How did it come to this? [Help with investments]

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Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

How did it come to this? [Help with investments]

Post by Cody6136 » Tue Apr 16, 2019 11:43 am

I've tried not to panic. I've read Don't Count on It. I've lurked here. I've checked with Dave Ramsey, checked books out of the library, written checks to accountants and still, I wonder.

So I am posting and hoping for your advice.

Vitals:

58 y.o. single. Work for a nonprofit organization (80k per year), and have raised more than 20M for charity. (Irony!). But every year at tax time, I owe a huge amount to Fed )7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds (T Rowe Price, Merrill Lynch) and are at about 80 percent stocks and 10 percent bonds, cash..:

Keep reading in the faith that there is a question buried here..but first, a bit about me:


Savings:
Short term savings fund $15,000
50 oz Krugerrand gold coins (transportable wealth and a relic of an immigrant family's approach to money).
Total:@$65,000

Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000

Total: approx. $500,000


Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$110,000 --very heavy on stocks
*Current 403 (b) at TIAA –$65,301
*Old 401k: American Funds 401k $36,000 --yes, you saw a pattern, heavy on stocks.
T Rowe Price IRA: $24,000
HSA $12,000 ..

Total: $238,000

2k/mo Social Security – not counting on this!

Home owned outright; no credit card debt, no unsecured debt

Inheritance issues --93 year old frugal mother has about 4M in assets -- three siblings.

Here is my question.

How exactly can I rebalance my stock mutual funds without triggering further tax implications? Mutual fund companies tell me I need to rebalance, but I don't know how to actually do this, and what the tax fallout will be. Is re-balancing a fancy word for selling and buying something else?

I have sat down with fee based financial advisors, who would love to manage my money for me. One suggested he would do this for me at 2 percent of my entire portfolio, down to the house and the gold. I explained that the gold was in a safe in the house, and both were being managed by me, quite well. There must be a better way.

Should I boldly sell the growth stock in the T Rowe Price Mutual funds and put the cash that I get...into bonds for an asset allocation that's more appropriate for a 60 year old gal rather than a frat boy ?

I would like to continue working until age 65. I have no liabilities other than my ignorance and past mistakes, and those are substantial.

I'm trying to learn, and like the Boglehead approach, but I feel clueless.

Can you help me?
Last edited by Cody6136 on Tue Apr 16, 2019 12:36 pm, edited 1 time in total.

mikemikemike
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Re: How did it come to this?

Post by mikemikemike » Tue Apr 16, 2019 12:28 pm

Based on the ~9K in taxes you're paying, I'm guessing you're getting taxed on ~27K in short-term capital gains, interest, and unqualified dividends. (Assuming marginal tax rate of 33%, which can't be too far off). So on your 500K portfolio, this is about 5.4% in returns that you're being taxed on. That's... maybe a little high, but not insane (IMO).

I'd expect dividends and bond interest to be in the 2-3% range at most. (Leading to around a 5K tax bill, again, assuming the 33% marginal rate).

The rest of your tax bill is probably coming from rebalancing as you say: selling appreciated assets (likely stock) to buy other stuff. You could always shut off the rebalancing and save this bit of tax burden. Downside is that your AA will drift. I don't think you can have it both ways (rebalancing without getting taxed on gains) except for the following...

My approach to rebalancing is to not sell stuff, basically ever. Instead, I buy more of whatever I'm "light" on, when I have more money to invest. That let's me rebalance (somewhat) without selling anything.

So if you're aiming for 50/50 stocks/bonds, but currently at 55/45, and you have money to invest, you buy bonds. If you're at 45/55, you buy stocks. This works if the amount you add each year is at least close to the amount that your AA has drifted. And if you feel like your AA is too far off, then you can sell some stuff and accept paying some taxes on your gains. But at least you won't have to do that selling too often.

EDIT: Or, as discussed below, you can use tax loss harvesting to help reduce your tax bill from rebalancing. I don't do this (yet) since I'm using purchases to rebalance. But the loss harvesting is another trick that can help you.
Last edited by mikemikemike on Tue Apr 16, 2019 12:37 pm, edited 1 time in total.

FoolMeOnce
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Re: How did it come to this?

Post by FoolMeOnce » Tue Apr 16, 2019 12:29 pm

You seem to be in pretty sound financial shape with about $900k in non-housing assets, am expected $36k/yr in outside income (pension and SS), and seemingly low-ish expenses (considering your income and savings), and your plan to keep working until 65. So don't panic!

Regarding owing taxes at tax-time, this is because you are not withholding enough from your paycheck. This is likely due to the paycheck calculation not knowing about your income in your taxable accounts (dividends, interest, capital gains distributions). You can adjust your withholding by getting a W-4 from your HR department and asking to withhold more from each paycheck. Or you can pay quarterly estimated taxes to the IRS and your state.

For rebalancing, selling in taxable has tax consequences. You'll owe portion sold that is a gain on the initial investment amount, but those can be offset by losses. But you have room in your tax-preferred (401k, 403b, etc) accounts to rebalance without any tax implications. If you want something more conservative, sell your stocks/equities and buy bond funds or stable value funds in those accounts first.

Your do not need a 2% financial advisor. That is a ridiculous price, made more absurd by trying to charge based on the value of your home and physical gold. That's just shocking. Then the advisor would probably put you in funds with high expenses on top of that.

If you don't want to manage your assets yourself, Vanguard will manage what you can transfer there for a reasonable 0.3% and will use low-cost funds.

Again, you are in sound shape. No need to panic.

MotoTrojan
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Re: How did it come to this?

Post by MotoTrojan » Tue Apr 16, 2019 12:31 pm

Paying someone 2% is criminal. 1% is devastating to your retirement spending. Don’t do that. We can help!

mariezzz
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Re: How did it come to this?

Post by mariezzz » Tue Apr 16, 2019 12:31 pm

I'd spend more time reading on bogleheads, including the wiki. You're panicking without much reason. You're finances are strong. I wouldn't pay a financial advisor. You can figure this out.

There are no tax implications of selling money in stock funds in retirement accounts like 401ks or IRA & shifting that money to fixed income options (bonds, cds, etc.), as long as you keep the money in retirement accounts. You can shift all your funds in the retirement accounts out of equities, and that will help adjust your overall asset allocation, without ever having to sell anything in your taxable accounts.

There are approaches to tax loss harvesting which others here can address better than I can.

You'll have to provide more detail as to why you said: "I owe a huge amount to Fed )7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds (T Rowe Price, Merrill Lynch) and are at about 80 percent stocks and 10 percent bonds, cash.

How much of your salary are you contributing to tax-deferred retirement accounts: IRA, 403b? You should be able to reduce your taxable income quite a bit by contributing more to those.

If you're not selling anything in taxable, and if you're having the right amount of money withheld from your paycheck, why do you end up owing a huge amount of taxes with a salary of only $80K per year? You'll probably have to include some details from your tax return about how much your getting in dividends, short term, and long-term capital gains.

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RickBoglehead
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Re: How did it come to this?

Post by RickBoglehead » Tue Apr 16, 2019 12:32 pm

1) Rebalance to lower taxes

2) Pay estimated taxes, or increase paycheck withholding, so as to not have a surprise bill in April.

OR

2) Do better estimates, pay only what is required for safe harbor, and April's bill is not a surprise.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

bloom2708
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Location: Fargo, ND

Re: How did it come to this? [Help with investments]

Post by bloom2708 » Tue Apr 16, 2019 12:35 pm

Start by putting everything you can under "Retirement Planning" into low cost intermediate term broad market bond index funds.

No tax consequences for moving in 401k/IRA/HSA.

That would increase your bond holdings.

In taxable, sell all losers and match with selling winners so the net (long and short) is $0.

If you are paying every year, adjust your W-4 to withhold more. Adjust allowances, do "additional" withholding for Fed and State every pay period.

