Basic tax topic

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Craig234
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Basic tax topic

Post by Craig234 » Tue Aug 13, 2019 4:07 pm

I have longtime mutual funds in and out of a 401(k).

I'm considering that a crash might be coming and it might be good to get out of stocks for a while.

I'm thinking about tax consequences of doing so. (I'm happy to pay taxes owed, but delaying that is nice).

As I understand, I could sell mutual funds in the 401(k) and the realized gains would just remain in the fund untaxed until withdrawal.

But that there's no real way to not realize the gains on funds outside the 401(k) when they're sold, and pay taxes for that year on the gains.

It makes long-term (really long-term, not the one year tax definition) stocks a bit of a prison outside a 401(k).

(Of course, 'really long-term' tends to ride out the crashes, but still misses out on the benefits of cashing out before a crash).

Does this all basically sound right? Are there any other ideas how to get out of the risk of a possible coming crash?

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prudent
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Re: Basic tax topic

Post by prudent » Tue Aug 13, 2019 5:11 pm

Welcome to bogleheads!

Capital gains in a taxable account get a bit of a break on income taxes. If you're married filing jointly, you would pay zero tax on long-term capital gains if your taxable income is under $78,750. Over that it's 15% tax on long-term capital gains up to around $430,000 of taxable income. So it may not be as painful as you thought.

livesoft
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Re: Basic tax topic

Post by livesoft » Tue Aug 13, 2019 5:13 pm

Craig234 wrote:
Tue Aug 13, 2019 4:07 pm
Are there any other ideas how to get out of the risk of a possible coming crash?
Select an overall asset allocation for your portfolio that is not 100% equities. Surely, some of your mutual funds in your 401(k) are bond funds, so you could exchange equity funds into bond funds in your 401(k) and that would reduce your risk, wouldn't it?
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Dottie57
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Re: Basic tax topic

Post by Dottie57 » Tue Aug 13, 2019 5:33 pm

Craig234 wrote:
Tue Aug 13, 2019 4:07 pm


But that there's no real way to not realize the gains on funds outside the 401(k) when they're sold, and pay taxes for that year on the gains.

It makes long-term (really long-term, not the one year tax definition) stocks a bit of a prison outside a 401(k).
The prison aspect is only in your mind. You make money on mutual funds so when you sell, the tax man cometh. W2 income is also taxed.

yohac
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Re: Basic tax topic

Post by yohac » Tue Aug 13, 2019 5:39 pm

The "tax prison" is the best financial thing that ever happened to me. My aversion to taxes overpowered the urge to sell out of fear.

megabad
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Re: Basic tax topic

Post by megabad » Tue Aug 13, 2019 5:39 pm

livesoft wrote:
Tue Aug 13, 2019 5:13 pm
Craig234 wrote:
Tue Aug 13, 2019 4:07 pm
Are there any other ideas how to get out of the risk of a possible coming crash?
Select an overall asset allocation for your portfolio that is not 100% equities. Surely, some of your mutual funds in your 401(k) are bond funds, so you could exchange equity funds into bond funds in your 401(k) and that would reduce your risk, wouldn't it?
This. Think of your portfolio as one entity. No reason to worry about realizing capital gains, just adjust your allocation in your 401k. Though I would hope you are making asset allocation decisions based on your risk tolerance and investment horizon and not based on market timing.

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Craig234
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Re: Basic tax topic

Post by Craig234 » Tue Aug 13, 2019 9:09 pm

In the 401(k) seems easy. Our of it, not so much. We're basically talking about just stock mutual funds.

This is all about market timing - something I haven't done before, but am considering this one time.

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Stinky
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Re: Basic tax topic

Post by Stinky » Tue Aug 13, 2019 9:41 pm

Craig234 wrote:
Tue Aug 13, 2019 9:09 pm

This is all about market timing - something I haven't done before, but am considering this one time.
Realize that if you sell out of stocks now, you’ll want to get back in at some future time.

So you’ll be market timing twice - once to get out, and once to get back in.

There are many threads on the forum about people who get out, never pull the trigger to get back in, and end up regretting their decisions.

