Author Topic: Will exchanging funds now affect receiving year end capital gains and dividends?  (Read 1547 times)

jhrobbin

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Hi folks,

I think the answer is 'No' but I haven't seen this explicitly anywhere so I figured I'd ask:

I have a traditional IRA invested in a Vanguard Target Retirement fund.  I want to move the money in this account into VTSAX.  I'd like to make this transaction now.  However, I am aware that I receive long-term and short-term capital gains and dividends (which are reinvested) at the end of the year.  If I exchange from one fund into another now, how does this affect the year end distributions (if at all)?

MustacheAndaHalf

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Money that stays in a Traditional IRA is not taxed.  Your end of year capital gains will stay within the Traditional IRA and won't have any tax impact.

Within a Traditional IRA, selling one fund and buying another will rarely have a tax impact (the exception being wash sales  where you bought something in your IRA while selling the same thing for a loss outside the IRA.  The IRS doesn't let you count that as a taxable loss).

jhrobbin

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MustacheAndaHalf, thanks for the reply.  Perhaps my question was not worded clearly.  I am aware there is no tax impact (excluding wash sales, as you pointed out) because this is a traditional IRA.

Let me try to put it another way:
Assuming I keep my money in this Vanguard Target Retirement Fund through the end of 2018... Based on years past, on or about the last day of the year my account will post several transactions which are reinvested in the fund.  Vanguard labels these transactions as type: Long-term capital gain, Short-term capital gain, and Dividend Received.  This is good, right?  And as you stated, I understand I have no tax burden from this.

If I exchange these shares from Target Retirement Fund into VTSAX this week then I'm not sure what happens...  I assume I won't get these end of year transactions from Target Retirement Fund because I won't hold those shares anymore.  Will I receive similar from VSTAX?  Of course I don't expect it to be the same, since the funds have different holdings, but I assume there would be something?  Does it make a difference if I didn't buy the VSTAX shares until October?

I suspect I'm really misunderstanding this but hopefully my question is more clear now.

TheHardenedInvestor

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You won’t get the dividends on the target retirement fund if you sell it and move into VTSAX. You will get the Q4 dividend of VTSAX but this will be significantly less than the full target fund yearly distribution. Depending on how much money you have in the fund, probably best to hold until end of December.

jhrobbin

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You will get the Q4 dividend of VTSAX but this will be significantly less than the full target fund yearly distribution. Depending on how much money you have in the fund, probably best to hold until end of December.

Many thanks for this information!

Why will VSTAX Q4 dividend be significantly lower than Target Retirement 2035?  Is it due to the approximately 20% of holding in bonds?

jhrobbin

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ah yes I see now.  and the TheHardenedInvestor mentioned this too in his post but I missed it earlier when reading from my smart phone.  thanks guys.  i'm glad i asked

terran

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You wonít get the dividends on the target retirement fund if you sell it and move into VTSAX. You will get the Q4 dividend of VTSAX but this will be significantly less than the full target fund yearly distribution. Depending on how much money you have in the fund, probably best to hold until end of December.

I could be totally wrong, but don't fund prices drop when a dividend is issued to make up for the fact that the dividends that the fund has been holding from all the companies that paid dividends to the fund have been distributed so they're no longer in the fund? See https://www.bogleheads.org/forum/viewtopic.php?f=10&t=129142

Given this, shouldn't the current price of VTSAX already reflect the fact that some of the dividends it will pay out this year have already been paid out (it's price is lower), while the price of the target date funds would reflect the fact that they're still holding all of the dividends (their price will be higher)?

Thought of another way, if it were in fact the case that the OP is better off holding the target date fund, wouldn't that mean we should all be selling our VTSAX and buying target date funds to get the "higher" return thanks to the retained dividends? That's certainly not the case, so it seems to me that means there's no advantage to continuing to hold the target date fund to receive the full year's dividend rather than exchanging to VTSAX and buying at a price that reflects the fact that some dividends have already been paid.

@jhrobbin, one question I would have for you is why do you want to buy VTSAX instead of holding the target date fund? Will you also hold international investments somewhere? What about Bonds?

TheHardenedInvestor

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I could be totally wrong, but don't fund prices drop when a dividend is issued to make up for the fact that the dividends that the fund has been holding from all the companies that paid dividends to the fund have been distributed so they're no longer in the fund? See https://www.bogleheads.org/forum/viewtopic.php?f=10&t=129142

Given this, shouldn't the current price of VTSAX already reflect the fact that some of the dividends it will pay out this year have already been paid out (it's price is lower), while the price of the target date funds would reflect the fact that they're still holding all of the dividends (their price will be higher)?