I would try to get taxable to a mix of Total US and Total International or equivalents based on options/expense ratios available. If you have large gains, it might take years to loss and gain harvest. Low dividends with a high percentage of qualified dividends. Low capital gains distributions. Total US and Total International (or similar) funds do that.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

magicrat
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Re: How did it come to this? [Help with investments]

Post by magicrat » Tue Apr 16, 2019 12:36 pm

If you want to hold more bonds without realizing capital gains, hold the bonds in your 401k.

Also, an aside, but I would avoid telling people you have 50 ounces of gold in your house.

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Wiggums
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Re: How did it come to this? [Help with investments]

Post by Wiggums » Tue Apr 16, 2019 12:56 pm

You appear to be doing well. I agree that you should withhold more or pay estimated taxes to get close to zero. If you want to add bonds, consider doing that in you tax deferred so that you don’t pay any additional taxes. If you are not contributing the max, consider contributing more as well. You do not need to solve this issue in one day.

Good luck to you.

decapod10
Posts: 112
Joined: Thu Dec 28, 2017 6:46 pm

Re: How did it come to this? [Help with investments]

Post by decapod10 » Tue Apr 16, 2019 12:59 pm

Cody6136 wrote:
Tue Apr 16, 2019 11:43 am

58 y.o. single. Work for a nonprofit organization (80k per year), and have raised more than 20M for charity. (Irony!). But every year at tax time, I owe a huge amount to Fed )7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds (T Rowe Price, Merrill Lynch) and are at about 80 percent stocks and 10 percent bonds, cash..:
I don't know exactly how your accounts are set up, but there shouldn't be any reason why taxable investments should cause a huge problem from a tax standpoint. The reason is that in most normal circumstances, you only get taxed when you realize a gain, meaning you get taxed when you are actually "receiving cash" (for lack of a better term) somehow from your investments. And the amount of tax you pay is going to be less than the amount you gained, so your investments should be giving you more than you are getting taxed.

I suspect what is happening is that the stocks in your taxable accounts are giving you dividends (and it looks like you have some bonds and other investments as well which will also give you dividends). Those dividends are being taxed. Probably what's happening is that you are having the dividends automatically reinvested in to more stocks, which means that you have to pay taxes on them but no longer have the cash to pay the taxes.

So, to solve the tax problem, if you can't afford to withhold more from your paycheck, you should make sure that any dividends produced by your taxable investments are NOT reinvested automatically. When you get dividends, withdraw the dividends and set aside whatever you need to pay for taxes.

If you have anything extra, assuming you're not maxing out your retirement accounts, you can increase your 403 (b) contributions by roughly the same amount as your "extra" dividends that you don't need for taxes.

If you move all your retirement accounts to bonds, and any new money in your retirement account also goes to bonds, you'll be able to hit whatever bond allocation you're looking for in not too long I think.

Edit: I guess the other possibility is that you are getting the dividends in cash from your taxable accounts and then just spending all of it, not saving any for taxes. Then of course the answer there is that you need to spend less.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue Apr 16, 2019 1:04 pm

As I said before...but I don't think it posted:

Blood pressure and heart rate trending lower.

Many thanks.

"If you think education is expensive....try ignorance."

DonIce
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Joined: Thu Feb 21, 2019 6:44 pm

Re: How did it come to this? [Help with investments]

Post by DonIce » Tue Apr 16, 2019 1:08 pm

Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
58 y.o. single. Work for a nonprofit organization (80k per year), and have raised more than 20M for charity. (Irony!). But every year at tax time, I owe a huge amount to Fed )7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds (T Rowe Price, Merrill Lynch) and are at about 80 percent stocks and 10 percent bonds, cash..:
Are you just having too little taxes withheld? You can always increase your withholding by filling out a new W4.

If the taxes are mostly on your portfolio transactions (rebalancing, etc), you can instead pay estimated quarterly taxes. You shouldn't be tapping your emergency fund to pay taxes, taxes are a known expense that can be anticipated well in advance, not an emergency.

To re-balance without incurring capital gains, two things:
- As someone else mentioned, re-balance mostly by buying. As your AA drifts due to out performance of one assett vs another, buy more of the asset you are light on.
- Hold both stocks and bonds in your tax-advantaged accounts. Then, if you do need to buy/sell stocks/bonds to keep your target AA, you can do it inside the tax-advantaged accounts without touching your taxable accounts.

Never pay anyone 2% or even 1% to manage your stuff for you. You take all the risk, they get most of the gains. If you really need a financial advisor you can get them for 0.3% as others have mentioned. Don't assume that other people can take better care of your money than you can (after a bit of reading and education and advice from here). They may have a lifetime of experience, but for them it is just one account out of thousands and they won't pay much attention to it and can easily make mistakes. And that's even assuming they don't have obvious conflicts of interests, which many advisors do (they get paid to sell you funds with high fees for example, or make money on every trade so they will churn your account way too much).

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

Re: How did it come to this? [Help with investments]

Post by mhalley » Tue Apr 16, 2019 1:13 pm

As said above, rebalance your tax deferred accounts to bonds. Look at the cost basis of your stocks and mutual funds, sell anything that has a loss. Sell some gainers to equal the losers. Figure how much you can afford to pay in taxes and sell that amount yearly going forward. TURN OFF dividend and capital gain reinvestment in the taxable accounts.
If you are paying taxes at the end if the year you need to adjust your withholding or pay estimated quarterly taxes. Your cpa or tax program should tell you the amount. Or use taxcaster app or web site.
Watch all the videos or read the articles on the wiki. You should make an investment policy statement, and write down a plan. Figure how many years it will take to achieve a tax effecient portfolio and include the plan in your ips.
Here are some salient wiki articles
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Tax-eff ... _placement
https://www.bogleheads.org/wiki/Investm ... _statement
Oh,I forgot to mention to be sure your taxable account is set to spec I’d so you can sell specific lots of themutual funds to minimize taxes.

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LilyFleur
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Re: How did it come to this? [Help with investments]

Post by LilyFleur » Tue Apr 16, 2019 1:25 pm

Since you like stocks, I would encourage you to invest (in your brokerage account, not your 401k) in an indexed stock fund that produces earnings in the form of qualified dividends, which are taxed at the lower capital gains rate and then plan on not selling until after you have a lower income in retirement. Of course, select investments in line with your desired asset allocation.

I like SCHB at Schwab. It is an index fund based on the Dow. Schwab told me the first year of dividends would be at the short-term capital gains rate, switching to the long term capital gains tax rate after a year of holding the fund.

I have a spreadsheet for each tax year to project my earnings and taxable income. It is detailed: ie, $x from pension, $x from part-time job, $x from mineral rights/commissions, $x from RMD from inherited IRA, $x from money market dividends, etc. I subtotal that amount, then I run that total up through the progressive tax brackets to estimate my total tax bill, federal and state, for the year. I used to send in estimated tax payments but I learned from a wise Boglehead here to just increase the withholdings in my pension checks. You will be surprised at how accurate you can be at anticipating your tax burden. I think this year I am getting a $300 refund!

Good luck to you, and keep us posted! I have learned a lot here.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue Apr 16, 2019 1:37 pm

mhalley wrote:
Tue Apr 16, 2019 1:13 pm
As said above, rebalance your tax deferred accounts to bonds. Look at the cost basis of your stocks and mutual funds, sell anything that has a loss. Sell some gainers to equal the losers. Figure how much you can afford to pay in taxes and sell that amount yearly going forward. TURN OFF dividend and capital gain reinvestment in the taxable accounts.
If you are paying taxes at the end if the year you need to adjust your withholding or pay estimated quarterly taxes. Your cpa or tax program should tell you the amount. Or use taxcaster app or web site.
Watch all the videos or read the articles on the wiki. You should make an investment policy statement, and write down a plan. Figure how many years it will take to achieve a tax effecient portfolio and include the plan in your ips.
Here are some salient wiki articles
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Tax-eff ... _placement
https://www.bogleheads.org/wiki/Investm ... _statement
Oh,I forgot to mention to be sure your taxable account is set to spec I’d so you can sell specific lots of themutual funds to minimize taxes.

