need advice on avoiding capital gains tax

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Topic Author
BitDude
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Joined: Tue Jan 13, 2015 1:59 am

need advice on avoiding capital gains tax

Post by BitDude » Mon Jan 13, 2020 5:57 pm

I'm thinking about making some big structural changes to my portfolio, and some of it is actually already in motion. Currently, I have all S&P500 index fund in my 401k, and some bonds in my Vanguard IRA and brokerage account. My portfolio is somewhat messy between all my accounts, and I'd like to clean it up and cut down on some fees.

My 401k plan has horrible bond choices, so I just opened a Schwab PCRA (self-directed) account for more bond options. I'll be shifting all my bonds into my 401k with 1 bond index fund, then fill the rest with stock index fund. I also opened an account with Fidelity and will be shifting everything from vanguard over because Fidelity has zero ER! The end result, my IRA will hold only stock index fund (FZROX), and some of this will also go into the brokerage account. The rest of the brokerage account space will be filled with total international stock (FZILX).

My question is, in order to make this conversion, it will require me to sell everything I have in my vanguard brokerage account, which will result in huge capital gains tax. Is there a smarter or more efficient way to do this so I don't get hit with large taxes? None of my funds has losses, so I cannot do tax-loss harvesting. I'm not worried about making conversions in my 401k or IRA since these don't have capital gains tax, it's just the brokerage account that worries me. Here are the current funds in my brokerage account that I want to sell/consolidate:

PTTPX - PIMCO Total Return Fund Class I-2 (0.81%)
VCAIX - California intermediate muni bond (0.17%)
VTABX - total international bond admiral (0.11%)
VTIAX - total international stock admiral (0.11%)
VTSAX - total stock admiral (0.04%)

My salary is $91k, I max out my 401k and IRA every year. Now selling everything in my vanguard brokerage account will bump me up to the next tax bracket. Please let me know the best course of action.

delamer
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Re: need advice on avoiding capital gains tax

Post by delamer » Mon Jan 13, 2020 6:26 pm

There’s no magic bullet to avoid taxes on capital gains altogether. But if the gains are long term, then you’ll pay 15% rather than 22%. So one strategy would be to make sure everything you sell will generate long-term gains, not short-term gains. Delay sales that would generate short-term gains (to create the needed one year holding period).

You could use the TaxCaster App (or other tax software) to estimate the impact of capital gains taxes, by entering your data with and without the sales.

(I am assuming you are single.)

mortfree
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Re: need advice on avoiding capital gains tax

Post by mortfree » Mon Jan 13, 2020 6:46 pm

Why can’t your IRA hold international?

If you are feeling charitable you could look into a DAF to manage gains in taxable.

vipertom1970
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Re: need advice on avoiding capital gains tax

Post by vipertom1970 » Mon Jan 13, 2020 7:02 pm

I regretted putting a very big chunk in Fedility Zero(FZROX) in brokerage taxable instead of ROTH. Look at FSKAX for brokerage account, the ER is only $150 per 1 million and it's a very established fund. You can't transfer Fidelity Zero funds to another brokerage company if you every move account again.
Last edited by vipertom1970 on Mon Jan 13, 2020 7:08 pm, edited 1 time in total.

Topic Author
BitDude
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Re: need advice on avoiding capital gains tax

Post by BitDude » Mon Jan 13, 2020 7:04 pm

delamer wrote:
Mon Jan 13, 2020 6:26 pm
There’s no magic bullet to avoid taxes on capital gains altogether. But if the gains are long term, then you’ll pay 15% rather than 22%. So one strategy would be to make sure everything you sell will generate long-term gains, not short-term gains. Delay sales that would generate short-term gains (to create the needed one year holding period).

You could use the TaxCaster App (or other tax software) to estimate the impact of capital gains taxes, by entering your data with and without the sales.
sigh ok I guess I'll just take this one time hit. Yes majority of it is long term gains.

So for long term sake, would it be worth it to take this tax hit to save on the expense ratios of my current funds listed in OP? Fidelity has zero ER funds which is a big reason I'm doing this.
(I am assuming you are single.)
Actually just got married a few months ago!

Topic Author
BitDude
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Joined: Tue Jan 13, 2015 1:59 am

Re: need advice on avoiding capital gains tax

Post by BitDude » Mon Jan 13, 2020 7:11 pm

mortfree wrote:
Mon Jan 13, 2020 6:46 pm
Why can’t your IRA hold international?

If you are feeling charitable you could look into a DAF to manage gains in taxable.
IRA can hold international, but I would think it's slightly more efficient to hold international stocks in taxable brokerage and domestic stock in IRA? I'm also banking on US stocks outperforming international stocks, so with the limited amount of space in my IRA account, I'd want that space to expand faster by having the highest performing mutual fund in there.

Unless there's another reason I'm missing on why int stocks should be in IRA?

Topic Author
BitDude
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Re: need advice on avoiding capital gains tax

Post by BitDude » Mon Jan 13, 2020 7:34 pm

vipertom1970 wrote:
Mon Jan 13, 2020 7:02 pm
I regretted putting a very big chunk in Fedility Zero(FZROX) in brokerage taxable instead of ROTH. Look at FSKAX for brokerage account, the ER is only $150 per 1 million and it's a very established fund. You can't transfer Fidelity Zero funds to another brokerage company if you every move account again.
Ah so any Fidelity Zero funds are only specific to Fidelity and can't be transferred? I didn't know that! I think after this move, I wouldn't see any other reason to switch to another company. But thank you for this bit of advice, I'll factor this in my decision.

