Non-Retirement, High Fee, High Tax Mutual Funds

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Colorado21a
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Non-Retirement, High Fee, High Tax Mutual Funds

Post by Colorado21a »

Last year, everyone on here helped me decrease my position of 30-40 years in some Franklin Templeton funds I had since I was a child and were now causing me very high CG tax bills every year and had such huge gains that they were very prohibitive to sell. I was able to successfully cut my position in those by about 50% and got rid of most of the funds that typically incur the highest CG taxes each year.

I'm now left with the other ~50% and the gains are too massive to probably ever sell them until desperately needed late in life after most other things have been exhausted. What I'd like to do to just chip away at another 10-20% of the total is to sell some shares using an accounting method that would be most beneficial in the short-term (LIFO, HIFO) to squeeze a few more withdrawals out with minimal to no tax bills and invest that money in index/ETF funds with Fidelity/Vanguard.

Because I was laid off earlier this year and received a full-year severance payout and vesting of unvested stock, I will probably never be in a higher tax bracket than I am right now, but not sure how much I'll work next year so I may be smart to wait to do anything else until next year, unless there would be some surprising losts to harvest using the above methods that would nicely offset other gains in this high income earning year.

My big question for the experts on this board - does Franklin Templeton owe me the answer to the cost basis on these different methods before I make the sale, or do I need to calculate on my own, or how does one go about finding this info out before committing to a blind sale as it relates to the cost basis? Does the accounting method previously used limit my selection for future sales?

Thanks everyone!!!
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retired@50
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by retired@50 »

Colorado21a wrote: Mon Jun 10, 2024 6:13 pm
My big question for the experts on this board - does Franklin Templeton owe me the answer to the cost basis on these different methods before I make the sale, or do I need to calculate on my own, or how does one go about finding this info out before committing to a blind sale as it relates to the cost basis? Does the accounting method previously used limit my selection for future sales?

Thanks everyone!!!
The accounting method (i.e. cost basis method) previously used may impact your choices for future sales but this could be fund-specific.

So, if you're allowed to change cost basis methods, and you've not sold any shares of a particular fund, then you may still have some wiggle room.

Look for a screen at the Franklin Templeton website that allows you to set the cost basis method. Then look for the unrealized gains on a lot by lot basis to see if any lots show losses or small gains. Those would be the lots to sell.

If allowed, using Specific Identification (Spec ID) cost basis method is typically best. It allows you pinpoint control over which shares / lots to sell so you can control the amount of capital gain you recognize.

These records should be easily accessed for all shares and lots purchased since the 2011 - 2012 time frame. It was at this point that tracking the cost basis became the job of the custodian. Prior to that (non-covered shares) were supposed to be tracked by the individual owner. In many cases, all that's available from the custodian for non covered shares is average cost.

More details here: https://www.bogleheads.org/wiki/Cost_basis_methods

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Colorado21a
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Colorado21a »

I logged into my account and I found the full list of lots since 2012 as you suggested, but I don't see an option to select a different type of cost basis to choose AND all lots show the same identical cost basis per share for all the funds I own. Not sure what that means?
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retired@50
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by retired@50 »

Colorado21a wrote: Mon Jun 10, 2024 6:51 pm I logged into my account and I found the full list of lots since 2012 as you suggested, but I don't see an option to select a different type of cost basis to choose AND all lots show the same identical cost basis per share for all the funds I own. Not sure what that means?
It probably means that they are using average cost. This would lead to the appearance you describe.

I'd call them. - Ask if you can set the cost basis to another method.

See the wiki link in the previous post for the generally accepted names of the cost basis methods.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
RetiredAL
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by RetiredAL »

Colorado21a wrote: Mon Jun 10, 2024 6:13 pm Last year, everyone on here helped me decrease my position of 30-40 years in some Franklin Templeton funds I had since I was a child and were now causing me very high CG tax bills every year and had such huge gains that they were very prohibitive to sell. I was able to successfully cut my position in those by about 50% and got rid of most of the funds that typically incur the highest CG taxes each year.

