Tax consequences of switching taxable accounts between mutual fund companies

[Amethyst]

Has anyone switched a taxable investment account from one mutual fund company to another?

I'd like to move our Fidelity and some of our T.Rowe Price assets into Vanguard, but they're all showing gains right now, and I imagine this is a taxable event. Guess I'd need to wait for the bear?

Amethyst

 

[Meadbh]

I've done this. Transfer it in kind, so that no capital gains are generated. The receiving fund company will be very motivated to make this happen!

 

[rbmrtn]

I moved some individual MF accounts to a brokerage years a go to consolidate paper work. You do a "Transfer in Kind" to keep the assets the same. However if the place you are transfering to doesn't offer the product then you can't move them.

 

[MichaelB]

I've done this. Transfer it in kind, so that no capital gains are generated. The receiving fund company will be very motivated to make this happen!

Same here. Always entire accounts, transfer in kind. I always made sure to document the cost basis, in case it is lost in the transfer.

some of our T.Rowe Price assets

I've never done some assets, and wonder if it might not be a bit more problematic.

I've always kept clear and detailed records of the transfer requests, so that any error can be backed out.

 

[LOL!]

As Meadh mentioned, transfer-in-kind is the way to do it without tax consequences, if you want to keep the same funds. BUT! -> Be sure your transaction info is also transferred or that you have a good record of all the transactions for the funds you keep. The reason is that you will need that when you sell to calculate the cost basis used on your tax return.

I have transferred funds in-kind from TDAmeritrade to WellsFargo and they used the ACAT system where all the transaction info transferred as well. It seems some places do this properly and some don't. Since you may not be a customer of the old place, you will probably lose your login and your ability to look up old records online, so you better have your records in order before the transfer.

If you want to sell and get new funds, then that's another tax matter.

 

[heeyy_joe]

Has anyone switched a taxable investment account from one mutual fund company to another?

I'd like to move our Fidelity and some of our T.Rowe Price assets into Vanguard, but they're all showing gains right now, and I imagine this is a taxable event. Guess I'd need to wait for the bear?

Amethyst

I agree with T-I-K method, usually via ACATS. If Vanguard will not hold one of your intended investments, you might consider another investment you have that you can harvest an offsetting "loss" against the taxable event. What? No losses to harvest? Now that is some tall cotton to be in!

 

[Amethyst]

Thanks, everyone, for the advice. I doubt we have all the transaction info for the Fidelity funds, as they are 20+ years old and we knew nothing about tracking anything until a few years ago. Also, we have paid taxes on the dividends all that time.

I'll be asking the VG rep if they have "like kind" funds. I'll beware of the standard-issue "ask your tax preparer" response.

Like I said earlier...all the funds are "up" just now. That will change, I'm sure.

Amethyst

I agree with T-I-K method, usually via ACATS. If Vanguard will not hold one of your intended investments, you might consider another investment you have that you can harvest an offsetting "loss" against the taxable event. What? No losses to harvest? Now that is some tall cotton to be in!

 

[LOL!]

I see no benefit or very little benefit to transferring "in-kind" to Vanguard and keeping the same Fidelity or TRowePrice funds at Vanguard.

If you want to go to "like kind" funds which I assumes means selling Fidelity fund (say a large-cap US fund) and buying buying a Vanguard fund (large-cap US), then I would recommend selling at Fidelity, transferring the cash and buying at Vanguard. This way, the whole cost basis mess stays at Fidelity and you can get them to figure it out and they will issue the 1099B early next year.

Indeed, if it was me, I would probably not do this all at once, but do a few sells, transfers, and buys. The first round will let me know how it goes and how to be better prepared for the next round. Also, it will help see how helpful Fidelity is with cost basis determination.

 

[rbmrtn]

"Like kind" funds won't work. If what you are talking about is something like transferring a Fido balanced fund to a vanguard balanced fund. The transfer in kind is the exact same investment moving from one institution to another. Like moving Magellan from TDameritrade to schwab. If the fido fund is offered through vanguards brokerage then I think you can do it.

Transfer In Kind

 

[Amethyst]

Thanks LOL, I didn't realize (although I suppose I should have) that "in-kind" and "like-kind" are different. I envisioned getting rid of the Fidelity funds, and using the money to buy a "similar" Vanguard fund, not keeping the same Fidelity fund.

I think you are saying that in such a scenario, Fidelity would have tracked all our transactions (except the taxes paid on the dividends, which I can track back at least 3/4 of the time we've owned those funds).

In fact, I can see on Fidelity's web site that they have calculated our current on-paper gains since purchase.

