Pay capital gains to move into 3 fund

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porter351
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Joined: Wed Nov 27, 2019 1:40 pm

Pay capital gains to move into 3 fund

Post by porter351 » Sun Dec 01, 2019 7:50 pm

Hello all, I have read this forum for the past year, along with some of the recommended books, and it has really helped me take control of my finances. This will be my first post, and I wanted to pick the brains of the community. Some background first.

I have a taxable account that was being managed by a broker (Merrill Lynch) that is used by other members of my family. In that account there are 5 mutual funds, and 100 shares of Coke a Cola stock (KO). Around May of this year I opened a Merrill Edge account to start funding my own 3 fund portfolio. I chose to stay with ML because of there platinum rewards perks that went along with my BoA accounts (I was already committed). I am an active service member and will be in a tax free area until winter of 2020, so almost all of my income except around $7000 next year will be tax free. I will easily fall into the 0% LTCG window next year. However, my home of residence is in MD, and it is my understanding that their tax policy on LTCG is the same as regular income, which for my bracket will be around 7.2% with state and local taxes combined. Now onto my question.

Would it be worth paying the state tax on some of my brokered unrealized gains in order to move that money into my 3 fund portfolio?

I have considered selling the KO stock at minimum, which has an unrealized gain of about $2500 ($182 tax hit), and maybe 3 or 4 of the mutual funds. The mutual funds are as follows: AEPGX, gains $1839 ($132 tax hit, .83 ER). ANEFX, gains $2915.43 ($210 tax hit, .77 ER). ANWPX, gains $2521.16 ($181 tax hit, .75 ER). AGTHX, gains $4035.25 ($291 tax hit, .59 ER).

Of course looking back I wouldn't have bought into these positions, but I am where I am now, and would like to make good choices moving forward. Any advice/assistance is appreciated.

retired@50
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Joined: Tue Oct 01, 2019 2:36 pm

Re: Pay capital gains to move into 3 fund

Post by retired@50 » Sun Dec 01, 2019 8:21 pm

porter351 wrote:
Sun Dec 01, 2019 7:50 pm
Hello all, I have read this forum for the past year, along with some of the recommended books, and it has really helped me take control of my finances. This will be my first post, and I wanted to pick the brains of the community. Some background first.

I have a taxable account that was being managed by a broker (Merrill Lynch) that is used by other members of my family. In that account there are 5 mutual funds, and 100 shares of Coke a Cola stock (KO). Around May of this year I opened a Merrill Edge account to start funding my own 3 fund portfolio. I chose to stay with ML because of there platinum rewards perks that went along with my BoA accounts (I was already committed). I am an active service member and will be in a tax free area until winter of 2020, so almost all of my income except around $7000 next year will be tax free. I will easily fall into the 0% LTCG window next year. However, my home of residence is in MD, and it is my understanding that their tax policy on LTCG is the same as regular income, which for my bracket will be around 7.2% with state and local taxes combined. Now onto my question.

Would it be worth paying the state tax on some of my brokered unrealized gains in order to move that money into my 3 fund portfolio?

I have considered selling the KO stock at minimum, which has an unrealized gain of about $2500 ($182 tax hit), and maybe 3 or 4 of the mutual funds. The mutual funds are as follows: AEPGX, gains $1839 ($132 tax hit, .83 ER). ANEFX, gains $2915.43 ($210 tax hit, .77 ER). ANWPX, gains $2521.16 ($181 tax hit, .75 ER). AGTHX, gains $4035.25 ($291 tax hit, .59 ER).

Of course looking back I wouldn't have bought into these positions, but I am where I am now, and would like to make good choices moving forward. Any advice/assistance is appreciated.
I'd take the opportunity to get out of the individual stock and high expense ratio funds now, while the getting is good. The longer you hold positions like this the larger the tax consequences are likely to be. Just saving on the expense ratios alone of the funds would probably make it a worthwhile proposition. This presumes you'll invest the money into a low expense ratio index mutual fund like VTSAX or its ETF equivalent VTI.

VTI expense ratio is .03%

Regards,

Topic Author
porter351
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Joined: Wed Nov 27, 2019 1:40 pm

Re: Pay capital gains to move into 3 fund

Post by porter351 » Sun Dec 01, 2019 9:05 pm

You are correct, the money would be moved to my 3 fund portfolio that consists of VTI, VXUS, and BND in the AA that I am comfortable with.

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Watty
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Re: Pay capital gains to move into 3 fund

Post by Watty » Sun Dec 01, 2019 9:10 pm

porter351 wrote:
Sun Dec 01, 2019 7:50 pm
I have considered selling the KO stock at minimum, which has an unrealized gain of about $2500 ($182 tax hit), and maybe 3 or 4 of the mutual funds. The mutual funds are as follows: AEPGX, gains $1839 ($132 tax hit, .83 ER). ANEFX, gains $2915.43 ($210 tax hit, .77 ER). ANWPX, gains $2521.16 ($181 tax hit, .75 ER). AGTHX, gains $4035.25 ($291 tax hit, .59 ER).
.......
which for my bracket will be around 7.2% with state and local taxes combined.
You can crunch the numbers but if you can lower your expense ratio by half a percent you will eventually break even with the 7.2% tax even though it might take 15 years.

That is sort of mute point though since you it sounds like you are unlikely to ever be able to avoid the taxes since even if you get residence in a state with more favorable taxes then you might not qualify for the 0% federal long term capital gains tax bracket.

