Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

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berg
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Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by berg »

So I think I have a grasp on tax lost harvesting, but this is my first time, so hoping for some help to confirm my plan.

In a taxable account I hold VTSAX and VTIAX. I also hold these funds in our Roth IRAs.

In my wife's 403b she holds FSIVX (Spartan Int'l Index) and FSTVX (Spartan Total Market Index).

In my 401k I hold for Int'l DODFX (Dodge & Cox Int'l) and FSIVX (Spartan Int'l Index). For domestic I hold FUSVX (Spartan 500 Index) and FSEVX (Spartan Extended Mkt Index).

For the 403b and 401k, my wife is done contributing for the year and I am still contributing, but only buying a bond fund right now for AA purposes.

I made a purchase in my taxable this Friday, October 17th of VTSAX and VTIAX and my last dividend payment on these funds is September 23rd.

So here is what I'm thinking as a plan.

1. Right now, in all accounts I turn off automatic dividend reinvestment.
2. 31 days from 10/17 (11/17), assuming my funds are still at a loss, I convert my taxable holdings of VTIAX to VFWAX and VTSAX to VLCAX.
3. 31 days after that (12/19), I can safely convert back to my original allocation and turn divined reinvestment back on.

Does this plan make sense? Am I missing anything?

Bonus question - If I have a loss in the fund I convert to during the 31 day waiting period, do I get a tax loss harvest on that too when I convert back?

Thanks for the help! Every year I feel like I am getting smarter thanks to the help of the Bogleheads.
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dodecahedron
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by dodecahedron »

berg wrote:
Bonus question - If I have a loss in the fund I convert to during the 31 day waiting period, do I get a tax loss harvest on that too when I convert back?
Yes, you do (assuming you make no other purchases of that fund during the 31 day waiting period) but the flipside of your question is that if you have a gain in the fund you convert to during the 31 day waiting period, it will be a short term taxable gain if you convert back at the end of the 31 days. Thus, many folks advise that you should not TLH into any fund you would not be willing to hold indefinitely.

Example: last month I TLHed out of Vanguard Developed Markets into Vanguard Total International (VTIAX). VTIAX is down quite a bit since my TLH purchases in mid-September. If it is still down after the 31 day waiting period, I can TLH back into Developed Markets.* If not, I am happy holding VTIAX indefinitely. (None of this is precise science on my part anyway. I just felt the need for some low cost diversified international exposure. Developed Markets is slightly lower ER and possibly more tax-efficient but VTIAX is somewhat broader diversification with some emerging markets exposure, which I am pretty agnostic about.)

*Caveat: some of my TLH purchases of VTIAX were made right before it went ex-dividend on September 23, so I will hold onto those shares long enough to satisfy the 61-day holding period to make sure those dividends retain their qualified dividend status. This is likely not going to be an issue for you if you are contemplating TLH conversions in October, but could be an issue if you TLH in, say, late November.
placeholder
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by placeholder »

I don't understand most of these gyrations as there don't seem to be any substantially identical funds except in the Roth not to mention that the IRS publications don't mention anything about 401k and 403b even being potential for wash sale.
Topic Author
berg
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by berg »

placeholder wrote:I don't understand most of these gyrations as there don't seem to be any substantially identical funds except in the Roth not to mention that the IRS publications don't mention anything about 401k and 403b even being potential for wash sale.
So ignoring my 401k and 403b, does the plan make sense otherwise? Just my first time doing this, so want to make sure I'm doing it correctly. Thanks!
livesoft
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by livesoft »

Your plan is not what I would do.

First, you should know when dividends are paid by these funds and when or if they were just paid. You don't have to turn off dividend re-investment because there will not be any dividends to be paid for a while.

Second, if after 31 days of the purchase of the new replacement shares (VLCAX or VFWAX) have a gain, then you should just keep those shares and not sell them since the act of selling them would create short-term capital gains that would increase your income on your tax return or offset the loss the just realized by selling the losers.

Third, you can sell the shares with a loss purchased on October 17 and with the dividend money in late September at any time. You do not have to wait to realize any losses in these shares.

If the shares that paid you dividends had been held for at least 61 days today (they were purchased before mid-August, then the dividends paid in late September are all qualified. Note that this statement has nothing to do with the shares purchased with the dividends or on October 17. Those recently purchased shares have not paid you any dividends.
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Topic Author
berg
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by berg »

Honestly, I'm just trying to keep it as simple as possible.

