Moving from 10 to 2 funds - capital gains?

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remomnyc
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Moving from 10 to 2 funds - capital gains?

Postby remomnyc » Fri Apr 21, 2017 8:36 am

I want to implement Taylor’s 3-fund portfolio. I am placing all my bond allocation in tax deferred and filling the remaining space with total stock. That makes the target for taxable 35% total stock and 65% total international. Currently, I have 10 funds in my taxable account. (Don’t judge.) Total stock is currently 33% of taxable, so I can let that be. I can sell VWEAX (high yield corporate), VAPIX (inflation protected), and VBTLX (total bond) (aggregate 7k gains) and buy VTIAX. What do I do with the rest? I have about 30k of capital loss carryover, 7k of which will be absorbed by the VWEAX-VAPIX-VBTLX sale. Do I just pull the trigger all at once or is there a better way to minimize capital gains? Below is a list of current capital gains.

IJS - Ishares S7P Small cap 600 ETF IV: 44k
VNQ - Vanguard REIT ETF: 34k
VGK: Vanguard FTSE Europe ETF: 7k
VPL: Vanguard FTSE Pacific ETF: 12k
DFCEX: DF Emerging Mkts Core Eqty Port Instl: 18k
DFA: DFA Intl Small Cap Value Port Instl: 14k

dbr
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Re: Moving from 10 to 2 funds - capital gains?

Postby dbr » Fri Apr 21, 2017 8:58 am

Granting that you move your bonds out of taxable at small negative consequences, otherwise minimizing capital gains tax cost would be done by keeping the current investments. Giving up the $3000 offset of ordinary income by wasting your carryover to change investments is not optimum. How costly this is as well as the cost of those cap gains depends on your tax situation.

To turn this into an optimization problem there has to be some benefit associated with changing the investment selection. Usually such a thing would be eliminating excessive costs or eliminating unrewarded risk in the investments to be liquidated. What is the cost for you to keep holding what you have?

remomnyc
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Re: Moving from 10 to 2 funds - capital gains?

Postby remomnyc » Fri Apr 21, 2017 9:34 am

dbr, I was hoping to simplify so my husband could easily manage the account, so the cost of holding is maintaining a more complex account. Our capital gains are taxed at 15%. If there is no magic trick to reducing capital gains, I could hold and sell the extraneous funds when I retire, so I only incur the gains when I need the money. It would take me about 5 years (maybe more depending on how much capital gains I want to recognize in any given year to manage our overall tax liability) to spend the funds earmarked for sale (excluding the bonds, which I will exchange for international), based on the current portfolio balances and my spending levels. Is that the best solution?

dbr
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Re: Moving from 10 to 2 funds - capital gains?

Postby dbr » Fri Apr 21, 2017 9:42 am

Two things that are tricks are:

1. Look through the holdings by tax lot and see of some positions can be sold that have no gain or unrealized losses. This does not really help if completely eliminating the position for simplicity is the goal.

2. Charitable donations may be an option. If you are already inclined to make donations doing those in appreciated stock would not cost you in taxes.

Finally, of course, the ultimate "trick" in avoiding capital gains is to allow your heirs to take a basis step up when you die. If you own these positions outright rather than jointly and you are concerned what your husband might do if you predecease him, then basis step up and letting him simplify then would do the trick.

I am sure other posters may have some thoughts.

Chip
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Re: Moving from 10 to 2 funds - capital gains?

Postby Chip » Fri Apr 21, 2017 10:11 am

Will your marginal tax rate decrease when you retire? Specifically, is it likely you will have a few years where you're in the 15% bracket, where some cap gains can be realized at no federal tax cost?

NancyABQ
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Re: Moving from 10 to 2 funds - capital gains?

Postby NancyABQ » Fri Apr 21, 2017 10:51 am

Hopefully you have already turned off dividend reinvesting for all the funds you no longer want?

Maybe focus on getting rid of the least tax-efficient funds first (probably the REIT?)?

It does seem a bit of a waste to use the accumulated capital loss to offset LTG instead of ordinary income, but I guess that is up to you whether it is worth it for the simplification.

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BL
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Re: Moving from 10 to 2 funds - capital gains?

Postby BL » Fri Apr 21, 2017 10:54 am

dbr wrote:Two things that are tricks are:

1. Look through the holdings by tax lot and see of some positions can be sold that have no gain or unrealized losses. This does not really help if completely eliminating the position for simplicity is the goal.

2. Charitable donations may be an option. If you are already inclined to make donations doing those in appreciated stock would not cost you in taxes.

Finally, of course, the ultimate "trick" in avoiding capital gains is to allow your heirs to take a basis step up when you die. If you own these positions outright rather than jointly and you are concerned what your husband might do if you predecease him, then basis step up and letting him simplify then would do the trick.

I am sure other posters may have some thoughts.

+1
Set the funds with CGs to Specific ID so you can sell the lots with low or no gain, maybe even a loss. This would leave less to sell off later. Check now and then when indexes are down to see if you can sell others cheaply.

Charity could be directly gifting high gain funds or putting them into a Donor Assisted Fund for later cash gifts but deductible all at once.

I believe you can transfer joint funds to you at least 2 years before death to give it 100% step-up for other spouse (to sell and simplify). Community property states may have 100% step-up when either person dies.

I would work on gradually selling off non-tax-efficient REIT since it generates so much taxable income. Perhaps wait until a low-income year after retirement but before SS.

I would not sell at a cost merely to simplify, just do what you can in taxable and leave written instructions for survivor. The 1/2 step-up might be the best solution, I don't know.

