I need to sell some stock now for a looming expense, right?

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Nearly A Moose
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I need to sell some stock now for a looming expense, right?

Post by Nearly A Moose » Thu Mar 08, 2018 10:59 pm

I have a new expense that's going to start this summer. Private school tuition that I can pay evenly at $2500/mo, 12 months a year, or $30k up front. I've confirmed that there's no penalty or fees for paying monthly installments and so plan to do that. Due to competing goals and priorities, I think I need to pull money out of my taxable account rather than cash-flowing it this year. The taxable funds are currently invested in a total stock market fund, with all the potential variability, with long-term capital gains.

I at first thought I'd need to pay all $30k up front, and so I was planning to liquidate $30k of stock immediately (out of $110k available in that account) because that full expense would hit in a couple months. But now that I've learned I can do monthly installments, I'm hesitating. My thought is still that I should probably liquidate the necessary funds now and slowly pay the monthly tuition out of it (although perhaps I can invest in a safer security to get a bit more yield than a simple savings account). But would it be reasonable to keep the money invested in total stock market and just take my chances each month when I need $2500? I don't like the idea of that much sitting around in cash, but I also would rather not be forced to sell through a downturn. Is there another way to think about this?
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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Alexa9
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Re: I need to sell some stock now for a looming expense, right?

Post by Alexa9 » Thu Mar 08, 2018 11:03 pm

I would put the entire tuition amount in an Ally Savings Account and pay it monthly. Worst case scenario the market tanks and you'd have to withdraw rather than buy more stock. Bad scenario is the bull market continues and you miss out on some gains.

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Watty
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Re: I need to sell some stock now for a looming expense, right?

Post by Watty » Thu Mar 08, 2018 11:16 pm

Money that you will need in the near future should not be in stocks so I would sell the stocks now.

If you had the $30K in a cash account that was earmarked for tuition I doubt you would be the least bit tempted to put it into the stock market but that is the same question.

I would make one small modification though. You should be getting somewhere in the ballpark of $2,000 in dividends so you can set the mutual funds to not automatically reinvest the dividends. You might only need $28,000(after taxes) and the dividends to have enough to make the payments.

If you will be needing similar amounts of money from this account in future years you should probably also put any other money that will be needed within five years into more conservative investments.

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eye.surgeon
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Re: I need to sell some stock now for a looming expense, right?

Post by eye.surgeon » Thu Mar 08, 2018 11:28 pm

I fail to see the necessity, with $110k available in taxable, to withdraw the full amount now. Seems overly conservative. Even a historic bear market will leave sufficient funds for the $30k expense.
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ryman554
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Re: I need to sell some stock now for a looming expense, right?

Post by ryman554 » Fri Mar 09, 2018 11:51 am

eye.surgeon wrote:
Thu Mar 08, 2018 11:28 pm
I fail to see the necessity, with $110k available in taxable, to withdraw the full amount now. Seems overly conservative. Even a historic bear market will leave sufficient funds for the $30k expense.
You would have the OP potentially sell low 30% (or more) of the portfolio?

I thought the common suggestion was to keep money that is *known to be needed* in the next several years out of the market, or at least out of things which can vary wildly.

Sure, it's great to get more gains. But you really don't want to be faced to sell at a loss. This isn't like a "hey, the stock market is up, let me splurge a bit on a vacation." This is "I need to spend this money or my kid gets kicked out of school"

One can argue about the wisdom of putting a kid in private school during a historic bear market, but I'm pretty sure nobody would suggest cash-flowing it from depressed investments during one.

OP, now that you have committed, take the money out of the market and earn a "guaranteed" 1% in a checking account and pay in installments. Do it today.

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Re: I need to sell some stock now for a looming expense, right?

Post by bloom2708 » Fri Mar 09, 2018 11:56 am

Is this a 1 year expense or ongoing for the next several years?

$30k is not a small amount for tuition. High school I hope and not elementary school. I have a friend in an urban area with two elementary kids paying $16k each per year for elementary school. He will pay an enormous amount of tuition before college even enters the picture.

Will this exhaust your taxable account in 3-4 years?

