When to dump/replace a fund - considering taxes

[JimmyJammy]

I own a mutual fund that I'd rather not own at this point, given that I've become more convinced by the Bogleheads emphasis on low cost index funds .

If I wanted to replace it with, say, VTI (VTSAX) the question is when to do it.

Perhaps this is a market timing question and the simple response is "don't time the market."

But taxes are a consideration here.

There are metrics and tools that help determine when a particular fund or stock is relatively overpriced.

GIVEN that I would immediately replace the sold fund with a more desirable equivalent, if I sell the fund near the top of the range then I will incur more taxes. But if I wait - here's the timing the market part - for a correction, then my cost basis won't be as high and I'll get taxed less.

How would you approach this kind of dilemma?

[ruralavalon]

I own a mutual fund that I'd rather not own at this point, given that I've become more convinced by the Bogleheads emphasis on low cost index funds .

If I wanted to replace it with, say, VTI (VTSAX) the question is when to do it.

Perhaps this is a market timing question and the simple response is "don't time the market."

But taxes are a consideration here.

There are metrics and tools that help determine when a particular fund or stock is relatively overpriced.

GIVEN that I would immediately replace the sold fund with a more desirable equivalent, if I sell the fund near the top of the range then I will incur more taxes. But if I wait - here's the timing the market part - for a correction, then my cost basis won't be as high and I'll get taxed less.

How would you approach this kind of dilemma?

First turn off any automatic reinvestment of dividends and gains that you may have set up. Don't buy any more shares of a fund which you want to be rid of.

I would not wait for a market collapse, hoping for a lower amount of capital gains in the sale of the old fund. (You have not identified the old fund.) If you sell fund X at a high, you may also be buying "VTI/VTSAX" at a high. If you sell fund X at a low, you may also be buying "VTI/VTSAX" at a low. So it may not matter. You don't know whether fund X or "VTI/VTSAX" will perform better during your wait for a market collapse.

Here are some metrics to consider.

(1) Consider your tax bracket, and look at what kind and amounts of capital gains you have (long-term versus short-term). You might defer action until short-term capital gains have become long-term capital gains.

(2) Consider whether you limit income tax liability by selling in two different tax years.

(3) Consider the differences in expense ratios, i.e. how much do you gain annually with the switch?

[JimmyJammy]

Ok, thanks for those tips.

The fund, by the way is ABALX. Not at all an equivalent fund in composition (it has something like 32% bond) but it is often used in an equivalent manner - as a core portfolio holding. So, I'd probably replace it with a mix of VTI, BND and VXUS. ABALX is .59 Expense ratio. Not terrible but not like Vanguard prices.

[retiredjg]

I would get rid of as much as I could without 1) going into NIIT territory 2) going into IRMAA territory if you are 63 or older and 3) without paying short term capital gains tax.

If you avoid those things, it is just a matter of paying your 15% now or later.

If you are in the 12% tax bracket there might be other things to consider.

[retiredjg]

The fund, by the way is ABALX. Not at all an equivalent fund in composition (it has something like 32% bond) but it is often used in an equivalent manner - as a core portfolio holding. So, I'd probably replace it with a mix of VTI, BND and VXUS. ABALX is .59 Expense ratio. Not terrible but not like Vanguard prices.

In addition to the higher ER, this fund is not tax-efficient. Getting rid of it will save you unnecessary taxes each year. Not sure I'd put BND in taxable though.

[JimmyJammy]

I would get rid of as much as I could without 1) going into NIIT territory 2) going into IRMAA territory if you are 63 or older and 3) without paying short term capital gains tax.

If you avoid those things, it is just a matter of paying your 15% now or later.

If you are in the 12% tax bracket there might be other things to consider.

Oh wow - I didn’t even know about NIIT. Luckily it doesn’t apply in this case.

[ruralavalon]

Ok, thanks for those tips.

The fund, by the way is ABALX. Not at all an equivalent fund in composition (it has something like 32% bond) but it is often used in an equivalent manner - as a core portfolio holding. So, I'd probably replace it with a mix of VTI, BND and VXUS. ABALX is .59 Expense ratio. Not terrible but not like Vanguard prices.

What is your tax bracket, both federal and state? What is your tax filing status?

A bond fund, such as Vanguard Total Bond Market ETF (BND), is not very tax-efficient and ordinarily should not be held in a taxable account.

[JimmyJammy]

Joint/Married. 24% tax bracket.

Alright so maybe I put fixed income in long term and intermediate muni funds?

[backpacker61]

Joint/Married. 24% tax bracket.

Alright so maybe I put fixed income in long term and intermediate muni funds?

That's what I use. And some limited term tax exempt (in taxable).

Your ABALX fund isn't terrible by any means; it's a 5 star rated balanced fund (by Morningstar). It's fine to take your time winding it down, IMHO.

[retiredjg]

Joint/Married. 24% tax bracket.

Alright so maybe I put fixed income in long term and intermediate muni funds?

Maybe. In the 24% tax bracket, munis might be a pretty good deal right now. But that might change in a few years. It would be something to keep an eye on.

[cheese_breath]

But if I wait - here's the timing the market part - for a correction, then my cost basis won't be as high and I'll get taxed less.

A correction changes your balance, not your basis.


Have you considered that even though your tax will be less, your after-tax proceeds might be less too?

[JimmyJammy]

But if I wait - here's the timing the market part - for a correction, then my cost basis won't be as high and I'll get taxed less.

A correction changes your balance, not your basis.


Have you considered that even though your tax will be less, your after-tax proceeds might be less too?

Sure. I think what will govern my decision is how much income I have in a particular year. This year, we have more income than usual due to side gigs, so I shouldn't sell everything this year. Next year may be different.