Capital Gains help

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IndexBeliever
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Capital Gains help

Post by IndexBeliever »

I spoke with vanguard personal advisors. Wanted to reduce my actively managed funds and move to a more indexed diversified portfolio. Currently 40% of my taxable account is in Wellington (VWENX) with ~30k of unrealized capital gains. Vanguard recommended not touching VWENX because of the capital gains. But shouldn't i transition out of VWENX over next few years before the capital gains get even worse?

Am I thinking about capital gains all wrong?

Thanks in advance
Sidney
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Re: Capital Gains help

Post by Sidney »

I'd be tempted to wait for the next major market crash - if you get lucky you will have losses you can book then.
I always wanted to be a procrastinator.
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cheese_breath
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Re: Capital Gains help

Post by cheese_breath »

Are these long or short term gains, and what tax bracket are you in?
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retiredjg
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Re: Capital Gains help

Post by retiredjg »

Yes, I think you are thinking of capital gains all wrong. Capital gains simply means you are making money. That's a good thing. Big capital gains are a big good thing.

The only reason to dump your Wellington is to become more tax-efficient. I think they are saying that it is not worth the tax cost to fix a tax-inefficiency. Better to just pay a little in extra tax each year than to pay a chunk of tax just to be more tax-efficient in the future.

Yes, you will have more in Wellington in the future and you will also have more capital gains. That isn't a problem. Any stock or balanced fund held in taxable will be building up capital gains over the years.

On second read, you want to get rid of your Wellington to move to more of an index approach. Is it worth paying $4k to $5k in tax now to move to indexes when Wellington is a perfectly good low cost managed fund? It would not be worth it to me. I prefer indexing over managed funds, but Wellington, for a limited portion of a portfolio, is low enough cost for me to overlook that it is actively managed.
Last edited by retiredjg on Mon Jan 19, 2015 4:51 pm, edited 1 time in total.
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BL
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Re: Capital Gains help

Post by BL »

If you are re-investing the CGs and dividends, I would turn that off. No need to add more to something you don't feel is right.
flyingaway
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Re: Capital Gains help

Post by flyingaway »

I would love to have capital gains, which are not that bad. I am surprised that some people think market crash is a good thing so that they can do tax loss harvesting.
dbr
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Re: Capital Gains help

Post by dbr »

IndexBeliever wrote:I spoke with vanguard personal advisors. Wanted to reduce my actively managed funds and move to a more indexed diversified portfolio. Currently 40% of my taxable account is in Wellington (VWENX) with ~30k of unrealized capital gains. Vanguard recommended not touching VWENX because of the capital gains. But shouldn't i transition out of VWENX over next few years before the capital gains get even worse?

Am I thinking about capital gains all wrong?

Thanks in advance
One piece of missing information is what fraction of your total assets now is in Wellington. Also what fraction will be in Wellington if you continue adding savings over the years. You may be making a mountain out of a molehill.

Also, Wellington is hardly the example of the big, bad, costly actively managed fund. It is a low cost, efficient fund though it is not as diversified as some would want. You can read all the posts here by people who are gaga over Wellington and from those choosing to move into Wellington. There is a potential for manager risk, but the issue is what fraction of all your assets would be affected.

Objectively, as mentioned, the issue with Wellington in taxable is tax cost, and depending on how large your holding is and your tax situation you can calculate the relative benefit of paying CG tax now vs tax cost over the years.

Aside from tax cost, it really comes down to incommensurate issues, diversification and idiosyncratic risk vs CG tax cost. It is true that if you are heart set on dumping the fund then if 'twere done 'tis best 'twere done quickly. Waiting for a market pullback is also an option, but not a certain one.

One lesson that might exist here is for investors to begin with the plainest vanilla, low cost, diverisified, and tax efficient allocation and pursue the more exotic with great caution before dilemmas develop.
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Electron
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Re: Capital Gains help

Post by Electron »

You could sell in increments now depending on your tax situation. If you have any space left in the 15% bracket (after all ordinary income, deductions and exemptions) you would qualify for the 0% capital gains tax rate for that remaining space. Any balance might be taxed at 15% or higher depending on other factors.