I'm now left with the other ~50% and the gains are too massive to probably ever sell them until desperately needed late in life after most other things have been exhausted. What I'd like to do to just chip away at another 10-20% of the total is to sell some shares using an accounting method that would be most beneficial in the short-term (LIFO, HIFO) to squeeze a few more withdrawals out with minimal to no tax bills and invest that money in index/ETF funds with Fidelity/Vanguard.

Because I was laid off earlier this year and received a full-year severance payout and vesting of unvested stock, I will probably never be in a higher tax bracket than I am right now, but not sure how much I'll work next year so I may be smart to wait to do anything else until next year, unless there would be some surprising losts to harvest using the above methods that would nicely offset other gains in this high income earning year.

My big question for the experts on this board - does Franklin Templeton owe me the answer to the cost basis on these different methods before I make the sale, or do I need to calculate on my own, or how does one go about finding this info out before committing to a blind sale as it relates to the cost basis? Does the accounting method previously used limit my selection for future sales?

Thanks everyone!!!
IMO, having a multi-year plan is fine. If me, towards end of each year I would see where I was at income and tax wise and sell only a portion to stay within income/taxing brackets.

Key is to understand what your cost basis is, especially those lots before 2012. With holdings in my Dad's Schwab Accounts, they lumped together everything pre-2012 and then did separate lots afterwards with all the reinvested dividends. The pre-2012 was average-cost. Ultimately, the residual got stepped-up basis.
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Hacksawdave
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Hacksawdave »

Colorado21a wrote: Mon Jun 10, 2024 6:13 pm I'm now left with the other ~50% and the gains are too massive to probably ever sell them until desperately needed late in life after most other things have been exhausted. What I'd like to do to just chip away at another 10-20% of the total is to sell some shares using an accounting method that would be most beneficial in the short-term (LIFO, HIFO) to squeeze a few more withdrawals out with minimal to no tax bills and invest that money in index/ETF funds with Fidelity/Vanguard.

Because I was laid off earlier this year and received a full-year severance payout and vesting of unvested stock, I will probably never be in a higher tax bracket than I am right now, but not sure how much I'll work next year so I may be smart to wait to do anything else until next year, unless there would be some surprising losts to harvest using the above methods that would nicely offset other gains in this high income earning year.
I recall a couple of posts you made earlier this year. I was in the same boat with a year worth of severance to begin 2020. I got tax pounded on that and the extra ‘help’ from increased and extended UI during the pandemic and got hit with NIIT for the first time. This year you can only plan for the next couple of years or so.

• Does your deferred comp run out soon and /or have accelerated mandatory withdrawals?
• I saw “We” in some posts, so does this mean a spouse earning ordinary income through some form of labor?
• Knowing what income and distributions from taxable components might aid in more responses.
• Are you anticipating being anywhere near the 0% QD/LTCG rate?
• Do you already have any municipal fund holdings?

One idea to think about is to pick a couple of years or so to maintain low AGI by reducing ordinary income to redeem these shares at the 0% LTCG rate. This can be done by taking extra cash in the prior year and temporarily hiding out in tax-exempt municipal funds. If the spouse has a high paying job as well, then this may not be a feasible plan. This will be year 4 for me that I have not paid a cent to the fed for my QDs and LTCGs and I enjoy it.
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retiredjg
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by retiredjg »

Remember, if you have sold some shares of a fund using average cost, all the remaining shares that you owned in that account at that time are locked into average cost. Shares bought since then might be changed to specific ID cost though.
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Colorado21a
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Colorado21a »

RetiredJG, I likely did sell some at some point and never thought of the cost basis method back then so likely was average cost and likely the reason for this, but I will call them tomorrow and ask the question and see what they say.
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Colorado21a
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Colorado21a »

HacksawDave,

What's odd about my withholding for my taxes this year with the severance, is when we (yes, married and my wife works a lower paying job than mine but still makes pretty good money) take our tax paid last year from my income tax return and divide by our total income it looks like an effective rate of about 20.7%. When I look at my last pay stub this year, which includes earnings for time worked, plus my one year lump sum severance, plus the tax ups for all the vesting of my 3 years of unvested stock shares, my tax rate comes out to almost the same identical 20.7%. Based on that, I lowered the amount of money I'm setting aside to pay income taxes next April, but am I missing something with that very rough calculation?

