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Please explain "Buy fund after the distribution date and sell fund before it"

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  • Please explain "Buy fund after the distribution date and sell fund before it"

    Hello

    Can someone please  explained me this concept off buying the fund after the distribution date and setting the fund before the distribution date. I have reviewed this concept in one of investing book but have not understood it clearly. How can I find out distribution date for each fund? I have Roth IRA and taxable account. I invest regularly in VTSAX, VBTLX and VTIAX.

     

    One more question. I contributed to individual IRA $5500 to do backdoor Roth IRA at Vanguard. Vanguard put my fund on hold for 1 week and they says it is their policy to prevent fraud, when I transfer money from bank. Never had this issue last year or before. Has any one had issue to do Backdoor Roth IRA this year? Any solution ?

     

    Thank you,

     

  • #2


    One more question. I contributed to individual IRA $5500 to do backdoor Roth IRA at Vanguard. Vanguard put my fund on hold for 1 week and they says it is their policy to prevent fraud, when I transfer money from bank. Never had this issue last year or before. Has any one had issue to do Backdoor Roth IRA this year? Any solution ?
    Click to expand...


    I'm not sure what solution you are looking for. You have until 4/17/18 to contribute to your nondeductible IRA, so sounds like you are fine. If you're not happy that your money had to sit for a week, you could always change custodians.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3




      Hello

      Can someone please  explained me this concept off buying the fund after the distribution date and setting the fund before the distribution date. I have reviewed this concept in one of investing book but have not understood it clearly. How can I find out distribution date for each fund? I have Roth IRA and taxable account. I invest regularly in VTSAX, VBTLX and VTIAX.

       

       
      Click to expand...


      It's that a fund distributes capital gains, the holder has to realize those gains even if you bought the fund on the declaration date.  It's not as big of an issue inside a Roth as it is a taxable account.  I wouldn't make all of your investment decisions based on the distribution date though.  It's more something to consider if it is approaching soon and you are making a buy/sell decision.

      Here are Vanguard's Year End distributions if you are interested: https://institutional.vanguard.com/iam/pdf/STBAYED.pdf

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      • #4
        When I did my backdoor roth contributions at Vanguard a few weeks back, the funds took a number of days to clear/settle from my checking account into the IRA before it would let me convert to Roth.

        For what it's worth I believe I could have instantly bought or sold securities without waiting for the funds to settle, but I had to wait to do the conversion.

         

        Edit - as for the first question, I believe the idea is to avoid buying a security and having a portion of your own money be immediately given back to you in the form of a taxable dividend, etc.  If you follow a particular company's stock that pays regular dividends, outside of the usual ups and downs of the markets, there will be an uptick in the stock price before a dividend record date, and an equal corresponding downtick in the stock price following the record date, usually close to the amount of the dividend.

        For the professional broker this is probably something worth factoring but for the buy-and-hold investor this is probably not worth worrying about.  I don't.

         

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        • #5
          The 'strategy' being discussed would imo be applicable in cases where the distributions are skewed towards ST or LT capital gains distributions versus a dividend distribution.  VTSAX, VBTLX, and VTIAX will do primarily dividend distributions.  Only VBTLX had a LT capital gains distribution this year (2017) and comprised only about 25% of the total dividend/capital gain distribution.

          If I recall in 2008 or 2009, Fidelity Contrafund had a distribution that had a large distribution percentage related to capital gains, but alot less of a decision point imo with respect to index funds.

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          • #6




            Hello

            Can someone please  explained me this concept off buying the fund after the distribution date and setting the fund before the distribution date. I have reviewed this concept in one of investing book but have not understood it clearly. How can I find out distribution date for each fund? I have Roth IRA and taxable account. I invest regularly in VTSAX, VBTLX and VTIAX.

             
            Click to expand...


            For me this is only applicable in investing in my taxable account.  It's based on the belief that dividends are bad because of the tax drag and that it's worth the effort to avoid them if it isn't too inconvenient.

            Look at the ex-dividend dates of what you want to buy.  I get this from morningstar.com.  Use that to figure out what the distribution schedule is for your fund.  Most Vanguard funds are distributed quarterly, in late March, June, September, and December.  However, there are some exceptions; some Vanguard ETF's pay out only at the end of December (and that dividend is much larger than a given quarterly dividend), and some ETFs I own only pay out semiannually, at the end of June and December.

            A key concept for me is the understanding that the less frequently the fund or etf pays a dividend, the more important it is not to "buy the dividend."  If it's a fund or etf that pays only quarterly, whether you buy it a week before or a week after the ex-dividend doesn't make too much difference.  But if on that dividend date the fund pays half or more of its distributions for the year, dodging the dividend can save you real money.

            Here's an example.  VIOO is one of the few Vanguard ETF's that pays all of its distributions once a year.  On 12/19/17 it paid out $1.54 per share, which had a NAV of $139.23.  Let's say in late December you wanted to buy $5000 of this ETF, or approximately 36 shares.  Well, if you bought on 12/18, you'd get dividends on those 36 shares, which adds up to $55.44.  How much are you taxed on that?  If you assume that the dividend is 100% qualified, and you're a high income doctor, it costs $10.43.  In reality, only 82% of the distribution is qualified, and it actually costs about $12.55 (which is like paying a 0.25% front-end load).  On the other hand, if you bought on 12/20, you wouldn't have to pay that.  Likewise, if you already had VIOO and wanted to sell it, you'd save a $12.55 back-end load if you did it on 12/18 instead of 12/20.

            So obviously we're not talking big sums of money here.  It only really becomes relevant when 1) a fund/etf is paying a particularly large distribution, 2) You're putting a lot of money in at once, 3) You're at a higher marginal tax bracket, or some combination of those factors.
            I sometimes have trouble reading private messages on the forum. I can also be contacted at [email protected]

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            • #7
              Thank you very much all. This responses are helpful. Have a good weekend.  

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              • #8
                Nothing wrong with selling a fund just after a distribution. But in a taxable account, you generally want to avoid "buying the dividend" because you basically haven't made any money yet but still get a distribution on which you have to pay taxes.
                Helping those who wear the white coat get a fair shake on Wall Street since 2011

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