What will happen if I turn off the dividend and capital gain reinvestmnet in the taxable accounts? I thought having that ON meant that my pile o money would grow larger with no tax implications. :oops:

This year, I sold stocks in the taxable accounts to pay the money I was making in the taxable accounts, and that is why I feel like I am chasing my tail!

DonIce
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Re: How did it come to this? [Help with investments]

Post by DonIce » Tue Apr 16, 2019 1:50 pm

Cody6136 wrote:
Tue Apr 16, 2019 1:37 pm
What will happen if I turn off the dividend and capital gain reinvestmnet in the taxable accounts? I thought having that ON meant that my pile o money would grow larger with no tax implications. :oops:
Dividends and capital gains you receive in taxable accounts are taxed. It doesn't matter whether you reinvest them, invest them in something else, or take out the cash.

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Elric
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Re: How did it come to this? [Help with investments]

Post by Elric » Tue Apr 16, 2019 1:52 pm

[quote=Cody6136 post_id=4497274 time=1555439820 user_id=147678
What will happen if I turn off the dividend and capital gain reinvestmnet in the taxable accounts? I thought having that ON meant that my pile o money would grow larger with no tax implications. :oops:
This year, I sold stocks in the taxable accounts to pay the money I was making in the taxable accounts, and that is why I feel like I am chasing my tail!
[/quote]

Dividends (and distributions from mutual funds), whether reinvested or not, is taxable income if in a taxable account. So, as you've learned, there are tax implications. But you're not fully chasing your tail, as there is no 100% tax bracket (and capital gains from mutual fund are taxed at the currently lower capital gains rates, not as regular income). As others have said, you need to plan for paying the taxes on this income to avoid a large tax hit (and possible penalties) when tax season roles around. You can:
  • Estimate what your taxable investment income will be and change your W4 so that your employer withholds more to cover it.
    Estimate what your taxable investment income will be and make quarterly tax payments to the IRS.
    Do not automatically reinvest dividends and distributions. When you get them, hold back what you'll have to pay in taxes and reinvest what's left. You can put them back in the same investments or use them to adjust your asset allocation.
Reinvestments in traditional IRAs don't incur taxes at the time, but are fully taxed when withdrawn.
Reinvestments in a Roth IRA don't get taxed.

Read up as others have suggested on which type of investments are best placed where for tax purposes (e.g., bonds in tax-exempt),
"No man is free who works for a living." | Illya Kuryakin

decapod10
Posts: 112
Joined: Thu Dec 28, 2017 6:46 pm

Re: How did it come to this? [Help with investments]

Post by decapod10 » Tue Apr 16, 2019 1:55 pm

Cody6136 wrote:
Tue Apr 16, 2019 1:37 pm
mhalley wrote:
Tue Apr 16, 2019 1:13 pm
As said above, rebalance your tax deferred accounts to bonds. Look at the cost basis of your stocks and mutual funds, sell anything that has a loss. Sell some gainers to equal the losers. Figure how much you can afford to pay in taxes and sell that amount yearly going forward. TURN OFF dividend and capital gain reinvestment in the taxable accounts.
If you are paying taxes at the end if the year you need to adjust your withholding or pay estimated quarterly taxes. Your cpa or tax program should tell you the amount. Or use taxcaster app or web site.
Watch all the videos or read the articles on the wiki. You should make an investment policy statement, and write down a plan. Figure how many years it will take to achieve a tax effecient portfolio and include the plan in your ips.
Here are some salient wiki articles
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Tax-eff ... _placement
https://www.bogleheads.org/wiki/Investm ... _statement
Oh,I forgot to mention to be sure your taxable account is set to spec I’d so you can sell specific lots of themutual funds to minimize taxes.

What will happen if I turn off the dividend and capital gain reinvestmnet in the taxable accounts? I thought having that ON meant that my pile o money would grow larger with no tax implications. :oops:

This year, I sold stocks in the taxable accounts to pay the money I was making in the taxable accounts, and that is why I feel like I am chasing my tail!
If you turn off the automatic reinvestments, the dividends will show up in your account as cash or whatever you designated as cash equivalent (usual some sort of MMF). You’re free to do with it as you wish at that point. You can invest it in something, withdraw it and spend it, whatever you want. As I mentioned previously, the best thing to do would be to turn off automatic investments, take the cash and set aside enough to pay your taxes.

If you turn on automatic investments, you still get taxed on it. It just saves you the step of rebuying more stocks (and also saves on transaction fees in some cases).

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue Apr 16, 2019 2:03 pm

magicrat wrote:
Tue Apr 16, 2019 12:36 pm
If you want to hold more bonds without realizing capital gains, hold the bonds in your 401k.

Also, an aside, but I would avoid telling people you have 50 ounces of gold in your house.
Indeed. Given the way I dress and comport myself, nobody would ever know.

krow36
Posts: 2191
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Location: WA

Re: How did it come to this? [Help with investments]

Post by krow36 » Tue Apr 16, 2019 5:11 pm

Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000
Total: approx. $500,000
You need to understand which of the above assets in your taxable account are adding to your taxable income each year. If the TRP mutual funds are actively managed funds rather than index funds, then the fund managers will be trading stocks during the year. At year's end they will distribute any capital gains to you as "capital gain distributions". If you invest in index funds instead of actively-managed mutual funds in your taxable account, you will avoid most or all cap gain distributions.

In addition, any dividends and cap gains distributions paid by the equity mutual funds or individual stocks during the year will add to your taxable income for the year. If the dividends are "qualified", they are taxed at a lower rate than if they are non-qualified. Broad market-based index funds produce mostly or all qualified dividends and little or no cap gain distributions.

Any mutual funds or stocks you sell for a capital gain during the year will add to your taxable income for the year. If the gain is long-term (>1 year), the gain is taxed at the cap gain rate, if the gain is <1 year, it is added to your other taxable income. Selling a mutual fund with a gain and another with a loss results in no increase in taxable income.

Other posters have mentioned how you might proceed.
1. Do not reinvest any dividends. Instead have the dividends and cap gain distributions go to a MM fund and use them to purchase an S&P 500 index fund. It does not make cap gain distributions and all dividends are qualified (at least that's the case with Vanguard's 500 Index fund). This will cause your tax-inefficient stocks and equity mutual funds to grow more slowly. If you want to add bonds to your taxable account, you should consider using an intermediate-term tax-exempt bond fund, that is a muni bond fund.
2. Sell any stock or mutual fund that has a capital loss and and an other stock or mutual fund with an equal cap gain.
3. Over several years, you can reduce the remaining stocks and non-index mutual funds with cap gains, so that the tax hit is spread out. Invest that money in one of the tax-efficient index funds. Remember that the cap gains tax rates are lower than the income tax brackets. Probably 15% for you?
You've done a good job of saving. Your portfolio just needs some tweaking. :)
Last edited by krow36 on Tue Apr 16, 2019 7:50 pm, edited 1 time in total.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue Apr 16, 2019 5:43 pm

krow36 wrote:
Tue Apr 16, 2019 5:11 pm
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000
Total: approx. $500,000
You need to understand which of the above assets in your taxable account are adding to your taxable income each year. If the TRP mutual funds are actively managed funds rather than index funds, then the fund managers will be trading stocks during the year. At year's end they will distribute any capital gains to you as "capital gain distributions". If you invest in index funds instead of actively-managed mutual funds in your taxable account, you will avoid most or all cap gain distributions.

In addition, any dividends paid by the equity mutual funds or individual stocks during the year will add to your taxable income for the year. If the dividends are "qualified", they are taxed at a lower rate than if they are non-qualified. Broad market-based index funds produce mostly or all qualified dividends.

Any mutual funds or stocks you sell for a capital gain during the year will add to your taxable income for the year. If the gain is long-term (>1 year), the gain is taxed at the cap gain rate, if the gain is <1 year, it is added to your other taxable income. Selling a mutual fund with a gain and another with a loss results in no increase in taxable income.

