What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

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Infomom2
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What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by Infomom2 » Sat Jan 12, 2019 12:27 pm

I use Vanguard's personal advisor services and got an e-mail that they will now use the MinTax cost basis method unless I request otherwise. The majority of my money is in IRAs, with only about $3000 in their brokerage account.

Can anyone help me understand what this means and if I should ask for anything different?

Thanks!

mhalley
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by mhalley » Sat Jan 12, 2019 12:36 pm

If you don’t have money in taxable accounts, then this won’t impact you. If you are adding money to taxable accounts, then it might in the future. Previous thread:
viewtopic.php?t=59718

Topic Author
Infomom2
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by Infomom2 » Sun Jan 13, 2019 12:05 pm

mhalley wrote:
Sat Jan 12, 2019 12:36 pm
If you don’t have money in taxable accounts, then this won’t impact you. If you are adding money to taxable accounts, then it might in the future. Previous thread:
viewtopic.php?t=59718

Thank you. I read through the previous thread linked above. I do have about $3500 in a taxable account with Vanguard. From what I can understand, it seems any impact would be minimal? Is that correct? Otherwise, maybe I can move more of the taxable money into non-taxable. I still have not contributed to my ROTH for 2018, but was going to so do with other money.

mhalley
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by mhalley » Sun Jan 13, 2019 12:22 pm

Hopefully as you continue in your career, your income will increase so that eventually you will have substantial assets in your taxable account. Vanguard will then have to rebalance the taxable account at some point, and minimizing taxes is always good.

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Infomom2
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by Infomom2 » Sun Jan 13, 2019 12:44 pm

mhalley wrote:
Sun Jan 13, 2019 12:22 pm
Hopefully as you continue in your career, your income will increase so that eventually you will have substantial assets in your taxable account. Vanguard will then have to rebalance the taxable account at some point, and minimizing taxes is always good.
I actually hope to keep the money I have in the taxable account to a minimum. However, it sounds like the Min Tax method will generally mean the least amount of taxes for the $3500 I have in the brokerage account?

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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by grabiner » Sun Jan 13, 2019 5:38 pm

mhalley wrote:
Sun Jan 13, 2019 12:22 pm
Hopefully as you continue in your career, your income will increase so that eventually you will have substantial assets in your taxable account. Vanguard will then have to rebalance the taxable account at some point, and minimizing taxes is always good.
However, Vanguard's algorithm for minimizing taxes may not be the same as yours.

In 2017, I sold some stock ETF shares in order to buy a car. I had the choice between selling for a smaller short-term gain, or a larger long-term gain. I had enough carryover losses to offset the entire gain, and thus there was no extra tax cost for taking the short-term gain. If I had had no carryover losses, I would have preferred a long-term gain for the lower tax rate.
Wiki David Grabiner

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Infomom2
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by Infomom2 » Sun Jan 13, 2019 8:43 pm

grabiner wrote:
Sun Jan 13, 2019 5:38 pm
mhalley wrote:
Sun Jan 13, 2019 12:22 pm

However, Vanguard's algorithm for minimizing taxes may not be the same as yours.

In 2017, I sold some stock ETF shares in order to buy a car. I had the choice between selling for a smaller short-term gain, or a larger long-term gain. I had enough carryover losses to offset the entire gain, and thus there was no extra tax cost for taking the short-term gain. If I had had no carryover losses, I would have preferred a long-term gain for the lower tax rate.
Thanks! I need to figure out how to manage my Vanguard accounts myself, so I will probably post another thread on that soon.

drzzzzz
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by drzzzzz » Sun Jan 13, 2019 10:12 pm

grabiner wrote:
Sun Jan 13, 2019 5:38 pm
mhalley wrote:
Sun Jan 13, 2019 12:22 pm
Hopefully as you continue in your career, your income will increase so that eventually you will have substantial assets in your taxable account. Vanguard will then have to rebalance the taxable account at some point, and minimizing taxes is always good.
However, Vanguard's algorithm for minimizing taxes may not be the same as yours.

In 2017, I sold some stock ETF shares in order to buy a car. I had the choice between selling for a smaller short-term gain, or a larger long-term gain. I had enough carryover losses to offset the entire gain, and thus there was no extra tax cost for taking the short-term gain. If I had had no carryover losses, I would have preferred a long-term gain for the lower tax rate.
Your example brings up the question of how is min tax method calculated by Vanguard if Vanguard doesn't know your tax situation or other potential gains or losses that you have outside of Vanguard.

