Taxable Fidelity Account - FSTVX vs ITOT

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Taxable Fidelity Account - FSTVX vs ITOT

Post by IndexEnthusiast »

Hello everyone,

I have had an opportunity to read the number of very informative posts on this subject but I am still struggling with what is best for my particular scenario.

By way of background I have a 401k with Fidelity which is fully funded each year (overwhelming majority is in FSTVX). Emergency funds and life insurance are also all set as is my housing situation.

Last year I opened at taxable account at Fidelity and moved a sizeable chunk into it ($500k). The current breakdown in my taxable account is as follows:

$400k in FSTVX
$100k spread between Fidelity Tax Free Bond Fund (FTABX) and Fidelity New Jersey Municipal Income Fund (FNJHX) - NJ Resident

Everything I have read thus far leads me to believe there is a tax advantage with ITOT as it is an ETF. My question is whether it is worth it to move from FSTVX to ITOT as I currently have about 13k in unrealized gains. My time horizon is 25 to 30 years and I plan to regularly contribute $50-100k per year going forward - provided my current level of income continues.

I believe there are three main options:

(1) Convert my FSTVX holdings into ITOT to avoid the taxes each year from the dividends and capital gains from FSTVX. Take the hit on the 13k now to avoid any future taxes for the next 25- 30 years.

(2) Simply start contributing to the ITOT going forward and leave the funds invested in FSTVX.

(3) Do nothing and continue contributing to FSTVX because it wont make much difference in the end even when you factor in the taxes.

Some additional data - I like Fidelity (find it very easy to use) but I like the idea of having funds in an ETF that I can simply transfer to a different discount brokerage firm if I am ever inclined to do so at some point in the future.

Any thoughts on my specific question or otherwise would be greatly appreciated - Happy New Year!
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triceratop
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

Wow -- FSTVX is shockingly tax-inefficient. Its December distribution had a capital gains distribution which was 40% of the dividend distribution. That is just, wow. :shock: Thank you for the OP, as I will include FSTVX as a cautionary tale in my annual tax efficiency post.

How much tax would you owe on the $13K in unrealized gains (include state tax)? Is it all long-term? I definitely wouldn't sell it while it is short-term gains, as it sounds like you are in a high tax bracket.

There is a fourth option by the way:

(4) Simply start contributing to the ITOT going forward and leave the funds invested in FSTVX, while turning dividend and capital gain redistribution off and diverting distributions to manual reinvestment in ITOT

Given the tax inefficiency of FSTVX, (4) is the minimum you should do. But I would like to see the answer to the above question before giving you a final recommendation.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by radiowave »

Another option is to purchase the Vanguard Total Stock ETF VTI. It will cost you a fee per trade of 4.95 however.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

radiowave wrote: Fri Jan 05, 2018 8:27 pm Another option is to purchase the Vanguard Total Stock ETF VTI. It will cost you a fee per trade of 4.95 however.
ITOT and VTI are both fine funds. Which tax-efficient ETF to purchase is hardly the real question though. I don't see why you would spend money on commissions, though.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by IndexEnthusiast »

Thanks Triceratop. I believe all of the gains would be taxed as ordinary income at this point - 39.6% plus another 8.97% for NJ
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

IndexEnthusiast wrote: Fri Jan 05, 2018 9:07 pm Thanks Triceratop. I believe all of the gains would be taxed as ordinary income at this point - 39.6% plus another 8.97% for NJ
I definitely would not sell before those become long-term. Then it will be only the federal long term capital gains tax + 8.97% for NJ. Given the tax inefficiency of FSTVX I would switch everything to ITOT. Unfortunately, there may be more unrealized gains if the market continues upward; but 35% (new tax rates!) is a nasty tax which you can avoid by waiting a few months until all shares are held long-term.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by grabiner »

triceratop wrote: Fri Jan 05, 2018 9:11 pm
IndexEnthusiast wrote: Fri Jan 05, 2018 9:07 pm Thanks Triceratop. I believe all of the gains would be taxed as ordinary income at this point - 39.6% plus another 8.97% for NJ
I definitely would not sell before those become long-term. Then it will be only the federal long term capital gains tax + 8.97% for NJ.
How long do you have to wait? The tax would drop from 40.8% (top federal rate for 2018, including ACA surtax)+8.97% to 23.8%+8.97%, a reduction for 49.7% to 32.8%. Thus, if you expect your gain to be 50% larger by the time the year is up, it's better to sell now. (And if the market drops instead of rising, you can harvest your loss and offset the capital gains.)
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