Other posters have mentioned how you might proceed.
1. Do not reinvest any dividends. Instead have the dividends go to a MM fund and use them to purchase an S&P 500 index fund. It does not make cap gain distributions and all dividends are qualified (at least that's the case with Vanguard's 500 Index fund). This will keep your tax-inefficient stocks and equity mutual funds from growing, to a large extent. If you want to add bonds to your taxable account, you should consider using an intermediate-term tax-exempt bond fund, that is a muni bond fund.
2. Sell any stock or mutual fund that has a capital loss and and an other stock or mutual fund with an equal cap gain.
3. Over several years, you can reduce the remaining stocks and mutual funds with cap gains, so that the tax hit is spread out. Invest that money in one of the tax-efficient index funds. Remember that the cap gains tax rates are lower than the income tax brackets. Probably 15% for you?
You've done a good job of saving. Your portfolio just needs some tweaking. :)
These tips place me in the driver's seat with the money that I have worked hard to earn. It is truly a remarkable thing that a few people (whom I'll likely never know) can create a sense of agency in someone else. I have a sense of a direction and choices going forward, and may not need my asthma medication for the rest of the day. Whew!

You are a remarkable set of people and I feel fortunate today for having found you all!

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this?

Post by Cody6136 » Wed Apr 24, 2019 12:29 pm

mikemikemike wrote:
Tue Apr 16, 2019 12:28 pm
Based on the ~9K in taxes you're paying, I'm guessing you're getting taxed on ~27K in short-term capital gains, interest, and unqualified dividends. (Assuming marginal tax rate of 33%, which can't be too far off). So on your 500K portfolio, this is about 5.4% in returns that you're being taxed on. That's... maybe a little high, but not insane (IMO).

I'd expect dividends and bond interest to be in the 2-3% range at most. (Leading to around a 5K tax bill, again, assuming the 33% marginal rate).

The rest of your tax bill is probably coming from rebalancing as you say: selling appreciated assets (likely stock) to buy other stuff. You could always shut off the rebalancing and save this bit of tax burden. Downside is that your AA will drift. I don't think you can have it both ways (rebalancing without getting taxed on gains) except for the following...

My approach to rebalancing is to not sell stuff, basically ever. Instead, I buy more of whatever I'm "light" on, when I have more money to invest. That let's me rebalance (somewhat) without selling anything.

So if you're aiming for 50/50 stocks/bonds, but currently at 55/45, and you have money to invest, you buy bonds. If you're at 45/55, you buy stocks. This works if the amount you add each year is at least close to the amount that your AA has drifted. And if you feel like your AA is too far off, then you can sell some stuff and accept paying some taxes on your gains. But at least you won't have to do that selling too often.

EDIT: Or, as discussed below, you can use tax loss harvesting to help reduce your tax bill from rebalancing. I don't do this (yet) since I'm using purchases to rebalance. But the loss harvesting is another trick that can help you.
I want to thank you for this response. It's taking me some time to go over the responses, read more in some cases in other books or the BH WIKI, and then mull over my plans and where I might go from here.

I like the approach of buying more of what I'm light on, in my case fixed income assets.

Thanks again!

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Wed Apr 24, 2019 12:31 pm

krow36 wrote:
Tue Apr 16, 2019 5:11 pm
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000
Total: approx. $500,000
You need to understand which of the above assets in your taxable account are adding to your taxable income each year. If the TRP mutual funds are actively managed funds rather than index funds, then the fund managers will be trading stocks during the year. At year's end they will distribute any capital gains to you as "capital gain distributions". If you invest in index funds instead of actively-managed mutual funds in your taxable account, you will avoid most or all cap gain distributions.

In addition, any dividends and cap gains distributions paid by the equity mutual funds or individual stocks during the year will add to your taxable income for the year. If the dividends are "qualified", they are taxed at a lower rate than if they are non-qualified. Broad market-based index funds produce mostly or all qualified dividends and little or no cap gain distributions.

Any mutual funds or stocks you sell for a capital gain during the year will add to your taxable income for the year. If the gain is long-term (>1 year), the gain is taxed at the cap gain rate, if the gain is <1 year, it is added to your other taxable income. Selling a mutual fund with a gain and another with a loss results in no increase in taxable income.

Other posters have mentioned how you might proceed.
1. Do not reinvest any dividends. Instead have the dividends and cap gain distributions go to a MM fund and use them to purchase an S&P 500 index fund. It does not make cap gain distributions and all dividends are qualified (at least that's the case with Vanguard's 500 Index fund). This will cause your tax-inefficient stocks and equity mutual funds to grow more slowly. If you want to add bonds to your taxable account, you should consider using an intermediate-term tax-exempt bond fund, that is a muni bond fund.
2. Sell any stock or mutual fund that has a capital loss and and an other stock or mutual fund with an equal cap gain.
3. Over several years, you can reduce the remaining stocks and non-index mutual funds with cap gains, so that the tax hit is spread out. Invest that money in one of the tax-efficient index funds. Remember that the cap gains tax rates are lower than the income tax brackets. Probably 15% for you?
You've done a good job of saving. Your portfolio just needs some tweaking. :)
I'm sorry that I've been slow to respond...there is a lot here for me to noodle over and absorb. Thank you for your reactions -- they are the basis for a solid road map!

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Wed Apr 24, 2019 12:32 pm

Elric wrote:
Tue Apr 16, 2019 1:52 pm
[quote=Cody6136 post_id=4497274 time=1555439820 user_id=147678
What will happen if I turn off the dividend and capital gain reinvestmnet in the taxable accounts? I thought having that ON meant that my pile o money would grow larger with no tax implications. :oops:
This year, I sold stocks in the taxable accounts to pay the money I was making in the taxable accounts, and that is why I feel like I am chasing my tail!
Dividends (and distributions from mutual funds), whether reinvested or not, is taxable income if in a taxable account. So, as you've learned, there are tax implications. But you're not fully chasing your tail, as there is no 100% tax bracket (and capital gains from mutual fund are taxed at the currently lower capital gains rates, not as regular income). As others have said, you need to plan for paying the taxes on this income to avoid a large tax hit (and possible penalties) when tax season roles around. You can:
  • Estimate what your taxable investment income will be and change your W4 so that your employer withholds more to cover it.
    Estimate what your taxable investment income will be and make quarterly tax payments to the IRS.
    Do not automatically reinvest dividends and distributions. When you get them, hold back what you'll have to pay in taxes and reinvest what's left. You can put them back in the same investments or use them to adjust your asset allocation.
Reinvestments in traditional IRAs don't incur taxes at the time, but are fully taxed when withdrawn.
Reinvestments in a Roth IRA don't get taxed.

Read up as others have suggested on which type of investments are best placed where for tax purposes (e.g., bonds in tax-exempt),
[/quote]

Hi again!

I have acted to change my w-4 and that is one of the early steps in my plan. Thank you for helping me out!

aristotelian
Posts: 5593
Joined: Wed Jan 11, 2017 8:05 pm

Re: How did it come to this? [Help with investments]

Post by aristotelian » Wed Apr 24, 2019 1:02 pm

You can buy and sell within your IRA's and 401k's. With the market back at record, now is a great time to rebalance to your target allocation. Generally the preference is to place bonds in 401k to keep stock gains from being taxed as income. Therefore, I would start by converting the entire TIAA account to TIAA Traditional Annuity (which is not an index fund, but is used by many as a core fixed income allocation). Before doing so, you should read up on the details of TIAA Traditional Annuity, particularly liquidity restrictions. viewtopic.php?t=256375

Then convert as much of the remaining 401k's to a good bond index fund.

You could also simplify your portfolio by combining some of the dead 401k's into one or roll into a Traditional IRA.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue May 14, 2019 3:12 pm

aristotelian wrote:
Wed Apr 24, 2019 1:02 pm
You can buy and sell within your IRA's and 401k's. With the market back at record, now is a great time to rebalance to your target allocation. Generally the preference is to place bonds in 401k to keep stock gains from being taxed as income. Therefore, I would start by converting the entire TIAA account to TIAA Traditional Annuity (which is not an index fund, but is used by many as a core fixed income allocation). Before doing so, you should read up on the details of TIAA Traditional Annuity, particularly liquidity restrictions. viewtopic.php?t=256375

Then convert as much of the remaining 401k's to a good bond index fund.

