Just wondering about mutual fund payouts in December 2021

[Value Buy]

We have three mutual funds which are all in IRA accounts so we do not have to pay any taxes on dividends and capital gains untill we withdraw the money.
Based on the performance of the funds last year, we would be hard pressed not to have to withdraw quite a bit of money t pay the IRS and state income taxes this spring.
Just wondering, was anyone caught off guard with your gains, and how do you pay the tax bill?
Do you have to sell some funds or stocks, or do you have emergency fund established to do that.
You do not have to give numbers, just let me know how you handle it.
In our case, we are retired and do not have a hefty emergency fund and would have to sell some shares to pay it. Yeh, I know big no no

I do know it would have thrown us into the higher tax bracket if it was not in an IRA, which would make it worse economically.
And now we see we will have a much higher required minimum distribution this year than last year........

[minnesotapaintlady]

Not myself, but my son had a huge capital gain distribution this year.  About 1/3 of the account value!  I have yet to see what the tax hit is, but we are in the 0% Federal LTCG tax rate, so nothing there.  It is the state that is going to hurt bad.  Especially since he has a bunch of unearned income in the form of scholarships/grants as well. 

[Deleted]

Yeah, I really have to watch this and it's a reason I'm getting more into ETFs (and many stock funds are turning themselves into ETFs).  The distinction:  when someone sells shares in an ETF there's usually a buyer waiting and they get the underlying shares- no securities are liquidated.  Apparently (I'm paraphrasing a Morningstar podcast here) when someone sells a mutual fund the fund company sells stock to pay them back, thus realizing gains and losses.  They're required to distribute those gains/losses at the end of the year.  So, you may be a buy-and-hold investor but if the fund has gains and losses realized from other people selling their shares (or other decisions to sell) you have to pay taxes on your share.  I've even gotten mid-year distributions.

These gains DO increase the basis of the fund, so if you bought into a fund for $10,000 and it's now worth $12,000 and then they declare a $2,000 distribution (which you can reinvest if you want), you pay taxes on the $2,000 but now when you do sell, your basis is $12,000, not the $10,000 you originally paid.

To answer the OP's question:  yes, it's a crapshoot and I've gotten blindsided a few times.  I look for the turnover % when buying funds outside of the IRA because that's an indicator of how often the firm trades).    Near the end of the year, mutual fund companies give an estimate of what their distributions will be and when  I've found those pretty reliable so at least I have some time to plan if I have to write a big check.  I'm also careful to pay the minimum "safe harbor" estimates so I'm not hit with an underpayment penalty.

[teen persuasion]

Our stuff is all inside IRAs, so no problems for us.

I saw lots of threads on Bogleheads about the big distributions. Generally the funds that did this have smaller CG distributions, so it took many by surprise. It sounded like it was a one time thing - the brokerages were folding a different class of fund into another, and had to buy/sell to do so. And then those funds were also used in funds-of-funds, like target date funds, triggering more widespread CG distributions pain.

[tallguy]

The other possibility to look at is whether the funds in your taxable accounts even paid a year-end distribution in 2020.  My smaller holdings did pay year-end capital gain distributions but my largest did not.  Did that maybe affect how large the distribution was in 2021 as if they were making up for it?  I don't know, but it could have.  Either way it doesn't affect me all that much.  I am managing my income for tax purposes, so will wait until after any year-end distributions are announced to determine how much I can then either withdraw or convert to stay within my desired limit.  I will typically do a safe amount at some point during the year to make sure most of it gets done and then finish it off in mid- to late-December.  It is a hassle and I almost wish I didn't have money in taxable accounts to make things simpler, but I REALLY don't want to sell anything from the taxable so will just deal with it every year.    

[CCL]

I do the same as tallguy. My biggest payouts tend to be in September and October. Fidelity Balanced Fund pays out quarterly. I also receive dividends, not just capital gains.

[minnesotapaintlady]

Jan 16, 2022 3:32:09 GMT -5 tallguy said:

The other possibility to look at is whether the funds in your taxable accounts even paid a year-end distribution in 2020.  My smaller holdings did pay year-end capital gain distributions but my largest did not.  Did that maybe affect how large the distribution was in 2021 as if they were making up for it?  I don't know, but it could have.  Either way it doesn't affect me all that much.  I am managing my income for tax purposes, so will wait until after any year-end distributions are announced to determine how much I can then either withdraw or convert to stay within my desired limit.  I will typically do a safe amount at some point during the year to make sure most of it gets done and then finish it off in mid- to late-December.  It is a hassle and I almost wish I didn't have money in taxable accounts to make things simpler, but I REALLY don't want to sell anything from the taxable so will just deal with it every year.    

