mutual fund distributions

[simple girl]

We DCA into our taxable account. I've read that you aren't supposed to buy just before a distribution, which typically occurs in December. I have a really hard time understanding this whole concept. Does this mean if you DCA, you should stop your DCA for the month when the distribution is expected?

The fund we DCA into is VTSMX (Vanguard Total Stock Market Index). I see that it just had a distribution in September. Do distributions in general only occur once a year, or should we expect another one in December?

Please forgive me if these are novice questions. We've only had our taxable account for just over a year now and are still learning.

 

[2B]

DCA into taxable funds will create a tax nightmare. I don't do it because all of the individual reinvestments will eventually have to be counted as individual purchases and sales on your Schedule D (assuming you pay US taxes).

VTSMX pays dividends every quarter.

 

[simple girl]

DCA into taxable funds will create a tax nightmare. I don't do it because all of the individual reinvestments will eventually have to be counted as individual purchases and sales on your Schedule D (assuming you pay US taxes).

VTSMX pays dividends every quarter.

Uh-oh. So what do you do...save up a bunch of $ in your money market and buy all at once?

 

[unclemick]

Hmmm - my memory says back in the good old multi asset days(slice and dice to the youngin's) of the 60's,70's and 80's - I got end of the year slips from my 6-12 taxable mutual funds with dividends/interest/long term/short term cap gains and losses. I DCA'd all the time.

?Don't they do that anymore? It's been a while.

heh heh heh

 

[ziggy29]

Uh-oh. So what do you do...save up a bunch of $ in your money market and buy all at once?

That's what I do. I always reinvest dividends and capital gains in an IRA or a 401K when I can, but I never do it in a taxable account because of all the recordkeeping hassles.

In a taxable account, I take all dividends and mutual fund capital gains distributions as cash. Together with cash contributions into the account, when I have enough cash to establish a new position -- or even buy another chunk of something I already hold -- then I make the trade.

 

[audreyh1]

I don't worry about the record keeping in a taxable account. I use the average share cost basis. Fidelity keeps perfect track of it for me. I have all the records, but I don't worry about ever really "needing" them.

If you've been buying into a fund all year, then don't worry about Dec. The "don't buy the distribution" rule is really for someone looking to buy into a fund with a lump sum in a taxable account. It's simply advice to wait until right after the distribution to do so.

You can always choose not to have distributions automatically reinvested if you like.

Audrey

 

[mickeyd]

Delete duplicate post

 

[mickeyd]

Does this mean if you DCA, you should stop your DCA for the month when the distribution is expected?

I would say that if you are so used to DSAing monthly that you should continue this process unabated as it's benefits in the long run will overshadow any negative results in the short run. That said, it is always better to delay your contribution in taxable accounts until after the distribution is made if you can.

As an aside, it is also generally better for most folks to direct any dividend or CG distribution to your MMF in taxable fund accounts rather than buying more shares.

 

[gindie]

As an aside, it is also generally better for most folks to direct any dividend or CG distribution to your MMF in taxable fund accounts rather than buying more shares.

I don't quite understand your reasoning. Please explain.

Also, I don't share all the recordkeeping angst expressed in this thread about reinvested CG and dividend distributions. When selling the shares and computing the CG, simply treat the shares gained via reinvestment EXACTLY the same as those you laid out cash for. All it does is add a few lines to your account statement each year/quarter.

 

[chinaco]

In my taxable accounts, I have all mutual fund distributions go to MM. I also put new money there. I will use some of that money to rebalance the portfolio. I make lump purchases. But, I do not keep large amounts of cash laying around. I tend to move it into the underperforming equity funds.

I only DCA on 401k.

 

[2B]

I don't quite understand your reasoning. Please explain.

Also, I don't share all the recordkeeping angst expressed in this thread about reinvested CG and dividend distributions. When selling the shares and computing the CG, simply treat the shares gained via reinvestment EXACTLY the same as those you laid out cash for. All it does is add a few lines to your account statement each year/quarter.

The record keeping is for your taxes when you eventually sell. How the money comes in is accounted for with your 1099 that comes at the end of the year. With dividend reinvestment, you have a purchase made in the case of VTSMX you have four a year. Let's say you reinvest in this fund for 30 years before beginning to take money out. You have to start accounting for 120 purchases made since you made your initial investment. If audited you will have to pull out all of those reinvestment statements.

When we took over my in-laws finances, I tried to get dividend reinvestment data from the brokerage houses he was using. They had all changed hands in the time he had been a client (decades). None of them could recreate a total account record of the many purchases. I ended up estimating the cost basis. So far, the return hasn't been audited.