My advice - look and think before you leap. :D
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rkhusky
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Re: Basic tax topic

Post by rkhusky » Wed Aug 14, 2019 6:58 am

Or you could just wait for the crash and then sell the taxable investments at a loss, which can have tax benefits (see Tax Loss Harvesting (TLH)).

Or if the crash isn't so large, you could withdraw without paying as much tax.

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Craig234
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Re: Basic tax topic

Post by Craig234 » Thu Aug 15, 2019 2:05 pm

rkhusky wrote:
Wed Aug 14, 2019 6:58 am
Or you could just wait for the crash and then sell the taxable investments at a loss, which can have tax benefits (see Tax Loss Harvesting (TLH)).

Or if the crash isn't so large, you could withdraw without paying as much tax.
I appreciate the replies, but this one is really bad advice. 'Lose money instead of making money to reduce taxes'.

The 800 point Dow drop yesterday and the 'inverted yield' news make a stronger case for my concern.

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Flobes
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Re: Basic tax topic

Post by Flobes » Thu Aug 15, 2019 3:37 pm

Welcome to the Forum, Craig.
Craig234 wrote:
Thu Aug 15, 2019 2:05 pm
rkhusky wrote:
Wed Aug 14, 2019 6:58 am
Or you could just wait for the crash and then sell the taxable investments at a loss, which can have tax benefits (see Tax Loss Harvesting (TLH)).

Or if the crash isn't so large, you could withdraw without paying as much tax.
I appreciate the replies, but this one is really bad advice. 'Lose money instead of making money to reduce taxes'.
Tax loss harvesting involves two steps.

First: sell at a loss. This can yield current and future tax savings.

Second: buy a replacement that is similar but not identical. For example, sell Total Stock and buy S&P 500.

If you do both steps, you maintain your asset allocation. And you can enjoy the "recovery" back upwards or you can harvest another loss if market spirals downward; either way you win. Tax code compensates you for harvesting losses rather than merely riding it out.

Doing the first (selling) without the second (buying) is merely selling at a loss thereby locking in the loss.
Craig234 wrote:
Tue Aug 13, 2019 4:07 pm
It makes long-term (really long-term, not the one year tax definition) stocks a bit of a prison outside a 401(k).
No. In your taxable (non-tax-deferred) accounts, the combination of favorable capital gains rates, advantages of tax loss harvesting, and stepped-up basis at death make for freedom. On the other hand, your 401k is subject to RMDs, compulsory withdrawals whether you want or need it or not, taxed at marginal tax rates, which can be "prison" for you and for your heirs.
Craig234 wrote:
Tue Aug 13, 2019 4:07 pm
I'm considering that a crash might be coming and it might be good to get out of stocks for a while...

The 800 point Dow drop yesterday and the 'inverted yield' news make a stronger case for my concern.
If you are feeling very jittery, it is a good time to reevaluate your asset allocation plan. Market goes up, market goes down -- sometimes bigly. Have you taken on more risk than you can comfortably bear? Adjust your plan, rather than react to noisy news, without a strategy.

Consider that everyone sees the same signals you have. We may read the tea leaves differently. If you believe your crystal ball is superior to everyone else's, then you're good to go. You will know exactly when and what to get out of as well as precisely what and when to get in. Lucky you.

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Craig234
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Re: Basic tax topic

Post by Craig234 » Thu Aug 15, 2019 4:40 pm

Flobes wrote:
Thu Aug 15, 2019 3:37 pm
Welcome to the Forum, Craig.
Thanks.
Craig234 wrote:
Thu Aug 15, 2019 2:05 pm
rkhusky wrote:
Wed Aug 14, 2019 6:58 am
Or you could just wait for the crash and then sell the taxable investments at a loss, which can have tax benefits (see Tax Loss Harvesting (TLH)).

Or if the crash isn't so large, you could withdraw without paying as much tax.
I appreciate the replies, but this one is really bad advice. 'Lose money instead of making money to reduce taxes'.
Tax loss harvesting involves two steps.

First: sell at a loss. This can yield current and future tax savings.

Second: buy a replacement that is similar but not identical. For example, sell Total Stock and buy S&P 500.