What I am not quite following, is how we can transfer the cash to VG without tax consequences. I have done this with IRAs - are you saying VG can facilitate the same kind of transfer with taxable accounts, wherein Mr. A. and I never "touch" the cash during the transaction?

thanks,

amethyst

I see no benefit or very little benefit to transferring "in-kind" to Vanguard and keeping the same Fidelity or TRowePrice funds at Vanguard.

If you want to go to "like kind" funds which I assumes means selling Fidelity fund (say a large-cap US fund) and buying buying a Vanguard fund (large-cap US), then I would recommend selling at Fidelity, transferring the cash and buying at Vanguard. This way, the whole cost basis mess stays at Fidelity and you can get them to figure it out and they will issue the 1099B early next year.

Indeed, if it was me, I would probably not do this all at once, but do a few sells, transfers, and buys. The first round will let me know how it goes and how to be better prepared for the next round. Also, it will help see how helpful Fidelity is with cost basis determination.

 

[LOL!]

If you sell a taxable fund at Fidelity, you will have to put that sale on your tax return. You probably will owe taxes if you sold at a gain. It won't matter if you the leave the cash from the sale at Fidelity or put it in your checking account or write a check to yourself and deposit the check at Vanguard. Just the fact that you sell triggers the tax consequences. You can touch the cash all you want and roll in it or not. It just does not matter. This is quite a bit different than an IRA.

For help with filling out your tax return please read: http://www.irs.gov/pub/irs-prior/p564--2009.pdf which is old but useful and also the newer http://www.irs.gov/pub/irs-pdf/p550.pdf

PS: The taxes you paid on previously paid dividends does not matter and you do not need to know that number. You do need to know about the re-invested dividends (number of shares bought with them, cost to buy those shares) because they are part of the cost basis of the position. The cost basis is price paid for each and every single share or fraction of share summed up over all shares you hold and will sell.

 

[Original Wally]

Ms. A -

Instead of MF shares, let's suppose you held PepsiCo. If you had OldCompany send the PepsiCo shares to NewCompany it is not a taxable event. You are only changing "custodian", if you will. If you have OldCompany sell Pepsi and use the money in NewCompany to buy Coke - the Pepsi sale is taxable. Gain or loss. Same concept with MF. If you move TICKER xxxxxx from OldCompany to NewCompany it is not a taxable event. If you change from ticker xxxxxx at old to ticker yyyyyyy at NewCompany you will MOST LIKELY have a taxable event when xxxxxx was sold.

One solution is to move xxxxxx from Old to New and then GRADUALLY change holdings from xxxxxx to yyyyyy.

 

[LOL!]

One solution is to move xxxxxx from Old to New and then GRADUALLY change holdings from xxxxxx to yyyyyy.

How so?

That won't change the need to know the cost basis.
That won't change the need to put the sale on the tax return.
That may incur more commissions, so it would cost more.
That sounds more like water torture if you drag it out.
If one moves, the historical records of the purchases may be lost.

It is true that if the capital gains are large by selling the whole position, then selling some in 2013 and some in 2014, 2015, ... may keep one in a lower tax bracket, but long-term cap gains are taxed at 15% anyways for most folks. Some folks will pay 0% LT cap gains rates and some folks higher than 15%.

 

[Original Wally]

How so?

That won't change the need to know the cost basis.
That won't change the need to put the sale on the tax return.
That may incur more commissions, so it would cost more.
That sounds more like water torture if you drag it out.
If one moves, the historical records of the purchases may be lost.

It is true that if the capital gains are large by selling the whole position, then selling some in 2013 and some in 2014, 2015, ... may keep one in a lower tax bracket, but long-term cap gains are taxed at 15% anyways for most folks. Some folks will pay 0% LT cap gains rates and some folks higher than 15%.

WOW.... ummm.. was just responding to OP saying that she didn't really want to KEEP the old investments. By spreading out the sales the CG can be spread out to avoid a large hit on taxes... perhaps even offset some with any future losers. You are, OF COURSE, right that the basis issue needs to be addressed - unless Mr. and Mrs. A pass away holding the assets. If they are sold, now or later, basis needs resolved. I don't think it is really "water torture" at all. Just an option to spread out the sales. If OP wants to move from one investment to another OF COURSE there will be commissions. Duh. I was only pointing out that she really cannot do it in a "like kind" manner. Either transfer investments in kind or sell/buy new. And if it is sell/buy, a gradual position shift **may** (or may not) reduce the tax liability of the shift

 

[Original Wally]

Ms. A - also, if you DO want to transfer in kind, I would try to resolve basis before you move. If you have a large enough portfolio, you might ask if they can help you research the various acquisition dates / shares. You can also check old tax returns for years where dividends were paid / reinvested. It is a pain, but it is possible to document a lot of the missing basis. And you really should do this whether or not you move from one brokerage firm to another. SOMEDAY you will need the basis. The data just keeps getting older every day.

