Capital Gain Tax Strategy

[JRB]

I'm wanting to sell out of my $500K active managed ETF taxable account (consisting of ETFs and muni bonds while holding $10K in cash) which has $75K in unrealized gains in the last 3 years to avoid the 0.78 management fee as well as the annual realized gains ($14K) I will have to pay short term cap gains taxes on in order to transition into passive index funds in my self directed taxable account. I only started making monthly contributions to index funds (almost exclusively VTI) in my taxable account earlier this year and thus don't have losses to harvest (nor do I fully understand what tax loss harvesting is or how to do it). I hesitate liquidating all of this account now (with only 1 month left in 2021) instead of waiting until Jan 2022 to allow for potential tax loss harvesting next year.

Can anyone help me think this strategy through?
1. Sell out, pay the 20% capital gains tax and move on accordingly (realizing capital gains tax may be higher in 2022)
2. Wait until Jan 2022 to sell out (hoping the current gains have not dropped (capital gains tax may be higher in 2022 and will still be payment management fee.
3. Sell a portion now and the remainder in 2022.

[Tangler]

Wow, that is a lot of money and worth a consultation with a fee only advisor + great CPA.

Rick Ferri is who i have used for specific advise.
https://rickferri.com

WCI has some recommendations.

https://www.whitecoatinvestor.com/financial-advisors/

I think you need some professional advice.

Tax IED.

[spiritrider]

I'm wanting to sell out of my $500K active managed ETF taxable account (consisting of ETFs and muni bonds while holding $10K in cash) which has $75K in unrealized gains in the last 3 years to avoid the 0.78 management fee as well as the annual realized gains ($14K) I will have to pay short term cap gains taxes on in order to transition into passive index funds in my self directed taxable account.

Why do you think you will have to pay short-term capital gains on unrealized gains over a year?

[Tim]

Transfer the holdings to your own taxable account to cut out the fees. Make sure to have the details of the tax basis,before you do it. Administrative effort.
Financially, when to sell is going to be a judgement call. Some you might hold forever and your heirs get a step up in basis. $75 in gains might cause a tax hit, but that will be a cost to exit the holdings. Ypu need to decide the cost(tax)/benefit(diversification).

[gap55u]

Don’t forget charitable giving for your most appreciated shares. As others said, you can fire your advisor now, but don’t have to simultaneously move out of all of the holdings they had you in. And absolutely get all of the records of cost basis, gains, records, etc before severing ties.

[Larry Ragman]

It makes sense to shift these funds to lower expense ratio, passive ETFs or index funds. I’d suggest waiting until next year. No sense in trying to do this in a hurry. You’ve already incurred the 2021 er. Doesn’t sound like it, but the ideal situation would be if you had a capital loss somewhere (property, other investments) to offset the gain. If you don’t here is how I would think about it: Pay a capital gain up front that will have a 5 year payback. For example, your Er is what, $4000 a year? In ~5 years that’s 20K, which offsets most of the capital gain taxes. I’d probably just bite the bullet and do it early in 2021. Sure, the market might have a downturn, but we don’t know when. One advantage of index low cost funds is eliminating worries like this.

By the way, it would not be the end of the world to hold on to these funds. Many of us have had stranded funds from early in our investing careers. I’d still sell these investments myself, but it isn’t wrong to hold on to them until some future downturn. Of course, then you will have to fret about the timing…

[zlandar]

Take your time and plan your moves before making them. You have had this actively managed taxable account for 3 years another couple months won't make a difference.

It sounds like you are paying a financial advisor a 0.78% fee to manage ETFs/muni bonds in a taxable account. If that's true you can move those assets to another taxable account you control without selling them.

POF has a detailed article on tax loss harvesting (TLH):

https://www.physicianonfire.com/tax-...ting-vanguard/

You can also find articles on WCI about TLH.

There is a 3.8% Medicare tax on investment income if your earn more than $200/250k a year so add that on top of the 20%. You also have to pay taxes to your state on capital gains.

[CordMcNally]

I would sit down, either by yourself or with the appropriate professional, and go through all your scenarios. You say the management fee is 0.78%, what's the actual expense ratios and do they fit into your overall plan. If the expense ratios are reasonable, you may not have to do anything. Your options range from doing nothing, selling some now and some later, selling all now, donating some/selling some, etc.

[Dewangski1]

75k in capital gains at 20% = 15k. Doesn’t seem impossible to manage using strategies listed above like donations or tax loss harvesting. You’re paying ~4K per year in ER. I’d do half now and half in early 2022, but I’m someone who is OK with paying a premium to get something done so I don’t have to worry about it anymore.

[childay]

Agree with most above.
But what kind of ETFs are you currently in?

[billy]

Getting rid of the management fee is easy, and the way to cut a guaranteed cost. Do that first. Can you transfer the funds IN KIND to vanguard, fidelity, etc to do that so you don't also have to liquidate them?
After that, agree with above, including paying the one time fee to someone to help you figure out the best way.
I have some funds I'm in that I want to get out of, so whenever I donate something to charity, I donate the shares of that fund that appreciated the most, then buy the same amount of VTSAX. Helped me get out of ~8k in gains this year.

[JRB]

Why do you think you will have to pay short-term capital gains on unrealized gains over a year?

Realized gains from churning of investments sold in 2021 from active management. I will owe taxes on that at end of year even if I do nothing with this account.

[JRB]

Transfer the holdings to your own taxable account to cut out the fees. Make sure to have the details of the tax basis,before you do it. Administrative effort.
Financially, when to sell is going to be a judgement call. Some you might hold forever and your heirs get a step up in basis. $75 in gains might cause a tax hit, but that will be a cost to exit the holdings. Ypu need to decide the cost(tax)/benefit(diversification).

I don't believe this is possible as this USAA account was transferred to Schwab where it is currently housed and my advisor tells me I can sell out to cash position before it can go into either my self-directed account or another portfolio like a roboadvisor portfolio.

[JRB]

It makes sense to shift these funds to lower expense ratio, passive ETFs or index funds. I’d suggest waiting until next year. No sense in trying to do this in a hurry. You’ve already incurred the 2021 er. Doesn’t sound like it, but the ideal situation would be if you had a capital loss somewhere (property, other investments) to offset the gain. If you don’t here is how I would think about it: Pay a capital gain up front that will have a 5 year payback. For example, your Er is what, $4000 a year? In ~5 years that’s 20K, which offsets most of the capital gain taxes. I’d probably just bite the bullet and do it early in 2021. Sure, the market might have a downturn, but we don’t know when. One advantage of index low cost funds is eliminating worries like this.

By the way, it would not be the end of the world to hold on to these funds. Many of us have had stranded funds from early in our investing careers. I’d still sell these investments myself, but it isn’t wrong to hold on to them until some future downturn. Of course, then you will have to fret about the timing…

good points. Thank you. Holding these funds would carry the 0.78% management fee which I'm trying to avoid unless you are also suggesting I can move holdings to a self directed account without selling the positions.

[JRB]

Agree with most above.
But what kind of ETFs are you currently in?

IEFA, IEMG, IVV, IJH, IJR, MUB, SHM, HYD, VIG, VNQ, VT, Cash position of $10K. I believe the portfolio ratio is approx 60/40.