So, do you then do the withdrawal from the taxable account in the amount of the capital gain distribution?   It seems like it would almost be forcing you to do that if you were trying to keep your income low and it could totally screw up planning if the distributions were really high. 

I am just not fond of them at all. My son had a 20K distribution on a 60K account.  He doesn't have 20K more in his pocket.  He still just has the same 60K he had the week before the distribution was made.  What if it was a 600K account?  He would have 200K in income to deal with that wasn't really income at all. 

[jerseygirl]

MPL I’m not understanding (have no mutual funds), what happened to the $20k ?
Is the $60k fund now $40k and 20k is cash?

[minnesotapaintlady]

Jan 16, 2022 10:43:19 GMT -5 jerseygirl said:

MPL I’m not understanding (have no mutual funds), what happened to the $20k ?
Is the $60k fund now $40k and 20k is cash?

It's paid out in additional shares of the fund, but then the fund price drops.  He had X number of shares at I think $102/share.  Now it's X+ 20K/worth of shares all at $66/share. 

[tallguy]

Jan 16, 2022 10:32:11 GMT -5 minnesotapaintlady said:

Jan 16, 2022 3:32:09 GMT -5 tallguy said:

The other possibility to look at is whether the funds in your taxable accounts even paid a year-end distribution in 2020.  My smaller holdings did pay year-end capital gain distributions but my largest did not.  Did that maybe affect how large the distribution was in 2021 as if they were making up for it?  I don't know, but it could have.  Either way it doesn't affect me all that much.  I am managing my income for tax purposes, so will wait until after any year-end distributions are announced to determine how much I can then either withdraw or convert to stay within my desired limit.  I will typically do a safe amount at some point during the year to make sure most of it gets done and then finish it off in mid- to late-December.  It is a hassle and I almost wish I didn't have money in taxable accounts to make things simpler, but I REALLY don't want to sell anything from the taxable so will just deal with it every year.    

So, do you then do the withdrawal from the taxable account in the amount of the capital gain distribution?   It seems like it would almost be forcing you to do that if you were trying to keep your income low and it could totally screw up planning if the distributions were really high. 

I am just not fond of them at all. My son had a 20K distribution on a 60K account.  He doesn't have 20K more in his pocket.  He still just has the same 60K he had the week before the distribution was made.  What if it was a 600K account?  He would have 200K in income to deal with that wasn't really income at all. 

No, I don't (and may never) touch my taxable accounts.  My traditional IRA balances are still well above where I was hoping they would be by now but it no longer makes much sense for me to do Roth conversions.  I want all of my investment money each year to come out of my IRA since I can do a certain amount tax-free.  Any capital gain distribution in my taxable account reduces what I can take from the IRA and still remain where I want to be.  Additionally, selling from my taxable accounts would create a larger capital gain all at once which would burn through my inherited capital loss carryover with no real benefit and prevent me from then using the $3000 per year to offset ordinary income into the future.  So yes, it is nice to have the distribution for the long-term effect but it is also an annoyance in a way.  Better for me to take money from the traditional IRA and let my son inherit the taxable at the stepped-up basis amount.      

[minnesotapaintlady]

Jan 16, 2022 11:46:54 GMT -5 tallguy said:

Jan 16, 2022 10:32:11 GMT -5 minnesotapaintlady said:

So, do you then do the withdrawal from the taxable account in the amount of the capital gain distribution?   It seems like it would almost be forcing you to do that if you were trying to keep your income low and it could totally screw up planning if the distributions were really high. 

I am just not fond of them at all. My son had a 20K distribution on a 60K account.  He doesn't have 20K more in his pocket.  He still just has the same 60K he had the week before the distribution was made.  What if it was a 600K account?  He would have 200K in income to deal with that wasn't really income at all. 

No, I don't (and may never) touch my taxable accounts.  My traditional IRA balances are still well above where I was hoping they would be by now but it no longer makes much sense for me to do Roth conversions.  I want all of my investment money each year to come out of my IRA since I can do a certain amount tax-free.  Any capital gain distribution in my taxable account reduces what I can take from the IRA and still remain where I want to be.  Additionally, selling from my taxable accounts would create a larger capital gain all at once which would burn through my inherited capital loss carryover with no real benefit and prevent me from then using the $3000 per year to offset ordinary income into the future.  So yes, it is nice to have the distribution for the long-term effect but it is also an annoyance in a way.  Better for me to take money from the traditional IRA and let my son inherit the taxable at the stepped-up basis amount.      