I do not have any municipal fund holdings. What I did was I started up a Vanguard Treasury Money Market that will pay our checking account my bi-weekly paycheck, and get funded by a series of CD's that mature in 6, 12, 18, and 24 months, all between 4.7 and 5.4% over those durations, and I think the Vanguard fund is paying 5.29% right now. This "strategy" if you can call it that, will keep our checking account funded until 9/30/26, not counting interest from those CD's and money markets, so I'm likely covered until YE 2026 if I decide to take that much time off. I'm a tick or two under 50 years old so I will have to go back to work at some point, but just weighing the value of having some time off now when I'm alive and healthy since the future is never guaranteed.

Fortunately, or unfortunately, we are not near the 0% LTCG rate. One of our longer-term financial challenges will be our lack of Roth $$$ as we both have large 401k's but very minimal money in Roth. As I get through some of these more pressing challenges, I'm going to do more homework and ask for some more help on here around Roth strategies for us. I missed the boat in past years not taking advantage of a Roth 401K, but I did defer 30% of my salary for the past few years to avoid paying tax on that, but now I have a 14 year wait on getting that money paid out to me.
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by tibbitts »

Colorado21a wrote: Mon Jun 10, 2024 6:13 pm My big question for the experts on this board - does Franklin Templeton owe me the answer to the cost basis on these different methods before I make the sale, or do I need to calculate on my own, or how does one go about finding this info out before committing to a blind sale as it relates to the cost basis? Does the accounting method previously used limit my selection for future sales?
Not a capital gains expert although I've paid taxes on plenty of them, but my understanding is that if you have ever sold shares using average cost, at least for the shares you owned at that point you're locked into average cost. Years ago funds provided only average cost and aren't obligated to provide anything else. It used to be if you didn't want to use average cost you were on your own. But I don't understand: if they're giving you average cost how are you "blind"? Or are they not providing average cost? I have maybe 75% capital gains in some funds that are locked into average cost, but haven't purchased in years, so does it really matter if I sell shares with 80% gains or 70%? Just doesn't move the needle, as long as I know exactly how much the gains will be before I sell.
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Colorado21a
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Colorado21a »

If they are average cost, then I'm not blind and I will just leave the money I have in those accounts since the gains will be massive. I was looking for low hanging fruit using other cost basis methods.
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Hacksawdave
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Hacksawdave »

Colorado21a wrote: Mon Jun 10, 2024 7:31 pm HacksawDave,

What's odd about my withholding for my taxes this year with the severance, is when we (yes, married and my wife works a lower paying job than mine but still makes pretty good money) take our tax paid last year from my income tax return and divide by our total income it looks like an effective rate of about 20.7%. When I look at my last pay stub this year, which includes earnings for time worked, plus my one year lump sum severance, plus the tax ups for all the vesting of my 3 years of unvested stock shares, my tax rate comes out to almost the same identical 20.7%. Based on that, I lowered the amount of money I'm setting aside to pay income taxes next April, but am I missing something with that very rough calculation?

I do not have any municipal fund holdings. What I did was I started up a Vanguard Treasury Money Market that will pay our checking account my bi-weekly paycheck, and get funded by a series of CD's that mature in 6, 12, 18, and 24 months, all between 4.7 and 5.4% over those durations, and I think the Vanguard fund is paying 5.29% right now. This "strategy" if you can call it that, will keep our checking account funded until 9/30/26, not counting interest from those CD's and money markets, so I'm likely covered until YE 2026 if I decide to take that much time off. I'm a tick or two under 50 years old so I will have to go back to work at some point, but just weighing the value of having some time off now when I'm alive and healthy since the future is never guaranteed.

