General advice - tax friendly investing ?

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SusanNeedsHelp
Posts: 1
Joined: Sun Apr 10, 2016 6:16 pm

General advice - tax friendly investing ?

Post by SusanNeedsHelp » Sun Apr 10, 2016 8:24 pm

I make about $200k/year, single, 52 years old, one child in college, no debt except mortgage(I still owe about 125k on a 30 yr fixed 5.375% interest rate). I have 65k in emergency cash . I save about $500/ mo plus I maximize my 401 k. (Via fidelity- currently at about 700k) I have about 500k in AMerican funds ( 450 in taxable accounts 8 in Roth 37 in IRA rollover ) and 300k in Vanguard. This year I'm paying more tax than expected due to capital gains ( despite the fact that my overall portfolio LOST money- which doesn't make sense to me). I worry now that my 2014 capital gains may not have been reported correctly by my CPA ( and I may be facing back taxes). I have always submitted the tax forms sent to me from AF and Vanguard( 1099 div and 1099 int) and trusted my CPA to figure it all out. What more should I have done ? feel like I need to move some of my $ to more tax friendly investments (would it help to move AFs to vanguard?) How can i do this without incurring even more capital gains? I've read about Backdoor Roth, 403 or 457 but still feels like a foreign language to me. Also wondering about stopping the automatic reinvestment in my AFs. In general would like to know if I should be saving or investing more money . Hope to retire in 10 years or to at least go part time.

MPAndy222
Posts: 42
Joined: Thu Mar 31, 2016 6:26 pm

Re: General advice - tax friendly investing ?

Post by MPAndy222 » Sun Apr 10, 2016 9:02 pm

It's hard to offer advice without knowing your current allocation and amount in taxable and non-taxable accounts. I would suggest posting your portfolio numbers as listed in the post made by Laura which is at the top of the investing board

jjface
Posts: 2570
Joined: Thu Mar 19, 2015 6:18 pm

Re: General advice - tax friendly investing ?

Post by jjface » Sun Apr 10, 2016 9:45 pm

Sounds like you are invested in active funds which distribute a lot in capital gains each year no matter how they are doing. This is because they do a lot of buying and selling within the fund to switch positions and in doing so keep realizing gains.

If so switch to index funds eg total stock market index fund or a s&p500 index fund and you probably won't receive capital gains until you decide to sell them.

So yes it should definitely help to move to vanguard or anywhere that offers inexpensive index funds.

You may not realize a large capital gain selling what you have since the funds have been realizing a good portion of built up gains each year. You'll need to check each position though to find out what is worth selling right away.

JoinToday
Posts: 763
Joined: Sat Mar 10, 2007 9:59 pm

Re: General advice - tax friendly investing ?

Post by JoinToday » Sun Apr 10, 2016 11:34 pm

Go look at your portfolio turnover.

Vanguard total stock market index has a 3% portfolio turnover
http://www.morningstar.com/funds/XNAS/VTSMX/quote.html

Fidelity contra fund (for example) has a 35% portfolio turnover (I am surprised it isn't higher)
http://www.morningstar.com/funds/xnas/fcntx/quote.html

American Funds AMECX has a portfolio turnover of 45%
http://www.morningstar.com/funds/XNAS/AMECX/quote.html

Higher turnover results in higher capital gains (or losses) and higher taxes (or offset of $3K)
I wish I had learned about index funds 25 years ago

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BL
Posts: 8395
Joined: Sun Mar 01, 2009 2:28 pm

Re: General advice - tax friendly investing ?

Post by BL » Mon Apr 11, 2016 12:03 am

Try to find either unrealized gain or cost basis on each taxable fund so you can decide whether to sell all or part of them and buy something like V.

krow36
Posts: 1900
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: General advice - tax friendly investing ?

Post by krow36 » Mon Apr 11, 2016 1:36 am

SusanNeedsHelp wrote:This year I'm paying more tax than expected due to capital gains (despite the fact that my overall portfolio LOST money- which doesn't make sense to me).
SusanNeedsHelp, welcome to the forum! The funds in your taxable accounts at both AF and Vanguard could be generating capital gain distributions. It's likely you have tax inefficient funds in your taxable account, instead of in your 401k and IRAs.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

As mentioned above, managed funds where buying and selling is done during the year accumulate capital gains that have to be distributed to shareholders. Capital gain distributions vary a lot from year to year and so having more in 2015 than 2014 may not mean your CPA did anything wrong. If you use Laura's format to list the funds, and include each funds unrealized capital gain or loss, folks here will help you decide how to proceed with the minimum tax bite.
viewtopic.php?f=1&t=6212

I would stop reinvesting dividends and cap gain distributions--have them put in a MM fund. You can move the AF funds to Vanguard "in kind", where you can sell them over time to lessen the taxes, if you have a lot of gains.
In general would like to know if I should be saving or investing more money .

I think the amount you've saved for retirement is impressive. The folks on the forum here are very good at explaining the foreign language.

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