What if you moved your taxable account to be more conservative. 50-50 for example. Use Vanguard Int-Term Tax-Exempt bond index. That way a 40% correction doesn't hit you so hard with money needed in the next few years.
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Re: I need to sell some stock now for a looming expense, right?

Post by Dottie57 » Fri Mar 09, 2018 2:44 pm

ryman554 wrote:
Fri Mar 09, 2018 11:51 am
eye.surgeon wrote:
Thu Mar 08, 2018 11:28 pm
I fail to see the necessity, with $110k available in taxable, to withdraw the full amount now. Seems overly conservative. Even a historic bear market will leave sufficient funds for the $30k expense.
You would have the OP potentially sell low 30% (or more) of the portfolio?

I thought the common suggestion was to keep money that is *known to be needed* in the next several years out of the market, or at least out of things which can vary wildly.

Sure, it's great to get more gains. But you really don't want to be faced to sell at a loss. This isn't like a "hey, the stock market is up, let me splurge a bit on a vacation." This is "I need to spend this money or my kid gets kicked out of school"

One can argue about the wisdom of putting a kid in private school during a historic bear market, but I'm pretty sure nobody would suggest cash-flowing it from depressed investments during one.

OP, now that you have committed, take the money out of the market and earn a "guaranteed" 1% in a checking account and pay in installments. Do it today.
+1

livesoft
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Re: I need to sell some stock now for a looming expense, right?

Post by livesoft » Fri Mar 09, 2018 3:26 pm

I would sell $2500 or so a month just like I do now in retirement to pay monthly bills. If you have to sell at a depressed price, so what? You can buy at a depressed price in a tax-advantaged account. You can also change your mind at any point along the way. You can even set a trigger point on when you will change your mind.
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Re: I need to sell some stock now for a looming expense, right?

Post by Jack FFR1846 » Fri Mar 09, 2018 3:36 pm

While livesoft has a good point, as a two tuition paying parent (at a much higher amount than just $2500 a month), I tend to keep at least a full semester sitting between a Redneck Bank Megamoney account (1.75% up to $35k) with backup at Ablebanking (1.7%, no limit). This way, I have enough lined up to allow me to sleep at night. I'm a huge safety net guy.....so I've got more than both my kids' full schooling tuitions sitting in US Savings bonds as well, which I consider part of my bond allocation.
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Re: I need to sell some stock now for a looming expense, right?

Post by eye.surgeon » Fri Mar 09, 2018 3:47 pm

livesoft wrote:
Fri Mar 09, 2018 3:26 pm
I would sell $2500 or so a month just like I do now in retirement to pay monthly bills. If you have to sell at a depressed price, so what? You can buy at a depressed price in a tax-advantaged account. You can also change your mind at any point along the way. You can even set a trigger point on when you will change your mind.
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JBTX
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Re: I need to sell some stock now for a looming expense, right?

Post by JBTX » Fri Mar 09, 2018 3:54 pm

Personally I would not save for any known large expenditures expected within 5 years with amounts in stocks.

livesoft
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Re: I need to sell some stock now for a looming expense, right?

Post by livesoft » Fri Mar 09, 2018 3:58 pm

And I wouldn't have a separate amount of money earmarked for anything. For instance, I am retired and spending down a portfolio of equities and fixed income. If i have to spend an extra $30,000 for a vacation or a car or my son's college tuition, then I sell the most appropriate shares which could be equities or bonds or both to raise the cash. Then I rebalance to get back to my desired asset allocation.

If I don't trust my portfolio to get me through thick and thin without any need for cash, then what's the point of investing in the first place?
Last edited by livesoft on Fri Mar 09, 2018 4:00 pm, edited 2 times in total.
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Re: I need to sell some stock now for a looming expense, right?

Post by DesertDiva » Fri Mar 09, 2018 3:59 pm

Maybe consider if "private school tuition" truly aligns with your financial goals. I assume this isn't college. Do you live in a horrible school district, or have a child with special needs? I'm not being judgmental, but wonder if pulling 30k out of a 110k account is really a necessity. Do you otherwise have the means to support this decision?

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Re: I need to sell some stock now for a looming expense, right?