When do the shares become long term (I.e. When have you held them for at least one year)? You could list the full cost basis information which will give a clearer picture. You likely don't have to wait the full year.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by P_McRR »

Hi TC, I made almost the same topic yesterday (viewtopic.php?f=1&t=236846&p=3701347), though we have our options 1 and 3 swapped :happy Looks like we are in a very similar situation. It’s really annoying, and is somehow a more difficult decision than it should be, right?

Option 1 (selling FSTVX) does not seem very good to me, especially as short-term gains. For my case ($500k and $33k gain), it would take 20 years to break even based on 17bp difference due to tax efficiency and 6%/year growth. That doesn’t sound like a good approach since so much can happen in that time (taxes could change, I could drop to a lower bracket, the market can crash and give an opportunity to TLH, etc.). Since your gain is lower (I guess you started later in the year?), it may not be quite as bad, but I still don’t like paying such a high tax rate for a relatively small improvement in expenses.

So I will re-evaluate where the market is when my gains become long term, but for now, I’m thinking option 2 (with triceratop’s addition of redirecting FSTVX distributions to ITOT) is the more sensible approach. I still do find myself wondering if it’s even worth the trouble though.

I’m curious to see what you decide and your reasoning behind it.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by epictetus »

I appreciate these threads on the tax-inefficiency of Fidelity's total stock market index fund.

I had been thinking about using this fund in a taxable account.

I wonder why the tax efficiency of Fidelity's fund is different than Vanguard's? Is it b/c Vanguard has the ETF linked with the mutual fund?

As best I can tell from reading these posts the tax-efficient options are (if using a Fidelity brokerage account):
ITOT
use Vanguard's ETF

or open an account at VAnguard and use the total stock market index fund.

is that about right?

I would rather use a mutual fund v. etf if possible
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by AlwaysaQ »

Epictetus
I started buying VTSAX at Vanguard after the capital gains in FSTVX got to be too much. I have about the same amount of dollars in the two funds. Most of my FSTVX goes back to 2008-early 2012 so has too much capital gains to sell until I need to use it for expenses.

I have the largest chunk of my investments at Fidelity to make it easier on my heirs plus I like the Fideltiy Website.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by IndexEnthusiast »

Thanks everyone. I am leaning towards just pulling the trigger and selling all of my FSTVX now rather then wait until they reach long term status (not until August and December for the two largest chunks). My thinking is just get it done sooner rather than later as the problem will (hopefully :) ) just get worse with time as the market continues on this trajectory.

Your right P_McRR this shouldn't be this tough of a decision - I love my tax advantaged accounts....

I also like the idea of being able to do a like kind transfer in the future if I decide to switch to vanguard.

Three more questions for the group if I may:

1 - Is ITOT my best option or should I be considering something else?

2 - Selling now (at least for a portion of my holdings) would be considered a round trip infraction - is that something I need to concerned with?

3 - FSTVX doesn't have an early redemption penalty - is that correct (I believe it used to but I don't see it anymore).

Thanks again for all of your insights!
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by AlwaysaQ »

IndexEnthusiast

FSTVX pays out in April and December. April's payout is not nearly as large. You could turn off reinvestment, sell your long term holdings, and wait until August to sell the rest and only one batch will be short-term. Also it could go negative if the market retreats.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by aj76er »

I spent a lot of time thinking about this as well, and a few years ago decided to use VTI in my taxable at Fidelity. Initially, I had free trades and made a lot of purchases (DCA into the market). Moving forward in 2018 and beyond, it will cost me $4.95 to purchase. To limit the impact of commissions, I plan to only do a couple of large purchases throughout the year (one at beginning and one midway). I can live with paying <$10/year for awesome customer service, a great website+security, and top-notch features (CMA, 2% CreditCard, etc...).

