Capital Gains

[Koolau]

Capital gains distributions are taxed whether reinvested or not. Both dividends and capital gains are “baked into the cake” until they are distributed.

True but a DRIP is usually funded by the dividends and it changes the number of shares (and basis) while capital gains (or losses) are based on stock price and doesn't affect number of shares (unless a stock split).

I was just wondering why Cap Gains were an issue to a DRIP and I still don't see how they would apply there.

 

[SecondCor521]

How would you invest the dividends? That's what supplies the DRIP IIRC. The capital gains are baked into the cake already, aren't they?

It's not clear to me that OP's situation involves a DRIP. It might, but they didn't say that AFAICT.

I think of DRIPs as usually being for stocks, which generally don't have CGDs in the same way as the OP's (probably actively managed) mutual fund.

For stock DRIPs, yes, the capital gains are what they are unless one takes one of the strategic options to avoid it like step up in basis at death or donating the appreciated shares to a charity.

 

[Koolau]

It's not clear to me that OP's situation involves a DRIP. It might, but they didn't say that AFAICT.

I think of DRIPs as usually being for stocks, which generally don't have CGDs in the same way as the OP's (probably actively managed) mutual fund.

For stock DRIPs, yes, the capital gains are what they are unless one takes one of the strategic options to avoid it like step up in basis at death or donating the appreciated shares to a charity.

Yeah, Lucie raised the question I was responding to that.

 

[audreyh1]

True but a DRIP is usually funded by the dividends and it changes the number of shares (and basis) while capital gains (or losses) are based on stock price and doesn't affect number of shares (unless a stock split).

I was just wondering why Cap Gains were an issue to a DRIP and I still don't see how they would apply there.

Capital gains distributions from mutual funds act exactly the same as dividend distributions in terms of increasing the number shares when reinvested. They don’t call them DRIPs either, but it’s not clear that what is owned are individual stocks.

 

[Lucie]

Perhaps DRIP was the wrong term. It is typically used for dividends, but CGs can be automatically reinvested by purchasing more of the same stock. If OP is unhappy with that particular stock, they are not going to want to buy more of it. I had to physically turn off the CG and dividend reinvestments in my Fidelity account.

 

[Koolau]

Okay, looks like we're all now on the same page.

 

[audreyh1]

Perhaps DRIP was the wrong term. It is typically used for dividends, but CGs can be automatically reinvested by purchasing more of the same stock. If OP is unhappy with that particular stock, they are not going to want to buy more of it. I had to physically turn off the CG and dividend reinvestments in my Fidelity account.

AFAIK stocks don’t cause capital gains unless there is a buyout - an acquiring company causes a sale. Otherwise the investor or their advisor is making a decision to sell some of the stock.

 

[Ronstar]

I don't know anything about DRIPs, but when the mutual funds in my taxable FA account post a dividend, the fund buys the amount of shares in that fund equal to the dividend. Automatically the same day. I also have a single issue in the account that pays a dividend. The dividend from the single issue goes into a money market in the account.

I roughed out my tax return yesterday and the damage is about as I expected. I made a roth conversion late December trying to get close to the top of the 12% bracket, but I didn't know the 2025 capital gains at that time. The capital gains were a little more than expected , and I went into the 22% bracket. It's ok because my projections show us in the 22% bracket or higher from 2027 on.

 

[audreyh1]

And your MILs brokerage account is all mutual funds?

 

[Ronstar]

And your MILs brokerage account is all mutual funds?

Yes, and with the same firm as some of our $. Her taxable account always outperforms my Tira and Roth, her returns being similar to our taxable account which is 97% equities. Her returns have been above 20% for each of the past 3 years.

So I suspected that her AA was too heavy in equites for a 96 YO. I brought this up to the FA a year or so ago. He said that the tax ramifications (capital gains) of changing her AA would be significant, so we left it as is.

She started this account 40-50 years ago with the AA for a 40ish YO working person, and they probably haven't changed the AA.

But still her capital gains as a pct of account value is considerably more than our pct of cap gains to account value. I'm going to track the account buy/sell transactions in detail and again talk to the FA.

 

[target2019]

One problem with typical FA cookie cutter fund selection is that fund(s) can end up in the wrong tax space. Then the client is stuck because of the sell implications.

The problem probably escapes notice at first. But at some time it becomes more obvious.

 

[audreyh1]

Yes, and with the same firm as some of our $. Her taxable account always outperforms my Tira and Roth, her returns being similar to our taxable account which is 97% equities. Her returns have been above 20% for each of the past 3 years.

So I suspected that her AA was too heavy in equites for a 96 YO. I brought this up to the FA a year or so ago. He said that the tax ramifications (capital gains) of changing her AA would be significant, so we left it as is.

She started this account 40-50 years ago with the AA for a 40ish YO working person, and they probably haven't changed the AA.

But still her capital gains as a pct of account value is considerably more than our pct of cap gains to account value. I'm going to track the account buy/sell transactions in detail and again talk to the FA.

Well since those substantial distributions are taxable anyway, not reinvesting them in equity mutual funds will help reduce the % in equity.

 

[VanWinkle]

Until your MIL gives you control over her FA, all you can do is pay
the taxes and hope she gets tired of all the taxation. This is a
curable problem over time, but the account owner must be willing
to make changes.

 

[Dalton]

I'd be looking at the monthly (and quarterly) statements to see exactly what's coming in and what's going out, and why.