It it really looks like you will pay the taxes sooner or later then I would just go on and sell the holdings and reinvest the money.

cas
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Re: Pay capital gains to move into 3 fund

Post by cas » Mon Dec 02, 2019 6:44 am

porter351 wrote:
Sun Dec 01, 2019 7:50 pm
I am an active service member and will be in a tax free area until winter of 2020, so almost all of my income except around $7000 next year will be tax free. I will easily fall into the 0% LTCG window next year. [ . . .]

Would it be worth paying the state tax on some of my brokered unrealized gains in order to move that money into my 3 fund portfolio?

I have considered selling the KO stock at minimum, which has an unrealized gain of about $2500 ($182 tax hit), and maybe 3 or 4 of the mutual funds. The mutual funds are as follows: AEPGX, gains $1839 ($132 tax hit, .83 ER). ANEFX, gains $2915.43 ($210 tax hit, .77 ER). ANWPX, gains $2521.16 ($181 tax hit, .75 ER). AGTHX, gains $4035.25 ($291 tax hit, .59 ER).
It looks like your funds are from American Funds.

I realize that your question is whether to sell the funds next year (2020), when you will be in the federal 0% tax bracket, but ... have you checked out American Funds' estimated year end distributions for 2019? Their estimates are pretty big for some funds.

I don't know American Fund tickers, so I didn't look up all your funds, but, for example ...

Growth Fund of America (your AGTHX): estimated 7%-10% of the value of the fund will be a 2019 capital gains distribution

To some degree, like it or not, your unrealized capital gains may be distributed to you in 2019 (as 2019 capital gains distributions). ***

Here's American Funds' estimated year end distributions document from September. An updated, more precise version should be available sometime in the next couple of weeks:

https://www.capitalgroup.com/individual ... tions.html


***I'm not sure how familiar you are with how capital gain distributions work, but they have the effect of siphoning off your unrealized capital gains and transforming them into taxable capital gains distributions. Depending on the total value of the shares you own in each fund, plus the proportion of unrealized capital gains to total value, it is even possible that large capital gain distributions could siphon off more unrealized capital gain than you actually have and drop you to an unrealized capital loss by the end of this year. If that was going to occur, you'd probably be better off selling the fund this year. There isn't any point in paying non-0% federal tax on phantom "realized capital gains" in 2019, only to sell the fund in 2020 and take the capital loss at a 0% federal tax rate.

If you want more information on how capital gains distributions work, you may be interested in this Morningstar article:

Christine Benz, "The Lowdown on Mutual Fund Capital Gains 2019 Edition" , https://www.morningstar.com/articles/95 ... 19-edition

HomeStretch
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Re: Pay capital gains to move into 3 fund

Post by HomeStretch » Mon Dec 02, 2019 8:18 am

Agree with selling the high ER mutual funds and single stock now in order to move to a low-cost diversified 3-fund portfolio.

Merrill Edge is a good brokerage especially when combined with the higher BofA CC rewards.

retiredjg
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Re: Pay capital gains to move into 3 fund

Post by retiredjg » Mon Dec 02, 2019 8:27 am

If you no longer want these funds, now is the best time to get rid of them. Later will not be better. by "now" I mean while you are low income on the federal level, not necessarily this week.

The funds you listed have higher expense ratios than necessary. AND they are actively managed funds which is causing you taxable income (dividends and capital gains distributions) that could be avoided. So you'd actually get a double savings in the long run by selling.


As for moving that money into the 3 funder, I would not put bonds in the taxable account. Buy total stock and total international in taxable and add some bonds in your TSP account.

Topic Author
porter351
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Joined: Wed Nov 27, 2019 1:40 pm

Re: Pay capital gains to move into 3 fund

Post by porter351 » Mon Dec 02, 2019 10:56 am

cas wrote:
Mon Dec 02, 2019 6:44 am

To some degree, like it or not, your unrealized capital gains may be distributed to you in 2019 (as 2019 capital gains distributions).

***I'm not sure how familiar you are with how capital gain distributions work, but they have the effect of siphoning off your unrealized capital gains and transforming them into taxable capital gains distributions. Depending on the total value of the shares you own in each fund, plus the proportion of unrealized capital gains to total value, it is even possible that large capital gain distributions could siphon off more unrealized capital gain than you actually have and drop you to an unrealized capital loss by the end of this year. If that was going to occur, you'd probably be better off selling the fund this year. There isn't any point in paying non-0% federal tax on phantom "realized capital gains" in 2019, only to sell the fund in 2020 and take the capital loss at a 0% federal tax rate.
Thanks for the info. I will consider all of this in my decision. I do have room in 2019 to fill some more of the 0% LTCG bracket, and was keeping that "buffer" for the mutual funds since I know later this month I will see an influx from those distributions.

Topic Author
porter351
Posts: 5
Joined: Wed Nov 27, 2019 1:40 pm

Re: Pay capital gains to move into 3 fund

Post by porter351 » Mon Dec 02, 2019 11:03 am

retiredjg wrote:
Mon Dec 02, 2019 8:27 am
As for moving that money into the 3 funder, I would not put bonds in the taxable account. Buy total stock and total international in taxable and add some bonds in your TSP account.
I have been researching this as well, and have been leaning toward this strategy. Earlier in the year when I was starting my 3 fund I was unaware of this strategy, and had kept looking at my taxable, and tax advantaged as separate. Recently I have been tracking everything together, and hopefully by the end of 2020 I will have everything well laid out, in the appropriate accounts. I wish I had learned most of this information sooner, but it's better late than never, and I don't dwell on the past. All I can do is make changes moving forward.

I appreciate the help.

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