Tag Archive: tax

Sell mutual fund with short term CG after distributions

When I was liquidating my FIREX holding last year, an interesting observation came to my mind. If an investor, for whatever reason, needs to liquidate a substantial position with short term capital gains, and there is a fund distribution coming up, it makes sense to find out (whenever possible) the nature of the fund distribution — whether it is mostly short-term CG (capital gain), long-term CG or qualified income distribution.

The reason is because if the distribution is mostly long-term CG or qualified income, then by selling after the distribution, the investor can save on taxes, with the savings being attributable to the difference in tax rates between short-term CG and long-term CG (or qualified income).

The above obviously assumes no significant market price movements in the mutual fund. However nobody has a perfect crystal ball to predict future price movements; so with all things been equal, selling a mutual fund with short term capital gains after the fund distribution seemed to be a good strategy to adopt in such a scenario.

Should 529 contributions be treated as part of portfolio?

With the removal of the sunset provisions of the tax-free withdrawal status from 529 college savings accounts, the 529 account is now more attractive than before. In particular, for qualified withdrawals, it functions effectively the same as a Roth account, where contributions are made with after-tax money and all withdrawals are tax-free.

For high income earners who are priced out of the Roth IRA, the 529 college savings account can become somewhat like a “giant” Roth IRA for you to sock away your savings, up to the limit of the estimated college costs. A Roth IRA is a great location for asset classes that have high expected returns but would otherwise be severely eroded by taxes due to high capital gains or dividend (especially the unqualified kind) distributions. This would include assets like the REITs, small-cap value and international small-cap asset classes.

Taking this view, one would then wonder why the 529 account should not be treated as part of the entire portfolio, instead of just treating it separately. When the 529 account is considered as part of the entire portfolio, an investor would have more freedom and less limitations as to where he/she can place the asset classes in the most efficient manner.

Conversation 54876 from the Diehards forum has a lively discussion on this issue. Personally I have not given serious thought into considering the 529 contributions as part of my portfolio but I believe it is an interesting idea that is worth exploring.