Looking for some advice

[bisimpson]

I've been investing in American Funds for the past few years and want to jump to Vanguard and start investing in their index fund. We have two nonretirement funds at AF. We can transfer them to Vanguard, but shifting them to an index fund will cause a tax event.

Would it just make sense to leave these with AF and start investing at Vanguard, or transfer them to an in kind investment with vanguard? Or to liqudate them, move the to vanguard, and take the tax hit. What's the best way to think about this.

[NoStacheOhio]

The tax hit is going to be the same in either case, but you want to minimize your transaction fees. Look at how much it'll cost you to sell the shares at both institutions, and pick whichever path is least expensive.

[Eric]

Sorry to hear about your American Fund problem.  They are pretty much the worst ones out there when it comes to fees.

There's no such thing as an in-kind transfer if Vanguard doesn't carry the same funds.  (they don't, since American Funds tend to suck)

So unfortunately, your options are to stay put and invest with Vanguard going forward or take the tax hit to move them over.  If you decide on the latter, then spreading it out of a couple of years might be better.  But it's going to depend on the details and your tax situation.

How much money are we talking here?

[bisimpson]

Thanks for your response. We have about $75k total in two accounts ($50k and $25k). The folks at Vanguard said they could transfer these types of mutual funds, but then shifting out of these into an index fund would create a tax event either way. I need to call AF to check the damage on backing out.

[GOFU]

I transferred an American fund to Vanguard this year. In kind transfer. No problem. Easily done. Just follow the directions on the web site. I immediately liquidated mine but it was in an IRA so I didn't have the tax issue.

To get out of that high expense ratio American fund you will have to liquidate it. If it is a taxable account you must navigate the tax issue on the gains you have. Only you and your accountant can decide how best to manage that, based on your entire tax situation in the tax year you sell the American fund.

You need to figure out how much gain you have in those American funds and decide if it is worth it to you to pay the taxes on them in this year or perhaps liquidate over several years. Or maybe you just bite the bullet on the taxes in one fell swoop after comparing the tax hit to what you would be paying in loads and expenses with American. There is no way for anyone to advise you on that tax issue based on the information you provided so far.

But, Vanguard will indeed take your American funds into your Vanguard brokerage account. I just did it this year.

[MustacheAndaHalf]

You should look at your "cost basis" in those funds to determine your profit.  Any shares held over 1 year enjoy a 15% tax rate for most people.

For example if you sold $75,000 worth with a cost basis of $40,000 you'd owe tax on the $35,000 gains.  At long-term capital gains rates (for most people) that would cost $5,250 tax on the $35,000 gains.

Last I checked, income + long-term capital gains totaling less than ~$418k per year leaves you in the 15% long-term capital gains tax bracket.

[Nate79]

It's possible your basis is not as bad as you think if you have been reinvesting the dividends and capital gains over the years. These mutual funds are not tax efficient and throw off quite a bit of capital gains every year that you have to pay taxes on - aka tax drag on your portfolio.

Which funds and fund class do you own? AF is not the worst of the worst and really depends on which class of fund you have to see your actual expenses.

Sent from my SM-G950U using Tapatalk

[bisimpson]

This is all super helpful. Thanks so much. We are holding five funds (ABALX, CWGIX, AGTHX, AISVX, NEWFX), class A shares. We paid a hefty sales fee, but it doesn't look like there's any transaction fee on the backside. So transitioning to Vanguard and selling there might be the easiest.