I felt these positives were enough for me to hold VTI (as opposed to ITOT):
1. Vanguard has a strong track record of lowering E/R's over time
2. Vanguard returns 100% of lending revenues back into their funds
3. VTI has a large AUM (3rd or 4th largest ETF?) and thus has higher liquidity
4. Because of large AUM, VTI has smaller bid-ask spreads and is slightly cheaper to trade
5. For infrequent buy-and-hold trades, the commissions are not that much (per year)

For a good summary on the effect of bid-ask spreads vs. commissions (between VTI and ITOT), you can read this thread (which I posted a while back as part of my decisions process): viewtopic.php?t=182340

Finally, note that the commission free status of ITOT could disappear any time.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by IndexEnthusiast »

First thank you all for the advice and insights you have shared thus far.

I had one final questions for the group if I may:

Since I need to sell off my FSTVX shares in order to switch to ITOT should I just open a new taxable brokerage account with Vanguard and move it over to them. I am thinking this may be best move as Vanguard has had a great track record over the years in doing what is truly in the best interests of its investors not what generates them the most revenue. More specifically while I like Fidelity and trust them completely I would hate to move it over to ITOT and then Blackrock for some reason adjusts the ER or makes some other change that makes it less competitive with the Vanguard offering and 5,10, 20 years from now I am forced to to sell it and realize a large amount of capital gains (hopefully!).

Why doesn't Fidelity have there own Total Stock Market ETF (it would be so much easier if they did)...

Thanks again!
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by rebellovw »

I also have FSTVX in taxable along with a small amount of VTI and VOO.

Wouldn't it be a wash going to VTI or ITOT? It might be slightly less - I'm not sure how much - but with VTI/VOO - you get quarterly dividends and with FSTVX you get bi-yearly. I did see some capital gains from FSTVX that I didn't see from VTI - but the largest distribution was from dividends.

My point is that you will still have dividends to deal with - which is the higher portion.

Of the 13K - how much was dividends and how much cap gains?
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by Jacotus »

triceratop wrote: Fri Jan 05, 2018 8:11 pm Wow -- FSTVX is shockingly tax-inefficient. Its December distribution had a capital gains distribution which was 40% of the dividend distribution. That is just, wow. :shock: Thank you for the OP, as I will include FSTVX as a cautionary tale in my annual tax efficiency post.
That is quite interesting information. I thought the conventional wisdom was that Fidelity's index funds are just as good as Vanguard's --- and that's what I've been advising people over many years. Thankfully I mainly use Vanguard, and have FSTVX only in a tax-advantaged account.

I wonder how big the effect has been. In your post, could you quantify the net effect of the tax inefficiency, comparing FSTVX to VTSAX? What would the net effect be over a few years?
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by IndexEnthusiast »

The 13k referenced in my original post was only the capital appreciation - nothing to do with the Dividends or Capital Gains that were accessed. I realize there are dividends attributable to both funds but my primary focus is on the Capital Gains assessed against FSTVX. Based on my rough math it will cost 0.0067 percent more solely because of the capital gains (all other things equal). Assuming $1M invested that's $6,700 in capital gains that could be avoided simply by switching to VTSAX or VTI.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by Esq123 »

I hold FSTVX in my taxable account. So far it has been pretty good. It does create some dividends. However, please note the customer service at fidelity has been second to none...

Hope this helps.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

Jacotus wrote: Tue Jan 09, 2018 11:55 am
triceratop wrote: Fri Jan 05, 2018 8:11 pm Wow -- FSTVX is shockingly tax-inefficient. Its December distribution had a capital gains distribution which was 40% of the dividend distribution. That is just, wow. :shock: Thank you for the OP, as I will include FSTVX as a cautionary tale in my annual tax efficiency post.
That is quite interesting information. I thought the conventional wisdom was that Fidelity's index funds are just as good as Vanguard's --- and that's what I've been advising people over many years. Thankfully I mainly use Vanguard, and have FSTVX only in a tax-advantaged account.

I wonder how big the effect has been. In your post, could you quantify the net effect of the tax inefficiency, comparing FSTVX to VTSAX? What would the net effect be over a few years?
I could, but that would be a lot of work. You're free to try; the math is no harder than a single year's. It is simply data entry.
IndexEnthusiast wrote: The 13k referenced in my original post was only the capital appreciation - nothing to do with the Dividends or Capital Gains that were accessed. I realize there are dividends attributable to both funds but my primary focus is on the Capital Gains assessed against FSTVX. Based on my rough math it will cost 0.0067 percent more solely because of the capital gains (all other things equal). Assuming $1M invested that's $6,700 in capital gains that could be avoided simply by switching to VTSAX or VTI.
If it costs .67% more solely because of the capital gains (I haven't checked this math), the actual capital gains are significantly more than $6,700. The taxes are assessed on the capital gains, so at most 20.3% of LTCG become taxes you owe. I agree that the sum is significant.
Esq123 wrote:I hold FSTVX in my taxable account. So far it has been pretty good. It does create some dividends. However, please note the customer service at fidelity has been second to none...

