taxable rebalance questions

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hudson4351
Posts: 307
Joined: Fri Aug 10, 2007 8:30 pm

taxable rebalance questions

Post by hudson4351 » Sat Jan 07, 2017 12:04 pm

It's time to do my annual rebalance and I'm thinking about decreasing my allocation to bonds (all in intermediate term tax-exempt, VWIUX) and increasing allocation to TSM/TISM. This is all in a taxable account. My understanding is that while the dividends from VWIUX are exempt from federal taxes, the capital gains from selling are not. Is that correct?

The price of bond funds doesn't seem to fluctuate very much, or at least not nearly as much as stock index funds. Does that mean my capital gains are likely to be very small from selling the bond fund?

I want to see exactly what the tax consequences would be of selling shares in my VWIUX before I actually do so. The problem is that when I go to my Vanguard account and click through the steps of exchanging shares using Specific Identification, I get to this message:
For trades placed today, the FIFO method will be used because it'll take us a day to provide detailed lot information. SpecID will be available for subsequent trades of this fund within 1 to 2 business days. If you want to use SpecID for this trade, complete this transaction online, then call us at 800-284-7245 to ensure the appropriate lots are sold. Call us with your lot details no later than the close of regular trading on the NYSE (usually 4 p.m., Eastern time) on the next business day.
Does this mean I have to complete a "test" sell/exchange transaction to have access to SpecID for all future sell/exchange transactions?

Would I be better off not selling anything in a taxable account to do a rebalance, and instead adjust future contributions accordingly, even if it would take a long time to reach the new target asset allocation?

lazylarry
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Re: taxable rebalance questions

Post by lazylarry » Sat Jan 07, 2017 12:37 pm

From the stock overview on Vanguard:
All investments are subject to risk, including the possible loss of the money you invest. Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes.
Does that mean my capital gains are likely to be very small from selling the bond fund?
That entirely depends on how much you capital gains are based on the tax lots you are using. If the bond fund rose a lot, then you will have large capital gains. If it didn't, you will have small capital gains.
Does this mean I have to complete a "test" sell/exchange transaction to have access to SpecID for all future sell/exchange transactions?
No. You just need to wait 1-2 days and then the Vanguard funds will start using specID rather than FIFO. It just takes Vanguard a few days to actually make those changes to your account so that you can see them.
Would I be better off not selling anything in a taxable account to do a rebalance, and instead adjust future contributions accordingly, even if it would take a long time to reach the new target asset allocation?
We need more information as per the stickies to give you a better answer for this. If you have a smaller account, then I would probably recommend just adjusting future contributions, as the capital gain tax loss will affect you more. In a larger account where this may take a while, then I would probably sell. You might also be able to sell specific lots that have lost money, and then use this to buy the other desired fund.
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hudson4351
Posts: 307
Joined: Fri Aug 10, 2007 8:30 pm

Re: taxable rebalance questions

Post by hudson4351 » Sat Jan 07, 2017 12:52 pm

lazylarry wrote: No. You just need to wait 1-2 days and then the Vanguard funds will start using specID rather than FIFO. It just takes Vanguard a few days to actually make those changes to your account so that you can see them.
Wait 1-2 days after what, the sell/exchange transaction? If that's what you mean, then that was my original point - I would like to know exactly what the consequence of selling any lot would be before actually doing so. If I'm understanding Vanguard's instructions correctly, it seems like I have to complete one sell transaction before I can have access to specID information for that and all future transactions.

Am I misunderstanding your comment?

lazylarry
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Re: taxable rebalance questions

Post by lazylarry » Sat Jan 07, 2017 1:12 pm

hudson4351 wrote:
lazylarry wrote: No. You just need to wait 1-2 days and then the Vanguard funds will start using specID rather than FIFO. It just takes Vanguard a few days to actually make those changes to your account so that you can see them.
Wait 1-2 days after what, the sell/exchange transaction? If that's what you mean, then that was my original point - I would like to know exactly what the consequence of selling any lot would be before actually doing so. If I'm understanding Vanguard's instructions correctly, it seems like I have to complete one sell transaction before I can have access to specID information for that and all future transactions.

Am I misunderstanding your comment?
Oh ok. No, you do not have to complete transaction before having access to specific ID. I show below how you change it in the link. Once you change it, just wait one to two days and the Vanguard account will allow you to look at specific shares .

http://i67.tinypic.com/2hzjzip.jpg
My profile: https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=86026 | Virtua lBogleheads® Blog: https://virtualbogleheads.wordpress.com/

hudson4351
Posts: 307
Joined: Fri Aug 10, 2007 8:30 pm

Re: taxable rebalance questions

Post by hudson4351 » Sat Jan 07, 2017 1:30 pm

lazylarry wrote:
hudson4351 wrote:
lazylarry wrote: No. You just need to wait 1-2 days and then the Vanguard funds will start using specID rather than FIFO. It just takes Vanguard a few days to actually make those changes to your account so that you can see them.
Wait 1-2 days after what, the sell/exchange transaction? If that's what you mean, then that was my original point - I would like to know exactly what the consequence of selling any lot would be before actually doing so. If I'm understanding Vanguard's instructions correctly, it seems like I have to complete one sell transaction before I can have access to specID information for that and all future transactions.

Am I misunderstanding your comment?
Oh ok. No, you do not have to complete transaction before having access to specific ID. I show below how you change it in the link. Once you change it, just wait one to two days and the Vanguard account will allow you to look at specific shares .

http://i67.tinypic.com/2hzjzip.jpg
Thanks!

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CAsage
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Re: taxable rebalance questions

Post by CAsage » Sat Jan 07, 2017 1:40 pm

You should be able to get an estimate of your total current capital gains/loss by clicking on the "cost basis" tab right under the account information for your brokerage account. It should show you "unrealized capital gains" for the total account by asset. You can of course control it by selling with Specific ID, but this will tell you about what you have to play with.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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