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MS4: Should I liquidate my taxable mutual fund?

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  • MS4: Should I liquidate my taxable mutual fund?

    First, thank you to this website, forum, and all of its contributors. As a generally financially-ignorant medical student, these resources have given me some valuable insight and helped me to start making some movements in the right direction.

    Some background: I am a fourth-year med student looking forward to graduating in May 2017. I was blessed to be given some money from a relative in the form of a taxable mutual fund, which I have added to over the years (although not at the expense of maximum contributions to a Roth IRA for the past several years). This account now totals just over $34,000.

    I am also on an Air Force scholarship to med school, which provides ~$30,000/year in taxable income. Next year, I will obviously be on a resident's salary (given that all goes well with the match!) of $50-60K. If I am selected for a military residency, that income could be more in the $70-80K range.

    In terms of minimizing taxes, would it be advisable to liquidate this mutual fund before the end of this year? My wife and I are looking at several larger expenses in the not-so-distant future (down payment on a house, upgrade to a larger vehicle as our family continues to grow) and the $34,000 could be well spent on these items. I obviously do not have a crystal ball, but we did not have a specific future purpose in mind for this fund besides one of several locations for our monthly saving budget.

    I am just trying to see what considerations I may be ignoring here. From what I can see, there is obviously no tax benefit to this account (taxed at every turn), and we could stand to save some money in interest from either a mortgage and/or an auto loan. I appreciate your thoughts.

  • #2
    Welcome to the forum, njones9! (Nora?)

    Which fund is it? Most funds aren't "taxed at every turn," but an actively managed fund could be churning out capital gains and dividends at a good clip. Do you know the expense ratio of the fund, or its cost basis to you?

    What is your marginal tax bracket? If you are in the 15% federal income tax bracket (AGI under ~$75,000 since you are married), you can sell without paying any tax on long-term capital gains (shares held a year or more).

    I know that's not an answer, but it depends on the answers to the questions. I'm guessing the best answer will be Yes, but then you need to decide what to do with the cash. It could go into a high-yield savings account, CD, bond, etc... or simply be reinvested in a more cost-efficient, tax-efficient manner.

     

    Best,

    -Physician on FIRE

     

     

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    • #3
      Will your only income this year be $30k? Or is there more (i.e. income from wife's work? IC income?) A $34k account, even if fully taxable (which it's not) would be taxed at zero this year if you liquidate while your income is < $50k.

      otoh, before you liquidate and spend it all, your first step should be to put together a financial plan. To DIY, read Carl Richards' book The One Page Financial Plan.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        I would liquidate but only if you are at the 0% long-term capital gains tax rate. I would then immediately turn around put all that money back into index funds (preferably in a tax advantaged account). I did that early on as a resident and avoided paying nearly $3,000 in long-term capital gains tax that I would otherwise now have to pay since our income has gone up into the next bracket.

        If you are on air force scholarship then you shouldn't have any student loan debt. You probably shouldn't buy a house in residency, so no need to save for a down payment (WCI has many posts on this). And you shouldn't take out a loan for a vehicle. You have good income and shouldn't have any debt, so put aside a little bit of money each money and in a few months you will be able to upgrade your vehicle.

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        • #5
          @physicianonfire: Thanks for the welcome and the advice! The fund is through Oppenheimer Funds, their Value Fund A. The cost basis is $28,271.27, vs the current value of $33,519.26. I was not able to easily locate the expense ratio on the Oppenheimer website, but other review websites listed it close to 1%.

          I should be safely within the 15% tax bracket this year. Thanks again for the pointers!

           

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          • #6
            @jfoxcpacfp: Thanks for the reply! We currently do not have any additional income, except for a few thousand in scholarships. We should be safely within the 15% tax bracket. Thanks for the book suggestion! I will have to look into that!

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            • #7
              @climbhigh: Thanks for the advice. It sounds like I will have to bone up on the housing discussion here on WCI. Thanks again!

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              • #8




                @physicianonfire: Thanks for the welcome and the advice! The fund is through Oppenheimer Funds, their Value Fund A. The cost basis is $28,271.27, vs the current value of $33,519.26. I was not able to easily locate the expense ratio on the Oppenheimer website, but other review websites listed it close to 1%.

                I should be safely within the 15% tax bracket this year. Thanks again for the pointers!

                 
                Click to expand...


                If I were standing on the Wall Street trading floor, I'd be screaming "Sell! Sell! Sell!" into my cell phone.

                You can "get out" of an expensive fund for free this year. Congrats!

                What to do next? It depends on how soon you expect to need that money and how risk averse you are. This would be a good time to think about developing an Investor Policy Statement.

                Best,

                -PoF

                 

                 

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