Selling VTSMX (VG Total Stock Market Index)

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suzie2012
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Selling VTSMX (VG Total Stock Market Index)

Post by suzie2012 » Sat Nov 25, 2017 8:59 pm

I am relatively new to investments. I need to sell my VTSMX fund. I know that it will distribute dividends in December, which are re-invested. Am I better off selling in early December (before the dividends are announced) or in early January (after they have been distributed)? I know that after the dividend distribution the share price goes down with almost the equivalent of the dividend. Obviously it is hard to know what the market will do price wise, but what else should I take into account otherwise to make this decision? Thanks in advance.

livesoft
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Re: Selling VTSMX (VG Total Stock Market Index)

Post by livesoft » Sat Nov 25, 2017 9:05 pm

1. you don't have to have distributions reinvested. You can have them sent to your checking account by changing that at vanguard.com

2. Whether you sell before the distribution in 2017, after the distribution in 2017, or in 2018 will depend on what kind of account your VTSMX is held in and your personal tax situation which you did not tell us. Also whether shares have been held long-term (more than 365 days) or short-term will affect any taxes on realized gains. Return of capital is always tax-free.
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suzie2012
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Re: Selling VTSMX (VG Total Stock Market Index)

Post by suzie2012 » Sat Nov 25, 2017 9:30 pm

Thanks. Re-investing was my choice.VTSMX is held in an after tax account.The shares have been held for more than 365 days (other than the re-invested dividends from 2017). Probably tax wise it would be better for me to pay taxes in 2019 with a sale in January 2018. Then if I wait until January, it will be after the distribution of the dividends (no more question about the before/after). I guess I kind of answered my question, unless there is something else to know about it. I just hope that market will not crash until I sell :happy

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grabiner
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Re: Selling VTSMX (VG Total Stock Market Index)

Post by grabiner » Sun Nov 26, 2017 9:26 pm

It is likely to be irrelevant whether you sell before or after the distribution, because your capital gain will decrease by the amount of the distribution, and both will be taxed at the same rate if the dividend is 100% qualified. And even if it isn't a wash, the difference is trivial; the December distribution is usually about 0.5% of the fund value.

For example, if you plan to sell $100,000 of stock, and the $500 distribution turns out to be only 90% qualified, you will have $450 in qualified and $50 in non-qualified dividends instead of $500 in long-term capital gains. In a 25% tax bracket, the tax difference is $5.

Why do you need to sell the fund? If you are planning to spend the money (say, because you want to use it as a down payment on a house), it is better to sell the fund as soon as you know you have the need, to avoid the risk that the market will decline and you won't have the money to spend; tax issues are less important here.
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suzie2012
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Re: Selling VTSMX (VG Total Stock Market Index)

Post by suzie2012 » Sun Nov 26, 2017 9:48 pm

Thanks for the clarification. I do not need the money for buying a house (or something else). Taxes are important. The final decision about selling was dependent on what I learned here and I wasn't sure about. I appreciate the help.

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TD2626
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Re: Selling VTSMX (VG Total Stock Market Index)

Post by TD2626 » Mon Nov 27, 2017 2:12 am

grabiner wrote:
Sun Nov 26, 2017 9:26 pm
It is likely to be irrelevant whether you sell before or after the distribution, because your capital gain will decrease by the amount of the distribution, and both will be taxed at the same rate if the dividend is 100% qualified. And even if it isn't a wash, the difference is trivial; the December distribution is usually about 0.5% of the fund value.

For example, if you plan to sell $100,000 of stock, and the $500 distribution turns out to be only 90% qualified, you will have $450 in qualified and $50 in non-qualified dividends instead of $500 in long-term capital gains. In a 25% tax bracket, the tax difference is $5.
Grabiner - what about interest earned on delayed taxes? Is this a consideration? If you sell in late December 2017, taxes need paid in April 2018, whereas if you sell in January 2018, couldn't payment of taxes could be delayed to April 2019 by making use IRS "safe harbor" rules? (I am not an expert in this, I am not sure). The expected capital gains tax that would be owed shouldn't be spent or put in risky investments -- but a low risk savings account or money market might earn interest for a year on that money until needing to send it to the IRS in 2019. It's probably a minor consideration in today's low interest rate environment, and if there's a genuine need to sell and a desire to get the hassle over with, and if the capital gain isn't that big, maybe December isn't that bad. One can probably do the full math on this given the specific numbers.

Also, it doesn't seem like this is within the scope of the post, but the OP should be very sure that they need to sell... a lot of people are tempted to engage in short-term market timing or sell for the wrong reasons.

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grabiner
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Re: Selling VTSMX (VG Total Stock Market Index)

Post by grabiner » Tue Nov 28, 2017 12:07 am

TD2626 wrote:
Mon Nov 27, 2017 2:12 am
Grabiner - what about interest earned on delayed taxes? Is this a consideration? If you sell in late December 2017, taxes need paid in April 2018, whereas if you sell in January 2018, couldn't payment of taxes could be delayed to April 2019 by making use IRS "safe harbor" rules? (I am not an expert in this, I am not sure).
This is a small benefit for waiting. If you wait until 2018 to sell for a $20,000 capital gain, you will owe $3000 in 2018 tax rather than 2017 tax. If you are already having enough tax withheld to qualify under the safe harbor rules, you delay the tax a full year, which is a risk-free gain of about $50 at the current yield on one-year CDs. If you do not qualify under the safe harbor rules, you will probably gain only six months' interest; you have to pay your fourth-quarter estimated tax for 2018 by January 15, 2018, and your estimated tax for 2018 in four equal payments by April 15, June 15, September 15, and January 15, 2019.

Working against this is the expectation that the market will rise, increasing your tax bill. If your capital gain increases by $333, that is enough to wipe out the $50. And if the market falls before the end of the year, you can sell your replacement stock to harvest the capital loss.
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TD2626
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Re: Selling VTSMX (VG Total Stock Market Index)

Post by TD2626 » Tue Nov 28, 2017 12:56 am

grabiner wrote:
Tue Nov 28, 2017 12:07 am
TD2626 wrote:
Mon Nov 27, 2017 2:12 am
Grabiner - what about interest earned on delayed taxes? Is this a consideration? If you sell in late December 2017, taxes need paid in April 2018, whereas if you sell in January 2018, couldn't payment of taxes could be delayed to April 2019 by making use IRS "safe harbor" rules? (I am not an expert in this, I am not sure).
This is a small benefit for waiting. If you wait until 2018 to sell for a $20,000 capital gain, you will owe $3000 in 2018 tax rather than 2017 tax. If you are already having enough tax withheld to qualify under the safe harbor rules, you delay the tax a full year, which is a risk-free gain of about $50 at the current yield on one-year CDs. If you do not qualify under the safe harbor rules, you will probably gain only six months' interest; you have to pay your fourth-quarter estimated tax for 2018 by January 15, 2018, and your estimated tax for 2018 in four equal payments by April 15, June 15, September 15, and January 15, 2019.

Working against this is the expectation that the market will rise, increasing your tax bill. If your capital gain increases by $333, that is enough to wipe out the $50. And if the market falls before the end of the year, you can sell your replacement stock to harvest the capital loss.
Thanks for the detailed reply. I've been in similar situations and I knew there was some sort of second-order effect to waiting. I guess the question is whether the $50 (minus the hassle of getting the $50) is worth it. It might depend on how important the need to sell was, for example. It probably more depends on the investor's attitude towards optimizing.

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