Thanks to the advice on this group, I have learned that index funds are the way to go. So I invest my money into Spartan and Vanguard bond index funds.
Every few months I buy around $20k worth of shares. Will this create some accounting nightmare when I sell, since I will have bought shares at different points in time?
Nice.
Not really. Ultimately, when you sell, you'll (hopefully) have capital gains, and you'll have to report those gains and pay taxes on them. There are a couple of ways to calculate your cost basis when you buy mutual funds, since there has always been a presumption that folks buy mutual funds and then add to their holdings either by buying additional shares or by reinvesting distributions (which you don't have to do, but most folks do anyway).
You can calculate basis by using an averaging method (once you start using averaging, you need to keep using it), or by first-in-first-out, or by specific share identification when you sell. The last of these offers you the most control over tax implications (ie. you can choose to sell in particular the highest-cost shares and thus minimize taxes).
Bear in mind that if you have distributions reinvested, each of those reinvestments is also a purchase - you pay taxes on those distributions annually (you'll get a 1099), but the reinvestment of those distributions increases the basis of your position on the whole. Make sure you track this so you don't pay cap gains taxes you don't owe!
For more details, see IRS pub 564:
Note further that the Emergency Economic Stabilization Act (the bailout bill signed into law in Oct., 2008) included rules requiring financial intermediaries to track and report adjusted cost basis for investors. It's phased in over a few years (different investments get covered at different times to allow the brokerages time to work the systems out). Starting in Jan 2011, they need to track and report basis for stock transactions. In Jan 2012, mutual funds and DRIPS. In Jan 2013, bonds and options.
This won't help, necessarily, with shares you've already purchased - it only covers shares purchased after those dates.
That said, most brokerages are already tracking basis for folks for things they bought and kept at that brokerage. (Currently, as far as I know, none of them transmit basis to a new brokerage if you transfer the shares in kind). Certainly Vanguard and Fidelity do a pretty good job of tracking basis for you. I recently sold some shares at Fidelity that had various purchases and reinvestments over the years and their basis calculation was within pennies of my own.
Vanguard reports dividends and capital gains, calculated in accordance with accounting standards. You should have an easy time.
i
That's amazing and wonderful to look forward to. Maybe I will even be able to revoke my never-reinvest-dividends rule. In the meantime I would caution the OP from many tiny automatic purchases from such reinvestments, and just consolidate them manually and reinvest in fewer chunks easier to track. Also beware how many bond types are poised for interest rate risk
One word: Quicken. It can link to most brokerage and mutual fund accounts and automatically track the basis for reinvestments. Totally pain free. -- Doug
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