Note also that the deferred capital gains in Wellington fund will be reduced following each capital gains distribution.
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Toons
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Re: Capital Gains help

Post by Toons »

Don't sell it ,stop reinvesting if you are ,reallocate and dividends or cap gains that are paid out. :happy
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IndexBeliever
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Re: Capital Gains help

Post by IndexBeliever »

Thanks all.


In 25% federal tax bracket and no state income tax

The VWENX makes up ~40% of the portfolio and was an inheritance. All future money going into index funds. Trying to simplify things but keeping it means pouring some into small and mid caps to balance it out. 10 years from now I would like to have a 3 or 4 fund lazy portfolio.

And yes, as advised I have turned off automatic reinvestment and moving those dividends to extended market to balance it out.
IPer
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Re: Capital Gains help

Post by IPer »

don't fidget!
You don't need to sell anything. Just add where you want it with new inflows. No need to realize capital gains and no advantage if you do.
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retiredjg
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Re: Capital Gains help

Post by retiredjg »

If you are 25 years old and have lots of contributions to make over the next several decades, 40% of your current portfolio is peanuts and not worth worrying about.

If you are 60 years old and about to retire, having 40% of your portfolio in a fund you don't want is another matter.
Topic Author
IndexBeliever
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Re: Capital Gains help

Post by IndexBeliever »

Thanks all.

Will not sell and will continue to diversify going forward!

Thanks so much for your insight!
Manbaerpig
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Re: Capital Gains help

Post by Manbaerpig »

also the oval office is floating a rise in the capital gains tax [doesnt look like theres a good chance of it passing], so I wouldnt worry about it but of course thats another scenario to keep in mind.

tax-gain harvesting may be prudent if we do actually return to the reagan era rates
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IndexBeliever
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Re: Capital Gains help

Post by IndexBeliever »

What is tax gain harvesting? I'm learning how to tax loss harvest.

Thanks
Manbaerpig
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Re: Capital Gains help

Post by Manbaerpig »

it's precisely the opposite but a more nuanced calculation and very personal in nature , occasionally, it may make sense to 'take' capital gains before something historic happens. Like LT cap gains rate moving from 15% to 28%

these are the types of posts however that I think tend to get locked, apologies in advance...I doubt we experience anything of this nature passed into law anytime soon of course
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Cosmo
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Re: Capital Gains help

Post by Cosmo »

flyingaway wrote:I would love to have capital gains, which are not that bad. I am surprised that some people think market crash is a good thing so that they can do tax loss harvesting.
That was my thought initially. Thinking about it more, though, tells me that is the wrong way of looking at it. It is very possible to minimize your tax liability during a significant market downturn without even significantly changing your equity position. It is possible to sell this at a potential loss (assuming market crash) and immediately purchase an index fund without bumping up against the wash rule. Why not, I say. However, you could be waiting 10 weeks to 10 years before we having something like that (2002, 2008) again.
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Electron
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Re: Capital Gains help

Post by Electron »

It might be a good idea to check the cost basis carefully to make certain that all purchases and reinvested distributions have been included. You could then calculate your breakeven NAV by dividing cost basis by the current share balance. I would then make note of that NAV for future reference.

Holding Wellington in a taxable account could have some disadvantages depending on your tax situation in the future. One third of the fund is typically held in taxable bonds.

The ordinary income and other distributions show up when you look at the Tax Cost Ratio provided by Morningstar. They currently show that cost as 2.06% over the last year. The return of the fund every year is reduced by the tax cost ratio after paying taxes. Your cost could be lower depending on your tax bracket. Note that the same page on Morningstar shows the capital gains tax exposure at 22.26%

http://performance.morningstar.com/fund ... ture=en-US

Vanguard also provides the unrealized capital gains which currently shows as 24.57%.

https://personal.vanguard.com/us/funds/ ... =INT#tab=4
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dbr
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Re: Capital Gains help

Post by dbr »

Electron wrote: Your cost could be lower depending on your tax bracket.
I would emphasize this point.
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IndexBeliever
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Re: Capital Gains help

Post by IndexBeliever »

Will holding an actively managed fund like Wellington (vwenx) In a taxable account not further increase taxable gains in the future? Let me rephrase, why would one hold an actively managed fund in a taxable account for decades? Is the hope that in retirement that one is in 15% federal tax bracket and thus 0% LT capital gains?

