Rebalancing from Taxable to tax advantage...

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Topic Author
wldlndfirefghtr
Posts: 59
Joined: Tue Jul 28, 2009 12:22 pm

Rebalancing from Taxable to tax advantage...

Post by wldlndfirefghtr »

Hello all,

I currently hold REIT's (adm) in a taxable account, and I know that I am better off having it in my ROTH IRA.

With only being able to contribute 5k in to my ROTH, I feel hesitant to sell and transfer my REIT account.

How would you handle this...

Appreciate the feedback.

Jason
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Scott S
Posts: 1937
Joined: Mon Nov 24, 2008 2:28 am
Location: building my position

Post by Scott S »

Every three months, it's kicking out a dividend that adds to your taxable income. I'd move it ASAP.

- Scott
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
tc33
Posts: 256
Joined: Sun Apr 01, 2007 6:11 pm

Re: Rebalancing from Taxable to tax advantage...

Post by tc33 »

wldlndfirefghtr wrote:With only being able to contribute 5k in to my ROTH, I feel hesitant to sell and transfer my REIT account.
Hi Jason...why do you feel hesitant? Are you sitting on a large amount of unrealized capital gains? What's your marginal tax rate?

Capital gains notwithstanding, I'd sell it immediately and reallocate existing assets within my Roth, and buy tax-efficient equities in the taxable account. If you want to post your complete portfolio breakdown maybe we can help.

Tom
Topic Author
wldlndfirefghtr
Posts: 59
Joined: Tue Jul 28, 2009 12:22 pm

Not really sure why....

Post by wldlndfirefghtr »

Not really sure why,

Maybe cause they are up and I just converted it to Admiral.

I have about $3,400 in unrealized capital gains, I have an American Century fund that has been way under performing, that I am in the process of selling, and that will either fund my 2011 ROTH contribution, with the remainder paying down a HELOC....

or....

Start selling off my REIT, re-buy in ROTH for 2011, and use the rest to pay down a HELOC or relocate to my other Taxable funds ( VG Primecap VPMCX, VG Small-Cap VSMAX)

Bottom line, is I KNOW I need to get it out of taxable, but hesitant to sell the Admiral and reopen in investor (need to get emotions out of investing..lol)

Thanks,

Jason
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chuck-lyn
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Joined: Wed Apr 15, 2009 12:54 pm

Post by chuck-lyn »

REITS in a taxable account might not be so bad if you are in a low tax bracket and/or need the money for living expenses. I think they are taxed at 15% max and some of the income could be return of capital and not taxed at all.

Forgive me Bogleheads if I blasphemed. :lol:

Cheers,

charlie
phositadc
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Joined: Mon Jul 26, 2010 6:17 pm

Post by phositadc »

chuck-lyn wrote:REITS in a taxable account might not be so bad if you are in a low tax bracket and/or need the money for living expenses. I think they are taxed at 15% max and some of the income could be return of capital and not taxed at all.

Forgive me Bogleheads if I blasphemed. :lol:

Cheers,

charlie
~95% of REIT distributions are taxed at your marginal tax rate (aka, as ordinary income).
Topic Author
wldlndfirefghtr
Posts: 59
Joined: Tue Jul 28, 2009 12:22 pm

Post by wldlndfirefghtr »

Right now I just reinvest all dividends, and I'll have to look at last years taxes to see what my marginal tax rate is (off hand it's low, I'm pretty sure), don't remember off hand. That will change for 2010 taxes as I got married, but think over time I will start moving my REIT in to my Roth.
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tyrion
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Joined: Fri Feb 08, 2008 2:33 pm

Post by tyrion »

You should turn off dividend reinvestment, especially if you need to sell another holding to fund your Roth.

If you are in the 15% marginal bracket, and your gains would be long term, you will owe no federal tax to the extent that your gains don't push you into the next tax bracket. You could potentially owe state tax, if applicable (you would in California).

You mentioned you just converted to admiral, so you have around 10k in REITs?
Topic Author
wldlndfirefghtr
Posts: 59
Joined: Tue Jul 28, 2009 12:22 pm

Post by wldlndfirefghtr »

Correct I have $13,539 in REIT's (Approx 7.17% of all investments, taxable and tax free/deferred)

No state tax.

Instead of reinvesting the dividends, should I just divert those into another fund?

I could use cash to fund my 2011 ROTH, but just getting rid of American Century Ultra, that I got as a UTMA, and just never did anything with it.

Thanks for the insight.

Jason
tc33
Posts: 256
Joined: Sun Apr 01, 2007 6:11 pm

Re: Not really sure why....

Post by tc33 »

wldlndfirefghtr wrote:Bottom line, is I KNOW I need to get it out of taxable, but hesitant to sell the Admiral and reopen in investor (need to get emotions out of investing..lol)
Unless this is going to cause tax headaches, just sell all of your taxable REITs right now. Worst case scenario is that you pay STCG, which won't be any worse than paying taxes on non-qualified dividends (both are taxed at regular income rate) -- unless the sale pushes you up into a higher bracket, that could actually be worse. You need to do the math here.

For another way of looking at it, just think of all the extra taxes you're paying just so you can save an extra .1 % with your admiral shares. Back of the cocktail napkin math, 3.15% yield (VGSLX) on $13K = $410 (~98.5% which are non-qualified), which is WAAAAY more than you're saving by keeping the admiral shares vs investor shares (what would that be, $10-15?). Plus the proceeds from your REIT sale may allow you to purchase admiral shares in one of your other taxable funds, giving you even lower expenses plus much greater overall tax efficiency, and/or allow you to pay off your HELOC for the equivalent of a guaranteed tax-free return.

So, in conclusion, just sell the damn REITS :D

Best wishes,
Tom
Topic Author
wldlndfirefghtr
Posts: 59
Joined: Tue Jul 28, 2009 12:22 pm

Post by wldlndfirefghtr »

Tom

Thanks for the kick in the butt and reasoning. My wife pretty much said the same thing last night when I was talking with her. Sell now while we are in a lower marginal tax, re-open in ROTH (it will have time to grow), paydown heloc, etc, etc... time is on my side...

Doing a quick look over our tax info, looks like we will be in the 25% tax rate, so again, better to get it moved out before our income starts climbing.

Guess I'll be working on shuffling that around next week :-)

Thanks for helping be the voice of reason everyone!

Jason
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