Help: Cap gain with coversion and tax implications of VTIVX

[investingholder]

I'm new to the forum. I have two separate but perhaps related questions. I am a 33 year old with a taxable portfolio question. I can post my entire portfolio of tax advantaged and taxable it it is helpful. But my overall asset allocation is approximately how I would like it to be, I just want to convert most of my taxable accounts into index funds rather than individual stocks. My retirement is almost all in VTIVX (Target retirement 2045) and has been for years. I max out 401k, have substantial savings/investments in Vanguard. This portfolio is in TD Ameritrade.

1. I have a portfoio of mostly large cap stocks that my father established for me long ago. It holds mostly large cap stocks such as XOM, JNJ, CVS, a few others that I am now considering to (over time or all at once) sell and use the money to buy into VTIAX. I have read some of the boglehead-recommended books but few of them really mention the tax implications of converting a large portfolio into the three/fund etc portfolio. Most seem to assume you are starting from scratch or don't mention this aspect? I have calculated that the cap gains of doing so at 15% of gains would cost me approximately $20,000 -- if I sold them all today for example -- not including trading costs (minimal I suppose). That is a lot of taxes for me to wrap my mind around, especially given that most of my holdings are large caps that figure in the VTIAX anyway. While I realize we can't predict the market, can you help convince me it is really worthwhile to do so over the long term? If so, should I spread the sales over a few years to make it easier to stomach? Or just bite the bullet? My ultimate goal is to have a passive portfolio I can leave alone most of the time and just rebalance periodically - or not at all if I reallocate things mostly into a balanced target date fund. Which leads me to question number 2.

2.I realize that there are negative tax implications of holding bonds in your taxable for the various reasons discussed on this board. My ordinary income rate is 28%. However, Asset Allocation aside, is there really a huge disadvantage to having some or most of my taxable assets in VTIVX? I understand there are *some* negative tax implications, but it seems to me the time value of what it takes to rebalance might outweigh that, for me. In both time, and stress. Am I making a reasonable assumption? I would love to spend as little time rebalancing/stressing as possible, over the long run.

Thanks for your help in advance.

[investingholder]

sorry I meant to write Vanguard total stock market index admiral shares, not VTIAX.

[rickmerrill]

sorry I meant to write Vanguard total stock market index admiral shares, not VTIAX.

I don't see vtiax mentioned above but assume you mean you have total stock in taxable?

I will give you a bump because I'd like to see answers to your first question - sorry, above my pay grade. Getting rid of the stock specific risks and simplifying your portfilio are both worthy goals but how do the tax consequences play in?

Putting total stock market in taxable is fine, it is very tax effecient but total international may be preferable because of the foreign tax credit. You don't need to put bonds in taxable, just increase your bonds in tax advantaged. Of course if you only have target 2045 in tax advantaged you'd need to add a bond fund or go to a lower date fund. I think you can see where this going and why the three fund portfolio fits most investors. Not a lot of work, rebalance once or twice yearly, and it simplifies your asset allocation. I hope this was a little help.

Rick

[dbr]

Getting rid of taxable investments that have a large tax liability creates a dilemma. Carrying diversifiable risk in single stocks is bad, but when the cost to diversify is high, I am not sure there is a simple calculation. The problem is that one is attempting to compare risk and cost, which are not like entities. A general aphorism that applies is the old don't let the tax tail wag the investment dog and just eat the cost to get a better portfolio. If a crash in any one of those stocks, like GM or Citibank has done, would exceed the $20,000, then that might motivate making the change. There is also the question of what fraction of the portfolio is involved. If now, or in the near future, the total is a small fraction of all assets, one could just keep the investments.

What you can do is look at the capital gain stock by stock and even tax lot by tax lot (if there are different tax lots) and start eliminating those with the least tax cost.

Another popular suggestion is that if one is making charitable gifts, then gift the stock instead of cash. Sometimes this might be sensible and other times seems to presume an amazing level of generosity.

You should also mind your tax brackets; it could be spreading the cost over more than one year makes sense.

[investingholder]

Thank you for the responses. I appreciate the advice. Because the portfolio is only about 10 percent if liquid assets I may leave most of it alone but will have to think about it more.