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You have no capital gains until you sell. Just as you suggest, value may go up in year one but down in year two. You have no gain and no loss until you sell.
VTSMX has a 2% dividend paid quarterly. You will pay taxes on those quarterly payments regardless of whether you reinvested or took the payment as cash. Small beans.
Let's say I start by putting 100,000 in the Vanguard account. This is after tax money. In year 1, let's say the balance is now 110,000. If I want to take out 10,000, then I have to pay tax on the 10,000? Why isn't the 10,000 considered part of my original after tax 100,000? It seems I should be able to draw out 100,000 without paying tax, then anything after 100,000, I should pay tax on since it would be considered gains.
VTSMX has a 2% dividend paid quarterly. You will pay taxes on those quarterly payments regardless of whether you reinvested or took the payment as cash. Small beans.
How does this efficiency/non-efficiency compare to other similar funds (ie managed/low cost..)?
It always seems to be a debate on Bogleheads whether the road to dublin is similar w/low cost index funds and low cost/low turnover managed funds...
Let's say I start by putting 100,000 in the Vanguard account. This is after tax money. In year 1, let's say the balance is now 110,000. If I want to take out 10,000, then I have to pay tax on the 10,000? Why isn't the 10,000 considered part of my original after tax 100,000? It seems I should be able to draw out 100,000 without paying tax, then anything after 100,000, I should pay tax on since it would be considered gains.
EXCELLENT QUESTION : you pay tax on anything over your cost basis. if you only take out 10k from the 100k you have choices as to how you want to figure it, fifo,average,lifo.
once you select a method you have to stick with it for all the rest of the money.
Now, let's say in year 1 the 100,000 grows to 110,000. I draw out 10,000 and pay tax on it. Now year 2, the 100,000 loses 20,000. So now the balance is 80,000. In year 3, the 80k goes up to 90k. I want to draw out 10k. Would I pay pax on the 10k since it went from 80k to 90k in that year? Shouldn't it take into account that I lost 20k the year before?
You would pay tax on the GAINS on those shares you sold for $10,000, not the entire $10,000. IOW, if your shares increased by 10% over your cost basis (i.e. $100,000 to $110,000), you would owe tax on $1,000 of that $10,000. Just in case that wasn't clear.
As to your second question, since $90,000 is less than your $100,000 cost basis, no, you wouldn't owe tax.
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