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Portfolio Cleanup

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  • Portfolio Cleanup

    Hi everyone,

    I am a resident starting my 4th year of a 5 yr residency. My wife just graduated as a pediatrician and will start a new job making ~180k. We have -200k of student loan debt. I am just starting to learn about finances and trying to get things in order. We have contributed to a Roth IRA for both of us the last three years but had not utilized the residency sponsored 403b because there is no match. I have a taxable account started by my grandparents when I was a kid with ~50k in various indivual securities (MSFT, AAPL, GOOG etc). After reading the WCI books I was thinking about selling these individual stocks and eating the associated cap gains tax in order to invest in index funds. My question is should I reinvest the funds immediately into index funds in the taxable account or use them to act as salary/ spending money so that I can divert my actual salary into the 403b? If I should go with the 403b should I use the Roth option since we arent in our maximum tax bracket yet?

    Additional considerations: Likely planning to buy a house in 2-3 years when residency is finished and need to save for down payment, so the additional liquidity of a taxable account might have some benefit.

    Thanks in advance

  • #2
    no reason to pay taxes.
    donate, TLH, etc. would just not add new money.

    save 20% to retirement. which is.......


    • #3
      There's just no way to tell. If you need to rebalance, you'll have to liquidate. For the long term, that's probably best option. I would not use a taxable account for downpayment liquidity, though. If you're going to buy in the next few years and will need that money, the best thing to have it in is cash. However, you may not have to have that money and i'm not your FA or CPA. iow, there are just too many unknowns and this is a free resource - I wouldn't base a decision on this thread, just use as food for thought and keep prowling through all of the info here.
      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


      • #4
        I agree with Peds , you don't necessarily have to sell them at this time but since you'll be in the 15% capital gains tax, I'd probably just pay the tax now and get them into something more appropriate.


        • #5
          Contrarian view: If you own mainly all mega-cap stocks like the ones you listed above, I would hold on to them for a few reasons:

          1) Those mega caps are the ones which mainly move the S&P as a whole, so even though it's not as ideal as owning the entire market, it's not that bad really.
          2) Depending on your outlook, tech/remote work will continue to rise rest of 2020 and parts of 2021, so if you were to own individual stocks, those large stable tech companies are not bad choices imo. In fact, I would buy more Amazon.
          3) 50k may sound like a lot, but after a few years of saving as an attending, it won't really make a difference. No point paying capital gains tax. Hodl.


          • #6
            If you file "married filing jointly" you can have earned income up to $80,000 and be in the 0% tax bracket for long term capital gains. Is there any way your standard deduction and aggressive use of the 403b, etc. can keep you down there? It would be great to harvest the gains at a time when you don't have to pay taxes for them. Even failing that, a 15% tax rate is going to look good to you a few years from now when you join those of us paying 23.8% in federal tax on longterm capital gains.


            • #7
              It sounds like you've decided to go the index fund route. Unless you plan on making a good amount of charitable donations, the only way to do that is to sell and pay the taxes now while your tax rate is lower.

              That said, the biggest mistake I've made was deciding that indexing was the best idea in 2008 when I graduated med school and moving my relatively small portfolio (in a Roth) away from my individual stocks which included Apple, Intuitive Surgical, Google, and Hansen Natural (among other less successful companies). Luckily I've found success later and along with my increased salary those gains I gave up are relatively minor on an absolute basis, but considering that I could have been compounding my more recent from a much larger base, not making the switch could have resulted in a 6 figure bump to my retirement accounts.

              I'm assuming because you listed those securities in particular that those are the ones that dominate your account, and you aren't talking about an account with one share of each or something. And that someone started this for you as a gift, presumably someone who wanted you to think about the stock market and investing. Apple, Microsoft, and Google are not going to just disappear overnight. Would it be the worst thing to just let them run and see where they go until you really need the money?


              • #8
                I would start by figuring out
                a. what you 'should' contribute to you and your wife's retirement accounts. 20% multiplied by your family gross income.
                b. What student loan or other debt obligations you have to repay. Based on a. and b. you can start to put together a budget, informing the of the choices/timing around d. and the priority/timing around c.
                c. Determine financial goals; you mention a home purchase.
                d. The taxable account question(s) you have will hopefully become clearer by answering the first three. Also answering the question will depend upon amount of gain you have; are you talking 40K of gains or 5K.
                Based on a. and b. you can start to put together a budget, informing the of the choices/timing around d. and the priority/timing around c.


                • #9
                  You’re thinking about this in the right way and this is where the “squishy” part comes into play of balancing the optimal financial decision within the context of your life and what’s important to you with timing of things like buying your house.

                  Like ajm184 mentions, starting with the end in mind and working backwards always helps to provide more clarity.

                  A couple thoughts:
                  1. You’re almost certainly going to be in the 15% capital gains tax bracket this year or next unless you aggressively maximized out traditional 403b contributions and 457b contributions if eligible.
                  2. Tax rates are at relatively low levels, and who knows where they will go in the future, but I think it is safe to say they are more likely to go up than down. With that in mind, next year, you are going to both be attendings and will likely start maxing out all your pre-tax space. So while there isn’t a big difference between the 22% and 24% bracket today, I’d prefer to get as much as I could into Roth accounts knowing you have a long runway of tax-free growth before retirement.
                  3. Unless you have an early financial independence goal, with a dual physician income, and a 15-20% savings rate (along with matching contributions), you’ll be fine to save enough for retirement, unless you have a big jump in your lifestyle or plan to have a basketball team of kids, even if you didn’t maximize your retirement account savings this year. That’s where seeing the bigger picture helps, because one year of not maximizing your savings won’t make or break your plan.
                  4. For the home down payment, back into what mortgage you’d be comfortable with cash flow wise once you’re an attending to not feel stretched (after you assume 15-20% goes toward retirement). Once you know what mortgage amount you are comfortable with, look at what would be required to save up for a 20% down payment.
                  5. If you’re confident that you could save enough for the down payment from cash flow, then you have flexibility of what to do with your individual stocks. If you don’t think you’d be able to save enough from cash flow, then you can look at your options (delay buying a house for a year, put less than 20% down, or look at using your individual stocks for the down payment).
                  6. If you are set on buying a house in 2-3 years, having a 20% down payment, and need to use some of the money from your individual stocks, then it’s up to you on your comfort level of risk or what you think the stock market will do in the near-term. Like Johanna, mentioned, any money that is earmarked for a goal in the next couple years, I like to be more conservative and leave in cash.
                  7. With individual stocks, you have more risk by being concentrated, but it will eventually be a smaller portion of your overall portfolio as you save more toward retirement where you can use index funds. The bigger problem with individual stocks (if you don’t need the money now) is when they become a very concentrated position. It’s hard to think any of those large companies would have a drastically larger decline than the overall market, but you never know. Look at GE as an example of a big company that was a staple until it wasn’t. I prefer to be well diversified using index funds and it’s a little easier to sleep at night since $50k isn’t an insignificant amount of money, but everyone has their own comfort level.
                  I get in my own head of trying to aggressively save because I like to be ahead of schedule, but thanks to a little help from my wife, am doing better about balancing that with enjoying things along the way even if not the “optimal” decision. It’s easier to give the advice than take it sometimes, but it is important to strike the right balance of saving enough for the future with enjoying along the way.
                  Andrew Musbach, CFP® | Co-Founder & Financial Advisor at MD Wealth Management, LLC | Podcast Host - The Physician's Guide to Financial Wellness