@@RetirementPlanningEducation so when I get the 1099 at the end of the year, I have to pay out of pocket for the capital gain distribution I received? Which for me, as I'm kinda looking at it probably won't be much since I just started, and I only have like 250$ in a mutual fund, and I make 36k a year.
@@briansamaniego-howard1806 If the total value of mutual fund(s) you have in a normal brokerage account is only about $250, the tax impact of the fund(s)'s capital gain distribution will be small. On $250 of mutual funds, the capital gains likely wont' exceed $50 for the year. Which means you'd only have up to $50 of additional taxable income for the year.
Great video! So why do people dislike capital gain distributions if they are still a net profit to the investor? If the fund buys the asset for $5, sells it for $8, and passes on the capital gains to me, then I just made $3 that I need to pay capital gains taxes on. But I still just got money I didn't have before, so what's the issue? $3 after 15% taxes is still $2.55, so I'm not losing money.
What people don’t like is the concept of having to pay tax on income they don’t actually get to see or use in the year they have to pay the tax. And the fact that the amount of taxable income is basically a wild card that could be a little or could be a lot. It could really mess with income and tax projections.
I've been asking the same question after trying to better learn the differences between distributions and dividends. If I'm holding in a mutual fund that has a great track record, I don't see the issue with getting a distribution that's just adding to my net income I didn't have before and having to pay the tax bill on it. In down years, it just lowers my basis in the fund and I'm able to buy more shares at a discount.
For index funds, it’s usually tiny, if anything. It’s more so actively managed mutual funds that could have sizable capital gain distributions. They could be like 5-20% of the funds size in a year.
Thanks for the helpful video. Is there a succinct answer why I have both capital gains and capital gains distributions for my mutual funds? I'm getting hammered with capital gains distributions.
Capital gains are from sales you intentionally made (or if you work with an advisor, sales your advisor intentionally made for you). Capital gain distributions are from sales made within the mutual funds you hold. Those sales were not intentional by you, and you didn't actually sell any of your position in the fund. But because the fund itself sold things at a gain throughout the year, those gains are passed on to you as capital gain distibutions.
Thank you! I have one partial mutual funds in my IRA that I wanted to sell and purchase an ETF with a better return. Would I have to pay the tax if I'm just basically trading these two. I don't see a way to "trade" in the Merrill app only sell then buy.
When held inside at tax "qualified" account like a traditional IRA, there is no current year tax implications of receiving a mutual fund capital gain distribution within that account. Nor is there any current year tax implications of selling a fund within an IRA (whether it's sold at a gain or a loss). As such, there should be no current year tax issue with selling that fund to reinvest the proceeds into something else within the IRA
Thanks so much for the reply. I'm slowly learning. About 15 years ago I left my previous employer and rolled my 401k into a Merrill account because I had BOA as my bank. The advisor told me I should buy ABALX and so I did. Only about $8k worth. But I remember him talking about fees and I had no idea what any of it meant. I now realize how much money I missed out on if I had invested in something like SCHD instead.
thanks for the video, I've been trying to solve a mystery as the bulk of our holdings are in IRA/401k but we do keep $100,000 in taxable brokerage and these last few years we've been seeing a bigger tax liability than expected, I believe it's coming from turnover inside that brokerage account which is creating short-term capital gains tax liability.
Do you mean 2a? That’s where the capital gain distributions are shown. Those are taxes as long-term capital gains and are therefore at the reduced long-term capital gains tax rates; not ordinary income tax rates
Great explanation! Question though - if you paid taxes along the way on those yearly distributions, and a year later or so you decided to sell out all your position on the mutual fund, do you get taxed again? I assume no. But how does that work? Thanks
You're not taxed on the same dollar twice. But if you sell the mutual fund for a price that's higher than what you paid for it, yes, you'll have to pay tax on that gain. All else equal though, a mutual fund's price drops by the amount of it's capital gain distribution.
Thanks and I have one question, I brought 1 share for $10, then i got $1 distribution that I need to pay tax, now I have 1.1 shares at cost of $9. If I sell now at price at$9/share, I only get $10 , which is exactly what i paid for, but i had to pay $1 capital on the distribution?
If you sell in this case, you will have a $1 realized capital loss on your original share that you bought for $10 but will now only sell for $9...hence a $1 loss on that portion. The new 0.1 share you purchased with the cash from your $1 capital gain distribution will be at neither a gain nor a loss. So, all said and done, of the $10 sale proceeds you were to get if you were to sell, $9 is the proceeds of selling your original share (at a $1 loss) and $1 is the proceeds of selling the 0.1 shares you just bought with the capital gain distribution. This ultimately means that yes you had to pay tax on the $1 of capital gain distribution, but you also will get a deductible loss of $1 because the price dropped from $10 to $9 on your original share. Therefore, the tax implications of the capital gain distribution are basically a wash in this case because you immediately sell the shares and realize the loss on your original share
Conversely, what if a mutual fund manager sold at loss, will you get a capital gain loss on your 1099 for you to use? Or will only the price drop. Great informative video by the way. Thank you.
