Sell Schwab Total Stock Market Index to Fund Roth IRA?

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kMz
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Joined: Fri May 14, 2010 12:51 am
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Sell Schwab Total Stock Market Index to Fund Roth IRA?

Post by kMz » Thu May 20, 2010 2:20 am

Hi, I'm a 19-year-old college student who recently opened a Roth IRA at Vanguard. Prior to that, I opened a taxable account at Charles Schwab and invested $500 in Schwab Total Stock Market Index (SWTSX), which was back in February. At that point in time, I did not know much about investing, asset allocation, tax efficiency, etc., and the only thing I was worried about was getting started.

Now, about three months later, I know I want to keep most of my portfolio in my Roth and I am debating whether or not I should just sell all my shares in SWTSX and use the money to contribute to my Roth. The only problem is that I have a loss, though relatively small (the market value as of today is $491.73), and I am not sure what that means in terms of taxes or capital gains.

I initially planned to keep this fund for at least one year to avoid the short-term capital gains tax rate, but I decided to keep all Vanguard funds in my Roth (including the 500 Index which would overlap with SWTSX, hence the debate to sell it) and leave my taxable account at Schwab for individual stocks/ETFs later on, after establishing my target asset allocation in my Roth.

Should I wait until the market value goes back up over $500 before selling it, or sell it now and take a loss? What would taking a loss mean in terms of taxes?

Should I even sell it in the first place?

Any input/comments/advice would be appreciated. Thanks in advance!
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anthau
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Post by anthau » Thu May 20, 2010 8:06 am

Selling at a loss is not the issue: If you sell it at a loss after holding for a year or less, you would incur a short-term capital loss, which I believe you could use first to offset short-term capital gains then to offset other income (start your research here and here to be sure).

I think the issue is the cost of selling the Schwab fund: First, if sold in 90 days or less, Schwab charges a $50 redemption fee; second, Schwab charges $50 for a full transfer out of assets. There may or may not be a work-around to avoid these fees (I don't know if cashing out is a transfer out, e.g.), but a full transfer out on the 90th day you own the fund would eat up 20% of your deposit.
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georgewatkins
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Post by georgewatkins » Thu May 20, 2010 8:33 am

Funding the Roth IRA should be your priority.

If you can avoid the Schwab fees that anthau mentioned, it would make sense to sell the Schwab fund and incur a small capital loss. Each year, you can offset up to $3000 of taxable income with capital losses (losses are good from a tax perspective).

If you plan to buy Vanguard's Total Stock Market Index Fund in your Roth IRA with the $500, you should also be aware of the wash sale rule, which prohibits you from claiming a capital loss if you buy a substantially identical fund within 30 days.

A good resource is this Fairmark page: Capital Gains and Losses 101

-George

marco100
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Post by marco100 » Thu May 20, 2010 8:57 am

Leave the Schwab taxable account alone for now. It's only $500.00.

You have until April 15, 2011 to fully fund your Roth IRA for tax year 2010.

That's 11 months.

I believe you can fund it up to $5,000 (double check this).

Earn more money, save hard, put every available penny into the Roth.

In March of 2011, if you have still not filled up your Roth for 2010, re-evaluate.

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Taylor Larimore
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Moving to Vanguard

Post by Taylor Larimore » Thu May 20, 2010 1:29 pm

Hi KMZ:

I don't know about Schwab's fees, but I do know that a good time to sell a taxable fund is when it has a loss--like now.

Total Stock Market is not an ideal single fund. Consider one of Vanguard's Target Retirement funds with the stock/bond ratio you want.
"Simplicity is the master key to financial success." -- Jack Bogle

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