Any issue with too many tax lots/betterment

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staybalanced
Posts: 321
Joined: Wed Jan 14, 2015 7:36 am

Any issue with too many tax lots/betterment

Post by staybalanced » Wed Oct 05, 2016 6:42 am

As I understand it, since the shares are "covered" it doesn't really matter that there are so many because the broker is required to keep track. My question is for the tax return gurus, last year on my return my CPA just put "various" and did not list out each gain and tax lot. Is that the correct/ok way to do it?

My concern is that even with a small balance there, I have a tremendous amount of tax lots, far more than I have ever had in a much, much larger vanguard account.

Any thoughts on this would be appreciated, to give context I use this account for college savings for a child because I feel that a 529 is too restrictive and the state tax deductions are too small. Thank you

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happymob
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Re: Any issue with too many tax lots/betterment

Post by happymob » Wed Oct 05, 2016 6:46 am

"Various" works. If I did my taxes by hand, I would avoid Betterment like the plague. With tax software, the burden is trivial.

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House Blend
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Re: Any issue with too many tax lots/betterment

Post by House Blend » Wed Oct 05, 2016 8:20 am

Yes, "various" is fine.

I don't see any connection between tax software and betterment. Reasons to use/not use either one seem orthogonal to me.

If all your sales are covered shares and you aren't doing anything foolish[*], filling out your Schedule D should be trivial, whether it's by hand or with tax software. No Form 8949 needed. Just copy the grand totals from your 1099-B onto lines 1a and 8a of Sched D.

[*] An example of foolishness would be to have both a betterment and a non-betterment account where you hold some of the same funds.

Random Walker
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Re: Any issue with too many tax lots/betterment

Post by Random Walker » Wed Oct 05, 2016 8:31 am

I'm not a betterment client, but it is the issue of tax loss harvesting that pushed me over the edge to use an advisor. I think TLH done well can perhaps cover an advisor's fee. I'm not compulsive and organized myself to track every individual lot for this. The Wiki has references to papers by Arnott and Belkin on potential benefits of TLH compared to buy and hold.

Dave

staybalanced
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Re: Any issue with too many tax lots/betterment

Post by staybalanced » Wed Oct 05, 2016 9:18 am

Thanks for the replies.

staybalanced
Posts: 321
Joined: Wed Jan 14, 2015 7:36 am

Re: Any issue with too many tax lots/betterment

Post by staybalanced » Wed Oct 05, 2016 9:24 am

Random Walker wrote:I'm not a betterment client, but it is the issue of tax loss harvesting that pushed me over the edge to use an advisor. I think TLH done well can perhaps cover an advisor's fee. I'm not compulsive and organized myself to track every individual lot for this. The Wiki has references to papers by Arnott and Belkin on potential benefits of TLH compared to buy and hold.

Dave
I'm curious, do you use a fee only adviser, or robo platform like schwab or wealth front? If you use a traditional adviser I am curious what value they bring versus you doing it (TLH) yourself. I assume by the # of post you've made on here that you are pretty knowledgeable on the subject.

I ask only because I have never really thought about it in the context you mentioned. Thanks

Random Walker
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Re: Any issue with too many tax lots/betterment

Post by Random Walker » Wed Oct 05, 2016 9:55 am

InvestorAdam,
Thanks for your question. I was a hardcore do it yourself Boglehead 2001-2009. As I learned more I became interested in tilting, but my savings are mostly in taxable accounts. So I became interested in DFA's tax managed value and small funds. As you know DFA is only offered through an advisor. As a good advisor will tell you, DFA access alone is not a good reason to go with an advisor. When I put together a little spreadsheet for reasons to go with an advisor, reasons included tax loss harvesting, increased tilt in taxable account, increased portfolio efficiency, individual bond ladder as opposed to bond fund, extra layer of protection from my own behavioral errors, and stuff I didn't know that I didn't know. Obviously the higher expense ratios and AUM fees are easy to measure. All of the above potential benefits are hard to estimate.
Assume an all Vanguard portfolio has an expense ratio of perhaps 0.10-0.20%. I found that the combined higher ER and additional AUM fee totaled about 0.8-0.9%, so perhaps 0.6-0.8% more expensive per year. I simply guesstimated that all the above potential advantages had a high likelihood of overcoming that hurdle.
As far as specifics, over the last 7 years, I can think of three big benefits to me. I wanted to make a substantial donation to a charity, and the advisor ensured I did it in the most cost effective manner possible. Effectively saved me 50% of the cost. On another occasion, I bought a house for my father, and the advisor helped me save a ton on purchase expenses. In both cases, my AUM fee for the year was covered by those actions alone. I have also taken advantage of Monte Carlo simulation exercises provided by my advisor. These exercises are invaluable I believe in getting the asset allocation right in the first place, and making rational adjustments to the AA over time. These advantages definitely fell in the "stuff I didn't know that I didn't know" department.
Larry Swedroe has made the point that a single investor mistake can cost an investor many years of AUM fees. I am definitely coming to believe this.
With regard to TLH, the advisor uses a computer program to screen for TLH opportunities. Obviously they keep track of every individual lot. I was initially frustrated by how little TLH was done to my portfolio 2009-2015, but the market was pretty much all up. There are costs associated with TLH, and the advisor has certain thresholds that have to be met for them to realize the loss. Interested to hear more about your advisor experience.