Hope this helps.
Top
It in fact does not help. FSTVX creates more than dividends; as mentioned above there are significant capital gains. It is difficult to quantify "so far it has been pretty good"; have you computed the tax cost? That is what is being asked here.

Given that one can hold ITOT at Fidelity, the customer service needn't be paid for with high taxes.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by Esq123 »

Esq123 wrote:I hold FSTVX in my taxable account. So far it been pretty good. It does create some dividends. However, please note the customer service at fidelity has been second to none...

Hope this helps.
Top
[/quote] It in fact does not help. FSTVX creates more than dividends; as mentioned above there are significant capital gains. It is difficult to quantify "so far it has been pretty good"; have you computed the tax cost? That is what is being asked here.

Given that one can hold ITOT at Fidelity, the customer service needn't be paid for with high taxes.
[/quote]

Well I am a young investor so I have only been contributing into the fund for a year. Some dividends were generated but no other capital gains. It seems that only some of the dividends will be considered qualified and taxed at a lower rate. I do not own any vanguard funds so I cannot speak as to them. I would think that it is pretty difficult to eliminate all dividends from being generated in a taxable account. The more money you have sitting in a taxable account the more dividends you will likely receive.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

Esq123 wrote: Tue Jan 09, 2018 3:40 pm
triceratop wrote:
Esq123 wrote:I hold FSTVX in my taxable account. So far it been pretty good. It does create some dividends. However, please note the customer service at fidelity has been second to none...

Hope this helps.
Top
It in fact does not help. FSTVX creates more than dividends; as mentioned above there are significant capital gains. It is difficult to quantify "so far it has been pretty good"; have you computed the tax cost? That is what is being asked here.

Given that one can hold ITOT at Fidelity, the customer service needn't be paid for with high taxes.
Well I am a young investor so I have only been contributing into the fund for a year. Some dividends were generated but no other capital gains. It seems that only some of the dividends will be considered qualified and taxed at a lower rate. I do not own any vanguard funds so I cannot speak as to them. I would think that it is pretty difficult to eliminate all dividends from being generated in a taxable account. The more money you have sitting in a taxable account the more dividends you will likely receive.
"Some dividends were generated but no other capital gains."

That is false, as the Fidelity fund page clearly shows

"I would think that it is pretty difficult to eliminate all dividends from being generated in a taxable account."

We are talking about forced distributions of capital gains, not eliminating dividends. The fact is that Vanguard and iShares Total Market funds both distributed $0 per share of capital gains last year, while Fidelity distributed $0.51 per share. That is a lot because the dividend distribution was itself $1.25 per share.

I'm afraid matters are a bit more complicated than you believe them to be.

By the way, I too am a young investor. That's why I am extra cautious about tax efficiency, I know the impact taxes can have on returns over a long period.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by jsh84 »

I too have a fairly big chunk of my portfolio (taxable) in FSTVX...now I'm wondering how to handle it, or if I should at all. So does VTSAX or ITOT just not have capital gains at all? I own plenty of VTSAX as well, mostly in tax advantaged accounts though. Selling FSTVX would mean some decent capital gains though, so I'd have to weigh the pros and cons of that I suppose.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

jsh84 wrote: Tue Jan 09, 2018 4:47 pm I too have a fairly big chunk of my portfolio (taxable) in FSTVX...now I'm wondering how to handle it, or if I should at all. So does VTSAX or ITOT just not have capital gains at all? I own plenty of VTSAX as well, mostly in tax advantaged accounts though. Selling FSTVX would mean some decent capital gains though, so I'd have to weigh the pros and cons of that I suppose.
Vanguard Total Stock Market has an ETF share class. The fact is that it is the sole mutual fund which has a dual share class structure with an ETF, because Vanguard holds a patent on the technology. As a result, shares with significant appreciation can be retired through the ETF creation-redemption process. That is why even after a period of significant growth for US equities, Vanguard Total Stock Market has a net realized loss of $1.26B (as of Jun 30, 2017).