If you do both steps, you maintain your asset allocation. And you can enjoy the "recovery" back upwards or you can harvest another loss if market spirals downward; either way you win. Tax code compensates you for harvesting losses rather than merely riding it out.

Doing the first (selling) without the second (buying) is merely selling at a loss thereby locking in the loss.
That makes sense, for something at a given value. But it doesn't make sense to intentionally hold something while expecting it to go down in value in order to do this, instead of getting a gain, which is the context here.
Craig234 wrote:
Tue Aug 13, 2019 4:07 pm
It makes long-term (really long-term, not the one year tax definition) stocks a bit of a prison outside a 401(k).
No. In your taxable (non-tax-deferred) accounts, the combination of favorable capital gains rates, advantages of tax loss harvesting, and stepped-up basis at death make for freedom. On the other hand, your 401k is subject to RMDs, compulsory withdrawals whether you want or need it or not, taxed at marginal tax rates, which can be "prison" for you and for your heirs.
The fact that 401(k)'s have some prison of their own unrelated to this topic (the ability to freely buy and sell while in the 401(k) without creating taxable gains), doesn't change the incentive to hold on to investments rather than sell them outside a 401(k).
Craig234 wrote:
Tue Aug 13, 2019 4:07 pm
I'm considering that a crash might be coming and it might be good to get out of stocks for a while...

The 800 point Dow drop yesterday and the 'inverted yield' news make a stronger case for my concern.
If you are feeling very jittery, it is a good time to reevaluate your asset allocation plan. Market goes up, market goes down -- sometimes bigly. Have you taken on more risk than you can comfortably bear? Adjust your plan, rather than react to noisy news, without a strategy.

Consider that everyone sees the same signals you have. We may read the tea leaves differently. If you believe your crystal ball is superior to everyone else's, then you're good to go. You will know exactly when and what to get out of as well as precisely what and when to get in. Lucky you.
It's not about 'feeling jittery', an emotional reaction, but observing facts and what they say. This isn't 'reacting to noisy news' - note my post was before this noisy news. 'Without a strategy' is an awfully presumptuous comment, and a bit rude.

The last bit looks like standard 'don't try to time the market' opinion, but presented in a rather passive-aggressive, sarcastic way. I know you mean well, that it's just an opinion you have reached and are trying to share what you think is good advice.

It also fits investing generally short of a pure index - any time you buy or sell a stock, you 'believe your crystal ball is superior to everyone else's', whether or indirectly by buying funds and trusting others on your behalf to do that.

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LilyFleur
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Re: Basic tax topic

Post by LilyFleur » Thu Aug 15, 2019 5:07 pm

Hi, Craig! Welcome!

I have learned much here at Bogleheads.

The folks on this forum generally follow the advice of Jack Bogle. And the advice they give you will be informed by this bias. The proof of the success in this approach is the financial security of most of us. Some advice will be stated more strongly than others. No one has a crystal ball, but generally you will be advised to not invest in individual stocks, not to time the market, and to have a portfolio of a few, strategically-selected, low expense-ratio index funds. There are strongly debated topics (dividend stocks or not, for example, or own rentals or not). I hope you, like I have, will learn from the wealth of information here. There is great advice on developing your own Investment Policy Statement, on creating your own Asset Allocation based on your IPS--BHs take a very disciplined approach. It's a great opportunity, I think.

Good luck!

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Craig234
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Re: Basic tax topic

Post by Craig234 » Thu Aug 15, 2019 6:22 pm

LilyFleur wrote:
Thu Aug 15, 2019 5:07 pm
Hi, Craig! Welcome!

I have learned much here at Bogleheads.

The folks on this forum generally follow the advice of Jack Bogle. And the advice they give you will be informed by this bias. The proof of the success in this approach is the financial security of most of us. Some advice will be stated more strongly than others. No one has a crystal ball, but generally you will be advised to not invest in individual stocks, not to time the market, and to have a portfolio of a few, strategically-selected, low expense-ratio index funds. There are strongly debated topics (dividend stocks or not, for example, or own rentals or not). I hope you, like I have, will learn from the wealth of information here. There is great advice on developing your own Investment Policy Statement, on creating your own Asset Allocation based on your IPS--BHs take a very disciplined approach. It's a great opportunity, I think.