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Tyler Aspect
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Re: Moving from 10 to 2 funds - capital gains?

Postby Tyler Aspect » Fri Apr 21, 2017 11:57 am

remomnyc wrote:I want to implement Taylor’s 3-fund portfolio. I am placing all my bond allocation in tax deferred and filling the remaining space with total stock. That makes the target for taxable 35% total stock and 65% total international. Currently, I have 10 funds in my taxable account. (Don’t judge.) Total stock is currently 33% of taxable, so I can let that be. I can sell VWEAX (high yield corporate), VAPIX (inflation protected), and VBTLX (total bond) (aggregate 7k gains) and buy VTIAX. What do I do with the rest? I have about 30k of capital loss carryover, 7k of which will be absorbed by the VWEAX-VAPIX-VBTLX sale. Do I just pull the trigger all at once or is there a better way to minimize capital gains? Below is a list of current capital gains.

IJS - Ishares S7P Small cap 600 ETF IV: 44k
Should be able to keep this. Keep a S&P 500 fund to balance out small company value.

VNQ - Vanguard REIT ETF: 34k
Not tax efficient but lots of gains here - maybe sell half of it.

VGK: Vanguard FTSE Europe ETF: 7k
VPL: Vanguard FTSE Pacific ETF: 12k
These two you can keep as international holding.

DFCEX: DF Emerging Mkts Core Eqty Port Instl: 18k
Sell one third to rebalance.

DFA: DFA Intl Small Cap Value Port Instl: 14k
Sell one third to rebalance.


I think you can sell off high yield corporate. Keep Inflation protected, and total bond market in the taxable account for now.
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remomnyc
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Re: Moving from 10 to 2 funds - capital gains?

Postby remomnyc » Fri Apr 21, 2017 12:18 pm

Tyler Aspect: Why shouldn't I sell total bond to hold in tax deferred? The gain is 2k.

- Do not foresee any time when we will be below the 15% capital gains tax rate.
- Dividends are not reinvested.
- I checked the holdings by tax lot and they all have gains, but I will check them again when/if there is a market downturn if I have not already disposed of them.
- Charitable donations of stock are a fantastic idea. I can't believe I've been writing checks every year. I will google how to do this.

If others have ideas not already mentioned, I will keep checking. Thank you.

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Tyler Aspect
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Re: Moving from 10 to 2 funds - capital gains?

Postby Tyler Aspect » Fri Apr 21, 2017 1:39 pm

remomnyc wrote:Tyler Aspect: Why shouldn't I sell total bond to hold in tax deferred? The gain is 2k.
Ok. You have convinced me on selling total bond and inflation protected bond.

- Charitable donations of stock are a fantastic idea. I can't believe I've been writing checks every year. I will google how to do this.
Donor advised funds are getting popular these days.
If others have ideas not already mentioned, I will keep checking. Thank you.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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grabiner
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Re: Moving from 10 to 2 funds - capital gains?

Postby grabiner » Fri Apr 21, 2017 8:58 pm

remomnyc wrote:Tyler Aspect: Why shouldn't I sell total bond to hold in tax deferred? The gain is 2k.


Given your handle, do you live in NYC? If so, you do want to get Total Bond Market out of your taxable account, as the state tax makes it expensive to keep there. You could hold it in an IRA. Alternatively, you might keep your bond holding in a taxable account, but in Vanguard NY Long-Term Tax-Exempt, particularly if you are in a high federal tax bracket.
David Grabiner

remomnyc
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Re: Moving from 10 to 2 funds - capital gains?

Postby remomnyc » Sat Apr 22, 2017 3:39 pm

grabiner wrote:
remomnyc wrote:Tyler Aspect: Why shouldn't I sell total bond to hold in tax deferred? The gain is 2k.


Given your handle, do you live in NYC? If so, you do want to get Total Bond Market out of your taxable account, as the state tax makes it expensive to keep there. You could hold it in an IRA. Alternatively, you might keep your bond holding in a taxable account, but in Vanguard NY Long-Term Tax-Exempt, particularly if you are in a high federal tax bracket.


Yes, plan is to sell total bond in taxable (only 2k of capital gains) and place all total bond in deferred. Already holding VWIUX in our joint taxable, which is our housing fund.

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grabiner
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Re: Moving from 10 to 2 funds - capital gains?

Postby grabiner » Sat Apr 22, 2017 9:09 pm

remomnyc wrote:
grabiner wrote:
remomnyc wrote:Tyler Aspect: Why shouldn't I sell total bond to hold in tax deferred? The gain is 2k.


Given your handle, do you live in NYC? If so, you do want to get Total Bond Market out of your taxable account, as the state tax makes it expensive to keep there. You could hold it in an IRA. Alternatively, you might keep your bond holding in a taxable account, but in Vanguard NY Long-Term Tax-Exempt, particularly if you are in a high federal tax bracket.


Yes, plan is to sell total bond in taxable (only 2k of capital gains) and place all total bond in deferred. Already holding VWIUX in our joint taxable, which is our housing fund.


If you want an intermediate duration (VWIUX is Intermediate-Term Tax-Exempt), you might want to hold half in Limited-Term Tax-Exempt and half in NY Long-Term Tax-Exempt. This would give you the same duration, but more than half the income would be exempt from NY state and city tax. (The after-tax return would be about the same; investors perceive NY munis as lower in risk, as NY Long-Term Tax-Exempt has a lower yield than any of Vanguard's other long-term funds.)
David Grabiner


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