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My parents contributed in the '80s and '90s to my non-retirement mutual funds, which are all SMMIX. The current value is about $98,000. The dividends are automatically reinvested as opposed to being paid directly back to me. However, compared to options like FSMEX or FSELX, they do not seem to perform as competitively. Each year, my 1099-DIV form for the SMMIX investments lists total capital gain distributions. Therefore, it seems I am paying taxes on them.

If I were to sell my existing funds to invest the money in FSMEX or FSELX, would I have to pay more in taxes, and, if so, would any potential performance increase be overshadowed by increased taxes?

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I don't know what data you have access to easily. Some of my investment's websites offer a cost-basis calculator -- you can get it to tell you how much its worth. Others, it's more difficult. Basically, you need to pay tax on each lot of the mutual fund separately. Lets say they deposited:

  • 10,000 at a share price of 10.00 (that's 1000 shares)
  • 10,000 at a share price of 11.00 (that's 909.09 shares)
  • 10,000 at a share price of 12.00 (that's 833.33 shares).

Today the share price is 19.20. You'd pay taxes on: - 9200 in gain on the first share lot - 7454.52 in gain on the second share lot - 5999.93 in gain on the third share lot

Assuming 15% tax rate on your LT capgains, that's about $3,400 bucks.

Ultimately, you'd need to pay capital gains taxes on all the lots you sold, including dividend and capital gains reinvestments. But to a first order, what I described is pretty good for making your decision.

I do want to challenge you on your assumption:

  • FSMEX and FSELX are sector-based mutual funds.
  • SMMIX appears to be a very broad mutual fund.

You will see that FSMEX and FSELX are more volatile. The companies within a sector all tend to track together. So its quite likely that one of those sector mutual funds will drop more precipitously than SMMIX ever will.

  • This answer is failing to recognize a very important fact. Mutual funds are not like individual holdings. Holders pay capital gains from transactions made in the fund as it operates. So if you bought shares of it for $10, 20 years ago, you've been paying taxes on the realized gains made in the fund that whole time. Your basis would not be $10 on those shares (unless there was zero activity in the fund). The fund company should be able to tell you your basis. – Glen Pierce Jul 17 '17 at 5:24
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The original investment plus all the reinvested distributions add to give you your cost basis. When you sell to buy the new funds, you'll have to pay tax on that gain. Long term capital gain, for all but the past 12 month's investment. By the way, your fund has a .90% annual expense. That's huge.

  • Thanks for the response. The cost basis information is absent on the website. Would the tax I pay from selling potentially be significantly more than what I have paid previously without selling? – BaronFiner Jul 15 '17 at 17:43
  • It would be tough to guess without any history. Given the original investment was so long ago, you are likely sitting on some large capital gains. – JoeTaxpayer Jul 15 '17 at 17:51
  • No. Probably not sitting on large capital gains. Mutual funds pay capital gains as they operate. It's possible that the fund has held some sticks for decades, but not likely. – Glen Pierce Jul 17 '17 at 5:29
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the answer also depends on your annual income. A one time sale of $98k may push you into a higher tax bracket. The expense ratio of 0.9% is huge, so getting out of that fund and into a fund that has a much lower expense ratio will be better in the long term.

first question you need to answer is: what is the cost basis? That will determine how much capital gains you must pay.

second question: What is your income bracket.

A possible alternative: sell some of the $98k... just enough so you don't bump into the next tax bracket. Then next year, sell some more, and move it slowly into a fund that has a reasonable expense ratio.

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Mutual funds are not like individual holdings. Holders have been paying capital gains from transactions made in the fund as it operates. So if you bought it for $10, 20 years ago, you've been paying taxes on the realized gains made in the fund that whole time. Your basis would not be $10 (unless there was zero activity in the fund). The fund company should be able to tell you your basis

  • The shares bought in the beginning were close to the $19 example. The basis for those shares doesn't change. The shares bought with the distributed gains or dividends do add to basis and will increase average cost. You are confusing two different issues here. – JoeTaxpayer Jul 17 '17 at 12:33
  • This article does a much better job of articulating what I'm trying to say, yahoo.com/news/cost-basis-basics-mutual-funds-002320684.html – Glen Pierce Jul 17 '17 at 13:51
  • The original shares' basis doesn't change. OP is just adding new shares to average up. – JoeTaxpayer Jul 17 '17 at 15:30
  • I agree there's something there, but the way you're communicating it is landing way off the mark. Regardless, it's an issue at sale time. Many lots. – Harper Dec 17 '17 at 4:11

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