You could also simplify your portfolio by combining some of the dead 401k's into one or roll into a Traditional IRA.
Hi all,

I've been hard at work tweaking my financial life and now wanting to move some of my tax sheltered money from stocks to bond index funds.

I've already learned an immense amount here -- I feel like the scales have fallen from my eyes and I am no longer the person who wrote this original note -- or considered an FA who would have charged me 2 percent of all of my assets, including precious metal stash and my home equity. The whole idea seems like a bad dream.... :oops:

Or a bullet that I dodged.

But I still have much to do, and here is my current query:

Poster above says "Now is a great time to rebalance your target allocation."

With the market burping (or worse) in the last couple of days, is this still a good time ...MY PLAN SAYS GO! I think this is a good opportunity to execute my plan and then stay the course, rather than try to "time things."

Is this what BHs mean when they say not to time the market, or is there a reasonable case to be made for waiting for things to settle down a bit?

aristotelian
Posts: 5593
Joined: Wed Jan 11, 2017 8:05 pm

Re: How did it come to this? [Help with investments]

Post by aristotelian » Tue May 14, 2019 3:53 pm

Cody6136 wrote:
Tue May 14, 2019 3:12 pm

Poster above says "Now is a great time to rebalance your target allocation."

With the market burping (or worse) in the last couple of days, is this still a good time ...MY PLAN SAYS GO! I think this is a good opportunity to execute my plan and then stay the course, rather than try to "time things."

Is this what BHs mean when they say not to time the market, or is there a reasonable case to be made for waiting for things to settle down a bit?
The market is barely down a few points from record highs. It's not like December when it had dropped almost 20%. For the most part you would be locking in gains. A few points here or there will not make a difference to you long term.

cherijoh
Posts: 5543
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: How did it come to this? [Help with investments]

Post by cherijoh » Tue May 14, 2019 4:36 pm

Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
58 y.o. single. Work for a nonprofit organization (80k per year), and have raised more than 20M for charity. (Irony!). But every year at tax time, I owe a huge amount to Fed (7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds (T Rowe Price, Merrill Lynch) and are at about 80 percent stocks and 10 percent bonds, cash..:

Keep reading in the faith that there is a question buried here..but first, a bit about me:


Savings:
Short term savings fund $15,000
50 oz Krugerrand gold coins (transportable wealth and a relic of an immigrant family's approach to money).
Total:@$65,000

Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000

Total: approx. $500,000


Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$110,000 --very heavy on stocks
*Current 403 (b) at TIAA –$65,301
*Old 401k: American Funds 401k $36,000 --yes, you saw a pattern, heavy on stocks.
T Rowe Price IRA: $24,000
HSA $12,000 ..

Total: $238,000

2k/mo Social Security – not counting on this!

Home owned outright; no credit card debt, no unsecured debt

Inheritance issues --93 year old frugal mother has about 4M in assets -- three siblings.

Here is my question.

How exactly can I rebalance my stock mutual funds without triggering further tax implications? Mutual fund companies tell me I need to rebalance, but I don't know how to actually do this, and what the tax fallout will be. Is re-balancing a fancy word for selling and buying something else?

I have sat down with fee based financial advisors, who would love to manage my money for me. One suggested he would do this for me at 2 percent of my entire portfolio, down to the house and the gold. I explained that the gold was in a safe in the house, and both were being managed by me, quite well. There must be a better way.

Should I boldly sell the growth stock in the T Rowe Price Mutual funds and put the cash that I get...into bonds for an asset allocation that's more appropriate for a 60 year old gal rather than a frat boy ?

I would like to continue working until age 65. I have no liabilities other than my ignorance and past mistakes, and those are substantial.

I'm trying to learn, and like the Boglehead approach, but I feel clueless.

Can you help me?
Your intuition about having the wrong asset allocation for your age is absolutely correct. As others have pointed out, you should start de-risking your portfolio by moving money in your tax-deferred accounts (401k, IRA) from their current allocations in stocks into bond funds. I would suggest posting your bond fund choices in all your tax-advantaged plans. Unfortunately, a lot of 401k plans only offer high-expense bond funds. So it may make sense to rollover your 2 401ks from former employers into a rollover IRA at Vanguard. Then invest the proceeds into total bond market index fund or an intermediate term bond index fund with very low expense ratios.

I think your underwithholding tax issue is because you own actively-managed mutual funds which can throw off unexpectedly large capital gains distributions, which I assume you are reinvesting along with dividends. I would suggest discontinuing automatic reinvestment, which would give you cash to reinvest elsewhere. The good news about this is that you may not have as much embedded capital gains as you might think. (This will reduce your tax burden when you sell your shares). When you reinvest dividends and cap gains they are treated as new purchases with a cost basis based on the price/share when you reinvested them.

If you haven't previously sold any of your taxable mutual fund investments then you can still chose which method to use to determine cost basis for sales. Usually mutual funds default to FIFO (first in first out) or average basis, but specific ID is also an option. This allows you to identify which lots to sell so you could chose ones with a higher cost basis to minimize the capital gains on any sales. If you have ever sold any shares using average cost basis, you are stuck with that basis for the rest of the remaining shares you held at the time of that sale.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue May 14, 2019 5:00 pm

cherijoh wrote:
Tue May 14, 2019 4:36 pm
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
If you have ever sold any shares using average cost basis, you are stuck with that basis for the rest of the remaining shares you held at the time of that sale.
Thank you so much for this feedback. I do want to follow up on this.

I HAVE sold shares of one of the more actively managed funds (growth stock) to pay the taxes that I owed on the winnings from those growth stocks, because with so much growth stock in my taxable accounts, and my relatively modest salary, I didn't really have much choice. And that's what triggered my first post, and my resulting financial re-boot.

Now that means in 2020, I'm going to be in a similar boat with the taxes owed. However, your comment makes me wonder about the next time I do a sale from this fund. I'm not stuck with the average cost basis for sales that I do later this year, am I? Because I DID own most of those shares when I chose to blindly just sell them -- I don't even remember choosing what kind of basis...FIFO was confusing, and remains so.

Do you mean that I am forever stuck with the average cost basis for the rest of the remaining shares that I held from the time of that sale (which is the bulk of them) because I was ignorant of having any choice of which shares to sell....this year? Really? I can never sell any selected lots at all?

:oops:

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue May 14, 2019 6:01 pm

[/quote]

Your intuition about having the wrong asset allocation for your age is absolutely correct. As others have pointed out, you should start de-risking your portfolio by moving money in your tax-deferred accounts (401k, IRA) from their current allocations in stocks into bond funds. I would suggest posting your bond fund choices in all your tax-advantaged plans. Unfortunately, a lot of 401k plans only offer high-expense bond funds. So it may make sense to rollover your 2 401ks from former employers into a rollover IRA at Vanguard. Then invest the proceeds into total bond market index fund or an intermediate term bond index fund with very low expense ratios.

[/quote]

Thanks again for the feedback. I'm going to investigate all the bond choices in the tax advantaged funds and ask for the wisdom of the group because I am STILL uncertain about the fee structures and even whether some of them are index funds or not. It's a little opaque for me.

cherijoh
Posts: 5543
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: How did it come to this? [Help with investments]

Post by cherijoh » Tue May 14, 2019 9:07 pm

Cody6136 wrote:
Tue May 14, 2019 5:00 pm
cherijoh wrote:
Tue May 14, 2019 4:36 pm
If you have ever sold any shares using average cost basis, you are stuck with that basis for the rest of the remaining shares you held at the time of that sale.
Thank you so much for this feedback. I do want to follow up on this.