If you're trying to keep your income low though it seems like it could really screw you over.  For me, I'd probably want to stay around 40K/year.  A 20K distribution means live super frugal for that year on only 20K or hit the taxable. 

[tallguy]

Jan 16, 2022 10:49:11 GMT -5 minnesotapaintlady said:

Jan 16, 2022 10:43:19 GMT -5 jerseygirl said:

MPL I’m not understanding (have no mutual funds), what happened to the $20k ?
Is the $60k fund now $40k and 20k is cash?

It's paid out in additional shares of the fund, but then the fund price drops.  He had X number of shares at I think $102/share.  Now it's X+ 20K/worth of shares all at $66/share. 

True, which is why "buying the dividend" is generally a bad idea.  The benefit is that you then own more shares which should later rise in value, earning you more than you would have had otherwise.  It also increases the cost basis (in a taxable account) so that future taxes are lower. 

[tallguy]

Jan 16, 2022 11:55:00 GMT -5 minnesotapaintlady said:

Jan 16, 2022 11:46:54 GMT -5 tallguy said:

No, I don't (and may never) touch my taxable accounts.  My traditional IRA balances are still well above where I was hoping they would be by now but it no longer makes much sense for me to do Roth conversions.  I want all of my investment money each year to come out of my IRA since I can do a certain amount tax-free.  Any capital gain distribution in my taxable account reduces what I can take from the IRA and still remain where I want to be.  Additionally, selling from my taxable accounts would create a larger capital gain all at once which would burn through my inherited capital loss carryover with no real benefit and prevent me from then using the $3000 per year to offset ordinary income into the future.  So yes, it is nice to have the distribution for the long-term effect but it is also an annoyance in a way.  Better for me to take money from the traditional IRA and let my son inherit the taxable at the stepped-up basis amount.      

If you're trying to keep your income low though it seems like it could really screw you over.  For me, I'd probably want to stay around 40K/year.  A 20K distribution means live super frugal for that year on only 20K or hit the taxable. 

Fortunately I have arranged my financial life in such a way that I almost don't even need my investments.  I took SS survivor's benefits at 60 which more than covers my normal and necessary expenses.  If I want more for spending I can take an IRA withdrawal up to my self-imposed limit.  If not I will convert that amount instead.  If for any reason I want a bunch of money in excess of that limit I could take it from Roth.  But yes, keeping my income at around $40K will make me pretty much "income tax-free" for at least a decade while saving me a small fortune in property tax.  It's nice to have options. 

[CCL]

How does that save you on property taxes?

[minnesotapaintlady]

Jan 16, 2022 13:28:19 GMT -5 CCL said:

How does that save you on property taxes?

Some states discount property taxes based on income.  Mine does something similar.  I usually get about half mine refunded every year, but that will go down when the kids drop off as dependents because each one is something like a 6K deduction from my income. 

[tallguy]

Jan 16, 2022 13:28:19 GMT -5 CCL said:

How does that save you on property taxes?

Because I am finally old enough to qualify for the "low-income senior" property tax exemption.  There are three tiers of income which can qualify someone for different levels of exemption.  Because the law was changed a couple of years ago, the levels are now tied to the median county household income for each county.  The four "richest" counties in the state now have levels above the rest of the state which still uses the old limits.  It makes sense because incomes, property values, cost of housing, and taxes are significantly higher in those counties.  My initial guess is that it will save me somewhere around $8000-$9000 each year, though I am still waiting for the county personnel to finish reviewing the application.  I don't need my income to be above that level, so why artificially make it so?  Far better to make sure it stays below, since the difference between the second and third level for me is large.

As I have said many times, "I don't make the rules, I only play by them.  But if you are going to play, play to win."

[minnesotapaintlady]

Jan 16, 2022 14:11:19 GMT -5 tallguy said:

Jan 16, 2022 13:28:19 GMT -5 CCL said:

How does that save you on property taxes?

Because I am finally old enough to qualify for the "low-income senior" property tax exemption.  There are three tiers of income which can qualify someone for different levels of exemption.  Because the law was changed a couple of years ago, the levels are now tied to the median county household income for each county.  The four "richest" counties in the state now have levels above the rest of the state which still uses the old limits.  It makes sense because incomes, property values, cost of housing, and taxes are significantly higher in those counties.  My initial guess is that it will save me somewhere around $8000-$9000 each year, though I am still waiting for the county personnel to finish reviewing the application.  I don't need my income to be above that level, so why artificially make it so?  Far better to make sure it stays below, since the difference between the second and third level for me is large.

