Quick question on Roth IRA and taxable accounts

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thomasbayarea
Posts: 362
Joined: Wed Feb 29, 2012 4:40 pm

Quick question on Roth IRA and taxable accounts

Post by thomasbayarea » Tue May 14, 2019 7:28 pm

Hi all,

I've been a set-and-forget guy for such a long time, that I have literally forgotten the rules :D I want to exchange my Total Market and International holdings for a Target Date fund. Called Vanguard, but the kid on the line was not very convincing, so here goes --

1. If I sell VTSAX to buy VTIVX in my Roth IRA (backdoor, if it matters) will I get taxed for it? (My guess = no)

2. If I sell VTSAX to buy VTIVX in my individual account (taxable) will I get taxed for it? (My guess = yes)

mhalley
Posts: 6859
Joined: Tue Nov 20, 2007 6:02 am

Re: Quick question on Roth IRA and taxable accounts

Post by mhalley » Tue May 14, 2019 7:32 pm

You are correct. No w depends on your cost basis.

megabad
Posts: 1634
Joined: Fri Jun 01, 2018 4:00 pm

Re: Quick question on Roth IRA and taxable accounts

Post by megabad » Tue May 14, 2019 9:09 pm

mhalley wrote:
Tue May 14, 2019 7:32 pm
No w depends on your cost basis.
*No 2* depends on your cost basis. (I am sure this is what mhalley meant) and Yes your are correct on No 1.

Also, please bear in mind that owning a target date fund in your taxable will have ongoing tax impacts in addition to any immediate capital gains resulting from the sale. Typically, it is not advised to own a target date fund in taxable for this reason.

Ddd7651
Posts: 14
Joined: Tue May 07, 2019 2:15 pm

Re: Quick question on Roth IRA and taxable accounts

Post by Ddd7651 » Wed May 15, 2019 7:13 am

megabad wrote:
Tue May 14, 2019 9:09 pm
mhalley wrote:
Tue May 14, 2019 7:32 pm
No w depends on your cost basis.
Also, please bear in mind that owning a target date fund in your taxable will have ongoing tax impacts in addition to any immediate capital gains resulting from the sale. Typically, it is not advised to own a target date fund in taxable for this reason.
True statement. A lot of people will instead buy corresponding ETF funds that mirror a mutual fund for this reason (and can be cheaper). You only have your capital gains when you sell. They are not "actively" managed. Also, a lot will pay dividends so you get taxed at dividend rate at that point.

rkhusky
Posts: 6580
Joined: Thu Aug 18, 2011 8:09 pm

Re: Quick question on Roth IRA and taxable accounts

Post by rkhusky » Wed May 15, 2019 7:19 am

thomasbayarea wrote:
Tue May 14, 2019 7:28 pm
Hi all,

I've been a set-and-forget guy for such a long time, that I have literally forgotten the rules :D I want to exchange my Total Market and International holdings for a Target Date fund. Called Vanguard, but the kid on the line was not very convincing, so here goes --

1. If I sell VTSAX to buy VTIVX in my Roth IRA (backdoor, if it matters) will I get taxed for it? (My guess = no)

2. If I sell VTSAX to buy VTIVX in my individual account (taxable) will I get taxed for it? (My guess = yes)
There is no backdoor method needed when exchanging funds in a Roth IRA. The backdoor method only comes into play for new contributions and when your income is too large to allow a direct contribution.

There are tax consequences when selling a fund in a taxable account. If you make a profit, you pay tax, and if you take a loss, you will generally get a tax break (need to watch out for wash sales).

As noted by others, if you are in a high tax bracket (32%+), you may not want taxable bonds in your taxable account. However, if you prefer simplicity over the small tax drag, you may not care.

If you do care about the tax drag, a solution might be to keep all stocks in the taxable account and choose an earlier TR fund in the Roth. Or just keep individual funds in both accounts.

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