I HAVE sold shares of one of the more actively managed funds (growth stock) to pay the taxes that I owed on the winnings from those growth stocks, because with so much growth stock in my taxable accounts, and my relatively modest salary, I didn't really have much choice. And that's what triggered my first post, and my resulting financial re-boot.

Now that means in 2020, I'm going to be in a similar boat with the taxes owed. However, your comment makes me wonder about the next time I do a sale from this fund. I'm not stuck with the average cost basis for sales that I do later this year, am I? Because I DID own most of those shares when I chose to blindly just sell them -- I don't even remember choosing what kind of basis...FIFO was confusing, and remains so.

Do you mean that I am forever stuck with the average cost basis for the rest of the remaining shares that I held from the time of that sale (which is the bulk of them) because I was ignorant of having any choice of which shares to sell....this year? Really? I can never sell any selected lots at all?

:oops:
Let's say you owned 1000 shares of fund XYZ purchased over time in 15 different lots. If you sold 50 shares and the mutual fund used first-in first-out method, the cost basis would be based on the purchase price of the first lot you bought if it contained 50 shares or more. If the first lot was smaller than 50 shares, then the cost basis would be the cost of the first lot, plus enough shares in the second lot to make up the 50 shares you wanted to sell. With this method, specific shares with a specific cost basis are being sold. The next time you sell some shares of that fund, a different cost basis would be calculated based on the remaining unsold shares. You could ask the mutual company to switch to the specific ID method if you wanted to if the previous sales in that fund were all FIFO.

If on the other hand, your 50 shares were sold on an average cost basis, then the entire 1000 shares are assigned the same cost basis which would be retained for the sale of the remainder of shares you owned at the time of the sale (i.e., 950). You have in effect thrown all the shares into the same pot and stirred it up, so there is no way to get back to separate lots with separate purchase prices.

The mutual fund company should be able to tell you which method was used for the previous sale(s).

Actually, since most funds do the largest capital gains distributions in December, you still have time to turn off the reinvestment of dividends and capital gains for the rest of the year. This should eliminate the need to sell more shares to pay the taxes next spring - you can use the un-reinvested dividends and cap gains to cover your tax bill.

cherijoh
Posts: 5543
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: How did it come to this? [Help with investments]

Post by cherijoh » Tue May 14, 2019 9:07 pm

Cody6136 wrote:
Tue May 14, 2019 5:00 pm
cherijoh wrote:
Tue May 14, 2019 4:36 pm
If you have ever sold any shares using average cost basis, you are stuck with that basis for the rest of the remaining shares you held at the time of that sale.
Thank you so much for this feedback. I do want to follow up on this.

I HAVE sold shares of one of the more actively managed funds (growth stock) to pay the taxes that I owed on the winnings from those growth stocks, because with so much growth stock in my taxable accounts, and my relatively modest salary, I didn't really have much choice. And that's what triggered my first post, and my resulting financial re-boot.

Now that means in 2020, I'm going to be in a similar boat with the taxes owed. However, your comment makes me wonder about the next time I do a sale from this fund. I'm not stuck with the average cost basis for sales that I do later this year, am I? Because I DID own most of those shares when I chose to blindly just sell them -- I don't even remember choosing what kind of basis...FIFO was confusing, and remains so.

Do you mean that I am forever stuck with the average cost basis for the rest of the remaining shares that I held from the time of that sale (which is the bulk of them) because I was ignorant of having any choice of which shares to sell....this year? Really? I can never sell any selected lots at all?

:oops:
Let's say you owned 1000 shares of fund XYZ purchased over time in 15 different lots. If you sold 50 shares and the mutual fund used first-in first-out method, the cost basis would be based on the purchase price of the first lot you bought if it contained 50 shares or more. If the first lot was smaller than 50 shares, then the cost basis would be the cost of the first lot, plus enough shares in the second lot to make up the 50 shares you wanted to sell. With this method, specific shares with a specific cost basis are being sold. The next time you sell some shares of that fund, a different cost basis would be calculated based on the remaining unsold shares. You could ask the mutual company to switch to the specific ID method if you wanted to if the previous sales in that fund were all FIFO.

If on the other hand, your 50 shares were sold on an average cost basis, then the entire 1000 shares are assigned the same cost/share basis which would be retained for the sale of the remainder of shares you owned at the time of the sale (i.e., 950). You have in effect thrown all the shares into the same pot and stirred it up, so there is no way to get back to separate lots with separate purchase prices.

The mutual fund company should be able to tell you which method was used for the previous sale(s).

Actually, since most funds do the largest capital gains distributions in December, you still have time to turn off the reinvestment of dividends and capital gains for the rest of the year. This should eliminate the need to sell more shares to pay the taxes next spring - you can use the un-reinvested dividends and cap gains to cover your tax bill.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Tue May 14, 2019 9:33 pm

cherijoh wrote:
Tue May 14, 2019 9:07 pm
Cody6136 wrote:
Tue May 14, 2019 5:00 pm
cherijoh wrote:
Tue May 14, 2019 4:36 pm
If you have ever sold any shares using average cost basis, you are stuck with that basis for the rest of the remaining shares you held at the time of that sale.
Thank you so much for this feedback. I do want to follow up on this.

I HAVE sold shares of one of the more actively managed funds (growth stock) to pay the taxes that I owed on the winnings from those growth stocks, because with so much growth stock in my taxable accounts, and my relatively modest salary, I didn't really have much choice. And that's what triggered my first post, and my resulting financial re-boot.

Now that means in 2020, I'm going to be in a similar boat with the taxes owed. However, your comment makes me wonder about the next time I do a sale from this fund. I'm not stuck with the average cost basis for sales that I do later this year, am I? Because I DID own most of those shares when I chose to blindly just sell them -- I don't even remember choosing what kind of basis...FIFO was confusing, and remains so.

Do you mean that I am forever stuck with the average cost basis for the rest of the remaining shares that I held from the time of that sale (which is the bulk of them) because I was ignorant of having any choice of which shares to sell....this year? Really? I can never sell any selected lots at all?

:oops:
Let's say you owned 1000 shares of fund XYZ purchased over time in 15 different lots. If you sold 50 shares and the mutual fund used first-in first-out method, the cost basis would be based on the purchase price of the first lot you bought if it contained 50 shares or more. If the first lot was smaller than 50 shares, then the cost basis would be the cost of the first lot, plus enough shares in the second lot to make up the 50 shares you wanted to sell. With this method, specific shares with a specific cost basis are being sold. The next time you sell some shares of that fund, a different cost basis would be calculated based on the remaining unsold shares. You could ask the mutual company to switch to the specific ID method if you wanted to if the previous sales in that fund were all FIFO.

If on the other hand, your 50 shares were sold on an average cost basis, then the entire 1000 shares are assigned the same cost/share basis which would be retained for the sale of the remainder of shares you owned at the time of the sale (i.e., 950). You have in effect thrown all the shares into the same pot and stirred it up, so there is no way to get back to separate lots with separate purchase prices.

The mutual fund company should be able to tell you which method was used for the previous sale(s).