Fortunately, or unfortunately, we are not near the 0% LTCG rate. One of our longer-term financial challenges will be our lack of Roth $$$ as we both have large 401k's but very minimal money in Roth. As I get through some of these more pressing challenges, I'm going to do more homework and ask for some more help on here around Roth strategies for us. I missed the boat in past years not taking advantage of a Roth 401K, but I did defer 30% of my salary for the past few years to avoid paying tax on that, but now I have a 14 year wait on getting that money paid out to me.
Ah, okay got it. The MMFs and CD will generate good income but taxed at the ordinary rates. Since you will use this for around three years then you already have something in place that will keep your AGI up there during this time. I have a Roth, but initially found conversions would be tax costly, so I started taking small distributions from the 401k when I hit 59.5. I could have used the IRS ‘Rule of 55’ but did not need to.

Nothing wrong with a break from work, I am in year 5 now, but this happened at age 56. If you do find something and they have a plan that allows for a 401k transfer and later on allow for IRS ‘Rule of 55’ withdrawals, then you are golden if you decide you had enough.

I am guessing the Franklin funds in a taxable account have dividend and CG reinvestment turned off, and you are taking all distributions in cash. If not, you should do this as you are paying the taxes on them anyways, and you do not want to keep increasing your share count. At least the deferred comp is pushed out well into the future and is not accelerated as some I have heard of where it all must be taken in a short timespan.

Good luck in your ventures.
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Colorado21a
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Colorado21a »

Just to follow up on this, I did find a way on the website at Franklin Templeton to select a Specific Share Identification technique rather than Average Cost. However, when I login to the website, it continues to only show me average cost information. I called them earlier this week and the good news is that for all shares I own, going back 45+ years, they have specific lot information and will run a complete report on all 7 of my funds and email to me so that I can select specific lots to sell going forward. So in a perfect world, I'll be able to dwindle the value in these accounts down so that I can reinvest elsewhere in index or ETF funds that will greatly lower my tax liability, and maybe even harvest some losses from these sales now on specific lots.

I greatly appreciate everyone's help on this one pointing me in the right direction!!!
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by grabiner »

Colorado21a wrote: Mon Jun 10, 2024 6:13 pm I'm now left with the other ~50% and the gains are too massive to probably ever sell them until desperately needed late in life after most other things have been exhausted.
SeePaying a tax cost to switch funds on the wiki. It may be worth selling now even for a huge gain. If the capital-gains tax is 10% of the value, and you save 1% per year in expenses and taxes, you'll actually come out ahead after 10 years, not just break even. The reason is that once you have switched your new fund will have a higher basis, and thus the capital-gains tax on selling it will be lower.

Another alternative, if you are charitably inclined, is to donate the highest-basis lots to charity. Don't do this just for the tax benefit, but if you are going to donate $10,000 to charity anyway, donating mutual fund shares for which you paid $3000 gets rid of $7000 in capital gains.

(edited to correct wiki link)
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Colorado21a
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by Colorado21a »

David, thank you so much I will check out that link. Last year when I was looking to downsize my position in these funds I did look at historical performance in terms of paying dividends and CG from trading within the fund and I was able to eliminate the great majority of funds that have paid the highest CG and Dividends, plus someone here thankfully advised me to start taking all of the remaining divs and CG in cash and reinvesting them elsewhere so that was a huge help.

I will check out that link and since next year might be a low income year for us and this year is a very high year, January might be the time to pull the trigger.

Thanks again!!!
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Re: Non-Retirement, High Fee, High Tax Mutual Funds

Post by livesoft »

If you are charitably-inclined, then donating shares to a Donor-Advised Fund in order to get a massive tax deduction could be helpful. Sure, you won't get the money, but maybe you can't spend all the money in your lifetime anyways.
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