Losses actually stay within the fund. Gains within the fund can then be offset by those losses. And then any excess gain is what’s distributed to shareholders.
Thank you for the explanations! Are the mutual fund capital gains distributions made for the gains generated during the calendar year? For some reason, I got them for the period from Nov 1 to Oct 30. Is that the 12-month period used by all mutual funds?
Yes I believe that’s right. Though I don’t think all funds use October 31 as the end of the period; I read somewhere that some use September-end, for example.
I would like to invest into VTIP in my cash account (due to the $10-15K per year limit on I bond purchases), but I'm worried about tax inefficiency. VTIP gives off quarterly dividends just as you describe at around 13:30 As you mention, these dividends are taxable events even though you haven't made any money. But what if you hold VTIP (or whatever security similar to it) all year long, receive all 4 dividends and experience whatever happens to the share price within that timeframe (hopefully increasing). And then you sell all shares at the end of the year. If you did this and the share price went down, wouldn't you realize a capital loss that would offset your combined dividends? And if dividends were more than the share price loss, then you made money and you just pay taxes on that net profit? Or, if the share price went up, then you just pay taxes on the combined money you made? And effectively only pay taxes on what your net profits are and not the "gotcha" non-profits from a dividend combined with share price loss as a result of the dividend? Is that correct? And then after Jan 1 you wait 30 days to avoid wash sale rules, buy VTIP again and repeat this process for the next year (selling at the end of the year as before). Does this make sense? My objective is to pay taxes only on what my net profits are, not pay taxes on something with no net gain to me. Thanks for everything!
Yes, if you could strip out any price changes due to anything other than the dividends, what would happen is the share price would fall by exactly the amount of the dividend after the share hits the "ex-dividend" date. Therefore, yes, you'll have a $X of taxable income from the dividend, but you'll also have $X of loss in your existing shares. As such, if you were to immediately sell your shares after the share price drop, the loss you'd have on that sale would exactly be offset by the income you had from the dividend. But where the tax analysis gets complicated is whether the loss is short-term or long-term, and how much of the dividend income is qualified vs ordinary. So, the tax implications may not exactly be a wash.
So I guess there isn't a scenario where the mutual fund has losses to offset the gains because if they sell at a loss to pay some investor pulling their money out, that investor will report the loss. But all the gains are hung on those in the fund who keep their money in.
I still don't get it. Wealth is neither created nor destroyed with a capital gains distribution. But the person left "holding the bag" we'll have to pay taxes. Isn't that wealth being destroyed? In your example, if the investor gets a $1 capital gain distribution and has to pay taxes on it, then he has to pay $0.20 today (or whatever his tax rate is). Then he doesn't actually have $10. He has $9.80. Because he has to pay taxes on the distribution. Also, is this a case of paying taxes now versus later? The guy getting the $1 capital gain distribution, is it the same as if he were to sell $1 of the mutual fund on his own and pay taxes on it? Also also, with capital gains distribution, are those investors getting taxed twice? First with the force distribution and second when they end up selling their share on their own? I was hit with the large Vanguard capital gains distribution and trying to understand it. Thanks.
The total value of the person's holding in the mutual fund doesn't change as a result of the capital gain distribution. That's what I meant by wealth neither being created nor destroyed. But yes, it does force the realization of income tax. And I guess you can say tax ALWAYS takes away from wealth (whether you're paying taxes on your wages, gambling winnings, pensions, etc.) But the total value of the position in the fund doesn't actually change. No, you're not double-taxed. If there is a capital gain of $1 paid, yes, you're taxed on that $1 in the year it's paid. But, all else equal, the market price of the fund will decline by $1 when the distribution is paid. Assume you originally bought the fund for $10 per share. And the price has since risen to $11. If you were to sell it today, you'd have to pay tax on the $1 gain. Or, if a capital gain distribution of $1 is paid, you'll have to pay tax on that distribution. BUT, the market price of the fund will drop from $11 to $10. So if you turn around and sell the fund right after the distribution, you wont' have any capital gain to be taxed on. In that sense, the capital gain distribution basically just forces you to realize some of the gain of the fund along the way, without you actually selling it.
