You can do that on your own, and it's less expensive than using the distributed capital gains.Active mutual funds tend to generate capital gains due to redemption needs or fund managers’ investment decisions. Many people loathe the capital gains because of taxes which ensue. What if the capital gains are a sign to rebalance?
For example, many active stock funds distributed huge capital gains in the end of 2021. As we know, 2022 was a terrible year for the stock market. If those capital gains had not been reinvested, they could have been used to buy the dip in 2022.
Suppose that you need to rebalance and move $50K out of US stock into bonds. The lowest-cost way to do that would be to sell stock to buy bonds in your 401(k) or IRA, with no tax cost. If you can't do that because your tax-sheltered accounts don't have the right funds, you can sell $50K from a US stock fund; in a bull market, you might sell stock for which you had paid $30K, and thus owe capital-gains tax on $20K. But if you received a $50K capital-gain distribution from your stock fund, you have to pay tax on the whole $50K.
I have had a large taxable account for years, and I have never needed to sell for a capital gain to rebalance. I came close in 2007; if emerging markets had continued their rise for one more year, I would have been over a rebalancing limit and needed to sell Vanguard Emerging Markets Index to rebalance. (Instead, all the stock markets fell in 2008, so I was able to rebalance while taking capital losses.)
Statistics: Posted by grabiner — Wed Mar 20, 2024 8:34 pm — Replies 24 — Views 1832