The explanation is even simpler for ITOT since it is purely an ETF.

As a result neither has distributed capital gains to its shareholders for quite some time. It's possible that they will in the future, but it is less likely than for FSTVX which doesn't have the same range of tax management strategies available.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by mrx »

triceratop wrote: Fri Jan 05, 2018 8:11 pm Wow -- FSTVX is shockingly tax-inefficient. Its December distribution had a capital gains distribution which was 40% of the dividend distribution. That is just, wow. :shock: Thank you for the OP, as I will include FSTVX as a cautionary tale in my annual tax efficiency post.

How much tax would you owe on the $13K in unrealized gains (include state tax)? Is it all long-term? I definitely wouldn't sell it while it is short-term gains, as it sounds like you are in a high tax bracket.

There is a fourth option by the way:

(4) Simply start contributing to the ITOT going forward and leave the funds invested in FSTVX, while turning dividend and capital gain redistribution off and diverting distributions to manual reinvestment in ITOT

Given the tax inefficiency of FSTVX, (4) is the minimum you should do. But I would like to see the answer to the above question before giving you a final recommendation.
Can you elaborate a bit on why this is very tax inefficient?
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

mrx wrote: Tue Jan 09, 2018 5:07 pm
triceratop wrote: Fri Jan 05, 2018 8:11 pm Wow -- FSTVX is shockingly tax-inefficient. Its December distribution had a capital gains distribution which was 40% of the dividend distribution. That is just, wow. :shock: Thank you for the OP, as I will include FSTVX as a cautionary tale in my annual tax efficiency post.

How much tax would you owe on the $13K in unrealized gains (include state tax)? Is it all long-term? I definitely wouldn't sell it while it is short-term gains, as it sounds like you are in a high tax bracket.

There is a fourth option by the way:

(4) Simply start contributing to the ITOT going forward and leave the funds invested in FSTVX, while turning dividend and capital gain redistribution off and diverting distributions to manual reinvestment in ITOT

Given the tax inefficiency of FSTVX, (4) is the minimum you should do. But I would like to see the answer to the above question before giving you a final recommendation.
Can you elaborate a bit on why this is very tax inefficient?
A capital gains distribution for an index fund is not a good thing, because it forces you to pay taxes now on what will likely be simply reinvested back into the fund for no net effect on your investment portfolio other than costing you tax money. What makes it very tax inefficient is that the capital gains distribution was 0.79% of NAV as of 2016 year end, while the dividend distribution (practically unavoidable, as companies pay dividends) was 1.94% of NAV. Even if 100% of the capital gains distribution was long-term (it wasn't, there was a component which was short-term, but I do not have the precise figure for the April distribution) then that would cost a typical taxable investor 0.12% + state tax. To me that's very tax inefficient given one can avoid it by investing in different funds in taxable. And people talk about the expense ratio between Fidelity and Vanguard, 0.005% ! ;)
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by mrx »

Ok now the question becomes is there a way to transfer these shares to Vanguard and somehow convert them to VBTLX without encountering a sale?
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by Carter3 »

I'm glad this topic came up. This is something I have been debating for a long time. My only dilemma is that my accounts are all so intertwined at fidelity. Even the 529s.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by CppCoder »

mrx wrote: Tue Jan 09, 2018 8:04 pm Ok now the question becomes is there a way to transfer these shares to Vanguard and somehow convert them to VBTLX without encountering a sale?
No.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by CppCoder »

Carter3 wrote: Tue Jan 09, 2018 9:44 pm I'm glad this topic came up. This is something I have been debating for a long time. My only dilemma is that my accounts are all so intertwined at fidelity. Even the 529s.
How are the accounts intertwined? My accounts at Fidelity are very distinct.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by Carter3 »