Good luck!
Thanks. From the bit I know of Bogle, I largely agree with his statements, and yours above. I've been mostly in mutual funds for decades, and some of my info for preferring that came from a Bogle book long ago.

I've done a little bit of stock trading, and have made a lot, lost a lot, had middle results, and come to agree with the above more, generally.

I'm usually the one saying what you said, encouraging people away from both stock purchases and market timing (they rarely listen).

And as you know - it gets more complicated from there!

I will share one little anecdote on timing that's not any indication of a broader principle. Just after the 2008 crash, I bought a house out of state for a 'friend' to rent when they were evicted.

Long story short, I didn't get a penny of rent for ten years while I didn't evict them to help them, but having bought at a 'low point', when I finally did sell it, it sold for nearly three times what I paid. Timing worked, though unplanned and luckily.

I had come here more looking for a specific topic unrelated to Bogle, and might have stumbled into a group that has a somewhat different focus. But no harm done; I consider myself mostly in agreement with what I know of Bogle.

I didn't mean to get into a debate about market timing; while I'm considering it now, decades of mutual funds untouched speak to my general support of not market timing. But I'm for civil discussion of the topic whichever side is being defended.

I think in general, financial forums are all too subject to conflict as people want to defend views important to them, but that it's better to try to treat people with respect, including respecting it's their choice and that you might be wrong also.

Even when I'm encouraging people to go with the odds and pick the mutual fund over the hot stock, I'm aware that hot stock might go up ten times in value and they could lose a lot going with the mutual fund.

rkhusky
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Re: Basic tax topic

Post by rkhusky » Fri Aug 16, 2019 6:31 am

Craig234 wrote:
Thu Aug 15, 2019 2:05 pm
rkhusky wrote:
Wed Aug 14, 2019 6:58 am
Or you could just wait for the crash and then sell the taxable investments at a loss, which can have tax benefits (see Tax Loss Harvesting (TLH)).

Or if the crash isn't so large, you could withdraw without paying as much tax.
I appreciate the replies, but this one is really bad advice. 'Lose money instead of making money to reduce taxes'.

The 800 point Dow drop yesterday and the 'inverted yield' news make a stronger case for my concern.
You just have to accept that you can't predict the future, especially in the long term (like a month out). The stock market is affected by world events and since you can't predict world events, you can't predict the stock market.

Everyone expects the market to crash someday. We just can't predict when. But we have a plan on what we are going to do when that happens - rebalance and tax loss harvest, if we can. We are not afraid of corrections or crashes - it is to be expected when investing in the stock market.

If you invest in stocks, you expect the stock market to generally go up over time. Therefore, you should expect that you will accumulate capital gains in stocks held in a taxable account. You should also have a plan for how and when you are going to withdraw from the taxable account. That should dictate what investments you should place in your taxable account.

When you make money, you should expect the government to collect their share of the taxes on it.

Worry about things you can control, like your asset allocation and investment choices, and not about things you can't control, like the stock market.

retiredjg
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Re: Basic tax topic

Post by retiredjg » Fri Aug 16, 2019 7:01 am

Craig234 wrote:
Tue Aug 13, 2019 4:07 pm
I'm considering that a crash might be coming and it might be good to get out of stocks for a while.
I'm sorry to sound harsh, but this is a very poor approach to managing your portfolio. There is no way to get "out of stocks for awhile" and get back in with any kind of reliability. Your plan is exactly how people lose their money. You should not do this.

There is no such thing as "a crash might be coming". In reality, a crash is always coming. This is why you need to ALWAYS be invested in a way that you can be comfortable in both the good times and the bad times....because it is nearly impossible to "get out" and "get in" at the right times.

A better plan for you is to re-evaluate your risk tolerance (people and articles here can help) and set your portfolio up in a way that you do not need to try to time the market.

Edited to add, in reading your further posts, it appears that your risk tolerance has actually changed rather than you just didn't know what it was. Nevertheless, the answer is still the same. Don't "get out" and try to get back in. Re-evaluate and adjust your portfolio to your new risk tolerance, realizing that you should never try to go back to where you were.

Welcome to the forum.

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