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Is it worth paying the taxes to consolidate taxable accounts?

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  • Is it worth paying the taxes to consolidate taxable accounts?

    When we first started investing in the early 1990s, I was not nearly as well-educated on investment matters as I am now. I opened our first taxable (non-retirement) account with an actively managed mutual fund that was pretty popular at the time and had a good track record (and still does). The account now stands at right around 100K. The EF is 0.81%.

    My dilemma is that over the years, our portfolio has come to include many different accounts with various companies. The older I get, the more I crave simplicity. I'd like to head into retirement with things consolidated as much as reasonably makes sense to make starting to draw from our nest egg more straightforward.

    I've thought about liquidating this fund and moving the money into our Vanguard account. The problem is, as stated, that this is a taxable account. Selling it all would generate a tax bill of about $3,750. There's no real monetary advantage to closing it out. It would strictly be to simplify our portfolio. The only slight benefit would be moving to a fund with a lower EF.

    What would you do? Is there anything else I should be considering here? Is the decreased sprawl of our portfolio worth the tax bill? Should I wait for the next market correction when our gain would be smaller and sell then?
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

  • #2
    Transfer “in-kind” or is the fund not supported at Vanguard?

    otherwise take the tax hit.

    Do you have any tax loss harvesting opportunities that could counter the gains of this fund?

    Edit: bogleheads always talk about donating appreciated shares or something called a DAF. This helps to “avoid” taxes but I think it contradicts the whole point of investing your money so it grows and you can spend it. But those folks are much smarter than I.
    Last edited by Jluke; 05-04-2019, 11:57 AM.

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    • #3
      I was thinking along the same lines as Jluke -- Vanguard should be able to do a transfer-in-kind (in most cases). You can keep the same fund(s), but you are able to transfer the custodian from Fidelity, eTrade, or whoever (I forget who you've said you also have accounts with) to be held within your Vanguard account. That would skip the taxable event by keeping the same funds & shares. Some details from Vanguard here.

      Once you get it into your Vanguard account, you can leave it as-is, or you can wait until the next big downturn or a random RBD, then sell out of it to simplify even further by consolidating your funds. So yes, I would wait to actually sell the funds until (a) the fund's value has gone down and you can minimize the tax hit; (b) you need the money for something (2nd home purchase, or whatever else); or (c) you're just tired of having this extra fund, expect that it won't be going down significantly anytime soon, and you can cut bait (sell it regardless of the taxes).
      "Praestantia per minutus" ... "Acta non verba"

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      • #4
        I hadn't considered just moving the fund itself to our Vanguard account so thanks for that idea. I was thinking of selling that fund and using the money to add to our existing Vanguard holdings. Moving the fund into our Vanguard account would make things a bit easier as there would be one less account to keep track of but it wouldn't actually simplify our portfolio at all as we'd still own the fund.

        We're not opposed to donating appreciated assets and have done that a couple of times in the past, but we have no plans to donate anywhere near this amount to anything so that wouldn't solve the problem.

        I'll look into moving it into our Vanguard account and also start tracking the performance. So far this year, it is up just over 23% so had I sold last year, this would have been less of an issue. Of course, then I also would have missed out on that run up.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

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        • #5
          I will say that generally, having to pay taxes just means that you earned money. So really, it's a win either way.
          "Praestantia per minutus" ... "Acta non verba"

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          • #6
            Transfer in kind would be a great way to get everything in one place. Also, another step to take would be to stop reinvesting the dividends. If you had it all in Vanguard it would be easier to sell it off whenever you thought best--all at once or a little each year. Maybe you could start off using use specific ID and sell some shares that haven't appreciated much?. Do you normally check with your tax accountant before you do anything that will have tax consequences? I think you said in another thread that you received a nice raise this year. When you get above 250k taxable income there is another 3.8% tax (Net Investment Income Tax) that is added on to capital gains. https://www.irs.gov/newsroom/questio...ent-income-tax

            So, maybe it would be worthwhile to do it now and get it over with. Maybe it would be better to wait until you are in a lower tax bracket (but, maybe you will never be in a lower tax bracket?) Or, maybe you wait until retirement and pull from the appreciated stock fund first? It is difficult to say without knowing your tax situation (and also having a crystal ball--because tax rates could always go up).

            The Donor Advised Fund is also a good suggestion. Suppose you are planning to give 10% of your income per year to charity as part of your normal budget. You can put the appreciated stock in a DAF--you get a tax deduction. Then, you can make allocations to your charities over several years. It is a great way to "bunch" your deductions.



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            • #7
              Transfer in kind was my first thought. A few others have commented.
              My second thought is when would fund get liquidated- when drawing down, if you make this fund the initial target (the next time you "need" $100,000), then you can simplify on draw down.

              Have you looked at spending calculators for retirement- often times there are changes depending on whether an IRA is drawn first, taxable drawn first, or Roth drawn first (FYI most people would drawn down Roth LAST).

              So for example drawing down the taxable mutual fund first and letting Roth compound 1-2 more years before drawing down Roth likely allows Roth to grow 2 more years.

              Is your asset allocation correct? Would you sell a stock mutual fund and buy a bond mutual fund (muni bond in taxable account for example).
              Is there another event in life coming up where you would need cash? Is there another life event which could generate a tax savings of $4000?

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              • #8
                Thanks for the replies. Lots of good thoughts.

                Transfer in kind is a great first step.
                Stopping the reinvestment of dividends and capital gains is another great idea as it will prevent us from accumulating even more of the fund.
                I wasn't aware of the higher tax once my income tops 250K. I don't anticipate that being an issue in 2019 but it could possibly happen in 2020.

                I may just move it to our Vanguard account, stop reinvestment, and leave it be. If an opportunity arises to sell with a smaller tax hit, I'll consider it. Otherwise, I'll probably just leave it be until we need to draw from it.
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

                Comment


                • #9
                  I have a similar situation where I'm trying to simplify my investments. I've been helping DD with some expenses while she is living on a grad school income. I've transferred stock/funds to her, and she sells them for cash. Since her income is so low, she hasn't had to pay any capital gains tax.

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                  • #10
                    Originally posted by moneybags View Post
                    I have a similar situation where I'm trying to simplify my investments. I've been helping DD with some expenses while she is living on a grad school income. I've transferred stock/funds to her, and she sells them for cash. Since her income is so low, she hasn't had to pay any capital gains tax.
                    Interesting. So do you gift them to her? What would prevent me from gifting shares to my daughter, her selling them with no CG tax, and then giving us back the money?
                    Steve

                    * Despite the high cost of living, it remains very popular.
                    * Why should I pay for my daughter's education when she already knows everything?
                    * There are no shortcuts to anywhere worth going.

                    Comment


                    • #11
                      Originally posted by disneysteve View Post

                      Interesting. So do you gift them to her? What would prevent me from gifting shares to my daughter, her selling them with no CG tax, and then giving us back the money?
                      It would not work due to the Step doctrine. ( It would have to be a gift with no strings attached. )

                      https://en.wikipedia.org/wiki/Step_transaction_doctrine

                      https://www.irs.gov/pub/irs-wd/0826004.pdf

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