Before I found this forum I poured a huge portion of my taxable account into Wellington and now have some significant capital gains.
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Re: Capital Gains help

Post by DSInvestor »

IndexBeliever wrote:The VWENX makes up ~40% of the portfolio and was an inheritance. All future money going into index funds. Trying to simplify things but keeping it means pouring some into small and mid caps to balance it out. 10 years from now I would like to have a 3 or 4 fund lazy portfolio.
Investments in taxable accounts that are inherited get a stepped up cost basis to the value on the day of death. Did you step up the basis of your wellington holding?
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IndexBeliever
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Re: Capital Gains help

Post by IndexBeliever »

Did not step up to it. But it was a gift and just trying to make the most reasonable decisions going forward.

Did not realize that about inheritance. But would want the Roth IRA to be an inheritance primarily if possible correct?
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BL
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Re: Capital Gains help

Post by BL »

No matter what you decide to do, it would be a good idea to calculate the basis now so you have those records whenever you sell them. If it is at Vanguard, there should be a button for capital gains and you could take a look there. I believe they use average cost basis for pre-2012? and what ever basis you choose for after that, assuming there were purchases since then. If you were reinvesting the dividends and capital gains, those would be purchases. If you chose specific Id, you could sell off individual purchases here when they have low gains or even losses. I bet there were recent days when some of these would have been losers or at least not gain much.
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Re: Capital Gains help

Post by JW-Retired »

IndexBeliever wrote: Did not step up to it. But it was a gift and just trying to make the most reasonable decisions going forward.

Did not realize that about inheritance. But would want the Roth IRA to be an inheritance primarily if possible correct?
Maybe you mean it was a gift of cash and you invested it, but If this Wellington fund came originally to you as a gift of shares, then your cost basis is whatever the giver's cost basis was. Did the giver tell you what that is? If it was in a brokerage account and was transferred to you in your brokerage account the cost basis data may have transferred with it. Regardless, you need to find out what it was.
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Peter Foley
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Re: Capital Gains help

Post by Peter Foley »

Indexbeliever:

It is hard to say what you should do because we lack information that might be helpful in providing advice. For example, if you are currently not contributing to a 401k and, by doing so, you would be in the 15% bracket, it would make sense to take some capital gains to close to the top of the 15% bracket.

Are there actions you could take to lower your taxable income for a year? By the way, paying 15% in taxes is really not a lot IMHO.
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Re: Capital Gains help

Post by grabiner »

IndexBeliever wrote:I spoke with vanguard personal advisors. Wanted to reduce my actively managed funds and move to a more indexed diversified portfolio. Currently 40% of my taxable account is in Wellington (VWENX) with ~30k of unrealized capital gains. Vanguard recommended not touching VWENX because of the capital gains. But shouldn't i transition out of VWENX over next few years before the capital gains get even worse?
Your logic is partly correct: you should either sell it now or never. If you wait until next year to sell, you will probably lose a higher percentage of the value to capital gains. If you never sell, you may not lose anything to capital gains; you can avoid the tax on capital gains by leaving it to your heirs, donating it to charity, or retiring in a 15% tax bracket and selling then.

It's probably better to sell now rather than never, because Wellington will lead to larger tax bills as long as you hold it. It holds value stocks, and is actively managed, so it generates higher dividends and capital gains on its stocks than an index fund would. If you would lose 5% of the value to taxes if you sell now (that is, your capital gain is 1/3 of the current value), and 0.5% per year to taxes if you continue to hold it, then you will actually be ahead after ten years, because your replacement stock fund will have a higher cost basis and thus a lower tax bill due when you sell it.
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