CppCoder wrote: Tue Jan 09, 2018 9:49 pm
Carter3 wrote: Tue Jan 09, 2018 9:44 pm I'm glad this topic came up. This is something I have been debating for a long time. My only dilemma is that my accounts are all so intertwined at fidelity. Even the 529s.
How are the accounts intertwined? My accounts at Fidelity are very distinct.
Not to hijack the thread but what I meant is that I've got a bunch of accounts under fidelty. That is where I do My Backdoor Roth have The Brokerage have three 529 accounts, the credit card with cash back directly to fidelity account etc. Been wondering for a long time if I should just put itot in my brokerage. Another thought was maybe I'll just buy vti in that account. I do that in my wife's account and in my work 401k (vti and tsm purchase that is). In the end I left it with the fstvx but never sat quite well with me in that brokerage account due to the inefficiency.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by CppCoder »

To compute the tax drag for 2017 for FSTVX (and 2017 was a particularly bad year for capital gains in this fund), you can use the following formula: (0.4533 * LT + 0.0567 * ST) / 74.47, where LT is your long term capital gains tax rate and ST is your short term capital gains tax rate (your marginal income tax rate). Multiply by 100 to give yourself the percentage. So, for example, if you pay 25% LT and 15% ST, you're looking at a tax drag equivalent of roughly 0.10%. It's not good, obviously, but it also isn't tragic.

The real problem with a forced capital gains distribution is not that you pay the tax but that it is forced and uncontrollable. You are assessed the tax if you don't sell, even if the fund loses value. It does, however, effectively lower your basis, so, at least for the long term distributions, it's not paying extra taxes. For example, consider a fund at $100 that will pay a forced LTCG of $1 and an ETF at $100 that will not pay a CG. Consider having 1 share of each at a basis of $90. You intend to sell after the CG distribution and you have held the funds for over a year. As soon as the mutual fund pays its CG, its share price will be $99. After your sale, you will incur a capital gain of $99 - $90 + $1 = $10. For the ETF, you'll simply have a capital gain of $100 - $90 = $10. It's the same capital gain. The difference is that if you choose not to sell either, you pay capital gains tax on $1 for the mutual fund, and when you reinvest your remainder, you'll have a share price of $100 - $1 * tax_rate, with two different basis lots. As livesoft astutely mentioned in the other similar thread on this topic, forced distributions also have hidden costs like potentially knocking you out of eligibility for certain tax credits.

The above said, with all things being equal, yes, one should prefer the tax efficient ETF on a purely monetary basis. That said, I personally prefer FSTVX to ITOT in my Fidelity account fully knowing the tax consequences because I buy FSTVX every two weeks and find mutual funds more convenient than ETFs. I like my Fidelity account and don't want to open an additional account at Vanguard. The 0.1% tax drag is worth it to me as a convenience fee. I accept that I may retire with $9.9 million instead of $10 million :happy.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by CppCoder »

Carter3 wrote: Tue Jan 09, 2018 10:06 pm Not to hijack the thread but what I meant is that I've got a bunch of accounts under fidelty. That is where I do My Backdoor Roth have The Brokerage have three 529 accounts, the credit card with cash back directly to fidelity account etc. Been wondering for a long time if I should just put itot in my brokerage. Another thought was maybe I'll just buy vti in that account. I do that in my wife's account and in my work 401k (vti and tsm purchase that is). In the end I left it with the fstvx but never sat quite well with me in that brokerage account due to the inefficiency.
The more efficient move is to buy ITOT (VTI is equally good, but why pay the $4.95 commission). That said, you may have reasons to prefer a mutual fund to an ETF. If you do, don't let the efficiency tail wag the dog. Compute the actual tax effect, and see if that matters to you. I can get to work tomorrow in a cheaper car than the one I own, but it doesn't mean that's the right decision for me just because I'll save money. If you have no preference for mutual funds over ETFs, though, then yes, you probably should buy an ETF instead.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

CppCoder wrote: Tue Jan 09, 2018 10:28 pm To compute the tax drag for 2017 for FSTVX (and 2017 was a particularly bad year for capital gains in this fund), you can use the following formula: (0.4533 * LT + 0.0567 * ST) / 74.47, where LT is your long term capital gains tax rate and ST is your short term capital gains tax rate (your marginal income tax rate). Multiply by 100 to give yourself the percentage. So, for example, if you pay 25% LT and 15% ST, you're looking at a tax drag equivalent of roughly 0.10%. It's not good, obviously, but it also isn't tragic.
You should be using $64.53 instead of $74.47 as that is the closing NAV of FSTVX in December 2016.

