Mutual fund taxes: Lessons learned

Every year I learn a little bit more about investing that I often wish I didn’t know.

Why?  Well, back in the day, my father took care of my investments and he’s really into complicated stuff.  Each year I can generally only handle untangling one crazy thing.  (I think I’m going to have one share of AOL for ETERNITY.  How?  I had AOL, then it became TWC, then it split off again, so now I have a bunch of TWC, some other Turner/Time Warner company, and one lonely AOL share.  Figuring out the cost-basis on that share is a really low priority.  Update:  And now Comcast is buying TWC… that’ll be fun.)

This year I learned that mutual funds can generate capital gains without your knowledge, and they don’t give you the money but instead they reinvest it, buying more shares of the fund.  This particular capital gain hasn’t done any such thing since like 1994 (before I was paying attention), so the $4K capital gain was a surprise.  I immediately groaned and wished I’d given these funds to the school instead of cash back when my dad was donating money to the school, but I was worried about dealing with that paperwork then too.  Or that I’d taken leave from the school when DH was unemployed so that I could claim a 15% marginal tax rate and sell every single one of those tangled up funds.  (Or better yet, taken a capital loss on all of them when the markets were down during the recession!)  If only I were more organized and not still learning in the past.

But, it turns out that paying capital gains taxes now on mutual funds isn’t such a horrible thing.  The tax I pay now will reduce my tax bill in the future when I actually sell the whole thing.  So it may be best not to donate these shares to charity.  (I probably have some QQQQ with a higher capital gain anyway.  QQQQ has been good to me.)

Still, this mutual fund has a 1% expense ratio, and I think it’s just a large cap fund, so I should get rid of it one of these days anyway since I can get large cap from Vanguard much less expensively.

So anyway.  None of our readers probably cares about this, but hey.  Stick with Vanguard index funds or Target date funds and you’ll be fine.  Stay away from needless and expensive complications!

And so say I.

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16 Responses to “Mutual fund taxes: Lessons learned”

  1. bogart Says:

    Haha, indeed. I have shares of Bank of America (woohoo!) for similar reasons. Every quarter I get a dividend check that is 3 digits — counting those to the right of the decimal (BOA is currently limited to $.01 per share by law due to past foolishness), and we party, to borrow a phrase from my elementary schooler, like it’s 1998 (he claims he is not allowed to party like it’s 1999, because he is a schoolkid. Of course, he is right about this though I am impressed he figured it out all on his own :) !).

    Said shares, which were (mostly?) then not BOA were given, not willed, to me 18 years before we first partied like it was 1998. I have no idea of the cost basis nor how to figure it out (some shares were Sovran, some may have been other banks). Clearly I’d have been well advised to sell them before the most recent meltdown (as my DH likes to remind me). I am tempted to give them away, solving the cost-basis problem.

    On the bright side, I don’t own any mutual funds outside of my retirement accounts.

    • nicoleandmaggie Says:

      There’s a lot to be said for giving away stocks, but my father says that’s also a PITA because unless you’re working with like the Catholic church (my sister went to Catholic school), the receiving institution often has no clue what to do. It’s gotten so even skinflinty he says screw it most of the time and just gives cash.

    • nicoleandmaggie Says:

      p.s. Next week we talk about escheatment… but as a heads up, if you haven’t logged into your BofA stock in a while, you might wanna do that. Otherwise the decision to sell may be taken out of your hands. Details next week!

      • bogart Says:

        Erm, OK — I’ll look for that next week. I don’t know what this “logged into” idea you mention is, as I have never had any electronic communications with or records of the BofA stuff, at all. Word is there is some handy new thing called the internett (or something like that) that people are using nowadays? But, seriously — I get and deposit the dividend checks, I have responded to a few mailings (most regarding class-action suits) — and, that’s it.

        I’d think since I’m getting (and depositing) the checks it would be obvious I’m still out here, but maybe I’m wrong. I suppose I’ll learn next week!

      • nicoleandmaggie Says:

        Responding to the class-action mailings is good enough. Direct deposit isn’t! WHICH IS CRAZY. If you’re still getting the paper checks and depositing them, that might be ok.

      • bogart Says:

        Weird. Good to know! I’ll look for your post next week.

  2. chacha1 Says:

    I “solved” this problem by only buying stocks in my 401(k) and pretending the capital gains aren’t happening. :-) When I am not working anymore and start taking distributions, that is time enough to figure out the capital gains. Right now it seems like it would be a second full-time job.

    • nicoleandmaggie Says:

      Thank goodness for tax-advantaged funds!

      Also the new laws that require companies to keep track of this stuff so you don’t have to. Too bad they’re not retroactive and too bad that many of these firms no longer exist because they got bought by other firms. (And why didn’t etrade keep brown and co’s info?)

  3. Well Heeled Blog Says:

    I wish I had this problem with some Google or Amazon stock. Ha!

  4. Jenna @ UpstartFinance Says:

    I love index investing for this exact reason! A lot less to worry about.

    I have two shares of Citi that are hanging out in an TD Ameritrade account all alone. Some day I’ll figure out how to take care of those.

  5. Rented life Says:

    I think both dad and I will venture I up vanguard index funds this year. We are totally inexperienced though, any advice?

    • Rented life Says:

      Auto correct. Should say “in to” not I up

    • nicoleandmaggie Says:

      Is this for retirement? If so, then a Roth IRA, put it all into a Vanguard Target Date fund. Just pick a retirement date and then don’t worry about it anymore.

      • Rented life Says:

        Retirement for me and hubby (I do/learn all the financial stuff then teach him). For dad, I think it’s just to invest. Mom has a number of other things set up for retirement and he retired a year ago, but will work part time and have “play money” that he’d put into the index funds. With it being play money, whatever he does won’t hurt their current spending/budget.

      • nicoleandmaggie Says:

        Well, he would probably benefit from tax advantaged funds too. Not sure what the limits are on those once you hit the age that you can take even the earnings out without penalty. Of course, if he’s planning on truly playing the market, he might want to keep them not tax-advantaged because you can’t write off losses in a tax-advantaged account.

        Money wise, I’d say for both situations, see if you can do an IRA Roth and stick it in Vanguard low cost funds. (Target-date for you so you can set and forget. He may want to buy his own mix of low cost stock and bond index funds from Vanguard.)

      • Rented life Says:

        Cool. This is sure helpful since I had no idea where to start and he and I are obviously at different places in our lives. Honestly I’m glad to see him learning about this at all, mom has always managed their money. She does well but I worry-that whole if something ever happened thing.


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