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grabiner
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by grabiner » Sun Jan 13, 2019 11:10 pm

drzzzzz wrote:
Sun Jan 13, 2019 10:12 pm
grabiner wrote:
Sun Jan 13, 2019 5:38 pm
mhalley wrote:
Sun Jan 13, 2019 12:22 pm
Hopefully as you continue in your career, your income will increase so that eventually you will have substantial assets in your taxable account. Vanguard will then have to rebalance the taxable account at some point, and minimizing taxes is always good.
However, Vanguard's algorithm for minimizing taxes may not be the same as yours.

In 2017, I sold some stock ETF shares in order to buy a car. I had the choice between selling for a smaller short-term gain, or a larger long-term gain. I had enough carryover losses to offset the entire gain, and thus there was no extra tax cost for taking the short-term gain. If I had had no carryover losses, I would have preferred a long-term gain for the lower tax rate.
Your example brings up the question of how is min tax method calculated by Vanguard if Vanguard doesn't know your tax situation or other potential gains or losses that you have outside of Vanguard.
I would guess that the minimum tax method assumes you have no offsetting losses and just adjusts for the tax rate. (Always preferring long-term gains doesn't make much sense; I had one sale on which I did have to pay tax on the gains, and had a choice of a short-term gain of $32 or a long-term gain of $800. I took the $32.)
Wiki David Grabiner

typical.investor
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by typical.investor » Sun Jan 13, 2019 11:10 pm

drzzzzz wrote:
Sun Jan 13, 2019 10:12 pm
grabiner wrote:
Sun Jan 13, 2019 5:38 pm
mhalley wrote:
Sun Jan 13, 2019 12:22 pm
Hopefully as you continue in your career, your income will increase so that eventually you will have substantial assets in your taxable account. Vanguard will then have to rebalance the taxable account at some point, and minimizing taxes is always good.
However, Vanguard's algorithm for minimizing taxes may not be the same as yours.

In 2017, I sold some stock ETF shares in order to buy a car. I had the choice between selling for a smaller short-term gain, or a larger long-term gain. I had enough carryover losses to offset the entire gain, and thus there was no extra tax cost for taking the short-term gain. If I had had no carryover losses, I would have preferred a long-term gain for the lower tax rate.
Your example brings up the question of how is min tax method calculated by Vanguard if Vanguard doesn't know your tax situation or other potential gains or losses that you have outside of Vanguard.
Methodology seems the same as Schwab's default Tax Lot Optimizer:


Per Vanguard:
1. Short-term capital loss from largest to smallest.
2. Long-term capital loss from largest to smallest.
3. Short-term zero gain or loss.
4. Long-term zero gain or loss.
5. Long-term capital gain from smallest to largest.
6. Short-term capital gain from smallest to largest.

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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by CABob » Sun Jan 13, 2019 11:20 pm

drzzzzz wrote:
Sun Jan 13, 2019 10:12 pm
Your example brings up the question of how is min tax method calculated by Vanguard if Vanguard doesn't know your tax situation or other potential gains or losses that you have outside of Vanguard.
I would assume that Vanguard looks at the tax implications of the transaction alone without any other consideration.
Bob

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grabiner
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Re: What does it mean that Vanguard's PAS will default to using use the MinTax cost basis method?

Post by grabiner » Sun Jan 13, 2019 11:44 pm

typical.investor wrote:
Sun Jan 13, 2019 11:10 pm
Methodology seems the same as Schwab's default Tax Lot Optimizer:


Per Vanguard:
1. Short-term capital loss from largest to smallest.
2. Long-term capital loss from largest to smallest.
3. Short-term zero gain or loss.
4. Long-term zero gain or loss.
5. Long-term capital gain from smallest to largest.
6. Short-term capital gain from smallest to largest.
1 over 2 is usually wrong. It doesn't matter whether you have short-term or long-term losses unless you have a year in which your gains exceed your losses, and you have both short-term and long-term gains that year.

3 over 4 is correct. If you have a break-even transaction, it's slightly better to sell short-term shares, since you might have a short-term gain on those shares later.

5 over 6 is the main issue. If you have enough losses to offset the gains, the only difference between long-term and short-term gains is that long-term gains allow you to keep more short-term loss carryovers. Even if you don't, the amount matters; as I mentioned earlier in the thread, I preferred a $32 short-term gain over an $800 long-term gain on a $5000 sale.
Wiki David Grabiner

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