Actually, since most funds do the largest capital gains distributions in December, you still have time to turn off the reinvestment of dividends and capital gains for the rest of the year. This should eliminate the need to sell more shares to pay the taxes next spring - you can use the un-reinvested dividends and cap gains to cover your tax bill.
Much appreciated. Enormously illuminating

EthanAllen
Posts: 31
Joined: Sat Mar 02, 2019 9:50 am

Re: How did it come to this? [Help with investments]

Post by EthanAllen » Wed May 15, 2019 8:09 am

Are you sure you’re not screwing up your taxes somehow? Is your effective tax rate what you’d expect?

tampaite
Posts: 569
Joined: Wed Feb 18, 2015 9:29 pm

Re: How did it come to this? [Help with investments]

Post by tampaite » Wed May 15, 2019 8:55 am

Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
58 y.o. single. Work for a nonprofit organization (80k per year), and have raised more than 20M for charity. (Irony!). But every year at tax time, I owe a huge amount to Fed )7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds
Paying taxes is good, that means you have a gain! how to minimize taxes? that's another topic.
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Savings:
Short term savings fund $15,000
50 oz Krugerrand gold coins (transportable wealth and a relic of an immigrant family's approach to money).
Total:@$65,000
Increase your short term savings to 25k and keep the gold.
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000
Total: approx. $500,000
Sell all - even though it might generate capital gains and you have to pay taxes and buy a 2020 target retirement fund since you want to retire in another 7 years
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$110,000 --very heavy on stocks
*Current 403 (b) at TIAA –$65,301
*Old 401k: American Funds 401k $36,000 --yes, you saw a pattern, heavy on stocks.
T Rowe Price IRA: $24,000
HSA $12,000 ..
Total: $238,000
defined benefit program aka Pension?
Sell stocks in 401k and buy 2020 target fund
Rollover *Old 401k into Merrill Edge
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
2k/mo Social Security – not counting on this!
You need to count on it and act as though healthy retirement depends on social security survival
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am

Inheritance issues --93 year old frugal mother has about 4M in assets -- three siblings.
I would like to continue working until age 65.
Spend more time and take care of Mom.

Once you rebalance:

Savings:
Short term savings fund $25,000 and 50 oz Krugerrand gold coins

Taxable Investments:
500k in 2020 target retirement fund

Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$146,000 -- 2020 target retirement fund
*Current 403 (b) at TIAA –$65,301
T Rowe Price IRA: $24,000
HSA $12,000 ..

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Wed May 15, 2019 3:22 pm

EthanAllen wrote:
Wed May 15, 2019 8:09 am
Are you sure you’re not screwing up your taxes somehow? Is your effective tax rate what you’d expect?

No and I think that I have to fire my tax accountant. She has said, repeatedly, "You can't do more in your 401k." She meant that you cannot get your employer to match any more in your 401k.

Big difference.

Giant losses.

Huge regret.

Now you see why I am here, learning like my life depends on it?

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Wed May 15, 2019 3:23 pm

tampaite wrote:
Wed May 15, 2019 8:55 am
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
58 y.o. single. Work for a nonprofit organization (80k per year), and have raised more than 20M for charity. (Irony!). But every year at tax time, I owe a huge amount to Fed )7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds
Paying taxes is good, that means you have a gain! how to minimize taxes? that's another topic.
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Savings:
Short term savings fund $15,000
50 oz Krugerrand gold coins (transportable wealth and a relic of an immigrant family's approach to money).
Total:@$65,000
Increase your short term savings to 25k and keep the gold.
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000
Total: approx. $500,000
Sell all - even though it might generate capital gains and you have to pay taxes and buy a 2020 target retirement fund since you want to retire in another 7 years
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$110,000 --very heavy on stocks
*Current 403 (b) at TIAA –$65,301
*Old 401k: American Funds 401k $36,000 --yes, you saw a pattern, heavy on stocks.
T Rowe Price IRA: $24,000
HSA $12,000 ..
Total: $238,000
defined benefit program aka Pension?
Sell stocks in 401k and buy 2020 target fund
Rollover *Old 401k into Merrill Edge
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
2k/mo Social Security – not counting on this!
You need to count on it and act as though healthy retirement depends on social security survival
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am

Inheritance issues --93 year old frugal mother has about 4M in assets -- three siblings.
I would like to continue working until age 65.
Spend more time and take care of Mom.

Once you rebalance:

Savings:
Short term savings fund $25,000 and 50 oz Krugerrand gold coins

Taxable Investments:
500k in 2020 target retirement fund

Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$146,000 -- 2020 target retirement fund
*Current 403 (b) at TIAA –$65,301
T Rowe Price IRA: $24,000
HSA $12,000 ..
Good good stuff here. Thanks so much. I have a lot to learn and have already screwed up. I also rolled the Merrill money into TIAA because I freaked out.

I don't know what I can do about that, but there are a lot of options still on the table and I do know how to LBYM.

Lee_WSP
Posts: 120
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: How did it come to this? [Help with investments]

Post by Lee_WSP » Wed May 15, 2019 4:01 pm

Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
How exactly can I rebalance my stock mutual funds without triggering further tax implications?
Unfortunately you cannot.
Mutual fund companies tell me I need to rebalance, but I don't know how to actually do this, and what the tax fallout will be. Is re-balancing a fancy word for selling and buying something else?
Pretty much. Which is why you'd have a taxable event if you re-balanced. You'd need to sell some assets to trade for other assets.

That said, it isn't the end of the world. You'd have to pay those cap gains taxes eventually if you ever want to tap into that cash. But, you may want to sit down with a tax professional to calculate the potential tax implications of that move so you can make a more informed decision.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Wed May 15, 2019 4:50 pm

tampaite wrote:
Wed May 15, 2019 8:55 am
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
58 y.o. single. Work for a nonprofit organization (80k per year), and have raised more than 20M for charity. (Irony!). But every year at tax time, I owe a huge amount to Fed )7k) and state (2k) and chew through my emergency fund paying taxes because my portfolio of taxable investments are primarily held in mutual funds
Paying taxes is good, that means you have a gain! how to minimize taxes? that's another topic.
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Savings:
Short term savings fund $15,000
50 oz Krugerrand gold coins (transportable wealth and a relic of an immigrant family's approach to money).
Total:@$65,000
Increase your short term savings to 25k and keep the gold.
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Taxable Investments:
T Rowe Price Mutual Funds: $460,000 as of 4/1/2019 -- 88 percent stocks
Exxon Stocks: $15,000
Dreyfus Liquid Assets $55,000
Annuities $12,000
Kemper Money Market $15,000
ATTI stock $2,000
Assorted others, stock $10,000
Total: approx. $500,000
Sell all - even though it might generate capital gains and you have to pay taxes and buy a 2020 target retirement fund since you want to retire in another 7 years
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$110,000 --very heavy on stocks
*Current 403 (b) at TIAA –$65,301
*Old 401k: American Funds 401k $36,000 --yes, you saw a pattern, heavy on stocks.
T Rowe Price IRA: $24,000
HSA $12,000 ..
Total: $238,000
defined benefit program aka Pension?
Sell stocks in 401k and buy 2020 target fund
Rollover *Old 401k into Merrill Edge
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am
2k/mo Social Security – not counting on this!
You need to count on it and act as though healthy retirement depends on social security survival
Cody6136 wrote:
Tue Apr 16, 2019 11:43 am

Inheritance issues --93 year old frugal mother has about 4M in assets -- three siblings.
I would like to continue working until age 65.
Spend more time and take care of Mom.

Once you rebalance:

Savings:
Short term savings fund $25,000 and 50 oz Krugerrand gold coins

Taxable Investments:
500k in 2020 target retirement fund

Retirement planning:
Defined benefit program from previous job –1,000 per month at 65
Merrill Edge 401 K from previous job –$146,000 -- 2020 target retirement fund
*Current 403 (b) at TIAA –$65,301
T Rowe Price IRA: $24,000
HSA $12,000 ..
What does a target retirement fund for 2020 give me that a bond index fund doesn't?

I had planned to move the tax sheltered assets into bond index funds. Isn't that going to be a lower fee approach?

Now that I rolled the Merrill Edge 401k to TIAA (not my best move, by the way), I am looking frantically for a decent fund there, and they do offer Target 2020 funds, but the fees look much higher.

What do you like about the target date funds?

tampaite
Posts: 569
Joined: Wed Feb 18, 2015 9:29 pm

Re: How did it come to this? [Help with investments]

Post by tampaite » Wed May 15, 2019 7:22 pm

Cody6136 wrote:
Wed May 15, 2019 4:50 pm

What does a target retirement fund for 2020 give me that a bond index fund doesn't?

What do you like about the target date funds?
the 2020 fund would have 50% in stocks and 50% in bonds.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Wed May 15, 2019 7:31 pm

tampaite wrote:
Wed May 15, 2019 7:22 pm
Cody6136 wrote:
Wed May 15, 2019 4:50 pm

What does a target retirement fund for 2020 give me that a bond index fund doesn't?