Also in your example you are missing the secondary effect that you are not able to compound via investing the $0.15 (well really it's 15% + state tax) in tax that you owe to the Federal Government on that forced LTCG distribution. When you say:
You are assessed the tax if you don't sell, even if the fund loses value. It does, however, effectively lower your basis, so, at least for the long term distributions, it's not paying extra taxes.
This is not true. You are paying extra taxes; or at least you'll have a lower post-tax return.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by AZMax »

OP - I feel your pain. This is exactly where I was 10 years ago with everything in mutual funds that paid out a ton of CGD when the marked tanked. It's even more painful to pay the taxes on those CGD when you're losing money...
Fortunately I used that opportunity to convert everything in taxable over to ETFs without having to realize capital gains in the process. I was even able to use the carry-over losses to offset ordinary income for a number of years.

So obviously the solution to your dilemma is a major market correction ;-)

Seriously, I also have ITOT at Fidelity and it is a good choice. The answer to your question really comes down to a personal decision, but I wouldn't vote for option 3.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by Carter3 »

CppCoder wrote: Tue Jan 09, 2018 10:33 pm
Carter3 wrote: Tue Jan 09, 2018 10:06 pm Not to hijack the thread but what I meant is that I've got a bunch of accounts under fidelty. That is where I do My Backdoor Roth have The Brokerage have three 529 accounts, the credit card with cash back directly to fidelity account etc. Been wondering for a long time if I should just put itot in my brokerage. Another thought was maybe I'll just buy vti in that account. I do that in my wife's account and in my work 401k (vti and tsm purchase that is). In the end I left it with the fstvx but never sat quite well with me in that brokerage account due to the inefficiency.
That said, you may have reasons to prefer a mutual fund to an ETF. If you do, don't let the efficiency tail wag the dog.

I can get to work tomorrow in a cheaper car than the one I own, but it doesn't mean that's the right decision for me just because I'll save money.
Thank you. In addition to the computation above, these 3 sentences alone have probably helped many reading this thread. Sure helps me. Thanks again.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by jsh84 »

maybe i'll just allocate future purchases to ITOT instead of FSTVX. I can safely redistribute FSTVX from within a Roth IRA though without penalties right?
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by rebellovw »

I read in another thread that you can transfer like for like to vanguard - is that possible? Any taxable event triggered?

Though I can't see how this couldn't be a taxable event.
Last edited by rebellovw on Wed Jan 10, 2018 9:28 am, edited 1 time in total.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by saltycaper »

I had a similar experience with Fidelity Total a few years ago and switched to ITOT. There weren't significant capital gains incurred in my sale. Now before I buying anything, even a plain old total market fund, I search this board for the ticker to see if I can't find anything to be aware of before making the transaction. For instance, if you would have searched for FSTVX, you would have seen among the top search results threads about its tax efficiency. Of course, you could not search this board a year ago if you didn't know it existed, but now you know, and now you know to always investigate tax efficiency before buying something in a taxable account. So there is a positive outcome.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

rebellovw wrote: Wed Jan 10, 2018 9:04 am I read in another thread that you can transfer like for like to vanguard - is that possible? Any taxable event triggered?

Though I can't see how this couldn't be a taxable event.
transferring in kind to vanguard is possible and is not a taxable event; but that is different from holding a vanguard mutual fund at vanguard. Only the latter will result in you holding a more tax-efficient index fund.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by jsh84 »

this doesn't matter inside a Roth account correct?
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by saltycaper »

jsh84 wrote: Wed Jan 10, 2018 9:56 am this doesn't matter inside a Roth account correct?
Correct.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by ACA »

saltycaper wrote: Wed Jan 10, 2018 10:00 am
jsh84 wrote: Wed Jan 10, 2018 9:56 am this doesn't matter inside a Roth account correct?
Correct.
This needs to be the first reply!
:oops:
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by rebellovw »

triceratop wrote: Wed Jan 10, 2018 9:40 am
rebellovw wrote: Wed Jan 10, 2018 9:04 am I read in another thread that you can transfer like for like to vanguard - is that possible? Any taxable event triggered?

Though I can't see how this couldn't be a taxable event.
transferring in kind to vanguard is possible and is not a taxable event; but that is different from holding a vanguard mutual fund at vanguard. Only the latter will result in you holding a more tax-efficient index fund.
Thanks - so in kind means you would have FSTVX at VG.

