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  • Exchanging taxable funds to be more tax efficient

    My portfolio:

    taxable acct vanguard:
    190k in wellington fund
    ​​​​​90k in S&P 500
    27k in mid cap
    11k small cap

    Roth ira vanguard:
    105k mix of reit and tips funds

    vanguard 403b (old employer):
    250k target fund

    Employer fund 403b:
    ​​​175k target fund

    Employer fund 457:
    35k target fund

    My concern is my taxable funds, which contain vanguard wellington fund, an actively manged balnced fund even with ER 0.16. the taxable acct funds were started 12 years ago and to date have lots of gains. In hindsight I would have started a 3 or 4 fund portfolio, but here I am.

    Ideally id like to exchange my taxable funds to something more tax efficient, and thenadjust my tax-deffered accounts to complement the tax efficiency
    What is the best way to exchange funds in the taxable account that would be the least costly? I'm thinking the capital gains taxes will be horrendous.

    I'm also interested in starting a Donor Advised fund , especially if it could be helpful with my current situation

    Thanks

  • #2
    Start by turning off dividend reinvestment for Wellington and the active managed fund.

    These situations are invariably complex and honestly it might be a time when it’s worth the money to pay an expert like Rick Ferri. To get the best advice, you need to provide a lot more info - your marginal tax rates (I’m assuming these are long term gains), how your state taxes capital gains, whether you already itemize, how much of the Wellington and actively managed fund is principal vs. gains, whether you’ve done any tax loss harvesting in 2020 or earlier… etc.

    As Allen Roth has said, Investing isn’t complicated, but nobody said taxes weren’t complicated.

    Comment


    • #3
      At least yours is Wellington. My taxable mistake was expensive American funds I had to unload. I did it over several years to spread out the tax bite

      i was early so DAF wasn’t on my radar. That’s probably a great option. Hopefully others can advise on this

      Comment


      • #4
        A financial advisor is likely the route I'll take given the complexities.

        For specifics, my marginal rate is 36%
        I usually have taken standard deduction
        Wellington basis is 135k, now worth 190k
        I've never done tax loss harvesting

        I like the DAF approach to reducing taxes while also being able to set myself up for more efficient charitable giving, but i wonder if it would raise the IRS eyebrows

        Thanks

        Comment


        • #5
          I guess I should add that I'm in Oregon which taxes cap gains at 9.9%. Also not good, but for what it's worth, Oregon gives me a 4k rural practice tax credit. They may sunset the tax credit at some point

          Comment


          • #6
            We donated highly appreciated stocks (like 300% gains) directly to our DAF. And then used the DAF contribution to offset selling our high cost mutual funds (fired our broker, ugh, American Funds) and diversified into a lower cost portfolio (low cost ETFs).

            We only did the DAF because giving is part of our plan. We were doing it already anyways with cash. Now we just give from our DAF, and buy more VTSAX monthly in our taxable account with the cash we used to donate. Doesn’t work quite so well if giving wasn’t part of the plan to begin with.

            Benefits:
            - didn’t have to pay the gains on our highly appreciated stocks. We wanted to get out of single stocks anyhow.
            - could also use the DAF contribution to offset the gains from the high cost mutual funds we sold to change to a lower cost portfolio
            - we use the cash we used to donate to buy more of what we want now to help keep our portfolio balanced

            Comment


            • #7
              I have a similar problem I have accumulated a substantial amount in a brokerage account invested in stocks and other funds. I am never happy when an see the large gains come at the end of the year. I dont think it makes sense to create a taxable event now in order to try to save taxes later.

              1. Turn off dividend reinvestment
              2. Sell individual lots when it makes sense to do so, tax loss harvesting
              3. Years ago I bought individual stocks so I could control the taxable events, other than dividends
              4. If you like the fund, sell it when it is down and buy the etf version, which tend to be more tax efficient
              5. If all else fails, think of it as your personal donation to the US government to help pay back the national debt

              Comment


              • #8
                Trouble with Wellington is that you’re getting hit with LT Cap Gains, ST Cap Gains (taxed at marginal rate), and Dividends.

                I would get out of this personally. You’re also paying nearly $200 a year more for the ER.

                1. Turn off dividend reinvestment
                2. Make sure you have individual lots turned on
                3. Sell all lots with no gain, decline in value and modest gain
                4. Selling all the rest now may not affect you more than if you were to spread it out over time. The latter makes you feel better but the former bites the bullet and just pays it all up front. You avoid ongoing ER differences, forced LT/ST cap gains, and stop the gains from getting worse. So think about biting the bullet and selling all now. It’s about $13k in tax.



                Edit: Based on your info provided you were hit with $670 in ST cap gains in 2020 alone, which came in at your federal + state tax rate of 45%. Just get out now.
                Last edited by ENT Doc; 06-12-2021, 05:42 AM.

                Comment


                • #9
                  If you give to charity, I second the DAF route.

                  My only single stock purchase was 4 shares of Apple in about 2009 with a basis of about $2600. I donated it to my DAF late 2020 or early 2021 with a charitable deduction of almost $11,000.

                  FWIW my DAF is 100% US stocks and now I can make donations of the gains with only a little erosion of principle.

                  We donate stock/ETF in even years [i.e., 2018, 2020], then give to charity every month/quarter. In the odd years [i.e., 2019], take the standard MFJ deduction.

                  If your situation, you don't have to make the move all in one year - it depends on the specifics of your giving and need to offset income. For example, you could donate $75 of Wellington to your DAF this year, take the standard deduction for a couple of years, then donate the rest down the road [ask tax advisor to make sure donated stock doesn't exceed maximum related to income - it is either 1/3 or 1/2 -- I don't remember off the top of my head].

                  Comment


                  • #10
                    Are you going to be in Oregon at the 35% tax rate indefinitely?

                    if there is ever a year you wanted to move across the border to Washington and cut back, 2022 could be the year.

                    sounds like the DAF is a good option if you just want to donate the whole $190k. Otherwise you have to choose which lots to donate and which to sell (look at basis of individual lots).

                    Comment


                    • #11
                      Originally posted by Chreeto View Post
                      My portfolio:

                      taxable acct vanguard:
                      190k in wellington fund
                      ​​​​​90k in S&P 500
                      27k in mid cap
                      11k small cap

                      Roth ira vanguard:
                      105k mix of reit and tips funds

                      vanguard 403b (old employer):
                      250k target fund

                      Employer fund 403b:
                      ​​​175k target fund

                      Employer fund 457:
                      35k target fund

                      My concern is my taxable funds, which contain vanguard wellington fund, an actively manged balnced fund even with ER 0.16. the taxable acct funds were started 12 years ago and to date have lots of gains. In hindsight I would have started a 3 or 4 fund portfolio, but here I am.

                      Ideally id like to exchange my taxable funds to something more tax efficient, and thenadjust my tax-deffered accounts to complement the tax efficiency
                      What is the best way to exchange funds in the taxable account that would be the least costly? I'm thinking the capital gains taxes will be horrendous.

                      I'm also interested in starting a Donor Advised fund , especially if it could be helpful with my current situation

                      Thanks
                      Starting a DAF by donating those appreciated shares is an excellent way out of your situation, especially if you had an inclination to do so, anyway.

                      This and more ideas:

                      Comment

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