As I have said many times, "I don't make the rules, I only play by them.  But if you are going to play, play to win."

Holy crap.  How much are your property taxes normally?  Full fare on my place is $2700.  

[tallguy]

Jan 16, 2022 14:22:47 GMT -5 minnesotapaintlady said:

Jan 16, 2022 14:11:19 GMT -5 tallguy said:

Because I am finally old enough to qualify for the "low-income senior" property tax exemption.  There are three tiers of income which can qualify someone for different levels of exemption.  Because the law was changed a couple of years ago, the levels are now tied to the median county household income for each county.  The four "richest" counties in the state now have levels above the rest of the state which still uses the old limits.  It makes sense because incomes, property values, cost of housing, and taxes are significantly higher in those counties.  My initial guess is that it will save me somewhere around $8000-$9000 each year, though I am still waiting for the county personnel to finish reviewing the application.  I don't need my income to be above that level, so why artificially make it so?  Far better to make sure it stays below, since the difference between the second and third level for me is large.

As I have said many times, "I don't make the rules, I only play by them.  But if you are going to play, play to win."

Holy crap.  How much are your property taxes normally?  Full fare on my place is $2700.  

It's been between $11-12,000, although I am expecting it to go up a bit this year.  I tried to figure out what the savings would be based on my understanding of how the exemption works, and my guess was that it would save about 73%.  I should also get that amount refunded from last year when it is all finished.  They are way behind both because of not having normal staff in the office because of the pandemic, and the increased number of people who now qualify.  If they do not finish in time for this year's payments then I will have to pay the full semiannual or annual amount up front and then get credited back later.  Application review was normally advertised as a six-week process.  I am now going on nine months.  Good thing I am not hurting for money.  

[jerseygirl]

Jan 16, 2022 10:49:11 GMT -5 minnesotapaintlady said:

Jan 16, 2022 10:43:19 GMT -5 jerseygirl said:

MPL I’m not understanding (have no mutual funds), what happened to the $20k ?
Is the $60k fund now $40k and 20k is cash?

It's paid out in additional shares of the fund, but then the fund price drops.  He had X number of shares at I think $102/share.  Now it's X+ 20K/worth of shares all at $66/share. 

Ugh he has to pay CGs on that? Now I’ll never do mutual funds.

[tallguy]

Jan 16, 2022 17:15:26 GMT -5 jerseygirl said:

Jan 16, 2022 10:49:11 GMT -5 minnesotapaintlady said:

It's paid out in additional shares of the fund, but then the fund price drops.  He had X number of shares at I think $102/share.  Now it's X+ 20K/worth of shares all at $66/share. 

Ugh he has to pay CGs on that? Now I’ll never do mutual funds.

Over the long term it is fine, but you do want to be careful about timing your buys in a taxable acount until after the ex-dividend date. Don't buy the dividend. 

[jerseygirl]

Jan 16, 2022 17:35:50 GMT -5 tallguy said:

Jan 16, 2022 17:15:26 GMT -5 jerseygirl said:

Ugh he has to pay CGs on that? Now I’ll never do mutual funds.

Over the long term it is fine, but you do want to be careful about timing your buys in a taxable acount until after the ex-dividend date. Don't buy the dividend. 

But if you keep it for more than a year you’ll still get these CGs . No thanks

[tallguy]

Jan 16, 2022 17:42:08 GMT -5 jerseygirl said:

Jan 16, 2022 17:35:50 GMT -5 tallguy said:

Over the long term it is fine, but you do want to be careful about timing your buys in a taxable acount until after the ex-dividend date. Don't buy the dividend. 

But if you keep it for more than a year you’ll still get these CGs . No thanks

So what?  You can either take the gains in cash or reinvest them.  If you take them in cash you pay tax at preferential rates.  If you reinvest them you increase the number of shares so make more money overall plus you increase your cost basis which lowers the capital gains later.

[CCL]

Jan 16, 2022 17:42:08 GMT -5 jerseygirl said:

Jan 16, 2022 17:35:50 GMT -5 tallguy said:

Over the long term it is fine, but you do want to be careful about timing your buys in a taxable acount until after the ex-dividend date. Don't buy the dividend. 

But if you keep it for more than a year you’ll still get these CGs . No thanks

Huh? You don't have to hold the funds for a year to receive capital gains distributions. I'm not sure I understand what you are saying.

[CCL]

Jan 16, 2022 17:35:50 GMT -5 tallguy said:

Jan 16, 2022 17:15:26 GMT -5 jerseygirl said:

Ugh he has to pay CGs on that? Now I’ll never do mutual funds.

