Author Topic: Paying taxes on stocks without selling them  (Read 774 times)

Runrooster

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Paying taxes on stocks without selling them
« on: November 11, 2020, 02:54:08 PM »
This has been going on for a few years, and I'm only now getting worried about it.
I get a decent income hike from capital gains ($4000) and ordinary dividends ($9000) even though I haven't sold anything.
Everything is in mutual funds and ETFs.
I'm guessing this is because I have some fixed income securities.

The history is that I stopped investing new money in the market in 2009 (scared but also busy).
Then, around 2014, I decided enough was enough and invested all 6 years worth of savings (a lot of money) at once.
Even though I'm more than 10 years from retirement, I felt like a crash must be immiment and put a significant amount (20%?) in fixed income.

I was rebalancing recently and my portfolio checkup from Schwab says I'm over invested in fixed income and should put more in international.
Is it time to ditch fixed income or only certain kinds of funds?

MDM

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Re: Paying taxes on stocks without selling them
« Reply #1 on: November 11, 2020, 04:07:01 PM »
If these are in taxable accounts (i.e., not IRAs, 401ks, etc.) then dividend income is taxable. 

As for capital gains, it depends what you mean by "capital gains". 

E.g., there is no tax on unrealized capital gains - the amount your investments have increased since purchase, but that you haven't sold. 

Capital gain distributions from mutual funds, and realized capital gains - the amount received when you sell, minus the purchase cost - are taxable.

Runrooster

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Re: Paying taxes on stocks without selling them
« Reply #2 on: November 12, 2020, 06:34:36 AM »
Yes I meant capital gains distributions.
I understand that these are taxable, I'm just confused as to why they are so high. I have maybe 40 funds so I can't tease out which one is giving all the problems.
Do you think it's fixed income for either the dividends or cap gains?
Or is this not an unusually high amount on stocks of $500,000?
Thanks.

Boll weevil

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Re: Paying taxes on stocks without selling them
« Reply #3 on: November 12, 2020, 09:41:54 AM »
4000/500000 = 0.008 = 0.8%

9000/500000 = 0.018 = 1.8%

Both of those percentages are about what Id expect.

ixtap

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Re: Paying taxes on stocks without selling them
« Reply #4 on: November 12, 2020, 09:50:04 AM »
Yes I meant capital gains distributions.
I understand that these are taxable, I'm just confused as to why they are so high. I have maybe 40 funds so I can't tease out which one is giving all the problems.
Do you think it's fixed income for either the dividends or cap gains?
Or is this not an unusually high amount on stocks of $500,000?
Thanks.

Look at your monthly statements. They will tell you exactly where the money is coming from.

Catbert

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Re: Paying taxes on stocks without selling them
« Reply #5 on: November 12, 2020, 10:36:30 AM »
Well if you have 40(!) mutual funds I'd bet many if not most are actively managed.  Actively managed funds buy and sell stocks much more often than broad indexes like the S&P500.  The fund selling individual stock will generate Capital Gains (or losses) for you.

Selling the funds generating the taxable income will potentially generate more taxable income.  Partial solutions after you identify the "culprits":  set your account up so that dividends and capital gains are paid out rather than automatically reinvested.  This will slowly make them a smaller share of your portfolio.  Then reinvest in a fund which won't generate so much taxable cap gains or dividends (e.g. S&P500, Total Stock Market).  Or if you donate to charity, set up a Donor Advised Fund and donate your appreciated mutual funds.  You won't have to pay the capital gains and still will get the same write-off for taxes.

Sibley

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Re: Paying taxes on stocks without selling them
« Reply #6 on: November 12, 2020, 10:40:20 AM »
I get the sense that you might benefit from some risk tolerance thoughts. You sound pretty risk adverse. You also should consider what your asset allocation SHOULD be, never mind what some company is telling you.

I'm sure Schwab would object to my nearly 100% equities. I don't care what they think though- I sat down, did some research, thought about what my risk tolerance was, thought about my age and goals and current situation and came up with my asset allocation. Then I executed it and it's almost no maintenance for me at this point.

You should also check what your expense ratios are. Are they too high? If so, you should consider switching to lower fee funds. Are the funds you're in actively managed? If so, they're going to be buying and selling and thus will have more capital gain distributions than an index fund which is much less activity.

There's a lot of smart people here if you need to talk this stuff through.

Runrooster

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Re: Paying taxes on stocks without selling them
« Reply #7 on: November 12, 2020, 01:38:09 PM »
I was ball-parking the mutual funds number, but counting them it looks like I have 21 in my brokerage account and 34 total-ish including 401k with two different companies.
I don't think an 80% equities makes me conservative; I've been toeing the line between moderate and moderate aggressive and am now pushing to moderate aggressive.
Yeah, even the aggressive portfolio on Schwab includes 5% cash, but most of us keep a separate emergency fund.

Most of my funds are under .10% expense ratio, but 2-3 are in the 1% range.
I don't remember how I decided to buy any non-index funds, but I tried to diversify and buy the 4 star ones.  When they didn't look that good, instead of selling at a gain, I bought new ones.
Not a great tactic, I see now.

I assume my 401K's didn't have the same stock choices, or maybe I just didn't worry about picking the same ones since they're in different accounts.

Is it worth it to pay capital gains taxes now to adjust and consolidate funds?  I expect not to have much more savings in the next 10 years outside my 401k where I can adjust at whim.
Since my retirement is almost all Roth, I expect to have room to get 0% tax on capital gains whenever that happens.