 

[chinaco]

When we took over my in-laws finances, I tried to get dividend reinvestment data from the brokerage houses he was using. They had all changed hands in the time he had been a client (decades). None of them could recreate a total account record of the many purchases. I ended up estimating the cost basis. So far, the return hasn't been audited.

We had some stock that was purchased via a drip plan for over 25 years. It was an absolute mess. The company had purchased companies, then sold divisions of the company (which shares in the new company or company that acquired the divisions were distributed to shareholders with a complex fractional formula). Anyway, fortunately I was able to get the historical information. I had most of the original information anyway (a few gaps). I had to use a spreadsheet to deal with it. Won't do that again!

 

[Dawg52]

I don't worry about the record keeping in a taxable account. I use the average share cost basis. Fidelity keeps perfect track of it for me. I have all the records, but I don't worry about ever really "needing" them.


Audrey

Exactly what I do. I don't understand the tax nightmare stuff.

 

[simple girl]

OK, I'm still really confused.

Seems like there are two approaches people use:

1. Purchase in lump sum amounts and also have all dividends sent to a money market account so it is easier to track when you have bought shares (for the time when you go to sell in the future)
2. DCA and allow the dividends to be reinvested and don't worry about the tracking, because your investment firm sends you everything you need to do taxes at the end of the year

It seems like two very different approaches.

I'd like to follow #2 approach, as it seems "easier"...however, I don't want to have a nightmare to deal with when we go to FIRE and start selling from our taxable account.

For those of you who follow the #1 approach, what is wrong with the #2 approach? Do the investment firms not give you enough info to do the taxes properly? Since I have an accountant do my taxes, and I give him all the paperwork, shouldn't that be sufficient?

 

[old woman]

Since I have an accountant do my taxes, and I give him all the paperwork, shouldn't that be sufficient?

It depends how much you want to pay him and what you include in all the paperwork. When I did public accounting we would get the 1099's and ask the client for the cost of what they sold. I only invest in my taxable account in even amounts of money and take the distributions in cash. Most of my distributions are in December so I will use that money to fund my ROTH for the following year or spend it.
I don't trust brokerage houses to help me track my basis. I have converted IRA money to ROTH then closed the IRA so now I don't have my basis, it doesn't matter in a ROTH but I should have recorded the data before I closed the account. A mutual fund company might do a better job since you won't close accounts without selling your funds.

 

[2B]

OK, I'm still really confused.

Seems like there are two approaches people use:

1. Purchase in lump sum amounts and also have all dividends sent to a money market account so it is easier to track when you have bought shares (for the time when you go to sell in the future)
2. DCA and allow the dividends to be reinvested and don't worry about the tracking, because your investment firm sends you everything you need to do taxes at the end of the year

It seems like two very different approaches.

For those of you who follow the #1 approach, what is wrong with the #2 approach? Do the investment firms not give you enough info to do the taxes properly? Since I have an accountant do my taxes, and I give him all the paperwork, shouldn't that be sufficient?

I'm a #1-er. The info you get from the mutual fund company every year is enough to do your taxes for that year no matter what you do with your dividends (MM or DRIP). Where the difficulty comes in is possilby 20 years later when you decide to sell the mutual fund that has an original cost and 80 other small purchases over those 20 years. Technically, each transaction is a unique purchase and sale for your Schedule D. If you sell half of your shares, you have to determine which half you sold. If you sell them all, you get to figure out your cost basis.

If you keep meticulous records your tax accountant can do it for you but it will probably increase what he charges you. Extra records require more time to sort through.

If you lose your 80 quarterly statements, you get to convince the IRS what you really paid for the shares if you have a clue.

Unless you have a very complicated life (simple girl ), I also encourage you to be a tax do-it-yourselfer. The tax software is real good at taking care of the basic ins and outs of income tax. If you have a complicated tax life, please ask yourself "why?"

My FIL was having a CPA firm do his taxes every year at $600 a pop. When we took over, it took me less than an hour to run his numbers through Tax Cut once I made my best guess on his mutual funds' cost basis.

 

[LOL!]

For those of you who follow the #1 approach, what is wrong with the #2 approach?

I have used both methods. #2 in my early years of investments, but #1 now. The problem I found with #2 is that financial firms change hands and your records don't always get transferred in full or correctly. So if you are depending on your broker or fund company keeping track for you, then you may be in for a rude awakenning 20 years from now. For those folks who have been investing only 5 years or so, that additional 15 years or longer may not seem like it's something to worry about.