I'm very happy with FSTVX -but I will consider future purchases to ITOT.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by saltycaper »

ACA wrote: Wed Jan 10, 2018 10:15 am
saltycaper wrote: Wed Jan 10, 2018 10:00 am
jsh84 wrote: Wed Jan 10, 2018 9:56 am this doesn't matter inside a Roth account correct?
Correct.
This needs to be the first reply!
:oops:
OP is talking about a taxable account though.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

ACA wrote: Wed Jan 10, 2018 10:15 am
saltycaper wrote: Wed Jan 10, 2018 10:00 am
jsh84 wrote: Wed Jan 10, 2018 9:56 am this doesn't matter inside a Roth account correct?
Correct.
This needs to be the first reply!
:oops:
Why? The title clearly states "Taxable".
rebellovw wrote:Thanks - so in kind means you would have FSTVX at VG.

I'm very happy with FSTVX -but I will consider future purchases to ITOT.
Yes. And yes, FSTVX is a fine fund, just inefficient compared to alternatives. Happy to have been a help.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by CppCoder »

triceratop wrote: Tue Jan 09, 2018 10:44 pm You should be using $64.53 instead of $74.47 as that is the closing NAV of FSTVX in December 2016.
Why? I used the 2017 capital gains distributions from April and December and used the weighted average of the NAV on the dates of the distributions.
Also in your example you are missing the secondary effect that you are not able to compound via investing the $0.15 (well really it's 15% + state tax) in tax that you owe to the Federal Government on that forced LTCG distribution.
Agreed, although some of us live in a state tax = 0 state.
When you say:
You are assessed the tax if you don't sell, even if the fund loses value. It does, however, effectively lower your basis, so, at least for the long term distributions, it's not paying extra taxes.
This is not true. You are paying extra taxes; or at least you'll have a lower post-tax return.
Yes, a lower overall post-tax return, but the reduced basis also has an effect.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by triceratop »

CppCoder wrote: Wed Jan 10, 2018 11:01 am
triceratop wrote: Tue Jan 09, 2018 10:44 pm You should be using $64.53 instead of $74.47 as that is the closing NAV of FSTVX in December 2016.
Why? I used the 2017 capital gains distributions from April and December and used the weighted average of the NAV on the dates of the distributions.
I see. I view the tax efficiency metric as trying to measure the effect on one's taxes if one buys Dec 31 of Year 0 and holding until Dec 31 of Year 1. Your method will result in funds having different tax efficiencies if they payout quarterly vs biannually vs annually depending on market conditions. Actually my method will differ from reality as well because I do not consider the effect of reinvested dividends and the effect that has on subsequent distributions. That said, it won't depend on market conditions like yours will. I think my approach is both simpler and more reflective of what we expect when we talk about efficiency.

Case study: Suppose I buy on Jan 1 @ $100 NAV, the price quadruples to $400 NAV by Dec 22 and then the fund distributes a $4 capital gain.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by rebellovw »

Thanks OP for the thread - I was heading in the same direction as you with FSTVX in both of my taxable accounts (and didn't realize the taxable issues) - today I made the switch - all future investments into ITOT.
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Re: Taxable Fidelity Account - FSTVX vs ITOT

Post by House Blend »

CppCoder wrote: Tue Jan 09, 2018 10:28 pm The real problem with a forced capital gains distribution is not that you pay the tax but that it is forced and uncontrollable.
+1.

If you lose $100 to Federal tax on a distribution of LTCG, and you sell the shares three years later at a profit, it means you paid $100 of the tax three years early. (Assuming your rates haven't changed.) So what you've lost isn't $100, it's the 3 years of growth on the $100.

And the immediate Federal tax cost of a $0.10/share LTCG distribution is not always the same as a $0.10/share distribution of qualified dividends. The former can be cancelled by carryover losses.

So for those new to taxable investing, don't assume that tax-efficiency can be captured by a simple-minded formula in which you plug in your tax rate for LTCG/QDI. LT cap gain distributions may cost you in taxes now, but after the next market crash you may accumulate substantial carryover losses that will absorb all of those future LTCG distributions at no immediate tax cost to you. Even with no changes in your tax bracket or in tax law.

(However, STCG distributions are toxic. They cannot be cancelled by carryover losses and are taxed the same as bank interest.)
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