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Dale_G
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Re: need advice on avoiding capital gains tax

Post by Dale_G » Mon Jan 13, 2020 7:53 pm

BitDude, think carefully about recognizing capital gains in order to slightly reducing expense. We haven't the slightest idea of what you mean by "huge capital gains tax", so I will just use a made up example.

You own $100,000 of Vanguard's Total Stock Market fund. The expense ratio is .04% or $40 per year. You have a capital gain of $10,000 (call it 10%) and at the 15% tax rate you will owe $1,500 in taxes.

So are you going to spend $1,500 now in order to save $40 a year by moving to a zero er fund. That doesn't sound like a very good "investment". It gets worse if your gains are greater than the 10% cap gain example. If a 20% gain you'll spend $3,000 to save $40 per year.

Edit: Actually, if your gain in TSM is 10% the return on your tax "investment" is about 2.7%, 1.4% if the gain is 20%, etc.
Edit II: Now of course the money sent to the IRS is no longer invested. In the 10% capital gain and $1,500 tax example, you forego maybe a 3%-5% return on the money no longer invested - $45-$75 a year.
Dale
Last edited by Dale_G on Tue Jan 14, 2020 6:56 pm, edited 1 time in total.
Volatility is my friend

delamer
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Re: need advice on avoiding capital gains tax

Post by delamer » Mon Jan 13, 2020 8:20 pm

BitDude wrote:
Mon Jan 13, 2020 7:04 pm
delamer wrote:
Mon Jan 13, 2020 6:26 pm
There’s no magic bullet to avoid taxes on capital gains altogether. But if the gains are long term, then you’ll pay 15% rather than 22%. So one strategy would be to make sure everything you sell will generate long-term gains, not short-term gains. Delay sales that would generate short-term gains (to create the needed one year holding period).

You could use the TaxCaster App (or other tax software) to estimate the impact of capital gains taxes, by entering your data with and without the sales.
sigh ok I guess I'll just take this one time hit. Yes majority of it is long term gains.

So for long term sake, would it be worth it to take this tax hit to save on the expense ratios of my current funds listed in OP? Fidelity has zero ER funds which is a big reason I'm doing this.
(I am assuming you are single.)
Actually just got married a few months ago!
If you’ll be married filing jointly, that changes when the various marginal rates click in. Congrats, BTW!

I am not as enamored of 0% ERs as some people are. While I agree that the PIMCO fund needs to go, the rest are in my tolerance band for ERs. In other words, I wouldn’t take a big tax hit to avoid a .11% ER.

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grabiner
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Re: need advice on avoiding capital gains tax

Post by grabiner » Mon Jan 13, 2020 8:39 pm

BitDude wrote:
Mon Jan 13, 2020 7:11 pm
mortfree wrote:
Mon Jan 13, 2020 6:46 pm
Why can’t your IRA hold international?

If you are feeling charitable you could look into a DAF to manage gains in taxable.
IRA can hold international, but I would think it's slightly more efficient to hold international stocks in taxable brokerage and domestic stock in IRA?
Not necessarily. Foreign stocks are eligible for the foreign tax credit, but they also have higher dividends and more non-qualified dividends, so it is close to break-even. Total Stock Market and Total International are thus two fine funds for the brokerage account.
I'm also banking on US stocks outperforming international stocks, so with the limited amount of space in my IRA account, I'd want that space to expand faster by having the highest performing mutual fund in there.
There is no reason to expect US or international stocks to outperform. (And if you do expect US stocks to significantly outperform international stocks, you shouldn't hold any international stocks. You expect stocks to outperform bonds, but the reason that you hold some bonds is that this gives a significant risk reduction; you don't get this from international stocks. Holding 30-40% international is optimal if you expect US and international stocks to have similar returns but international stocks to have slightly more risk.)
Wiki David Grabiner

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grabiner
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Re: need advice on avoiding capital gains tax

Post by grabiner » Mon Jan 13, 2020 8:41 pm

BitDude wrote:
Mon Jan 13, 2020 5:57 pm
Here are the current funds in my brokerage account that I want to sell/consolidate:

PTTPX - PIMCO Total Return Fund Class I-2 (0.81%)
VCAIX - California intermediate muni bond (0.17%)
VTABX - total international bond admiral (0.11%)
If you are in CA in a 22% tax bracket, and hold bonds in your taxable account (because of poor options in your 401(k)), it is reasonable to hold CA munis for part of your bond allocation (since you avoid 30.3% tax) and taxable bonds for the rest. I would get rid of the PIMCO fund, which is rather expensive for what it holds.

In any case, you shouldn't have too much tax cost in selling any of these funds.
Wiki David Grabiner

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Wiggums
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Re: need advice on avoiding capital gains tax

Post by Wiggums » Mon Jan 13, 2020 8:48 pm

vipertom1970 wrote:
Mon Jan 13, 2020 7:02 pm
You can't transfer Fidelity Zero funds to another brokerage company if you every move account again.
Thank you for pointing this out. That is certainly a cost and limitation of holding the zero funds.

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