Target Date Fund in Taxable / Large Unrealized Gain Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
FootballFan5548
Posts: 164
Joined: Mon May 01, 2017 2:20 pm

Target Date Fund in Taxable / Large Unrealized Gain Question

Post by FootballFan5548 » Wed Jun 20, 2018 11:58 am

I found this forum a little over a year ago and it has been a tremendous help in getting my financial affairs in order. I can't thank all of you enough, and I don't think a day (or a few days) go by without me checking in for a few minutes.

Current income in NJ is roughly $275k, so not sure exact tax bracket but probably 25%?
Married, 2 kids, roughly $900k invested, half taxable / half tax protected 401k/IRA

My question:
Before I found this forum as an investing newbie I had an automatic investment plan on Capital One Investing to buy every 2 weeks (corresponding with my paycheck) portions of VFORX (Vanguard Target Retirement 2040). I was doing this since roughly 2014 and accumulated to date roughly $70k in VFORX in my taxable account. There are now roughly $11k in unrealized long term gains. Note - since finding this forum a year ago I haven't contributed any new money to VFORX and have switched automatic contributions to VTSAX. I max 401k, backdoor roths for wife and I, and contribute to 529's etc...

Specific to Target Date Funds in taxable, and in my situation having 11k of LTG's in Taxable.. should I:
1. Sell it all immediately and reallocate to my 80/20 AA and bite the bullet on tax (what would that tax bill be roughly?)
2. Sell bits and pieces (mainly on down days) to limit tax bill over the course of a couple of years
3. Hold it, don't do anything for now, and deal with it down the road? Just how bad is holding this in taxable in my situation?


VFORX is currently my 2nd largest holding of all funds that I own... the looming tax bill is a concern and trying to figure out how best to handle it.

Thanks for thoughts

bradpevans
Posts: 340
Joined: Sun Apr 08, 2018 1:09 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by bradpevans » Wed Jun 20, 2018 12:18 pm

FootballFan5548 wrote:
Wed Jun 20, 2018 11:58 am
I found this forum a little over a year ago and it has been a tremendous help in getting my financial affairs in order. I can't thank all of you enough, and I don't think a day (or a few days) go by without me checking in for a few minutes.

Current income in NJ is roughly $275k, so not sure exact tax bracket but probably 25%?
Married, 2 kids, roughly $900k invested, half taxable / half tax protected 401k/IRA

My question:
Before I found this forum as an investing newbie I had an automatic investment plan on Capital One Investing to buy every 2 weeks (corresponding with my paycheck) portions of VFORX (Vanguard Target Retirement 2040). I was doing this since roughly 2014 and accumulated to date roughly $70k in VFORX in my taxable account. There are now roughly $11k in unrealized long term gains. Note - since finding this forum a year ago I haven't contributed any new money to VFORX and have switched automatic contributions to VTSAX. I max 401k, backdoor roths for wife and I, and contribute to 529's etc...

Specific to Target Date Funds in taxable, and in my situation having 11k of LTG's in Taxable.. should I:
1. Sell it all immediately and reallocate to my 80/20 AA and bite the bullet on tax (what would that tax bill be roughly?)
2. Sell bits and pieces (mainly on down days) to limit tax bill over the course of a couple of years
3. Hold it, don't do anything for now, and deal with it down the road? Just how bad is holding this in taxable in my situation?


VFORX is currently my 2nd largest holding of all funds that I own... the looming tax bill is a concern and trying to figure out how best to handle it.

Thanks for thoughts
Its only a tax bill ... if you sell it. And, if you do, and then reinvest in taxable your back where you started.

For Long Term Cap Gains, you will pay 0 or 15 or 20%, with the 15% bucket (income + LTCG) being pretty wide, but eventually you hit 20%. And potentially the 3.8% Net Investment Income Tax: https://www.thebalance.com/net-investme ... ax-3192936

You will need more exact numbers / estimate to see the % tax IF you sell.

