Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

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Topic Author
yosemite_mountain
Posts: 69
Joined: Tue Oct 02, 2018 8:44 pm

Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

Post by yosemite_mountain » Wed Jan 09, 2019 5:35 pm

My portfolio is as shown in portfolio A below. Lets say I need to access 40k during a recession. I sell 40k worth of stocks in my taxable account. I then sell some bonds in my 401k and use the proceeds to buy back 40k worth of a similar stock fund in my 401k, ending up with portfolio B. Note that portfolio A and portfolio B still have the same number of stocks across the entire portfolio, hence avoiding the stocks losses during a downturn.


Questions
-How do I get back to my desired asset allocation now that I went from 80% stocks /20% bonds in portfolio A to 92% stocks/ 8% bonds in portfolio B? Remember I'd like to maintain the same number of stocks across the portfolio without having to sell until they recover. Do I gradually get back to my desired 80:20 stocks bonds allocation over time by directing new contributions to bonds? Is this the best way to access funds during a downturn to avoid a loss, or is their a better way?

Stats
Emergency funds: yes (3 months)
Debt: 0
Tax Filing Status: Single, no kids
Tax Rate: 32% Federal, 9.3% State
State of Residence: California
Income: 200k a year before taxes. This includes RSUs and bonuses.
Desired Asset allocation: 80% stocks / 20% bonds

Portfolio A): Retirement assets before change: $300k
Taxable at Vanguard
80% Vanguard Total Stock Market Index: 240k
401k with employer
20% Vanguard Total Bond Market Index: 60k

Portfolio B): Retirement assets after change: $260k
Taxable at Vanguard
77% Vanguard Total Stock Market Index: 200k
401k with employer
8% Vanguard Total Bond Market Index: 20k
15% Schwab Total Stock Market Index: 40k

Questions
-How do I get back to my desired asset allocation now that I went from 80% stocks /20% bonds in portfolio A to 92% stocks/ 8% bonds in portfolio B? Remember I'd like to maintain the same number of stocks across the portfolio without having to sell until they recover. Do I gradually get back to my desired 80:20 stocks bonds allocation over time by directing new contributions to bonds? Is this the best way to access funds during a downturn to avoid a loss, or is their a better way?

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Duckie
Posts: 6707
Joined: Thu Mar 08, 2007 2:55 pm

Re: Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

Post by Duckie » Wed Jan 09, 2019 7:41 pm

yosemite_mountain wrote:How do I get back to my desired asset allocation now that I went from 80% stocks /20% bonds in portfolio A to 92% stocks/ 8% bonds in portfolio B? Remember I'd like to maintain the same number of stocks across the portfolio without having to sell until they recover.
You have to decide what you want. Do you want to be 80/20 or do you want to have the same dollar amount in stocks that you had before? You can't do both. I'd pick 80/20 and make the 401k 3% Total Stock and 20% Total Bond.
Is this the best way to access funds during a downturn to avoid a loss, or is there a better way?
If you really think you'd need this then increase your emergency fund to at least six months' expenses, increase your bond AA to 25-30%, and/or add a muni bond fund to your taxable account.
Last edited by Duckie on Wed Jan 09, 2019 9:09 pm, edited 1 time in total.

Topic Author
yosemite_mountain
Posts: 69
Joined: Tue Oct 02, 2018 8:44 pm

Re: Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

Post by yosemite_mountain » Wed Jan 09, 2019 8:57 pm

Duckie wrote:
Wed Jan 09, 2019 7:41 pm


If you really think you'd need this then add a muni bond fund to your taxable account.

Thanks for the insight!

Questions:

-Looks like even if I had municipal bonds in taxable, I would still have to sell 32k worth of stocks in taxable to get back to a 80% stocks /20% bonds allocation, which means I’d still have to sell sticks during a downturn, as shown below.
-Is there a capital gain tax when I sell municipal bonds in taxable?
-How do I approximate Vanguard Total Bond Market using municipal bonds in taxable?

Portfolio A): Retirement assets before change: $300k
Taxable at Vanguard
80% Vanguard Total Stock Market Index: 240k
13.3% Muni bond: 40k
401k with employer
6.67% Vanguard Total Bond Market Index: 20k

Portfolio B): Retirement assets after change: $260k
Taxable at Vanguard
80% Vanguard Total Stock Market Index: 208k
12.3% Muni bond: 32k
401k with employer
7.7% Vanguard Total Bond Market Index: 20k

User avatar
Duckie
Posts: 6707
Joined: Thu Mar 08, 2007 2:55 pm

Re: Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

Post by Duckie » Wed Jan 09, 2019 9:10 pm

yosemite_mountain wrote:Looks like even if I had municipal bonds in taxable, I would still have to sell 32k worth of stocks in taxable to get back to a 80% stocks /20% bonds allocation, which means I’d still have to sell sticks during a downturn, as shown below.
<snip>
Portfolio A): Retirement assets before change: $300k
Taxable at Vanguard
80% Vanguard Total Stock Market Index: 240k
13.3% Muni bond: 40k
401k with employer
6.67% Vanguard Total Bond Market Index: 20k