Over the long term it is fine, but you do want to be careful about timing your buys in a taxable acount until after the ex-dividend date. Don't buy the dividend. 

Really, I don't even worry about that anymore. It will be added to my basis whenever I decide to sell. Over the years, my funds are up enough that anything I would add at year-end would be a small percentage of the total.

[minnesotapaintlady]

Jan 16, 2022 17:51:22 GMT -5 tallguy said:

Jan 16, 2022 17:42:08 GMT -5 jerseygirl said:

But if you keep it for more than a year you’ll still get these CGs . No thanks

So what?  You can either take the gains in cash or reinvest them.  If you take them in cash you pay tax at preferential rates.  If you reinvest them you increase the number of shares so make more money overall plus you increase your cost basis which lowers the capital gains later.

It can still really screw you up though if its a big distribution.

[Deleted]

Jan 16, 2022 18:38:39 GMT -5 CCL said:

Jan 16, 2022 17:42:08 GMT -5 jerseygirl said:

But if you keep it for more than a year you’ll still get these CGs . No thanks

Huh? You don't have to hold the funds for a year to receive capital gains distributions. I'm not sure I understand what you are saying.

Right- as long as you bought the fund before the "record date" (usually a few days before the distributions are paid out) you get the distributions and they'll be classed as long-term or short-term depending on when the fund sold them, not how long you've held the fund.

[tallguy]

Jan 16, 2022 18:38:39 GMT -5 CCL said:

Jan 16, 2022 17:42:08 GMT -5 jerseygirl said:

But if you keep it for more than a year you’ll still get these CGs . No thanks

Huh? You don't have to hold the funds for a year to receive capital gains distributions. I'm not sure I understand what you are saying.

I'm guessing it was in response to my saying that in the long term dividends and capital gain distributions are not a problem.  It all balances out.  It's only a negative if your initial purchase is poorly-timed.  She is apparently saying they are still undesirable.  I would say the only negative with mutual funds is that you are not in full control of when you have to realize gains, but gains themselves are still good.  

[minnesotapaintlady]

Jan 16, 2022 20:15:08 GMT -5 tallguy said:

Jan 16, 2022 18:38:39 GMT -5 CCL said:

Huh? You don't have to hold the funds for a year to receive capital gains distributions. I'm not sure I understand what you are saying.

I'm guessing it was in response to my saying that in the long term dividends and capital gain distributions are not a problem.  It all balances out.  It's only a negative if your initial purchase is poorly-timed.  She is apparently saying they are still undesirable.  I would say the only negative with mutual funds is that you are not in full control of when you have to realize gains, but gains themselves are still good.  

But you don't think say a 60K gain when you're needing to keep your income at 40K for all the other reasons you stated would not be a huge PIA?  

[tallguy]

Jan 16, 2022 20:18:30 GMT -5 minnesotapaintlady said:

Jan 16, 2022 20:15:08 GMT -5 tallguy said:

I'm guessing it was in response to my saying that in the long term dividends and capital gain distributions are not a problem.  It all balances out.  It's only a negative if your initial purchase is poorly-timed.  She is apparently saying they are still undesirable.  I would say the only negative with mutual funds is that you are not in full control of when you have to realize gains, but gains themselves are still good.  

But you don't think say a 60K gain when you're needing to keep your income at 40K for all the other reasons you stated would not be a huge PIA?  

Of course it is a complication in the moment, but an extreme outlier of a gain in one year is still an extreme outlier.  Even with that you can usually find out in advance if distributions are going to be abnormally large so that you could maybe adjust other actions to compensate.  If there were any reason to assume it would recur then the whole plan needs to be reworked.  If not, you deal with it for that year and move on.    

[CCL]

Jan 14, 2022 12:07:15 GMT -5 minnesotapaintlady said:

Not myself, but my son had a huge capital gain distribution this year.  About 1/3 of the account value!  I have yet to see what the tax hit is, but we are in the 0% Federal LTCG tax rate, so nothing there.  It is the state that is going to hurt bad.  Especially since he has a bunch of unearned income in the form of scholarships/grants as well. 

I was thinking about this. A couple years ago I sold some stock I had for a nice little long-term profit. I thought I would be in the 0% capital gains bracket, but I wasn't and had to pay some tax on it. I think the gains were added to my AGI (it may have been at 50%) and I had to pay 15% tax on some of my gains. I'm gonna research this cause now I can't really remember how it worked out.

This article mentions it but doesn't give much info:

www.finra.org/investors/insights/capital-gains-explained