Investment Advice - LTCG Opportunity

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RedSox1
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Joined: Thu Dec 20, 2007 10:59 am

Investment Advice - LTCG Opportunity

Post by RedSox1 » Mon Dec 02, 2019 6:05 pm

Frequent reader and first-time questioner.  Facing an investment decision and need advice. 

I am military and was deployed for half of last year resulting in a reduced AGI for tax purposes.  Because of my deployment, our current AGI will be ~$69,000 – slightly below the threshold for paying 15% LTCG taxes.

We have a taxable account earmarked for a future home purchase(in 6-8 years when I retire from the military). The account is 100% in VBIAX (Balanced Index Fund) and we have ~$36,000 in unrealized gains (~$32500 LTCG and ~$3500 in STCG).  Because of the deployment, and thus lower AGI, I am considering selling part or all of the VBIAX and re-investing into VTSAX (TotalStock) and VTBLX (Total Bond) funds allowing greater flexibility with tax-loss harvesting and rebalancing going forward.  By my math, our AGI should allow us to pay 0% tax on ~$9700 or so in LTCG (if sell the whole thing).   

My only issue with the balanced fund is the inflexibility to adjust/rebalance as approach home purchase.  I do have additional money in a CD that acts as a minimum necessary down payment so this fund(s) is intended to generate some growth (thus the 60/40 split).

My question is does it make sense to sell the Balanced fund(60/40) to purchase VTSAX and VTBLX given that my AGI will allow me to do so with a reduced tax bill on at least part of the LTCG? It is likely my AGI will put me well above the threshold for paying LTCG taxes over the next 6-7 years and I anticipate working for at least some period following retirement from the military so will remain above the threshold well past home purchase. 

I am having to use avg cost to determine cost basis so cannot select individual lots (long-story).

Appreciate any thoughts or advice in advance. 

RedSox1

retired@50
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Re: Investment Advice - LTCG Opportunity

Post by retired@50 » Mon Dec 02, 2019 6:16 pm

Does it have to be an all or nothing decision? Would selling a portion of your holding in VBIAX, that only generates $9,700 in gains be a desirable outcome?

Regards,

livesoft
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Re: Investment Advice - LTCG Opportunity

Post by livesoft » Mon Dec 02, 2019 6:21 pm

The math may be trickier than you thought, so be sure to run tax-prep software or an online tax estimator. Your AGI will be $69,000 + $36,000 = $104K. Take away $24,000 for the standard deduction, then you have taxable income of $80,000, so most of any LTCG will be untaxed, but probably not all of it.

If you check your numbers, you may decide to sell all or some. I would certainly do any tax-gain harvesting.
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HomeStretch
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Re: Investment Advice - LTCG Opportunity

Post by HomeStretch » Mon Dec 02, 2019 6:33 pm

If you have room, agree with doing tax gain harvesting.

Bonds (VBTLX) may not be tax efficient in your Taxable account. Consider buying 100% equity in the Taxable account, then rebalance in your tax deferred account to buy bonds (and sell equity).

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FiveK
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Re: Investment Advice - LTCG Opportunity

Post by FiveK » Tue Dec 03, 2019 2:57 am

If you have funds in a traditional account, converting to Roth at 12% might be even better than tax gain harvesting - if you expect to be in the 22% (or higher) brackets later on.

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Wiggums
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Re: Investment Advice - LTCG Opportunity

Post by Wiggums » Tue Dec 03, 2019 3:07 am

FiveK wrote:
Tue Dec 03, 2019 2:57 am
If you have funds in a traditional account, converting to Roth at 12% might be even better than tax gain harvesting - if you expect to be in the 22% (or higher) brackets later on.
I would explore this option first.