@@RetirementPlanningEducation Are capital gains distributions considered a good or bad event? Is they only downside being forced to pay taxes unexpectedly (when you will have to pay later anyway)? Any upside to capital gains distributions in terms of overall wealth building? I know the capital gains distribution is equivalent to being forced to take a capital gain but then going back and buying the same fund. Why would anyone, on their own, sell a fund and then buy it back on the same day? Wouldn't that trigger taxes every time they sell at a gain - thus eating into their overall profit from the investment? I'm trying to understand the math on this - whether capital gains distributions are as bad as it seems (getting a huge unexpected tax bill) or whether there are any possible upsides to this (lower realized gains and lower tax bill in the future when I sell, etc). Also, is it worth selling all my shares in a mutual fund to move to an ETF? This would trigger a huge realized capital gains tax bill now for potential tax savings in the future. I come from the mindset that moving funds too much is bad (brokerage fees, taxes, etc). But I feel stuck because most of my funds are in mutual funds that pay capital gains distributions. It feels like I'm paying taxes every year to upkeep them without seeing any realized gains.
@@patma You're thinking about it the right way; they aren't necessarily bad or good. They're definitely not good from a tax management and tax-efficiency perspective because you have zero control over them and the tax impacts they force upon you. But to your point, when you get a distribution and have to pay tax on it, it reduces the taxable gain you'd otherwise have when you do eventually sell the position. So in that sense, the tax impacts could potentially offset each other. But that aside, the fact you can't control the timing and taxability of the distributions is far from ideal. As for how best to manage capital gain distributions or how to get out of the fund and into something more tax-efficient, I can't give any specific advice on that. Yes, one option is to sell out of the fund and reinvest into something more tax-efficient. But if that means you have to incur a large taxable gain to do that, it may not be the right move for you.
I've been searching all over the internet to get this info and you've put it altogether. Thank you
Hopefully it's everything you've been looking for, thanks!
@@RetirementPlanningEducation so when I get the 1099 at the end of the year, I have to pay out of pocket for the capital gain distribution I received? Which for me, as I'm kinda looking at it probably won't be much since I just started, and I only have like 250$ in a mutual fund, and I make 36k a year.
@@briansamaniego-howard1806 If the total value of mutual fund(s) you have in a normal brokerage account is only about $250, the tax impact of the fund(s)'s capital gain distribution will be small. On $250 of mutual funds, the capital gains likely wont' exceed $50 for the year. Which means you'd only have up to $50 of additional taxable income for the year.
Thanks Andy! Very clear explanation!
Thank you!
Great video! So why do people dislike capital gain distributions if they are still a net profit to the investor? If the fund buys the asset for $5, sells it for $8, and passes on the capital gains to me, then I just made $3 that I need to pay capital gains taxes on. But I still just got money I didn't have before, so what's the issue? $3 after 15% taxes is still $2.55, so I'm not losing money.
What people don’t like is the concept of having to pay tax on income they don’t actually get to see or use in the year they have to pay the tax. And the fact that the amount of taxable income is basically a wild card that could be a little or could be a lot. It could really mess with income and tax projections.
I've been asking the same question after trying to better learn the differences between distributions and dividends. If I'm holding in a mutual fund that has a great track record, I don't see the issue with getting a distribution that's just adding to my net income I didn't have before and having to pay the tax bill on it. In down years, it just lowers my basis in the fund and I'm able to buy more shares at a discount.
Great Video.
thank you!
Can you give a sense of scale on this?
What is the normal annual tax % for just holding an s&p500 or global all world tracker through vanguard
For index funds, it’s usually tiny, if anything. It’s more so actively managed mutual funds that could have sizable capital gain distributions. They could be like 5-20% of the funds size in a year.
@@RetirementPlanningEducation thank you for your quick response :)
@@RetirementPlanningEducation thank you for your quick response :)
Big thumbs up to this vid
Thanks! 👍👍
Thanks for the helpful video. Is there a succinct answer why I have both capital gains and capital gains distributions for my mutual funds? I'm getting hammered with capital gains distributions.
Capital gains are from sales you intentionally made (or if you work with an advisor, sales your advisor intentionally made for you).
Capital gain distributions are from sales made within the mutual funds you hold. Those sales were not intentional by you, and you didn't actually sell any of your position in the fund. But because the fund itself sold things at a gain throughout the year, those gains are passed on to you as capital gain distibutions.
Could you please share the Vanguard article about retail -> institutional?
www.wsj.com/articles/vanguard-target-retirement-tax-bill-surprise-11642781228?st=zj8wqy0erubhukw&reflink=share_mobilewebshare
Thank you! I have one partial mutual funds in my IRA that I wanted to sell and purchase an ETF with a better return. Would I have to pay the tax if I'm just basically trading these two. I don't see a way to "trade" in the Merrill app only sell then buy.