Furthermore, I will want to rebalance from time to time. If dividends are reinvested, then they may go into a fund that I wish to cut back on and not go into a fund that I need to rebalance into.

 

[mickeyd]

I don't quite understand your reasoning. Please explain.

If when you sell shares of a taxable MF, and you will be using the "average cost" method, I guess it may not matter.

If, on the other hand, you will be using the "individual shares" as a way to calculate your basis, it is a lot easier to do (less bookkeeping) than buying more shares with your distributions each month/quarter/year depending on the fund.

 

[Alan]

OK, I'm still really confused.

Seems like there are two approaches people use:

1. Purchase in lump sum amounts and also have all dividends sent to a money market account so it is easier to track when you have bought shares (for the time when you go to sell in the future)
2. DCA and allow the dividends to be reinvested and don't worry about the tracking, because your investment firm sends you everything you need to do taxes at the end of the year

It seems like two very different approaches.

I'd like to follow #2 approach, as it seems "easier"...however, I don't want to have a nightmare to deal with when we go to FIRE and start selling from our taxable account.

For those of you who follow the #1 approach, what is wrong with the #2 approach? Do the investment firms not give you enough info to do the taxes properly? Since I have an accountant do my taxes, and I give him all the paperwork, shouldn't that be sufficient?

I follow #2 but all my taxable MF's are with Vanguard and they do good paperwork making it easy to file, except once when I sold from a taxable MF and the auto invested dividend caused a problem (for me to understand) because the IRS doesn't like short term trading - because of the dividend reinvestment I inadvertently bought shares of the same fund I had sold from within 30 days so had a little extra work to do in filing.

The year before ER I intend to direct all divends to a MM account, so that when I start drawing down I won't have that issue again.

 

[tricky88]

This is an interesting and valuable post. Thanks for asking the question - and for all the answers.

 

[kaudrey]

I do number #2 as well. Haven't had a problem yet - of course, I am a buy and hold type person, and don't sell much on a year to year basis. Hopefully Schwab will have good records when I do!

 

[JohnEyles]

Hopefully Schwab will have good records when I do!

Just in case they don't, at each year's end, I like to go to the
Accounts->History tab and print out all my transactions for the year.
You can print to a PDF file and/or put a hard copy in your records.

 

[simple girl]

OK, so I realized I needed to take some time to learn about how sales of mutual funds are taxed. I went to this site (Selling Mutual Fund Shares) to try and educate myself. There I learned that there are two ways of reporting gains/losses for mutual funds when you sell. You can use the same rules as those used for stocks, or the averaging method.

Basically, it sounds like stock method lets you have greater flexibility in that you can choose which shares you want to sell and therefore report smaller gains on what you sell. However, this method can be very detailed if you DCA into your mutual funds and/or have dividends reinvested. So, if you think this through ahead of time, and decide this is how you want to do your taxes, then it would be best to buy in lump sums and have dividends sent to your MM acount.

The averaging method is a little easier in that you don't have to figure out what shares you sold when you sell. So, if you have tons of transactions (ie. reinvested dividends), you'll likely find this method easier to do. Drawbacks are that once you start this for a mutual fund, you must always use this method. It also does not let you choose which shares you want to sell, so you may not have quite as favorable tax treatment. So it seems that for the slightly easier method, you may be giving up a little bit of advantage in how you are treated at tax time. However, I did read this: "For many people this method is not only the simplest method, but also the method that produces the best tax result." (Single-Category Averaging Method)

Hmmm...is the "stock" method really all that much more advantageous (in terms of tax treatment) than the averaging method Opinions??

 

[simple girl]

Unless you have a very complicated life (simple girl ), I also encourage you to be a tax do-it-yourselfer. The tax software is real good at taking care of the basic ins and outs of income tax. If you have a complicated tax life, please ask yourself "why?"

LOL, our tax lives have indeed become more complicated over the last year. Due to moving around for my husbands' job, we have lived in multiple states. Plus, we had a rental for the first time. Last year was the first year we used an accountant, primarily for these reasons. Prior to this, I was a steadfast TurboTax user. I do plan to return to doing our taxes myself when our lives become "simpler" again!

 

[mickeyd]

Hmmm...is the "stock" method really all that much more advantageous (in terms of tax treatment) than the averaging method Opinions??

Hey Simple Girl,

I gotta say that I am impressed with your research on this subject as well as your summation of each method. You seemed to have nailed it. Hard to say which is better one to use, but at least there is a choice. I use specific shares. You do not always have a choice when it comes to taxes.

Another point, once you start doing your taxes one way ( specific or average) with an individual MF, you must continue to do it that way as long as you own that fund (can not switch).