Selling a fund in taxable - SpecID and best way to exit

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NYCaviator
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Selling a fund in taxable - SpecID and best way to exit

Post by NYCaviator »

This seems like a very simple question, because I'm sure it is.

I hold low-ish 5 figure position in a moderate growth fund (stock/bond mix) in a taxable account that I am trying to get out of. I bought it early on when I didn't know much about the 3 fund portfolio, but it sat there because I didn't want to sell and pay cap gains on it, but I haven't put any more money into it. It just doesn't fit into the AA very well, and I'd rather have it in VTI. We keep the minimal bonds we do have in our 401ks.

I have SpecID, and looking at the positions, all of the "purchases" are long term gains. There are no losses. What is the best way to get out of this?

1. We still haven't funded one of our Backdoor Roth IRAs for the year, so can we sell $5,500 and use that for the backdoor Roth?
2. Should I sell all at once, and not use the money for the BD Roth?
3. Should I sell over time?
4. Should I just leave it?
5. Should I wait and see if/when the market tanks and then sell when I have losses?

Thanks in advance!
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grabiner
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Re: Selling a fund in taxable - SpecID and best way to exit

Post by grabiner »

If you want to get rid of the fund, getting rid of all of it is likely the best strategy. If you wait and the market rises, your tax cost will increase. If you don't want and the market falls, you can take a capital loss on whatever you bought as a replacement, so you haven't missed out on the tax benefit of the declining market.

If you haven't funded your IRAs yet, that is almost always a worthwhile use of money in your taxable account. Even if you would have to pay capital-gains tax on a fund you want to keep, getting the same fund into a Roth IRA avoids future taxes, for a net benefit.

Since your position is low 5 figures, selling it probably won't push you into a higher tax bracket. If it would, splitting the sale over two years might make sense, to pay 18.8% federal tax next year rather than 23.8% tax this year on which might be a slightly smaller amount.

And if you are charitably inclined, use this fund to make your charitable contributions; that gets rid of the capital gains without any tax cost. (I have been doing this for years with a fund that I would prefer not to keep but that is not worth selling because of the large capital gain.)
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Re: Selling a fund in taxable - SpecID and best way to exit

Post by sycamore »

NYCaviator wrote: Wed Jul 21, 2021 5:53 pm What is the best way to get out of this?
Donate some/all of the shares to charity. You get to itemize the whole donation on schedule A. You offload the capital gains liability to the charity. You get to start over clean in your taxable account. Win-win-win. Well, I guess you give up the low 5-figure amount. So it's a win-win-win-umm situation. But maybe think about it? :)
NYCaviator wrote: Wed Jul 21, 2021 5:53 pm 1. We still haven't funded one of our Backdoor Roth IRAs for the year, so can we sell $5,500 and use that for the backdoor Roth?
2. Should I sell all at once, and not use the money for the BD Roth?
3. Should I sell over time?
4. Should I just leave it?
5. Should I wait and see if/when the market tanks and then sell when I have losses?

Thanks in advance!
1. Yes, that's one way to get money for the backdoor Roth (really a non-deductible Trad IRA contribution followed by a Trad-to-Roth conversion). Or you could use $5,500 from other sources you might have like a savings account, job wages over the next few months, etc.

2. and 3. are related. This is like the Lump Sum versus DCA question but here it's a question of when you should sell. One reason to sell over multiple years is to spread the tax cost out over multiple years. Another reason is to keep your income/cap gains level from going up so much that you jump into the next tax bracket. I would calculate how much the tax cost is to switch now; if it's a reasonable cost, sell it all now and buy the funds you want. See https://www.bogleheads.org/wiki/Paying_ ... itch_funds for a discussion.

Regarding whether to use or not use the money for BD Roth depends on what other assets you have and your general spending needs. There's nothing special about the money you'd get from selling the fund. "Money is fungible."

4. Leave it if (1) you feel the tax cost would just be "too much". This is a personal decision.
Or (2) you think a balanced fund is a reasonable fit for your portfolio. Based on what you said above ("It just doesn't fit into the AA very well"), I think you answered your own question :)

5. See the answer to 2 and 3. above.
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NYCaviator
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Re: Selling a fund in taxable - SpecID and best way to exit

Post by NYCaviator »

Thanks for all the suggestions! Since all of the gains are long term, should I sell the lots that have the lowest gain if that is the route I go?
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grabiner
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Re: Selling a fund in taxable - SpecID and best way to exit

Post by grabiner »

NYCaviator wrote: Wed Jul 21, 2021 8:25 pm Thanks for all the suggestions! Since all of the gains are long term, should I sell the lots that have the lowest gain if that is the route I go?
Yes. If you are making a partial sale (either to sell the rest next year, or never to sell them), selling the lots with the lowest gain per share lets you get rid of the most shares for the same tax cost.
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