I dont think it makes sense to sell (based on the info provided)

LinusP
Posts: 55
Joined: Fri May 18, 2018 10:29 am

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by LinusP » Wed Jun 20, 2018 2:43 pm

FootballFan5548 wrote:
Wed Jun 20, 2018 11:58 am
Specific to Target Date Funds in taxable, and in my situation having 11k of LTG's in Taxable.. should I:
1. Sell it all immediately and reallocate to my 80/20 AA and bite the bullet on tax (what would that tax bill be roughly?)
2. Sell bits and pieces (mainly on down days) to limit tax bill over the course of a couple of years
3. Hold it, don't do anything for now, and deal with it down the road? Just how bad is holding this in taxable in my situation?
At its core, #2 is thinking that you can time your contributions to buy low and sell high. A few people may manage this on a year-by-year time scale, but I doubt anyone can on a day-to-day basis. Resist the temptation to think you're any different.

The choice between #1 and #3 is between simplicity (#1) and (possibly) saving some money (#3). Your tax bill could be on the order of a few thousand bucks - that's not a lot relative to your income or assets. You can (and should) include VFORX in your asset allocation calculations, but I think you should ask yourself how much it's worth to just have it all how you want it. Seems to me like that kind of satisfaction and peace of mind might be worth it, but ultimately it's your choice to make.

delamer
Posts: 6286
Joined: Tue Feb 08, 2011 6:13 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by delamer » Wed Jun 20, 2018 3:34 pm

You’ll very likely pay 15% on the gains in federal tax.

See the table in this article: https://www.fool.com/taxes/2017/12/22/y ... -2018.aspx

But you will probably pay NJ state taxes too.

Your unrealized gains will continue to accrue so if that is what you want to avoid, then sell now. I don’t see the point — at the federal level — of selling over multiple years since your tax rate won’t be different if the gains are spread out.

All that said, what will you invest the money in if you sell? Unrealized gains aren’t a bad thing; it means that you are making money.

maj
Posts: 412
Joined: Wed Jun 25, 2008 2:58 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by maj » Wed Jun 20, 2018 3:51 pm

Football Fan,
I may be missing something about this being a problem.
1. Any long term c.g. tax is minor issue given your assets and earning power.
2. You do not give your age, so I will guess that you about 40 years of age, with two kids.
3. You can use the investment to pay your kid's college expenses, selling off year by year what you need.
4. You can keep the investment as an emergency fund.
5. You can use the investment to purchase new cars, as you need them, selling enough to pay for the cars as needed.

You have a blest problem.
peace

maj
Posts: 412
Joined: Wed Jun 25, 2008 2:58 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by maj » Wed Jun 20, 2018 3:53 pm

I forgot, so let me add
6. You can give shares to charity each year.

FootballFan5548
Posts: 164
Joined: Mon May 01, 2017 2:20 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by FootballFan5548 » Wed Jun 20, 2018 4:02 pm

Thanks everyone for the replies. One more question I had, and one of the main drivers for this, is the dividend and capital gains.

Aren't they taxes as ordinary income because of the bonds that are held? I don't fully understand that aspect of a target date fund, but I remember reading that overall they're inefficient because of that.

If I were to sell and replace VFORX which is 85/15 AA, with 85% VTSAX and 15% Muni Bonds wouldn't that be a more efficient thing to do in terms of dividends?

retiredjg
Posts: 34219
Joined: Thu Jan 10, 2008 12:56 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by retiredjg » Wed Jun 20, 2018 4:42 pm

I think the place to start this decision is just how much this costs you in taxes each year. If you've held this for awhile, you know what income you enter on your tax form that is attributable to this fund. Some will be taxed at the capital gains rate and some at your ordinary rate. Look on your taxes and see.

Is it tiny? Is it small but large enough to irritate you? You don't know but it irritates you anyway?

If you sell it all, my guess is it will cost you about $2000 in federal taxes. Unknown about the state taxes.

Yes, holding total stock and a municipal bond fund would be more tax efficient once it is all done. You'd be missing the international allocation though, if that is important to do.

You could wait until the next crash and sell with less gains. :happy

mhalley
Posts: 6184
Joined: Tue Nov 20, 2007 6:02 am

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by mhalley » Wed Jun 20, 2018 4:51 pm

You will be taxed yearly on the interest from the bonds in the fund at the ordinary income tax rate, but if you sell you will be taxed at the cap gains rate. Turn off dividend reinvestment and sell on downturns to minimize taxes.