When held inside at tax "qualified" account like a traditional IRA, there is no current year tax implications of receiving a mutual fund capital gain distribution within that account. Nor is there any current year tax implications of selling a fund within an IRA (whether it's sold at a gain or a loss). As such, there should be no current year tax issue with selling that fund to reinvest the proceeds into something else within the IRA
Thanks so much for the reply. I'm slowly learning. About 15 years ago I left my previous employer and rolled my 401k into a Merrill account because I had BOA as my bank. The advisor told me I should buy ABALX and so I did. Only about $8k worth. But I remember him talking about fees and I had no idea what any of it meant. I now realize how much money I missed out on if I had invested in something like SCHD instead.
thanks for the video, I've been trying to solve a mystery as the bulk of our holdings are in IRA/401k but we do keep $100,000 in taxable brokerage and these last few years we've been seeing a bigger tax liability than expected, I believe it's coming from turnover inside that brokerage account which is creating short-term capital gains tax liability.
Great video!! So for the 2b column on a 1099 DIV form showing total capital gain distribution, is it taxed as long term gains? or short term gains
Do you mean 2a? That’s where the capital gain distributions are shown. Those are taxes as long-term capital gains and are therefore at the reduced long-term capital gains tax rates; not ordinary income tax rates
Yes my bad!! thanks!@@RetirementPlanningEducation
Great explanation! Question though - if you paid taxes along the way on those yearly distributions, and a year later or so you decided to sell out all your position on the mutual fund, do you get taxed again? I assume no. But how does that work? Thanks
You're not taxed on the same dollar twice. But if you sell the mutual fund for a price that's higher than what you paid for it, yes, you'll have to pay tax on that gain.
All else equal though, a mutual fund's price drops by the amount of it's capital gain distribution.
Thanks and I have one question, I brought 1 share for $10, then i got $1 distribution that I need to pay tax, now I have 1.1 shares at cost of $9. If I sell now at price at$9/share, I only get $10 , which is exactly what i paid for, but i had to pay $1 capital on the distribution?
If you sell in this case, you will have a $1 realized capital loss on your original share that you bought for $10 but will now only sell for $9...hence a $1 loss on that portion. The new 0.1 share you purchased with the cash from your $1 capital gain distribution will be at neither a gain nor a loss. So, all said and done, of the $10 sale proceeds you were to get if you were to sell, $9 is the proceeds of selling your original share (at a $1 loss) and $1 is the proceeds of selling the 0.1 shares you just bought with the capital gain distribution. This ultimately means that yes you had to pay tax on the $1 of capital gain distribution, but you also will get a deductible loss of $1 because the price dropped from $10 to $9 on your original share. Therefore, the tax implications of the capital gain distribution are basically a wash in this case because you immediately sell the shares and realize the loss on your original share
@@RetirementPlanningEducationoh I see,thanks a lot!
Conversely, what if a mutual fund manager sold at loss, will you get a capital gain loss on your 1099 for you to use? Or will only the price drop. Great informative video by the way. Thank you.
Losses actually stay within the fund. Gains within the fund can then be offset by those losses. And then any excess gain is what’s distributed to shareholders.
Thank you for the explanations! Are the mutual fund capital gains distributions made for the gains generated during the calendar year? For some reason, I got them for the period from Nov 1 to Oct 30. Is that the 12-month period used by all mutual funds?
Yes I believe that’s right. Though I don’t think all funds use October 31 as the end of the period; I read somewhere that some use September-end, for example.
I would like to invest into VTIP in my cash account (due to the $10-15K per year limit on I bond purchases), but I'm worried about tax inefficiency. VTIP gives off quarterly dividends just as you describe at around 13:30 As you mention, these dividends are taxable events even though you haven't made any money. But what if you hold VTIP (or whatever security similar to it) all year long, receive all 4 dividends and experience whatever happens to the share price within that timeframe (hopefully increasing). And then you sell all shares at the end of the year. If you did this and the share price went down, wouldn't you realize a capital loss that would offset your combined dividends? And if dividends were more than the share price loss, then you made money and you just pay taxes on that net profit? Or, if the share price went up, then you just pay taxes on the combined money you made? And effectively only pay taxes on what your net profits are and not the "gotcha" non-profits from a dividend combined with share price loss as a result of the dividend?
Is that correct? And then after Jan 1 you wait 30 days to avoid wash sale rules, buy VTIP again and repeat this process for the next year (selling at the end of the year as before). Does this make sense? My objective is to pay taxes only on what my net profits are, not pay taxes on something with no net gain to me. Thanks for everything!