Post by oldcomputerguy » Fri Mar 09, 2018 4:05 pm

My rule of thumb is, if it's money I know I'm going to need in the next two years, I pull it out and put it in Ally. Otherwise, I leave it invested according to my AA.
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Chicago60
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Re: I need to sell some stock now for a looming expense, right?

Post by Chicago60 » Fri Mar 09, 2018 4:47 pm

Have you considered, and determined what State tax deductions you may receive, placing some of the funds now into a 529 plan?

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Kevin M
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Re: I need to sell some stock now for a looming expense, right?

Post by Kevin M » Fri Mar 09, 2018 5:55 pm

To reinforce a point already made, I would look at your entire portfolio, including your tax-advantaged accounts, in thinking about this. If you have fixed income in tax-advantaged, then you aren't forced to sell stocks after they drop in value, since you can offset the stock sale in taxable with an exchange from fixed income to stocks in tax-advantaged. This would assume that your AA is right on target.

If you are above target in stocks, then your monthly sale of stocks in taxable moves you closer to target. If you are below target for stocks, you exchange more fixed income to stocks in tax-advantaged after your taxable sale, if you want to move closer to target.

This is just a long-winded way of saying what's already been said in a previous post.

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wshang
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Re: I need to sell some stock now for a looming expense, right?

Post by wshang » Fri Mar 09, 2018 10:35 pm

While I don't have a total answer to you question and agree funds for near term spending shouldn't be in stocks, there is a way to mitigate some potential loss through tax savings. For example, in preparation sell three months worth of holdings and buy an essentially similar ETF (let's call it B). You realize the long-term gain like you would have anyway. If the market dips in less than a year, sell the B. Now you have a short-term loss which is more valuable, in order to reduce taxable ordinary income up to $3,000 per year. If the market doesn't dip, hold the shares of B for 12 months for the long-term gain. Be sure to designate lots when selling.

Nearly A Moose
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Re: I need to sell some stock now for a looming expense, right?

Post by Nearly A Moose » Sat Mar 10, 2018 9:01 am

Thanks, all this is helpful. To clarify, this isn’t by any means all of my portfolio, just the easiest pile of money to pull from. I should be able to cash flow this next next (or I might even be able to set aside an end of year bonus for it), so this is sort of a one-time issue; I’m not trying to make this pile of stocks pay tuition indefinitely.

One thing I’m thinking of doing is either (1) selling $30k (or maybe 28k and not reinvesting dividends) and putting it into something like Wellesley or a conservative balanced fund, then paying from that. Basically reducing risk a bit in light of the fact that I now have a shorter term need for some of this money. But those funds are really not tax efficient; or (2) selling maybe half the amount, throwing that in a tax exempt bond fund, and then each month either selling stock or bonds for tuition, depending on the market situation. In either event I would need to realize some gains now though. I get what Livesoft is saying about just rebalancing in tax deferred accounts, although for some reason I’m having trouble getting my head around the fact that I’m not going to be overly complicating my portfolio management.

And, yes, this is elementary school... long story, but poor school districts, great everything else about the neighborhood. 14 minute commute in a city with averages of 45-60 minutes one way. I’m seeing this in part as buying lots of time with my family, plus I feel very good about the education.
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livesoft
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Re: I need to sell some stock now for a looming expense, right?

Post by livesoft » Sat Mar 10, 2018 9:16 am

Nearly A Moose wrote:
Sat Mar 10, 2018 9:01 am
I get what Livesoft is saying about just rebalancing in tax deferred accounts, although for some reason I’m having trouble getting my head around the fact that I’m not going to be overly complicating my portfolio management.
I have to say that what you wrote makes me laugh. In effect, you wrote, "I'm going to complicate my portfolio management by adding maybe Wellesley and muni bond fund along with the extra work of taxes instead of just doing what I'm already doing and not changing a thing."

In other words, you got the mental accounting thing really messing with your mind.

Also consider if you buy something new to sell, then it may have short-term capital gains which just further complicates your finances. In other words, just stick with selling something for a loss or a long-term capital gain. It will also be good practice for when you are retired.
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101
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Re: I need to sell some stock now for a looming expense, right?

