Tax efficiency question, TLH

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lynx21
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Tax efficiency question, TLH

Post by lynx21 » Sat Nov 15, 2008 1:41 pm

Hi all,

I'm a first-time poster who has visited the forum for several years--long enough to know I've made some mistakes. I began investing in Vanguard Wellington and Windsor II in 1995, adding to them periodically over the years. I now have 28K and 40K in these funds respectively (Windsor II is now an admiral account). I'm holding these in the taxable side of my portfolio (I also have tax-deferred accounts). I know these are tax-inefficient and should be in tax-deferred, but I've been afraid to switch because of tax consequences. I'm 65, semi-retired, and my total income last year was 70K (57K taxable income). Overall asset allocation now 35% equities and 65% fixed. Would this be a good time to exchange Wellington for Total Stock Index, and hopefully tax loss harvest? Not sure what to do with Windsor II Admiral. Any ideas would be appreciated.

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PiperWarrior
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Post by PiperWarrior » Sat Nov 15, 2008 5:15 pm

Welcome to the forum!

You mention TLH. Does that mean your Vanguard Wellington and Windsor II have losses? If so, I would replace them with Total Stock Market and some value fund (to retain value tilt that comes with Wellington and Windsor).

If they have significant gains, you might take distributions in cash and either spend them or reinvest them into something else.

Anyway, the first thing to do may be to look at the cost basis. If you have been reinvesting distributions into the funds, chances are you have a fairly high cost basis.

By the way, tax efficiency is about time value of money. If you think you'll tap the two funds in your taxable account first when you fully retire, then I wouldn't be in a hurry to clean up your taxable account unless of course you have losses. If you deplete them soon, there isn't so much time value.

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lynx21
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Post by lynx21 » Sun Nov 16, 2008 11:47 am

Thanks for your thoughtful comments. I'm not sure if I have losses in Wellington and Windsor II, even with the market downturn. Maybe not, since I've held them a long time. Can I find out by calling Vanguard?

I understand there are different ways of determining cost basis--not sure how to do that either. I was reinvesting my distributions until recently, so my cost basis may be complicated.

At present I don't need to draw money from my taxable accounts--I have enough to live on from pensions, social security, and part-time work. At age 70.5 I'll have to start drawing from my tax-deferred account.

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grabiner
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Post by grabiner » Sun Nov 16, 2008 8:44 pm

lynx21 wrote:Thanks for your thoughtful comments. I'm not sure if I have losses in Wellington and Windsor II, even with the market downturn. Maybe not, since I've held them a long time. Can I find out by calling Vanguard?

I understand there are different ways of determining cost basis--not sure how to do that either. I was reinvesting my distributions until recently, so my cost basis may be complicated.
If you have never sold the fund, or you used average-cost accounting when you sold, log onto Vanguard; they will have your total gains. (If you sold shares using a different accounting method, Vanguard's basis will not match yours.)
Wiki David Grabiner

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lynx21
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Post by lynx21 » Mon Nov 17, 2008 11:42 am

Thanks very much. I didn't know I could get the cost basis information so easily. I do show losses, 6K and 21K, in Wellington and WindsorII respectively. Guessing I should go ahead and exchange (at least Wellington) for another fund?

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grabiner
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Post by grabiner » Tue Nov 18, 2008 12:11 am

lynx21 wrote:Thanks very much. I didn't know I could get the cost basis information so easily. I do show losses, 6K and 21K, in Wellington and WindsorII respectively. Guessing I should go ahead and exchange (at least Wellington) for another fund?
Yes, this might be a good time to sell them. Wellington and Windsor II are both fine funds for a tax-deferred account, but they aren't the best choices for taxable account. Windsor II can be replaced with Value Index if you want its value bias; so can the stock portion of Wellington. The bond portion can be replaced by a municipal-bond fund if you must hold bonds in your taxable account.

Don't buy the same funds in your IRA or 401(k) within 30 days of selling them in your taxable accounts; that would create a wash sale, which would cost you your tax loss.
Wiki David Grabiner

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lynx21
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Post by lynx21 » Tue Nov 18, 2008 10:46 am

Don't buy the same funds in your IRA or 401(k) within 30 days of selling them in your taxable accounts; that would create a wash sale, which would cost you your tax loss.
David,

Glad you mentioned this precaution--I wasn't aware of it. Thanks to you and Piper Warrior for your very helpful advice.

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