Taxable/tax-advantaged allocations

"Default User" wrote > I have paid yearly capital gains and dividend taxes. For instance, my

It does sound like you're mistaken. The big picture: You get to increase the cost basis of your mutual fund holding by the amount of capital gains distributed each year. This is because you already paid taxes each year on these capital gains. No double taxation yada allowed.

The "cost basis" is the original cost of each purchase of shares of your mutual fund. There are a few ways of computing the capital gain for folks who regularly reinvest dividends and cap gain distributions. But the good news is that your cap gain should be quite a bit less than the current value of the mutual fund less the original purchase price.

Any load you paid at the initial purchase and subsequent purchases should result in an increase in the cost basis, too.

The internet has detailed treatments of this. Try googling for {"capital gain" "mutual fund" distribution tax}.

I see the box where Morningstar shows this fund (AIVSX, you noted) as a "blend"; yet Morningstar says on the same web page that it falls into the "large value" category. I vaguely remember an explanation for this but am too lazy to look it up. The 2% yield and a look at AIVSX's top holdings say to me "Large Value."

Total yearly expenses are 0.77%; turnover about 20%. (Plus is the load waived on reinvested distributions? Probably... ) That turnover is very likely unnecessary cap gains you're paying each year, since other funds or ETFs can get the same (or more) growth with less turnover. Per Yahoo's chart tool (not perfect but good enough as part of a quick check), AIVSX tends to mimic the S&P 500. I would consider giving up AIVSX and buying an ETF such as VV, VTI, or SPY. All have much lower expenses and turnover, thus promising greater growth of principal at lower tax cost each year.

Reply to
Elle
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[an old mutual fund bought a long time ago]

Here's basically how it works:

Most folks, when they buy a mutual fund, have it set by default to reinvest distributions. That means that when the fund pays out dividends, short-term cap gains and long-term cap gains (usually paid separately), those payouts are used to buy more shares - and in doing so, their cost basis increases.

A (I don't know how common) error when dealing with taxes is that when they sell the fund, they assume that their taxable capital gain is the difference between what they paid (out of pocket on that first purchase) and what they got from the sale. In fact, each time they reinvested a dividend, they paid more - just they didn't see the cash between the distribution and the reinvestment.

Example: You buy FundX shares for $10,000. The shares appreciate to being worth $12,000. The fund pays out distributions (of all three sorts) which work out to, say, $1500 on your shares and you have them reinvested. The shares you own (both original and reinvested combined) continue to appreciate and now your original $10,000 investment is worth $14,000.

You sell all of them and pocket $14,000. Here's the thing - you owe cap gains taxes on $2500, *not* on $4000. Because in the year when you got those $1500 of distributions you reinvested, you paid taxes on those distributions separately.

(note that if you sell within a year of the distribution and reinvestment, some of those cap gains may be short-term gains - the reinvested shares were held for less than a year)

It's been throwing off distributions every year, sometimes quite substantial (ie. in '06, they totalled up to about

8% of share price!). If you've been reinvesting distributions since you bought that fund, as most folks do, your cost basis is a *lot* higher than you may think.
Reply to
BreadWithSpam

Hmmm ... tough target with only 10% available in your Roth IRA. If you also had a taxable brokerage account, I could see a possible way to do this.

401K: Bonds, Domestic Large, Domestic Small, International Large Roth IRA: REIT Brokerage: International Small, International RE, Emerging Market, Commodities
Reply to
wyu

Oh, I do. When I said 10% in Roth, I meant 10% of the investments outside of the 401(k). The aggregate investible money is about 80% of what's in the 401(k).

The asset allocation I showed was what I originally came up with for that money, with different plan for the 401(k) because not all of those asset classes are available. However, if I blend the two strategies to an extent, then you could look at that as an overall asset allocation too.

I'll have to see what I can come up with for a spreadsheet to help me figger it out.

Thanks for the suggestions.

Brian

Reply to
Default User

It's not too surprising that I'm mistaken on it, as I'm still fairly new at all this. I called the brokerage, they said they'll have to research it to get information on all that due to the dividend reinvestment.

I'm not even entirely sure what that was. I doubt I could find the original paperwork for it, and my account has changed companies several times over the years. The original check I gave the broker was for $6000.

I was expecting a bad tax hit, but if it's not too onerous I might just do that.

Thanks to you and to "Bread", who had some good words as well.

Brian

Reply to
Default User

"Default User" wrote On mutual fund capital gains and their taxation --

This problem is common enough that fund companies are generally well prepared to help solve it.

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94 for example has all the distributions and reinvestment NAVs from 1990 to 1994 for your fund. You can change the time period as needed.

If you do your own taxes, a spreadsheet may come in quite handy. :-)

American Funds should have a record of it. See their web site for contact info.

Reply to
Elle

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