Post by 101 » Sat Mar 10, 2018 11:08 am

Are you still contributing to tax advantaged accounts during this time? If you plan to contribute more to your portfolio than you plan to withdraw during this time, then what you're really doing is cash-flowing your tuition payments, and then selling taxable assets to fund your tax advantaged accounts.

If you plan on net withdrawing from your portfolio over this time, then the average time horizon of your portfolio has decreased, and you should adjust your asset allocation accordingly, if needed. Just move some stocks to bonds in your tax advantaged accounts, and then when you need to make tuition payments, sell stocks in your taxable account, reassess your portfolio's average time horizon and corresponding asset allocation, and rebalance in your tax advantaged accounts accordingly.

101
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Re: I need to sell some stock now for a looming expense, right?

Post by 101 » Sat Mar 10, 2018 11:20 am

wshang wrote:
Fri Mar 09, 2018 10:35 pm
If the market doesn't dip, hold the shares of B for 12 months for the long-term gain.
If the OP puts the proceeds from selling their taxable funds into B, and then doesn't sell B when the tuition payments are due, where do they get the money from?

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Re: I need to sell some stock now for a looming expense, right?

Post by PhilosophyAndrew » Sat Mar 10, 2018 11:32 am

If you’ve already made the significant decision to pay for this year’s tuition from your taxable account, why not pick the simplest option of withdrawing all now and paying for the year? I don’t see any compelling reasons to make more complicated than this.

If, however, you are feeling ambivalent about the big decision you have made, you should address that ambivalence directly eithe by ponying up for any tuition refund insurance progra the school offers or by changing your mind about the school.

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wshang
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Re: I need to sell some stock now for a looming expense, right?

Post by wshang » Sat Mar 10, 2018 1:06 pm

101 wrote:
Sat Mar 10, 2018 11:20 am
wshang wrote:
Fri Mar 09, 2018 10:35 pm
If the market doesn't dip, hold the shares of B for 12 months for the long-term gain.
If the OP puts the proceeds from selling their taxable funds into B, and then doesn't sell B when the tuition payments are due, where do they get the money from?
Thanks for giving me a chance for expanding and clarifying. The OP is worried about erosion of long-term gains in the short-term. Selling B in less than 12 months only makes sense if there is a loss. Selling B after 12 months only makes sense if there is a gain. As long as there isn't a loss from this summer onward, he can fund the tuition payments from the original taxable funds. For any month when he might have to realize less than the present market value, he sells B. This softens the blow of market drops in his taxable fund. Hope that makes sense.

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Re: I need to sell some stock now for a looming expense, right?

Post by Nearly A Moose » Sat Mar 10, 2018 2:16 pm

livesoft wrote:
Sat Mar 10, 2018 9:16 am
Nearly A Moose wrote:
Sat Mar 10, 2018 9:01 am
I get what Livesoft is saying about just rebalancing in tax deferred accounts, although for some reason I’m having trouble getting my head around the fact that I’m not going to be overly complicating my portfolio management.
I have to say that what you wrote makes me laugh. In effect, you wrote, "I'm going to complicate my portfolio management by adding maybe Wellesley and muni bond fund along with the extra work of taxes instead of just doing what I'm already doing and not changing a thing."

In other words, you got the mental accounting thing really messing with your mind.

Also consider if you buy something new to sell, then it may have short-term capital gains which just further complicates your finances. In other words, just stick with selling something for a loss or a long-term capital gain. It will also be good practice for when you are retired.
Fair enough, but retirement is (probably) still a long ways away! I’m going to give this some more thought before doing anything.
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101
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Re: I need to sell some stock now for a looming expense, right?

Post by 101 » Sat Mar 10, 2018 6:11 pm

wshang wrote:
Sat Mar 10, 2018 1:06 pm
101 wrote:
Sat Mar 10, 2018 11:20 am
wshang wrote:
Fri Mar 09, 2018 10:35 pm
If the market doesn't dip, hold the shares of B for 12 months for the long-term gain.
If the OP puts the proceeds from selling their taxable funds into B, and then doesn't sell B when the tuition payments are due, where do they get the money from?
Thanks for giving me a chance for expanding and clarifying. The OP is worried about erosion of long-term gains in the short-term. Selling B in less than 12 months only makes sense if there is a loss. Selling B after 12 months only makes sense if there is a gain. As long as there isn't a loss from this summer onward, he can fund the tuition payments from the original taxable funds. For any month when he might have to realize less than the present market value, he sells B. This softens the blow of market drops in his taxable fund. Hope that makes sense.
I'm having a hard time coming up with a scenario where this strategy would put you ahead.