Thought of another way, if it were in fact the case that the OP is better off holding the target date fund, wouldn't that mean we should all be selling our VTSAX and buying target date funds to get the "higher" return thanks to the retained dividends? That's certainly not the case, so it seems to me that means there's no advantage to continuing to hold the target date fund to receive the full year's dividend rather than exchanging to VTSAX and buying at a price that reflects the fact that some dividends have already been paid.

You are correct @terran. The target date fund price will drop in December when the dividend is issued in order to accurately reflect the per share price after the dividend distribution.

I suppose @jhrobbin, terran does pose the better question, which is why do you want to buy VTSAX now instead of holding your target fund?


jhrobbin

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I could be totally wrong, but don't fund prices drop when a dividend is issued to make up for the fact that the dividends that the fund has been holding from all the companies that paid dividends to the fund have been distributed so they're no longer in the fund?

The fund will also distribute long and short term capital gains on that day.  Does the fund price drop for those as well?  I imagine so but can't hurt to confirm.

@jhrobbin, one question I would have for you is why do you want to buy VTSAX instead of holding the target date fund? Will you also hold international investments somewhere? What about Bonds?

Here's my reasoning and I'm curious if you guys think it is sound:
At this point we have several retirement accounts: Traditional + Roth IRAs in my name and my spouse's name + 401k.  I've had most of these in Target Retirement Fund which I understand it a mix of stock (US + International) and bond (US + International) funds.

I'm certainly an investing novice (though at least I've been smart enough to stick with Vanguard and Index funds), but I've always felt the percentage of International Stock in these Target Retirement funds was kind of high.  For example, Vanguard Target Retirement 2035 Fund (VTTHX) is 30.90% invested in Vanguard Total International Stock Index.

I've recently been reading J L Collins' book The Simple Path to Wealth which has validated my thoughts about international investments.  Luckily, much of the content from his book can be found in his blog and these posts from his Stock Series explain his reasoning.  Although he clearly states the TRFs are
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an excellent choice for many, maybe most people

He also states:

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The TRFs all hold the Total International Stock Market Index Fund.  While this is an excellent fund, I donít feel the need for additional international coverage beyond that found in the Total Stock Market Index Fund.

Among some other reasons, explained in detail the second blog post linked below, he says that by owning VSTAX you are in effect already exposed to international investing:

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With VTSAX you own ~3600 companies, virtually every publicly traded company in the USA.  More to the point, the largest of these are all international businesses, many of which generate 50% or more of their sales and profits overseas.

https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/
https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

So in conclusion, this is why I'm considering moving some of my retirement investments from Target Retirement Funds into VSTAX.  By keeping some of the TRF's I will still have some true international stocks and bonds.  Thoughts?

TheHardenedInvestor

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So in conclusion, this is why I'm considering moving some of my retirement investments from Target Retirement Funds into VSTAX.  By keeping some of the TRF's I will still have some true international stocks and bonds.  Thoughts?

Sure makes sense to me. John Bogle also agrees with JL Collins regarding international investing. Rather, JL Collins is actually just following Bogle’s advice on international investing. Warren Buffett agrees as well, that’s why he said after he dies he wants 90% invested in a S&P 500 fund. I personally also only invest in the US market.

terran

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Sure, disagreeing with the international allocation in the target date funds is certainly a good reason to go another route. I think Jack Bogle and JL Collins may be the most visible of a vocal minority saying US stocks have plenty of international exposure. I think having some international is a good thing (I shoot for 35% of stocks), but you should make your own decision on the matter. You might try taking a look at some of the frequent threads on the bogleheads forum about it.

Yes, I would say the price will drop to reflect capital gains distributions as well. None of these distributions are a mystery, so if there was anything to be gained by being invested in a target date fund for the year end distributions then people would invest in it and drive up the price. until it wasn't any better. Since that doesn't happen I think it's all baked in to the price.

appleshampooid

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You wonít get the dividends on the target retirement fund if you sell it and move into VTSAX. You will get the Q4 dividend of VTSAX but this will be significantly less than the full target fund yearly distribution. Depending on how much money you have in the fund, probably best to hold until end of December.
Yes. I have screwed myself with this in the past. If the funds you are moving between have the same distribution schedule (both quarterly, both yearly, etc.) then it won't be too bad (can affecting the qualified-ness of the dividends if in a taxable account). I am in fact waiting till year end to rollover a Schwab IRA that is mostly invested in SWTSX - which distributes yearly in December. It's about $160k invested, so the distribution will be significant cash...the fund I'll be investing in on the other side is quarterly distributions.

TheHardenedInvestor

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So in conclusion, this is why I'm considering moving some of my retirement investments from Target Retirement Funds into VSTAX.  By keeping some of the TRF's I will still have some true international stocks and bonds.  Thoughts?

Video released today and just popped up in my YouTube channel recommendations.

Bogle on international investing:
https://youtu.be/P54trh0Rre8