Portfolio B): Retirement assets after change: $260k
Taxable at Vanguard
80% Vanguard Total Stock Market Index: 208k
12.3% Muni bond: 32k
401k with employer
7.7% Vanguard Total Bond Market Index: 20k
Your post had $60K in the 401k. It's still going to be there. You only add the muni bonds in taxable if you're increasing your bond AA to more than the 23% already in the 401k.
Is there a capital gain tax when I sell municipal bonds in taxable?
There might be if the value when selling is more than the cost basis. The advantage of muni funds is the non-qualified dividends are federally tax-exempt and possibly state tax-exempt.
How do I approximate Vanguard Total Bond Market using municipal bonds in taxable?
You don't. But if you pick an intermediate-term muni fund you'll be good. Vanguard has some good options like (VWITX) Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (0.19%).

Topic Author
yosemite_mountain
Posts: 69
Joined: Tue Oct 02, 2018 8:44 pm

Re: Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

Post by yosemite_mountain » Wed Jan 09, 2019 10:59 pm

Duckie wrote:
Wed Jan 09, 2019 9:10 pm

You don't. But if you pick an intermediate-term muni fund you'll be good. Vanguard has some good options like (VWITX) Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (0.19%).
One more question Duckie. I would like to stick with a two fund portfolio across all of my accounts for simplicity. These funds are Total Stock and Total Bond. So I would prefer not to add a municipal bond fund as I want the funds in taxable to be forever funds. With that said, if I needed access to 40k during a downturn, I would be able to go from portfolio A to portfolio B below. I’d go from portfolio A to B by selling 40k stocks in taxable for my needs, then selling 8k bonds in 401k and use the proceeds to buy 8k stocks in 401k. It would be like “only selling 32k worth of stocks”. Is my logic correct?

80:20 stocks bonds
Portfolio A): Portfolio before 40k withdrawal: $300k
Taxable at Vanguard
80% Vanguard Total Stock Market Index: 240k
401k with employer
20% Vanguard Total Bond Market Index: 60k

80:20 stocks bonds
Portfolio B): Portfolio after 40k withdrawal: $260k
Taxable at Vanguard
77% Vanguard Total Stock Market Index: 200k
401k with employer
20% Vanguard Total Bond Market Index: 52k
3% Schwab Total stock: 8k

2nd question: To avoid having to sell lots of stocks during a downturn, I should increase my bond percentage to say 25% or 30% and then I can still use the "sell stock in taxable and buy similar fund in 401k" logic above, right?

User avatar
Duckie
Posts: 6707
Joined: Thu Mar 08, 2007 2:55 pm

Re: Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

Post by Duckie » Thu Jan 10, 2019 5:34 pm

yosemite_mountain wrote:I would like to stick with a two fund portfolio across all of my accounts for simplicity. These funds are Total Stock and Total Bond. So I would prefer not to add a municipal bond fund as I want the funds in taxable to be forever funds.
You can make things too simple. If you need fixed income in taxable to avoid selling stocks then that's what you need. If you don't want muni-bonds then consider CDs, high-yield savings accounts, and/or money market accounts. The same type of assets you'd hold in your emergency fund.
With that said, if I needed access to 40k during a downturn, I would be able to go from portfolio A to portfolio B below. I’d go from portfolio A to B by selling 40k stocks in taxable for my needs, then selling 8k bonds in 401k and use the proceeds to buy 8k stocks in 401k. It would be like “only selling 32k worth of stocks”. Is my logic correct?
Yes, in a sense. You sell $40K and buy $8K which nets $32K.

If you sell in a downturn your stocks may have a loss. Be aware of the Wash sale rules. In taxable turn off automatic dividend reinvestment.
To avoid having to sell lots of stocks during a downturn, I should increase my bond percentage to say 25% or 30% and then I can still use the "sell stock in taxable and buy similar fund in 401k" logic above, right?
If you need the taxable money, having more bonds in tax-sheltered won't change the "avoid having to sell lots of stocks during a downturn" equation. You would need some type of fixed income in taxable because that's where the sale will occur.

Topic Author
yosemite_mountain
Posts: 69
Joined: Tue Oct 02, 2018 8:44 pm

Re: Sell stock fund in taxable account and use the proceeds to buy back a similar stock fund in a 401k?

Post by yosemite_mountain » Thu Jan 10, 2019 8:31 pm

Duckie wrote:
Thu Jan 10, 2019 5:34 pm

You can make things too simple. If you need fixed income in taxable to avoid selling stocks then that's what you need. If you don't want muni-bonds then consider CDs, high-yield savings accounts, and/or money market accounts. The same type of assets you'd hold in your emergency fund.

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Thanks for all the helpful responses Duckie!

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