jwp@uwmacc.UUCP (Jeffrey W Percival) (03/07/86)
I've seen several postings talking about mutual funds that are actually a family of funds, which allow switching money from fund to fund, with just a phone call, with no load, etc. It's my understanding that the IRS considers each such switch a sale and a purchase, exposing you to capital gains taxation on each switch. If true, this would seriously erode the advantage such switches would offer in getting your money in the right fund at the right time. Comments? -- Jeff Percival ...!uwvax!uwmacc!jwp
suhre@trwrba.UUCP (Maurice E. Suhre) (03/10/86)
In article <2019@uwmacc.UUCP> jwp@uwmacc.UUCP (Jeffrey W Percival) writes: >It's my understanding that the IRS considers each such switch >a sale and a purchase, exposing you to capital gains taxation >on each switch. If true, this would seriously erode the >advantage such switches would offer in getting your money in >the right fund at the right time. Comments? > Yes, it's true. However, if you don't make any money you won't have any tax liability. The trick would be to estimate how much your profits would erode if you waited for the capital gains holding period to complete. If I could do that, I'd be "famous by Friday". The Wall Street Week Elves have called switch about once a year for the last 4 or 5 years, and Mark Hulbert offered anecdotal evidence that hyperactive switching isn't any better than moderate switching. Maurice {decvax,sdcrdcf,ihnp4,ucbvax}!trwrb!suhre
boucher@hsi.UUCP (Keith Boucher) (03/10/86)
> I've seen several postings talking about mutual funds that > are actually a family of funds, which allow switching money > from fund to fund, with just a phone call, with no load, etc. > It's my understanding that the IRS considers each such switch > a sale and a purchase, exposing you to capital gains taxation > on each switch. If true, this would seriously erode the > advantage such switches would offer in getting your money in > the right fund at the right time. Comments? > > -- > Jeff Percival ...!uwvax!uwmacc!jwp The IRS does indeed consider a switch to be a sale and a purchase and therefore you have to pay tax on any capital gains from the sale. Of course, you can also write off any loss from the sale. The key is whether the capital gains (or losses) are short term or long term. You are better off tax wise if the capital gains are long term and the capital losses are short term. Frequent switching would cause any capital gains to be short term and thus taxable as ordinary income. Therefore switching funds would have to take this into account. Of course, tax consequences are not the only thing to consider when switching investments. Keith Boucher HSI New Haven, CT
alan@mtxinu.UUCP (Alan Tobey) (03/11/86)
> > I've seen several postings talking about mutual funds that > > are actually a family of funds, which allow switching money > > from fund to fund, with just a phone call, with no load, etc. > > It's my understanding that the IRS considers each such switch > > a sale and a purchase, exposing you to capital gains taxation > > on each switch. If true, this would seriously erode the > > advantage such switches would offer in getting your money in > > the right fund at the right time. Comments? > > > > -- > > Jeff Percival ...!uwvax!uwmacc!jwp > > The IRS does indeed consider a switch to be a sale and a purchase and > therefore you have to pay tax on any capital gains from the sale. Of > course, you can also write off any loss from the sale. The key is whether > the capital gains (or losses) are short term or long term. You are better > off tax wise if the capital gains are long term and the capital losses are > short term. It's worth noting that some mutual funds get around this disadvantage by restricting their investors to using IRA funds. Since all IRA withdrawals are taxed as ordinary income, the fund managers are presumably free to buy and sell without being restrained by capital-gains timing. It remains to be seen if this produces better results; the one I've been in (Fidelity Freedom) has done about as well as a good traditional growth fund like Fidelity Magellan over the past year.
ekrell@ucla-cs.UUCP (03/12/86)
Sure, every fund exchange is a taxable event (of course, for IRAs that is
not an issue). There is a tradeoff and you have to decide whether it is
worth to switch or not (if you think the market is headed for a sharp decline,
it might be better to switch to a money-market fund and pay the taxes anyway).
--
Eduardo Krell UCLA Computer Science Department
ekrell@ucla-locus.arpa ..!{sdcrdcf,ihnp4,trwspp,ucbvax}!ucla-cs!ekrell