pitiful proceeds will go into an ETF, probably VTI.
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