I wonder if it would make more sense to just move to money market for 31 days and then move back to the same funds. I might miss out on some gains, but this is for long term growth.
livesoft
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by livesoft »

Here is simple:

Exchange all loser shares of VTIAX to VFWAX now. Do nothing else.
Exchange all loser shares of VTSAX to VLCAX now. Do nothing else.
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nobsinvestor
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by nobsinvestor »

Would it be considered a wash sale if one sold VTIAX and bought the Fidelity or Schwab Total International Market Index? Does the IRS consider that to be the same type of security so to speak?
livesoft
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by livesoft »

nobsinvestor wrote:Would it be considered a wash sale if one sold VTIAX and bought the Fidelity or Schwab Total International Market Index? Does the IRS consider that to be the same type of security so to speak?
That controversial with no known answer.
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Topic Author
berg
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by berg »

livesoft wrote:Here is simple:

Exchange all loser shares of VTIAX to VFWAX now. Do nothing else.
Exchange all loser shares of VTSAX to VLCAX now. Do nothing else.
Ha. I like simple, thanks!

Will this have any other impact on my taxes in the future? Or would it simply be if did this exchange today and sold at any point in the next year for a profit, I'd owe short term capital gains?

Also, I'm 31, so a lot of time horizon left. Would it be safe to assume at some point in the next 20 years, I'll probably want to do a TLH again, since we know the market will go down at some point. And in this case, I could swap back to VTIAX and VTSAX if I wanted?
randomguy
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by randomguy »

Any reason to favor Vanguard Large Cap over Vanguard Tax-Managed Capital App? I though that tax managed has a slightly better correlation with total market (and if you wanted to buy some of the small cap it would be even higher).
nobsinvestor
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by nobsinvestor »

livesoft wrote:
nobsinvestor wrote:Would it be considered a wash sale if one sold VTIAX and bought the Fidelity or Schwab Total International Market Index? Does the IRS consider that to be the same type of security so to speak?
That controversial with no known answer.

I see. So best to not risk it and just stick to a large cap index fund?
livesoft
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by livesoft »

berg wrote:Will this have any other impact on my taxes in the future? Or would it simply be if did this exchange today and sold at any point in the next year for a profit, I'd owe short term capital gains?

Also, I'm 31, so a lot of time horizon left. Would it be safe to assume at some point in the next 20 years, I'll probably want to do a TLH again, since we know the market will go down at some point. And in this case, I could swap back to VTIAX and VTSAX if I wanted?
I swapped from VTSAX to VLCAX in 2009. I doubt I will ever be able to sell VLCAX at a loss going forward. So, No, it would not be safe to assume at some point in the next 20 years that you will swap out of funds bought this week to get back into VTSAX and VTIAX. It is possible. For instance, if the funds bought this week have a loss still at the end of the 31 days, one would gladly swap back.

It is safe to assume that you will do TLH in the future, but with other shares.
Last edited by livesoft on Thu Oct 23, 2014 6:29 am, edited 1 time in total.
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Topic Author
berg
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by berg »

Ok, so I think I understand what I need to do. I currently have a loss just over $3500.

Is there any reason not to do it. My tax bracket is 33%, so seems like it would be prudent to try to get the deduction and save nearly $1000.
skibum
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by skibum »

Preparing for my first TLH as well, so I thought I'I tag onto this thread for input. Let's see if I have the basics covered while trying to Keep It Simple:
Sell FSIVX (Fido MSCI EAFE) in taxable, buy FSGVX (Fido MSCI ACWI) in IRA. (I have Vangaurd positions, these are on Fido platform)
Approx $8k to harvest, short term loss, so flexability to offset short term (unlikely) or long term gains this year. Have several years of carry over from past losses also FWIW.
My future AA and withdrawal positioning steer this position from taxable to qualified regardless of TLH. It would seem that transferring the lower cost basis into the IRA mitigates the eventual capital gains that would be incurred from a taxable holding, although I will be hit with income taxes upon IRA withdrawal and/or conversion to Roth up to the top of the 15% bracket. Since I expect to be in the 15% bracket with Roth conversions and zero capital gains tax rate for the next decade, it's not totally clear to me to me that the lower cost basis is better in qualified plan, but it seems favorable.
Lastly, funds are ex-dividend in April and Dec, so I presume dividend reinvestment is irrelevant. I haven't figured out why dividend reinvestment before harvest can trigger a wash sale, curious about this, but don't need to understand now if it is irrelevant to my situation.