User avatar
FiveK
Posts: 5739
Joined: Sun Mar 16, 2014 2:43 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by FiveK » Wed Jun 20, 2018 5:14 pm

FootballFan5548 wrote:
Wed Jun 20, 2018 4:02 pm
Thanks everyone for the replies. One more question I had, and one of the main drivers for this, is the dividend and capital gains.

Aren't they taxes as ordinary income because of the bonds that are held? I don't fully understand that aspect of a target date fund, but I remember reading that overall they're inefficient because of that.

If I were to sell and replace VFORX which is 85/15 AA, with 85% VTSAX and 15% Muni Bonds wouldn't that be a more efficient thing to do in terms of dividends?
Having a bond fund as part of VFORX does not make the dividends and capital gains from stock funds taxable as ordinary income. See the 1099 form you received this year: it should have both dividends and interest for VFORX (and maybe some other line items).

The VTSAX and munis would be more tax efficient. Whether the munis would give you better returns depends on their yield vs. the yield from a taxable bond fund and your tax rate.

MotoTrojan
Posts: 2485
Joined: Wed Feb 01, 2017 8:39 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by MotoTrojan » Wed Jun 20, 2018 5:25 pm

FootballFan5548 wrote:
Wed Jun 20, 2018 4:02 pm
Thanks everyone for the replies. One more question I had, and one of the main drivers for this, is the dividend and capital gains.

Aren't they taxes as ordinary income because of the bonds that are held? I don't fully understand that aspect of a target date fund, but I remember reading that overall they're inefficient because of that.

If I were to sell and replace VFORX which is 85/15 AA, with 85% VTSAX and 15% Muni Bonds wouldn't that be a more efficient thing to do in terms of dividends?
Better, unless you have a very high tax rate, would be to buy 100% VTSAX and then shift equity to bonds in your 401k to balance.

At a minimum, make sure you aren’t reinvesting dividends in this. Overall it’s not the worst thing ever but you could clean it up. If the market tanks and the gain goes down a bunch id dump it personally. It’s a pretty small amount of bonds right now relative to portfolio.

venkman
Posts: 720
Joined: Tue Mar 14, 2017 10:33 pm

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by venkman » Wed Jun 20, 2018 9:56 pm

FootballFan5548 wrote:
Wed Jun 20, 2018 11:58 am
2. Sell bits and pieces (mainly on down days) to limit tax bill over the course of a couple of years
If you do this, make sure you put in an order to exchange your current fund for VTSAX, so both transactions go through on the same day.

Selling on down days is generally a bad idea. Exchanging one thing that went down for another thing that went down is a neutral idea, which has practical applications in your case.

User avatar
grabiner
Advisory Board
Posts: 22908
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by grabiner » Sat Jun 23, 2018 3:19 pm

Since you live in NJ, note that NJ does not allow capital loss carryovers, but does allow losses to be deducted against gains in the same year. Therefore, if you have a capital loss from somewhere else (tax loss harvesting, for example), sell for a capital gain in the same year to get the benefit of the loss carryover on your state tax.

If you do hold munis in taxable after selling the fund, Vanguard has a NJ tax-exempt fund. The 3.14% yield on Admiral shares of that fund is not a free lunch; it reflects the state of the state. Therefore, I wouldn't recommend putting more than half your bonds in that fund; the other half could be a bond fund in your IRA or 401(k), or if you hold munis in your taxable account, split between a NJ and national fund.
Wiki David Grabiner

User avatar
Kevin M
Posts: 10211
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Target Date Fund in Taxable / Large Unrealized Gain Question

Post by Kevin M » Sat Jun 23, 2018 3:40 pm

The fund has only about 15% in bonds, so not a big deal. So at a distribution yield of about 2.7%, you're only paying ordinary income tax on 70,000 * 15% * 2.7% = $284 per year.

Only problem is that the fund is on it's glidepath, so allocation to bonds will gradually increase.

I think I'd wait until opportunities for tax-loss harvesting occur in the future, and then use losses in say VTSAX to offset gains in VFORX.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Post Reply