Topic Author
RedSox1
Posts: 4
Joined: Thu Dec 20, 2007 10:59 am

Re: Investment Advice - LTCG Opportunity

Post by RedSox1 » Tue Dec 03, 2019 7:39 am

Thank you all for the inputs.
FiveK wrote:
Tue Dec 03, 2019 2:57 am
If you have funds in a traditional account, converting to Roth at 12% might be even better than tax gain harvesting - if you expect to be in the 22% (or higher) brackets later on.
FiveK - My IRAs and TSP are both in ROTH and max'd out separately. The fund I am planning to sell is in taxable account where we have been saving towards house payment for awhile.
HomeStretch wrote:
Mon Dec 02, 2019 6:33 pm
Bonds (VBTLX) may not be tax efficient in your Taxable account. Consider buying 100% equity in the Taxable account, then rebalance in your tax deferred account to buy bonds (and sell equity).
Homestretch - didn't cover in the original post but have been treating taxable and tax-advantaged accounts separately and not as a single overall portfolio with House funds located solely in the taxable account. I will have to rethink that but to date have liked the simplicity. Tax-advantaged accounts currently have ~20% bonds in the AA
retired@50 wrote:
Mon Dec 02, 2019 6:16 pm
Does it have to be an all or nothing decision? Would selling a portion of your holding in VBIAX, that only generates $9,700 in gains be a desirable outcome?
.

Retired@50 - it's not an all-or-nothing decision and I am considering this. Would allow me to create greater flexibility for future without having to eat the STCG associated with selling the whole fund and putting off taxes on majority of the LTCG to the future.
livesoft wrote:
Mon Dec 02, 2019 6:21 pm
The math may be trickier than you thought, so be sure to run tax-prep software or an online tax estimator. Your AGI will be $69,000 + $36,000 = $104K. Take away $24,000 for the standard deduction, then you have taxable income of $80,000, so most of any LTCG will be untaxed, but probably not all of it.
Livesoft - I factored in the standard deduction when calculating my AGI so taxable income already accounts for it. Will definitely run tax-prep software first.

Thanks again to all. Any other thoughts on where to reinvest the proceeds from the sale are welcome. Thought keeping a portion (~30%-50%) in VTSAX would provide possible appreciation. That portion is not essential to downpayment so would leave it in the market if timing is not right when go to buy the house.

HomeStretch
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Re: Investment Advice - LTCG Opportunity

Post by HomeStretch » Tue Dec 03, 2019 7:51 am

RedSox1 wrote:
Tue Dec 03, 2019 7:39 am
HomeStretch wrote:
Mon Dec 02, 2019 6:33 pm
Bonds (VBTLX) may not be tax efficient in your Taxable account. Consider buying 100% equity in the Taxable account, then rebalance in your tax deferred account to buy bonds (and sell equity).
Homestretch - didn't cover in the original post but have been treating taxable and tax-advantaged accounts separately and not as a single overall portfolio with House funds located solely in the taxable account. I will have to rethink that but to date have liked the simplicity. Tax-advantaged accounts currently have ~20% bonds in the AA
Simplicity is good. But with a larger portfolio, tax efficient fund placement might save you money on taxes each year. It’s good to consider it early as it can be difficult when a portfolio gets larger to make it more tax efficient if one has a Taxable account with large capital gains.

Link to BH wiki page on Tax-Efficient Fund Placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Fishing50
Posts: 362
Joined: Tue Sep 27, 2016 1:18 am

Re: Investment Advice - LTCG Opportunity

Post by Fishing50 » Tue Dec 03, 2019 9:35 am

RedSox1 wrote:
Tue Dec 03, 2019 7:39 am


Thanks again to all. Any other thoughts on where to reinvest the proceeds from the sale are welcome. Thought keeping a portion (~30%-50%) in VTSAX would provide possible appreciation. That portion is not essential to downpayment so would leave it in the market if timing is not right when go to buy the house.
I like your thoughts for taxable savings plan. 6-7 years can be two maybe three PCS moves, so many things may change your current plans. Navy Federal Credit Union has a Homebuyers Choice Mortgage that requires no down payment and no PMI.

We may never sell an IWB (Russell 1000) taxable position with large capital gains that I purchased in 2003 with the savings for a new car. We’ve purchased cars and motorcycles along the way with other income. We no longer reinvest dividends, so we have a choice to spend them or reinvest with other income if desired. Our taxable account is our emergency fund with very little cash at the end of the month, dividends provide enough income for over indulgences. Fishing at 50 after military retirement has been delayed at least a year (maybe 2) due to service commitments of an unexpected promotion. We’re comfortable with only equities in taxable, and the foreign tax benefit of total international index funds is nice benefit.

Develop a asset allocation across all accounts, and I recommend the tax efficient approach of only equities in the taxable account. If market timing isn’t right when you retire, there’s no harm continuing to rent with your military pension-heck you might even continue to serve for an extra tour.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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