Mutual funds and cap gains

[Kendoo]

Help a newbie understand how I can better manage income for aca purposes. In 2020 I received a 1099-Div for almost $11K for some mutual funds that I did not sell. From what I understand it's a combination of dividends and fund manager sales from within with the funds. I didn't receive a penny from this, all reinvested. What are my options to either minimize the amount on future 1099-DIV forms, or putting the amount reported in my pocket to live on? I won't be able to keep my MAGI as low as I'd like with this extra "income". Surely others are fighting this same battle. Thanks, just trying to educate myself on all this prior to pulling the plug on work.

 

[USGrant1962]

The most common recommendation is to make sure you have only index funds in your taxable accounts. They throw off very little to zero capital gains distributions.

 

[TheWizard]

The most common recommendation is to make sure you have only index funds in your taxable accounts. They throw off very little to zero capital gains distributions.

Right.
Last I checked, my S&P 500 index fund was paying out around 1.8% per year in mostly qualified dividends and zero CGDs.
You can't get much lower than that...

 

[RunningBum]

Were they dividends, or capital gains? Index funds generally don't have capital gains, but they will have dividends. There are index funds that tilt away from holding stocks that pay large dividends.

You say you want the money in your pocket to live on? Easy, turn off automatic reinvestment.

 

[TheWizard]

Also, for the OP: it's fine to leave those dividends in there reinvested, along with other incoming new money.
No need to take divs out as spendable income...

 

[pb4uski]

Help a newbie understand how I can better manage income for aca purposes. In 2020 I received a 1099-Div for almost $11K for some mutual funds that I did not sell. From what I understand it's a combination of dividends and fund manager sales from within with the funds. I didn't receive a penny from this, all reinvested. What are my options to either minimize the amount on future 1099-DIV forms, or putting the amount reported in my pocket to live on? I won't be able to keep my MAGI as low as I'd like with this extra "income". Surely others are fighting this same battle. Thanks, just trying to educate myself on all this prior to pulling the plug on work.

It is probably a combination of qualified dividends and capital gains distributions. The capital gains distributions can be mitigaged by selecting funds that pay less capital gains distributions... but repositioning you fund might result in capital gains for the year that you reposition.

Another alternative would be to invest in something that doesn't pay dividends... like BRK.B. Or put it in a savings account... that will drive the income lower.

You can put it in your pocket by just turning off dividend reinvestment. IF one of your current sources of income are tax-deferred retirement account withdrawals for spending then you could just change the taxable account to receiving dividends in cash and then reduce your tax-deferred withdrawals by the same amount and your ACA income would go down by $11k.

 

[OldShooter]

It's probably a small optimization, but there are some tax-managed index funds that you could take a look at. Check expenses first, though. The bold print giveth but sometimes the fine print taketh away. More: https://www.bogleheads.org/wiki/Tax-managed_fund_comparison

... I didn't receive a penny from this, all reinvested. ...

Actually you did receive the pennies. Some computer somewhere followed your instructions to reinvest them in the same fund that paid them to you. That is all that reinvestment is -- automated buying.

 

[Sunset]

OP I know your pain... One year we had a mutual fund declare $70K in capital gains. Totally freaked out DW.... and caused a taxation issue

We have over time, in our taxable accounts sold off our mutual funds and replaced them with ETF's that don't have this effect of capital gains created by manager selling shares when others cash out.

Selling your mutual funds may not generate much in taxes as each year you have been paying the capital gain assigned, that has been our experience.

 

[disneysteve]

OP I know your pain... One year we had a mutual fund declare $70K in capital gains. Totally freaked out DW.... and caused a taxation issue

We have over time, in our taxable accounts sold off our mutual funds and replaced them with ETF's that don't have this effect of capital gains created by manager selling shares when others cash out.

Selling your mutual funds may not generate much in taxes as each year you have been paying the capital gain assigned, that has been our experience.

Same here. We never got hit quite that badly but we have been well into 5 figures once or twice.


One thing you should do, which has already been mentioned, is turn off reinvestment. At least that prevents you from buying even more shares and making the problem bigger going forward. Then gradually start selling off the holdings and moving the money to more tax-efficient vehicles. We actually haven't taken that last step yet ourselves but I plan to in the near future. As noted, some of the gains have already been taxed so hopefully the tax hit won't be awful, especially if we do it gradually.

 

[scrabbler1]

Kendoo, I feel your pain after having gone through it for a few years until I finally dumped at the end of 2019 the actively managed stock fund I had been in since 1996. I switched to an index fund which invested in similar equities. The results in 2020 were terrific. With my MAGI down a lot, I got back on the ACA subsidy train, a train which is running even better thanks to recently enacted legislation expanding the ACA subsidy.

And, as others have pointed out, for tax purposes it doesn't matter if you take those distributions as cash or reinvest them. I usually had reinvested the cap gains and took the dividends as cash, using that cash to pay the added taxes. But sometimes, the cap gain distributions were so big I had to take them as cash and use some of it to pay the taxes.

 

[jebmke]

Taxable; dump active funds if you can. I dumped my last ones in March 2020 when I could harvest a small loss. All the rest were dumped in 2009 or donated to charity.

 

[Montecfo]

only individual stocks in taxable.

 

[Dash man]

I just keep individual stocks and a couple of ETFs in our taxable accounts. We also have a bond ladder. Our only mutual funds are in DW’s 401k and individual stocks and ETFs in our IRAs. Surprises in dividends and interest are rare and very manageable for tax purposes.