Dave

staybalanced
Posts: 321
Joined: Wed Jan 14, 2015 7:36 am

Re: Any issue with too many tax lots/betterment

Post by staybalanced » Wed Oct 05, 2016 10:44 am

Random Walker wrote:InvestorAdam,
Thanks for your question. I was a hardcore do it yourself Boglehead 2001-2009. As I learned more I became interested in tilting, but my savings are mostly in taxable accounts. So I became interested in DFA's tax managed value and small funds. As you know DFA is only offered through an advisor. As a good advisor will tell you, DFA access alone is not a good reason to go with an advisor. When I put together a little spreadsheet for reasons to go with an advisor, reasons included tax loss harvesting, increased tilt in taxable account, increased portfolio efficiency, individual bond ladder as opposed to bond fund, extra layer of protection from my own behavioral errors, and stuff I didn't know that I didn't know. Obviously the higher expense ratios and AUM fees are easy to measure. All of the above potential benefits are hard to estimate.
Assume an all Vanguard portfolio has an expense ratio of perhaps 0.10-0.20%. I found that the combined higher ER and additional AUM fee totaled about 0.8-0.9%, so perhaps 0.6-0.8% more expensive per year. I simply guesstimated that all the above potential advantages had a high likelihood of overcoming that hurdle.
As far as specifics, over the last 7 years, I can think of three big benefits to me. I wanted to make a substantial donation to a charity, and the advisor ensured I did it in the most cost effective manner possible. Effectively saved me 50% of the cost. On another occasion, I bought a house for my father, and the advisor helped me save a ton on purchase expenses. In both cases, my AUM fee for the year was covered by those actions alone. I have also taken advantage of Monte Carlo simulation exercises provided by my advisor. These exercises are invaluable I believe in getting the asset allocation right in the first place, and making rational adjustments to the AA over time. These advantages definitely fell in the "stuff I didn't know that I didn't know" department.
Larry Swedroe has made the point that a single investor mistake can cost an investor many years of AUM fees. I am definitely coming to believe this.
With regard to TLH, the advisor uses a computer program to screen for TLH opportunities. Obviously they keep track of every individual lot. I was initially frustrated by how little TLH was done to my portfolio 2009-2015, but the market was pretty much all up. There are costs associated with TLH, and the advisor has certain thresholds that have to be met for them to realize the loss. Interested to hear more about your advisor experience.

Dave
Thanks for the reply. I tend to agree with your conclusions. I am still in the low six figure portfolio club and pretty young, but often think about using an adviser at some point. I have noticed many of the fee only firms have lower fees once you cross 500k. I actually really like betterment, but they are strictly a portfolio manager at this point and don't have the broader advice on wealth management I have certainly made behavioral errors over the years, this site has helped a lot, but at the same time it can give you "analysis paralysis" sometimes. My current instructions to my wife are to use vanguard personal adviser should something happen to me. Although probably not the best, at least I know she wouldn't be ripped off there. Even though I don't use an adviser I sometimes think they are dismissed too broadly on the forum.

Would you be willing to share what firm you used or at least how you went about finding someone that had your best interest at heart? I will say the more I have learned and studied the more I would consider using and adviser, seems counter intuitive but for some reason that's how I feel. Thanks

Random Walker
Posts: 3327
Joined: Fri Feb 23, 2007 8:21 pm

Re: Any issue with too many tax lots/betterment

Post by Random Walker » Wed Oct 05, 2016 11:18 am

InvestorAdam,
You reminded me. I also chose an advisor partly because my wife has zero interest in investing. I think it's really good you are considering this early in your investing career. As you accumulate assets and hopefully capital gains, it will become harder to take the plunge and make a huge change to your investment plan. You get locked in. I took advantage of the "opportunity" provided by the huge losses of 2008-9 to take a huge tax loss harvest when I made the transition.

Dave

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