Questions about Switching Funds in Taxable Accounts

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nszzya
Posts: 55
Joined: Wed Feb 22, 2012 2:19 pm

Questions about Switching Funds in Taxable Accounts

Post by nszzya » Wed Jan 15, 2020 12:01 am

Hi Bogleheads,

I'm interested in simplifying my portfolio towards a three fund portfolio. As some of my holdings are in taxable accounts. I've read the wiki "Paying a tax cost to switch funds" www.bogleheads.org/wiki/Paying_a_tax_co ... itch_funds. In part, it reads,

"If the annual difference in taxes and costs is more than 10% of the tax you would pay, you should almost always switch."

So, for example I am interested in the advisability of selling DFA Calif. Intermediate-Term Muni Bond Portfolio (DCIBX ER 0.23%) and replacing it with Vanguard Total Bond Market ETF (BND ER 0.035%).

Suppose I sell:

DCIBX $560,000 with a basis of $540,000
LTCG $20,000
LTCG Tax $4,860 (15% Federal and 9.3% CA)
ER 0.0023 * $560,000 = $1,288

If I use the proceeds to pay the LTCG tax and buy BND with the remainder, I'm left with:

BND $555,140
ER 0.00035 * $555,140 = $194

Using the wiki rule of thumb, the annual difference is $1,288 - $194 = $1,094 which is greater than 10% of the LTCG tax of $4,860 which would indicate that switching is in order.

Questions:

1. Did I calculate this correctly?
2. How do I account for the tax exempt (federal and state) gains that DCIBX provides?
3. Tangentially, when using the switchtaxable spreadsheet http://remarque.org/~grabiner/switchtaxable.html, where does one find the fund distributions and how is tax on distributions calculated (columns E and F)?

Thank you for any help with this!

shess
Posts: 372
Joined: Wed May 17, 2017 12:02 am

Re: Questions about Switching Funds in Taxable Accounts

Post by shess » Wed Jan 15, 2020 12:36 am

nszzya wrote:
Wed Jan 15, 2020 12:01 am
1. Did I calculate this correctly?
2. How do I account for the tax exempt (federal and state) gains that DCIBX provides?
I think you did the math right - that for your $4800 up-front tax payment, you'll have saved that much on ER in about 4 years. Additionally, keep in mind that it is likely you'd have paid taxes on that gain at some point, so it's not a straight-up "time to positive cashflow" type of calculation.

Then again, I had already decided to pull the trigger when you said $560k with $540k basis. I have stock positions where I leave them along because 3/4 of the position is capital gains, but if I'm realizing only 10% or 20% in gains, usually I don't worry about it.

There is no such thing as tax-exempt gains. You get tax-exempt dividends, but the capital gains on munis are just regular old capital gains.

While I agree with the notion of simplifying, for a position of that size, I'd think two or three times about what impact converting from tax-exempt to taxable will have on AGI. I'm not saying I wouldn't do it, just that I'd wonder if there are unexpected side effects at tax time.

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