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I recently transferred some non-qualified funds "in kind" from an outside institution to VG. Several of them have higher expense ratios, 1.39% to 1.89%, no back end loads. I'd like to move all the funds to VG but do in a tax-savvy manner. These were purchased less than one year ago, and according to VG, would be short term cap gains.
Is there a simple way to determine if holding these funds until they qualify for long term gains is better than selling to get out of the higher ER and move sooner to VG?
A second scenario is that I have some Class C shares in 10K worth of Roth IRA money that have ER of 1.89%. I would have to hold them for six more months to avoid a 1% back end load. When does it make sense to move these to VG funds?
I'm in the highest personal income tax bracket, fyi.
Thanks in advance for the help, sorry if this is a simple answer that I'm missing.
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First question - do the funds you own basically meet the category of investments you want (i.e., if these funds are holding US large, small, Int'l large, small in about the proportions you want)?
If the answer is yes, then you should wait to sell them until they have long term capital gains - the differential in tax costs will outweigh the expense ratio by a lot.
If the answer is no, then the question becomes more complicated but boils down to- what is it worth to you to meet your desired allocation? If you have mostly stock and want to move to mostly bond, then some selling probably makes sense. In most cases, though, if the stock/bond ratio of your holdings is approximately what you want to end up with, it makes sense to wait until you can exchange at the long-term rate. (Hey - by then, it may even be losses if the market tanks - even more valuable
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Short term gains are taxed punitively by the state I live in (MA) so I have done my best to balance short term gains with sales of assets that generate short term losses.
However, I have also sold other investments that generated both long and short term gains when I realized they were inappropriate investments for my long-term goals and likely to suffer significant drops in value. My thought was that a taxable gain still left me with more money than a loss would. As a result I ended up booking $30K of taxable gains this January from the sale of some high expense, very low quality junk bond funds I'd inherited. Had I held them six months longer, I'd have ended up with a $4K loss. Even after heavy taxes that $30K gain beats the alternative.
Unless something dramatic happens to my remaining bond funds (the safe, Vanguard funds I kept) I'll be selling them for a loss by the end of the year and balancing out some of that $30K gain. But that's just making lemonade out of lemons.
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Everything is relative. If the short term gain is $100 I'd take it and move on being thankful I didn't owe more. If its $10,000 I'd wait for it to be a long term gain. Answer might be different if I had offsetting losses. You'll have to run the numbers -- generic advice isn't appropriate in this situation.
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knopflergrass wrote:Is there a simple way to determine if holding these funds until they qualify for long term gains is better than selling to get out of the higher ER and move sooner to VG?
Yes, math. We don't know what percentage of the holding is STCG, so we can't do the math for you, but it's pretty simple math. Be sure to consider differences between both federal and (if any) state STCG/LTCG rates. I guess you'll pay the ACA and ATRA taxes independent of whether the gains are short term or long term.
Bob's not my name
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Thank you to everyone for your responses. I appreciate the time and help as i'm slowly learning these details.
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knopflergrass wrote:A second scenario is that I have some Class C shares in 10K worth of Roth IRA money that have ER of 1.89%. I would have to hold them for six more months to avoid a 1% back end load. When does it make sense to move these to VG funds?
If you wait for six months, you will lose about 0.84% for expenses (half the difference between 1.89% with the C shares and 0.10% with a low-cost Vanguard fund fund) and avoid the 1% fee, so it's close to a wash. If you don't like the fund for other reasons, you might as well switch now.
While I hate C shares, you were lucky to have bought them; if you had B shares, it would be worth selling them even with a 5% back-end load because it would cost much more than 5% to wait for the load to go away.
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