What do you like about the target date funds?
the 2020 fund would have 50% in stocks and 50% in bonds.
Thanks...the truth is...I cannot imagine what the implications are of moving 500k from assorted taxable accounts to 2020 retirement fund, if tax consequences of a 20k in earnings this year threw me for a loop. Boggles the mind.
That is too sudden and too unpredictable to me. Plus... isn't that a lot in one fund?
Gulp!

tampaite
Posts: 569
Joined: Wed Feb 18, 2015 9:29 pm

Re: How did it come to this? [Help with investments]

Post by tampaite » Wed May 15, 2019 8:00 pm

Cody6136 wrote:
Wed May 15, 2019 7:31 pm
tampaite wrote:
Wed May 15, 2019 7:22 pm
Cody6136 wrote:
Wed May 15, 2019 4:50 pm

What does a target retirement fund for 2020 give me that a bond index fund doesn't?

What do you like about the target date funds?
the 2020 fund would have 50% in stocks and 50% in bonds.
Thanks...the truth is...I cannot imagine what the implications are of moving 500k from assorted taxable accounts to 2020 retirement fund, if tax consequences of a 20k in earnings this year threw me for a loop. Boggles the mind.
That is too sudden and too unpredictable to me. Plus... isn't that a lot in one fund?
Gulp!
Question is do you want simplicity or as you said assorted investments. It's a personal decision

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Wed May 15, 2019 9:53 pm

tampaite wrote:
Wed May 15, 2019 8:00 pm
Cody6136 wrote:
Wed May 15, 2019 7:31 pm
tampaite wrote:
Wed May 15, 2019 7:22 pm
Cody6136 wrote:
Wed May 15, 2019 4:50 pm

What does a target retirement fund for 2020 give me that a bond index fund doesn't?

What do you like about the target date funds?
the 2020 fund would have 50% in stocks and 50% in bonds.
Thanks...the truth is...I cannot imagine what the implications are of moving 500k from assorted taxable accounts to 2020 retirement fund, if tax consequences of a 20k in earnings this year threw me for a loop. Boggles the mind.
That is too sudden and too unpredictable to me. Plus... isn't that a lot in one fund?
Gulp!
Question is do you want simplicity or as you said assorted investments. It's a personal decision
I see...lots to think about. I've made at least one hasty good decision...not to hire the advisor. And at least one bad one, rolling the Merrill stock funds to TIAA, an organization that leaves me completely confused.

Now I need to give the next steps major consideration. You are the only respondent who has suggested making broad changes in the taxable accounts.

Hmmmm... :confused

BarbBrooklyn
Posts: 234
Joined: Fri Aug 24, 2018 9:33 am
Location: NYC

Re: How did it come to this? [Help with investments]

Post by BarbBrooklyn » Wed May 15, 2019 10:15 pm

Cody, are you maxing your current 403b? Do you have access to a 401k or 457 as well?

Make sure you stay aware of the " catch up" provisions of tax advantaged plans. The limits go up when you turn 50.
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."

tampaite
Posts: 569
Joined: Wed Feb 18, 2015 9:29 pm

Re: How did it come to this? [Help with investments]

Post by tampaite » Thu May 16, 2019 6:10 am

Cody6136 wrote:
Wed May 15, 2019 9:53 pm

I see...lots to think about. I've made at least one hasty good decision...not to hire the advisor. And at least one bad one, rolling the Merrill stock funds to TIAA, an organization that leaves me completely confused.

Now I need to give the next steps major consideration. You are the only respondent who has suggested making broad changes in the taxable accounts.

Hmmmm... :confused
It can be daunting. Let's see if others on the board can chime in and you can think about the best option.

I respond to every posting here as though am in "your" shoes and what I would do - although, that's said easy since am thinking about it based on my age, my experience and background and I can't really think about it being in "your" age nor under "your" circumstances.

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Thu May 16, 2019 7:23 am

BarbBrooklyn wrote:
Wed May 15, 2019 10:15 pm
Cody, are you maxing your current 403b? Do you have access to a 401k or 457 as well?

Make sure you stay aware of the " catch up" provisions of tax advantaged plans. The limits go up when you turn 50.
I'm stepping up my 403 b...I'm not crazy about the choice of funds... pretty high fees. But I need to do more. I added another 500.00 each month and every bit helps!

metacritic
Posts: 319
Joined: Fri Oct 05, 2007 12:58 pm

Re: How did it come to this?

Post by metacritic » Thu May 16, 2019 8:22 am

Want to reiterate the points of this post. You are in good financial shape. Not sure you need to sell what's in taxable (but you certainly could if you feel strongly that you want to bring down taxes on this portion of your savings).
FoolMeOnce wrote:
Tue Apr 16, 2019 12:29 pm
You seem to be in pretty sound financial shape with about $900k in non-housing assets, am expected $36k/yr in outside income (pension and SS), and seemingly low-ish expenses (considering your income and savings), and your plan to keep working until 65. So don't panic!

Regarding owing taxes at tax-time, this is because you are not withholding enough from your paycheck. This is likely due to the paycheck calculation not knowing about your income in your taxable accounts (dividends, interest, capital gains distributions). You can adjust your withholding by getting a W-4 from your HR department and asking to withhold more from each paycheck. Or you can pay quarterly estimated taxes to the IRS and your state.

For rebalancing, selling in taxable has tax consequences. You'll owe portion sold that is a gain on the initial investment amount, but those can be offset by losses. But you have room in your tax-preferred (401k, 403b, etc) accounts to rebalance without any tax implications. If you want something more conservative, sell your stocks/equities and buy bond funds or stable value funds in those accounts first.

Your do not need a 2% financial advisor. That is a ridiculous price, made more absurd by trying to charge based on the value of your home and physical gold. That's just shocking. Then the advisor would probably put you in funds with high expenses on top of that.

If you don't want to manage your assets yourself, Vanguard will manage what you can transfer there for a reasonable 0.3% and will use low-cost funds.

Again, you are in sound shape. No need to panic.

BarbBrooklyn
Posts: 234
Joined: Fri Aug 24, 2018 9:33 am
Location: NYC

Re: How did it come to this? [Help with investments]

Post by BarbBrooklyn » Thu May 16, 2019 8:26 am

Cody6136 wrote:
Thu May 16, 2019 7:23 am
BarbBrooklyn wrote:
Wed May 15, 2019 10:15 pm
Cody, are you maxing your current 403b? Do you have access to a 401k or 457 as well?

Make sure you stay aware of the " catch up" provisions of tax advantaged plans. The limits go up when you turn 50.
I'm stepping up my 403 b...I'm not crazy about the choice of funds... pretty high fees. But I need to do more. I added another 500.00 each month and every bit helps!
Ah, I see! Have you posted what's available for the gurus here (not me!!) to weigh in on?

What's your MOM'S strategy? 4 M? That's an awesome accumulation. I'll have what SHE'S having, lol!
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."

Topic Author
Cody6136
Posts: 140
Joined: Tue Apr 16, 2019 10:54 am

Re: How did it come to this? [Help with investments]

Post by Cody6136 » Thu May 16, 2019 8:36 am

BarbBrooklyn wrote:
Thu May 16, 2019 8:26 am
Cody6136 wrote:
Thu May 16, 2019 7:23 am
BarbBrooklyn wrote:
Wed May 15, 2019 10:15 pm
Cody, are you maxing your current 403b? Do you have access to a 401k or 457 as well?

Make sure you stay aware of the " catch up" provisions of tax advantaged plans. The limits go up when you turn 50.
I'm stepping up my 403 b...I'm not crazy about the choice of funds... pretty high fees. But I need to do more. I added another 500.00 each month and every bit helps!
Ah, I see! Have you posted what's available for the gurus here (not me!!) to weigh in on?

What's your MOM'S strategy? 4 M? That's an awesome accumulation. I'll have what SHE'S having, lol!
I'm going to be posting them soon.
Mom probably has a diversified portfolio of mattresses! And yeah...lol!

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