Avoid taxes: How do I know which account will have the most capital gains if I cash out?
- catnamedspot
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Avoid taxes: How do I know which account will have the most capital gains if I cash out?
I really screwed up and paid 10x more taxes than normal because I took money out of an account that had a lot of capital gains, but I wasn't aware of it. I normally take out $50,000 a year to live off of, and this year I decided to take it out of an account I'd had for 10 year untouched (non-retirement) that had grown really big. Can you explain in the simplest way possible (as if I was your kid) how to avoid my doing this in the future? I specifically want to know where on the Vanguard website I can get information for which account will incur the most capital gains if I take money out of it. I've been really good at investing, but this is the first time I really screwed up on taking money out. Thanks!
Last edited by catnamedspot on Fri Jul 23, 2021 5:42 pm, edited 1 time in total.
Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
Look at your portfolio and then the unrealized gains tab - that will give you an idea of cost basis vs market value.
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Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
There is a “cost basis” tab you can click on. You can see the cost basis for every stock/index fund purchase you have made.
- RickBoglehead
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Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
Click on Holdings, then Cost Basis, then in the drop down tab click Unrealized gains/losses.
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- catnamedspot
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Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
Follow up question: Then am I correct in understanding hypothetically:
-If I have a $100,000 in the account and $50,000 of is unrealized gains - then if I cash out $50,000, ALL of that will be taxable gains, correct?
-If I have a $100,000 in the account and $25,000 of is unrealized gains - then if I cash out $50,000, only $25,000 will be taxable gains, correct?
The part I get even more confused about - when you pull money out of a fund, does it start with the the earlier deposits first?
Thanks!!!!
-If I have a $100,000 in the account and $50,000 of is unrealized gains - then if I cash out $50,000, ALL of that will be taxable gains, correct?
-If I have a $100,000 in the account and $25,000 of is unrealized gains - then if I cash out $50,000, only $25,000 will be taxable gains, correct?
The part I get even more confused about - when you pull money out of a fund, does it start with the the earlier deposits first?
Thanks!!!!
Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
If you have specified "specific ID" under cost basis method (which is found under Holding options) you will be able to pick the shares with the least (or most gains) when you sell.catnamedspot wrote: ↑Fri Jul 23, 2021 7:06 pm Follow up question: Then am I correct in understanding hypothetically:
-If I have a $100,000 in the account and $50,000 of is unrealized gains - then if I cash out $50,000, ALL of that will be taxable gains, correct?
-If I have a $100,000 in the account and $25,000 of is unrealized gains - then if I cash out $50,000, only $25,000 will be taxable gains, correct?
The part I get even more confused about - when you pull money out of a fund, does it start with the the earlier deposits first?
Thanks!!!!
Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
The series of web pages starting with Vanguard cost basis information: Know your options | Vanguard may be worth reading. After you do so, what questions remain?
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Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
Not to derail too much but can someone please tell me how to find these options/same process/information in Fidelity? Thank you!
Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
fidelity cost basis - Google Search may be useful.DidOurBest wrote: ↑Fri Jul 23, 2021 7:27 pm Not to derail too much but can someone please tell me how to find these options/same process/information in Fidelity? Thank you!
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Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
Thank you!FiveK wrote: ↑Fri Jul 23, 2021 7:40 pmfidelity cost basis - Google Search may be useful.DidOurBest wrote: ↑Fri Jul 23, 2021 7:27 pm Not to derail too much but can someone please tell me how to find these options/same process/information in Fidelity? Thank you!
Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
There are 2 scenarios:catnamedspot wrote: ↑Fri Jul 23, 2021 7:06 pm Follow up question: Then am I correct in understanding hypothetically:
-If I have a $100,000 in the account and $50,000 of is unrealized gains - then if I cash out $50,000, ALL of that will be taxable gains, correct?
-If I have a $100,000 in the account and $25,000 of is unrealized gains - then if I cash out $50,000, only $25,000 will be taxable gains, correct?
The part I get even more confused about - when you pull money out of a fund, does it start with the the earlier deposits first?
Thanks!!!!
1) use average cost basis:
a. Total the cost of all the shares you own in a mutual fund.
b. Divide that result by the total number of shares owned to get the average basis per share.
c. Multiply that number by the number of shares sold. The shares are considered to be sold in the order you got them for purposes of the holding period.
— let’s assume you have 1,000 shares each currently worth $100. And the cost basis per share is $50. For every share you sell, you’ll have a capital gain of $50. So if you sell 500 shares at $100 each (yielding a total of $50,000), your total capital gain will be $50 times 500 shares. So $25,000 in total capital gains.
— let’s assume you have 1,000 shares each currently worth $100. And the cost basis per share is $75. For every share you sell, you’ll have a capital gain of $25. So if you sell 500 shares at $100 each (yielding a total of $50,000), your capital gain will be $25 times 500 shares. So $12,500 in total capital gains.
2) use specific ID
As 2cents2 noted, you can identify specific shares to sell and your capital gains will be determined based on which shares you sell. So if you sell shares with a higher cost basis, you’ll have smaller capital gains. And vice versa.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Avoid taxes: How do I know which account will have the most capital gains if I cash out?
If you withdrew funds this year what makes you think you will pay 10x more taxes than last year? Have you used tax software to estimate your taxes to determine this. Capital Gains are taxed at favorable rates as low as zero depending upon your other income.
Your follow up question regarding $100k account which includes $50k in gains with a withdrawal of $50k causing all of that $50k to be taxable is not how capital gains tax works. When you sell you will receive original basis (untaxed upon withdrawal) plus a certain amount of gains which will be taxed. One possible example of that $50k withdrawal would only have $25k of taxable income.
Cheers
Your follow up question regarding $100k account which includes $50k in gains with a withdrawal of $50k causing all of that $50k to be taxable is not how capital gains tax works. When you sell you will receive original basis (untaxed upon withdrawal) plus a certain amount of gains which will be taxed. One possible example of that $50k withdrawal would only have $25k of taxable income.
Cheers