Mutual Fund Distribution Dates / Amounts?

[bingybear]

I don't see where it is any better (talking about LTCG distributions).. taxed the same and NAV goes down by the distribution so I don't understand where the advantage is.

really depends on the exact situation. I had a fund last year that distributed 20%, but my gain was much less. I would have paid more tax. Fortunately this was in an IRA. Back in 2007 I also has really large distributions from MF also. After a big run up they will sell some big winners and move $ into other stocks that are hopefully on the way up. But this creates a distributible gain.

I now use ETF and individual stocks in taxable accounts. So far these have not had the large distributions that accompany the market cycles with stock mutual funds. OK... fixed indexed funds may not have as much of a distribution.

Really large distributions and change your tax bracket in one year, but not make up for it in the next.

 

[kaneohe]

Ok, I see an advantage if one has capital loss carryforwards... but if not, I don't see any advantage.

ok, pls show what the advantage is if you have loss carryforwards......I was just about to vote w/ your previous remark.

Suppose NAV at purchase is 60. Current NAV is 100. Fund distributes a built-in CG of 50 so NAV decreases to 50. If you sell before distribution,
CG is 100 - 60 = 40. If you wait till after distribution, you have a CG distribution of 50, and if you then sell shares, you have a CG = 50 - 60 = <10>
for a total of 50 + <10> = 40 which is the same as if you sell before the distribution. If you have a capital loss carryforward, that just is combined with the CG of 40 in both cases. Isn't that the same?

 

[LOL!]

@kaneohe, your scenario is not about dividends which is what I was talking about.

And even with dividends, not all dividends are taxed at the LTCG tax rate since not all dividends are 100% qualified.

In any event, the December dividends should not be more than about 1% to 3% of the underlying holding except in special circumstances. I would think that would be a non-issue for most folks except those at the margin of a phase-out.

 

[Willers]

I don't see where it is any better (talking about LTCG distributions).. taxed the same and NAV goes down by the distribution so I don't understand where the advantage is.

It is about timing. I have a relatively high bracket/income this year and will be in a much lower bracket next year. The savings now are worth more than the carry-forward will be later when my fed cap gain tax rate will be minimal. If all was equal then yes, there wouldn't be a benefit. In my case, there is. As always, YMMV.

 

[bingybear]

ok, pls show what the advantage is if you have loss carryforwards......I was just about to vote w/ your previous remark.

Suppose NAV at purchase is 60. Current NAV is 100. Fund distributes a built-in CG of 50 so NAV decreases to 50. If you sell before distribution,
CG is 100 - 60 = 40. If you wait till after distribution, you have a CG distribution of 50, and if you then sell shares, you have a CG = 50 - 60 = <10>
for a total of 50 + <10> = 40 which is the same as if you sell before the distribution. If you have a capital loss carryforward, that just is combined with the CG of 40 in both cases. Isn't that the same?

If you wait until after the reinvested distribution to sell (within a year), the CG on these reinvested dividends will be STCG and may have a higher tax rate than LTCG.
Distributions may be well behaved for many index MF. However, even many typically well behaved active MF can have large distributions after a good run up in the market (2007 for instance).
But wanting to know year end distributions does extend to ETFs and other investments. For instance SDY had an extra distribution last year as well as others. So why care about knowing before year end (as some may distribute on the last day (or last trading day)? Well, being my first year of RE, I want to max the 15% bracket with roth conversions. So the reason to know may have nothing to do with selling before or after the distribution, it may be to get your roth conversion in before year end or to harvest more losses.

 

[audreyh1]

I don't see where it is any better (talking about LTCG distributions).. taxed the same and NAV goes down by the distribution so I don't understand where the advantage is.

If your gain in the fund is significantly less than the distribution, you will have a much smaller tax hit if you sell the fund before the dist record date. You can always buy the fund back after the dist if you really like it.

You could sell the fund after the dist date this year, and have a capital loss to offset the distribution. Tax-wise the same outcome as selling ahead, although now you'll have to wait a month to buy it back without violating wash sale rules. And if you reinvested the distribution - oops, now you also have to wait a month before you can sell it.

But if you do nothing, you have a taxable distribution and now a fund with an unrealized capital loss. And you just incurred a lot of extra taxes.

An example may help:

Say I see fund X has an estimated distribution of $20,000.

But my long-term gain in the fund, compared to my basis, is only $8000.

If I sell it before the dist, I owe cap gains taxes only on the $8000.

Otherwise I'll owe taxes on $20,000. And now I have an unrealized loss on the fund of $12,000.

For someone well under the 15% tax bracket limit with all long term cap gain dist or qualified div dist, this won't matter. But for anyone close to the total income exceeding the 15% tax bracket, or getting a chunk of short-term cap gains/unqualified divs it can make a big difference.

 

[pb4uski]

I guess that I have trouble relating to these examples since I usually hold positions for a long time and I haven't had any significant capital loss carryforwards. Lucky I guess.

 

[audreyh1]

I guess that I have trouble relating to these examples since I usually hold positions for a long time and I haven't had any significant capital loss carryforwards. Lucky I guess.

You don't have to have any capital loss carry forwards for this to matter!

I had a fund where the long term dist would have been $15,000.

I chose to sell the fund and realize an $8000 lt cap gain instead.

My 2015 AGI will be $7000 lower as a result of my actions.

Such a scenario can occur even if you've held the fund for a long time, as I have.

 

[kaneohe]

audrey.......can you give some examples of these funds.....large CG distributions implies actively managed, I assume? and CG distribution > than your own unrealized gains means ?? that they don't sell the winners every yr but sometimes accumulate them before selling?? and you've owned the fund a relatively short time??

 

[audreyh1]

audrey.......can you give some examples of these funds.....large CG distributions implies actively managed, I assume? and CG distribution > than your own unrealized gains means ?? that they don't sell the winners every yr but sometimes accumulate them before selling?? and you've owned the fund a relatively short time??

Yes - this is something that can happen with active funds. And it can be a combination of things. Equity funds often let gains accumulate every year, so after a while they may have a large unrealized gain, particularly if it's a popular fund with large inflows over many years. That's great, until something triggers the fund to realize those gains.

Sometimes it's simply that the fund closes out investments that were held over a long period of time, because that investment reached their notion of fully valued. And/or they might have held a significant position that was bought out.

Sometimes a new manager comes in, and they decide to reorganize the holdings a bit. This usually generates a lot of realized cap gains.

If a fund falls out of favor, and starts to have a lot of redemptions, they are forced to sell assets incurring realized capital gains which are passed along in the near future to the remaining shareholders.

In my case, a fund had paid out fairly large distributions over recent years, enough to return much of the gain I had in the fund held since the early 2000s. So this year, when the fund had a tough year, the estimated dist was higher than my remaining gain in the fund.

Several examples in this M* article: http://news.morningstar.com/articlenet/article.aspx?id=722733

And more details about specific cases here (you can read the transcript if you don't want to watch the video) http://www.morningstar.com/cover/videocenter.aspx?id=692933

 

[MBAustin]

Thanks for those M* links and your details, Audrey.