Exchanging taxable VGTSX into Roth?

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Slothrop
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Exchanging taxable VGTSX into Roth?

Post by Slothrop » Tue Jan 08, 2013 11:50 am

Good morning!

Newbie to the Forums and I'll eventually post Portfolio info for a critique, but for now, I'm wondering if it's possible and/or advisable to sell shares of VGTSX that I bought in a taxable account and immediately purchase the same in my Roth?

Are there any special tax implications? Or would this be nothing more than a taxable sale, on which I'd pay 15% on capital gains?

This is 'extra' money left over from when I transferred investments from FranklinTemp and moved everything to Vanguard (April 2011), the dollar value of which makes up only a small portion of my overall portfolio. At the time, I'd already maxed out my Roth, so I put it in taxable. Now I'd like to use some of it toward my 2013 contribution.

I'm sure there'll be other questions to answer, though, right now, I'm just looking at the mechanics of the taxable-to-Roth exchange.

Thanks.

BTW: When I say 'My Roth,' I mean, 'Our Roths,' as I am managing mine and my spouse's investments, pooled in an 80/20 Portfolio. The taxable shares are in a Joint Account. We are both 43 years-old.

nwffdiver
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Re: Exchanging taxable VGTSX into Roth?

Post by nwffdiver » Tue Jan 08, 2013 5:11 pm

I just did this very thing a few days ago. Last year I had some extra cash, and my International fund offered in my 457 plan is the most espensive fund I use there.I had already maxed both mine and my wifes Roth's. I though since I already have some Total International SM (VGTSX) in my Roth I would just put it in the individual account until this year.

Yes, you will be paying Capital gains on it if you sell (even though you're [*]moving it to Roth).

There was a recent discussion about this ( though I am unable to find it now to hyperlink), most people feel it is generally better to fund from a seperate account ie. checking savings .

*edited Moved the $ not exchanged thanks dbr.
Last edited by nwffdiver on Tue Jan 08, 2013 5:40 pm, edited 1 time in total.

dbr
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Re: Exchanging taxable VGTSX into Roth?

Post by dbr » Tue Jan 08, 2013 5:31 pm

I'm not sure that technically there is any such thing as an exchange from any taxable account to any tax deferred account. One sells in taxable, contributes the cash, and buys in tax deferred. That means you have a taxable event from the sale. The one possible gotcha is that if you sell at a loss and create a wash sale in the purchase, you cannot recover the lost basis and you lose the tax loss. I think that would be true for a repurchase in a Roth, but I know it is true for a 401K.

Slothrop
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Re: Exchanging taxable VGTSX into Roth?

Post by Slothrop » Tue Jan 08, 2013 11:15 pm

Thank you both for your insights.

I'm pretty sure I understand the concept enough to know that there would not be much of a loss to harvest. I just checked the VG Cost Basis page to find that, using the Average Cost Method, the account shows a Short-Term Gain of $193 and a Long-Term Loss of $454 for a Total Loss of $261.

Does this mean going to cash with these shares would realize a loss of $261, to be reported on my 2013 taxes? If this is true, we're not talking about a lot of money here. It might be worth it to be able to fund our Roths from these funds and free up some paycheck cash for other purposes.

I don't know that I'll be purchasing any more shares in that taxable account, at least not for a while, so with so little +/- activity, maybe it would make sense to liquidate the shares now?

Further thoughts?

Thanks.

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FNK
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Re: Exchanging taxable VGTSX into Roth?

Post by FNK » Tue Jan 08, 2013 11:28 pm

I would avoid creating a wash sale into Roth with a tax loss. It's dead simple to avoid, too: either sit in cash for a month, or keep FTSE for a month.

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House Blend
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Re: Exchanging taxable VGTSX into Roth?

Post by House Blend » Wed Jan 09, 2013 9:55 am

FNK wrote:I would avoid creating a wash sale into Roth with a tax loss. It's dead simple to avoid, too


Agreed.

What I would do is sell VGTSX in taxable, harvesting the loss. Then buy VFWIX in the Roth. If after 31 days I'm still pining for the creamy nougat of small caps in VGTSX, I'd move the VFWIX shares to VGTSX in the Roth.

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Phineas J. Whoopee
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Re: Exchanging taxable VGTSX into Roth?

Post by Phineas J. Whoopee » Wed Jan 09, 2013 5:02 pm

dbr wrote:I'm not sure that technically there is any such thing as an exchange from any taxable account to any tax deferred account. One sells in taxable, contributes the cash, and buys in tax deferred. That means you have a taxable event from the sale. The one possible gotcha is that if you sell at a loss and create a wash sale in the purchase, you cannot recover the lost basis and you lose the tax loss. I think that would be true for a repurchase in a Roth, but I know it is true for a 401K.

The wash sale provision you mention is definitely true for a Roth or traditional IRA.

PJW

Default User BR
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Re: Exchanging taxable VGTSX into Roth?

Post by Default User BR » Thu Jan 10, 2013 1:05 pm

dbr wrote:I'm not sure that technically there is any such thing as an exchange from any taxable account to any tax deferred account. One sells in taxable, contributes the cash, and buys in tax deferred. That means you have a taxable event from the sale. The one possible gotcha is that if you sell at a loss and create a wash sale in the purchase, you cannot recover the lost basis and you lose the tax loss. I think that would be true for a repurchase in a Roth, but I know it is true for a 401K.

Actually, the IRS publications specifically mention that this is the case for IRAs. I've never seen anything about qualified plans.
From Pub 550:
Wash Sales

You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,

Acquire substantially identical stock or securities in a fully taxable trade,

Acquire a contract or option to buy substantially identical stock or securities, or

Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

http://www.irs.gov/publications/p550/ch04.html#en_US_2012_publink100010601

Whether or not the IRS could declare a wash for qualified plans is an unknown (at least for me). I don't recall any cites for such an occurrence.


Brian

Slothrop
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Re: Exchanging taxable VGTSX into Roth?

Post by Slothrop » Thu Jan 10, 2013 1:45 pm

Thanks, again, for all the info. The gain/loss on a sale--currently a loss--wouldn't be large enough to cause tax headaches either way, but it's always good to know the ins/outs. I can see how every trip to this forum will turn into an education!

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