Thanks and Happy Returns,
Skibum
livesoft
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by livesoft »

Selling FSIVX in taxable for a loss and buying FSGDX in an IRA seems like a great idea to me. (FSGVX is probably a typo.) I have done essentially the same thing since I sold VEA in taxable and bought FSGDX in a 401(k).

But what will you do in taxable with the money from selling FSIVX? Stay in cash for a while? And where did the money to buy FSGDX come from? A bond fund? In a sense you are doing what is described in this Wiki article: http://bogleheadswiki.pbworks.com/w/pag ... %20account

Also, do you plan to reverse the trade in 90 days by selling FSGDX in the IRA and buying FSIVX in taxable? I wrote "90 days" because of the extra 1% fee if you sell sooner. Or will you use the cash in taxable for rebalancing?
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fundtalk
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by fundtalk »

I tax loss harvest between VTIAX/VFWAX and VTSAX/VLCAX. I did this trade last week and will save a lot of money on taxes because of it.

I believe in keeping it simple, but if you are going to do this, you should be comfortable holding all 4 funds permanently. Selling back to the total market funds 31 days later will significantly reduce the benefit of doing this. If you are concerned about the performance difference between the funds (i.e. won't it cost me not holding all those small cap stocks in the TSM fund?), run the "growth of $10000" graphs on morningstar comparing the two funds. It is difficult to tell that there are two lines graphed on the chart because the performance is so close.

I would turn off the dividends in your taxable account regardless on whether you do this or not. Also, I would turn them off for your identical funds in your tax sheltered accounts...or, hold different funds (the IRS can consider shares of VTSAX or VTIAX you buy in your IRA's as "replacement shares".)
gronkman
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by gronkman »

I have about $32k in long term capital losses carried over to this year. I also have about $20k of short term capital losses I could TLH. Does it still make sense to TLH, or should I just sit on it? If I do TLH, should I do the entire amount? I'm curious since I also have a long term horizon (25 years). I'm currently in the 39.6 bracket.
livesoft
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by livesoft »

I would TLH with that amount of losses. It makes sense to do all of them. I assume these are all in a taxable account, but I do wonder.
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skibum
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by skibum »

Thanks Livesoft. Correct ticker is FSGUX. I have not considered swapping back in 90 days. I think either fund provides passive intl allocation, I could shave 6 basis points by swapping back in 90 days. As for the cash source and future objectives, I have been increasing cash holdings in preparation for early retirement in 2015; following the "six figure expense zero tax post" (best post ever in my opinion, http://www.bogleheads.org/forum/viewtopic.php?t=87471). Essentially, the TLH swap to IRA also transfers cash raised from IRA to taxable for expenses in the next 2-3 years. Still working on the details for my withdrawal strategy, a couple years expenses in cash seems prudent. Holding the cash in IRA mitigates the income as described in link, I could keep cash/fixed investment there and make the swap trade later to access cash for expenses. I'm thinking a Pennfed CD ladder in taxable, I read they often increase rates year end. Open to suggestions on short term fixed investments. I'm thinking the TLH benefits will outweigh the income in taxable in my last 1/2 year of work and low tax in ER. The near zero tax rate in early retirement and IRA->Roth conversion opportunity is difficult to grasp in total, and the subtle nuances especially.
My next posts will likely steer toward withdrawal strategies, thanks all for sharing your expertise.
tj
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by tj »

fundtalk wrote:I tax loss harvest between VTIAX/VFWAX and VTSAX/VLCAX. I did this trade last week and will save a lot of money on taxes because of it.

I believe in keeping it simple, but if you are going to do this, you should be comfortable holding all 4 funds permanently. Selling back to the total market funds 31 days later will significantly reduce the benefit of doing this. If you are concerned about the performance difference between the funds (i.e. won't it cost me not holding all those small cap stocks in the TSM fund?), run the "growth of $10000" graphs on morningstar comparing the two funds. It is difficult to tell that there are two lines graphed on the chart because the performance is so close.

I would turn off the dividends in your taxable account regardless on whether you do this or not. Also, I would turn them off for your identical funds in your tax sheltered accounts...or, hold different funds (the IRS can consider shares of VTSAX or VTIAX you buy in your IRA's as "replacement shares".)
Why VLCAX rather than the S&P 500 fund?
livesoft
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Re: Plan of attack for Tax Lost Harvesting VTIAX and VTSAX

Post by livesoft »

tj wrote:Why VLCAX rather than the S&P 500 fund?
I chose VLCAX because it holds more stocks than the S&P500 fund. Furthermore, many large cap companies are not in the S&P500, so VLCAX is more representative to the total stock market index than an S&P500 index fund is.
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