Yes, if you could strip out any price changes due to anything other than the dividends, what would happen is the share price would fall by exactly the amount of the dividend after the share hits the "ex-dividend" date. Therefore, yes, you'll have a $X of taxable income from the dividend, but you'll also have $X of loss in your existing shares. As such, if you were to immediately sell your shares after the share price drop, the loss you'd have on that sale would exactly be offset by the income you had from the dividend.
But where the tax analysis gets complicated is whether the loss is short-term or long-term, and how much of the dividend income is qualified vs ordinary. So, the tax implications may not exactly be a wash.
So is this is the reason why a MF price chart may not show much movement in share price but the fund still have a 10-15% return?
Yes, definitely. Price declines by the amount of the distribution each time there is a distribution.
So I guess there isn't a scenario where the mutual fund has losses to offset the gains because if they sell at a loss to pay some investor pulling their money out, that investor will report the loss. But all the gains are hung on those in the fund who keep their money in.
I still don't get it. Wealth is neither created nor destroyed with a capital gains distribution. But the person left "holding the bag" we'll have to pay taxes. Isn't that wealth being destroyed?
In your example, if the investor gets a $1 capital gain distribution and has to pay taxes on it, then he has to pay $0.20 today (or whatever his tax rate is). Then he doesn't actually have $10. He has $9.80. Because he has to pay taxes on the distribution.
Also, is this a case of paying taxes now versus later? The guy getting the $1 capital gain distribution, is it the same as if he were to sell $1 of the mutual fund on his own and pay taxes on it?
Also also, with capital gains distribution, are those investors getting taxed twice? First with the force distribution and second when they end up selling their share on their own?
I was hit with the large Vanguard capital gains distribution and trying to understand it. Thanks.
The total value of the person's holding in the mutual fund doesn't change as a result of the capital gain distribution. That's what I meant by wealth neither being created nor destroyed.
But yes, it does force the realization of income tax. And I guess you can say tax ALWAYS takes away from wealth (whether you're paying taxes on your wages, gambling winnings, pensions, etc.) But the total value of the position in the fund doesn't actually change.
No, you're not double-taxed. If there is a capital gain of $1 paid, yes, you're taxed on that $1 in the year it's paid. But, all else equal, the market price of the fund will decline by $1 when the distribution is paid. Assume you originally bought the fund for $10 per share. And the price has since risen to $11. If you were to sell it today, you'd have to pay tax on the $1 gain. Or, if a capital gain distribution of $1 is paid, you'll have to pay tax on that distribution. BUT, the market price of the fund will drop from $11 to $10. So if you turn around and sell the fund right after the distribution, you wont' have any capital gain to be taxed on. In that sense, the capital gain distribution basically just forces you to realize some of the gain of the fund along the way, without you actually selling it.
@@RetirementPlanningEducation Are capital gains distributions considered a good or bad event? Is they only downside being forced to pay taxes unexpectedly (when you will have to pay later anyway)? Any upside to capital gains distributions in terms of overall wealth building?
I know the capital gains distribution is equivalent to being forced to take a capital gain but then going back and buying the same fund. Why would anyone, on their own, sell a fund and then buy it back on the same day? Wouldn't that trigger taxes every time they sell at a gain - thus eating into their overall profit from the investment?
I'm trying to understand the math on this - whether capital gains distributions are as bad as it seems (getting a huge unexpected tax bill) or whether there are any possible upsides to this (lower realized gains and lower tax bill in the future when I sell, etc).
Also, is it worth selling all my shares in a mutual fund to move to an ETF? This would trigger a huge realized capital gains tax bill now for potential tax savings in the future. I come from the mindset that moving funds too much is bad (brokerage fees, taxes, etc). But I feel stuck because most of my funds are in mutual funds that pay capital gains distributions. It feels like I'm paying taxes every year to upkeep them without seeing any realized gains.
@@patma You're thinking about it the right way; they aren't necessarily bad or good. They're definitely not good from a tax management and tax-efficiency perspective because you have zero control over them and the tax impacts they force upon you. But to your point, when you get a distribution and have to pay tax on it, it reduces the taxable gain you'd otherwise have when you do eventually sell the position. So in that sense, the tax impacts could potentially offset each other. But that aside, the fact you can't control the timing and taxability of the distributions is far from ideal.
As for how best to manage capital gain distributions or how to get out of the fund and into something more tax-efficient, I can't give any specific advice on that. Yes, one option is to sell out of the fund and reinvest into something more tax-efficient. But if that means you have to incur a large taxable gain to do that, it may not be the right move for you.