If B loses value, but less than the amount of long-term capital gains you realized when you sold, the short-term loss would offset an equal amount of long-term gain, and you would be left with the same amount of long-term capital gains you would have had if you had not sold and bought B.

If B loses more than the amount of long-term capital gains you realized when you sold, you would realize a short-term loss. But if you had not sold, you would realize the same amount of long-term losses, which offset ordinary income and rollover just like short-term losses.

If B gains value, you'll sell taxable assets to make the payments, just like you would have done if you had not sold and bought B. But with B, you also pay long-term capital gains now on the amount you sold to buy B, instead of deferring that amount, and come out behind.

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Re: I need to sell some stock now for a looming expense, right?

Post by remomnyc » Sat Mar 10, 2018 6:24 pm

Kevin M wrote:
Fri Mar 09, 2018 5:55 pm
To reinforce a point already made, I would look at your entire portfolio, including your tax-advantaged accounts, in thinking about this. If you have fixed income in tax-advantaged, then you aren't forced to sell stocks after they drop in value, since you can offset the stock sale in taxable with an exchange from fixed income to stocks in tax-advantaged. This would assume that your AA is right on target.

If you are above target in stocks, then your monthly sale of stocks in taxable moves you closer to target. If you are below target for stocks, you exchange more fixed income to stocks in tax-advantaged after your taxable sale, if you want to move closer to target.

This is just a long-winded way of saying what's already been said in a previous post.

Kevin
This. If you need to sell for a loss, take the capital loss for taxes purposes and sell fixed income in your tax deferred and buy stocks to rebalance. Be careful to avoid wash rule.

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Re: I need to sell some stock now for a looming expense, right?

Post by Lafder » Sat Mar 10, 2018 10:11 pm

Double check there is no extra fee for a payment plan. It is to the school's advantage to be paid up front, so they often add fees to encourage payment in full.

There were also extra charges for tuition "insurance".

I tended to pay in full since the fees for installments was more than I wanted to pay for the convenience of monthly payments. There was a lower fee if you paid in 2 installments, and a higher fee if you spread it out over 10 payments.

lafder

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wshang
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Re: I need to sell some stock now for a looming expense, right?

Post by wshang » Sat Mar 10, 2018 11:06 pm

101 wrote:
Sat Mar 10, 2018 6:11 pm
wshang wrote:
Sat Mar 10, 2018 1:06 pm
101 wrote:
Sat Mar 10, 2018 11:20 am
wshang wrote:
Fri Mar 09, 2018 10:35 pm
If the market doesn't dip, hold the shares of B for 12 months for the long-term gain.
If the OP puts the proceeds from selling their taxable funds into B, and then doesn't sell B when the tuition payments are due, where do they get the money from?
Hope that makes sense.
I'm having a hard time coming up with a scenario where this strategy would put you ahead.
The transitive law of math we all learned in elementary math holds as you point out. The difference is short-term losses can be applied against income. Unless one is in the 15% bracket or less, this is a strategy is tax-efficient. It takes on no more risk than the OP was contemplating. This is the major difference.
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Re: I need to sell some stock now for a looming expense, right?

Post by Nearly A Moose » Sun Mar 11, 2018 9:00 am

Lafder wrote:
Sat Mar 10, 2018 10:11 pm
Double check there is no extra fee for a payment plan. It is to the school's advantage to be paid up front, so they often add fees to encourage payment in full.

There were also extra charges for tuition "insurance".

I tended to pay in full since the fees for installments was more than I wanted to pay for the convenience of monthly payments. There was a lower fee if you paid in 2 installments, and a higher fee if you spread it out over 10 payments.

lafder
Yes, I specifically asked the finance director (by email) - no fees for a monthly plan. And the numbers add up. I was shocked. That fact that I was prepared to pull the trigger on all $30k right away is what got me to post this thread in the first place.

And this is not tuition insurance. I declined that.
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