 

[kaneohe]

Perhaps it might be useful to know why OP wants to switch to VG. If for lower expense funds and OP does not want to have the tax impact of selling existing funds, perhaps consider at least stopping reinvestments in the old funds and making all new investments (w/ both new funds and the distributions from the old funds) at VG. Complicates your life a little bit but at least gets you started on the road you want to travel.

When I first became aware of the index fund idea, it was unproven , at least in my mind, and some like TIAA-CREF were just starting to try it for a portion of their funds. Later when I became convinced, I too did not want to sell because of the gain problem. I didn't think about stopping the reinvestments (or even putting the new funds into index funds) until much later and now wish I had done that years (or decades) earlier. Still, better late than never...........

 

[Amethyst]

The Fidelity shares are only worth about $30K, but there's still an appreciable gain, what with the recent market run-up. Bigger gains with the T.Rowe Price shares. I do thank you all for the advice, web sites, etc. You have given me some more avenues for my research. I so wish we had known what we were doing 20 years ago, but...we all know how that goes.

Amethyst

 

[LOL!]

One can avoid the whole "what is my cost basis" and taxes story by donating the shares to charity. I would recommend the Donor-Advised Fund (DAF) at Fidelity if you are so inclined. You would get the tax deduction this year, but could then use your DAF to pay out to multiple charitable organizations over one or many years as you see fit.

Although you would have to put a basis for the donated shares on your tax return, there is no way the IRS would ever quibble about what you put there as it won't affect the taxes they would collect. And you would get the tax deduction if you itemized.

 

[Original Wally]

so[/I] wish we had known what we were doing 20 years ago, but...we all know how that goes.

Yup. In my prior life as a practicing CPA I have had to dog down the basis for a number of clients. It isn't pretty.

 

[Original Wally]

LOL is right. The general rule is that the fair market value of the appreciated security would be allowed as a charitable deduction in the year given.

 

[haha]

I think you are saying that in such a scenario, Fidelity would have tracked all our transactions (except the taxes paid on the dividends, which I can track back at least 3/4 of the time we've owned those funds).

In fact, I can see on Fidelity's web site that they have calculated our current on-paper gains since purchase.

What I am not quite following, is how we can transfer the cash to VG without tax consequences. I have done this with IRAs - are you saying VG can facilitate the same kind of transfer with taxable accounts, wherein Mr. A. and I never "touch" the cash during the transaction?

thanks,

amethyst

Two things: no, your idea of how to transfer the funds will not work. If you wind up with any cash or fund shares other than the exact same shares that you now own, you will owe taxes. And the second thing is that the taxes you have paid all along do not have to be calculated; they have nothing to do with anything after the year in which you pay them.

You haven't yet said what you hope to gain from this transaction. IT appears to me that the sensible thing to do, if you cannot just transfer the exact same Fidelity Fund to Vanguard, is to leave it at Fidelity. It doesn't cost you anything to leave it there.

You haven't really said what your goal is. If it is to save money on fund operating expenses, the only way you can accomplish that is to take your gain and pay your tax- which will only make sense if you have de minimus gains and/or a huge difference in the expenses of the current fund and the one you plan on holding at Vanguard.

Don't rush unless you understand every aspect of this.

Ha

 

[Original Wally]

To clarify HA... Ha is correct in that the taxes themself do not enter into the situation. BUT the important thing is that the dividends were used to reinvest into more shares. And the fact that they were taxable means that the additional shares have basis. In really werid cases we have scoured back tax returns for the amount of taxable dividends, looked up the dividend rate for those years and the share price on dividend dates and backed into # of shares acquired over time with a really close approximation of actual cost.... close enough that we believed it would stand the test of an audit. Thankfully we never had to prove THAT.

 

[LOL!]

I wonder if we should advise folks with new taxable accounts to sell everything after 2 years? And to be sure to automatically reinvest distributions, too.

At least that way, they would learn how to deal with the tax reporting while all their transactions were fresh in their statements.

 

[haha]

To clarify HA... Ha is correct in that the taxes themself do not enter into the situation. BUT the important thing is that the dividends were used to reinvest into more shares. And the fact that they were taxable means that the additional shares have basis. In really werid cases we have scoured back tax returns for the amount of taxable dividends, looked up the dividend rate for those years and the share price on dividend dates and backed into # of shares acquired over time with a really close approximation of actual cost.... close enough that we believed it would stand the test of an audit. Thankfully we never had to prove THAT.

Yes; thank you, you are certainly correct. I think Fidelity tracks cost including dividend re-investment, and has for quite some time. So she should be able to get this just by looking at her positions page.

I never do re-investment of dividends except in tax deferred or tax free accounts, just to avoid the hair pulling exercises that you mention. In fact, I rarely hold mutual funds anywhere except in tax deferred accounts.

Ha