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Tax question when switching to Vanguard

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  • Tax question when switching to Vanguard

    I have $40,000 invested in an American Funds MF in a taxable account. I want to sell/exchange these for Vanguard funds. The money was invested by my parents in the '90s and I was given ownership over the account in 2000's after college. I don't know how to figure out my capital gains on the funds. I am in 28% tax bracket. What is the best way to convert to vanguard index funds for lowest tax bill?

  • #2
    Just contact Vanguard and have them move the assets over in kind.  Brokers and advisors usually keep track of the info you need, which is the price and date of purchase, and that should get to Vanguard before too long.  But if your parents have records of that anywhere, it would be best if you can track it down as a backup.

    You pay a 15% LTCG on the difference between the difference in value at the time of sale and the time of purchase for anything you hold for more than a year.  I'm guessing most of that $40k is going to be in capital gain, rather than principal.  If your parents bought the funds for 20k, and they're now worth 40k, you have a LTCG of 20k and would owe 3k if you sold them all.  While that's a significant hit, it's probably better to take it now rather than let the ERs of the American Funds drag down your returns forever.  It would be a different story if you were looking at a capital gain of 200k.  Once you sell the American funds, buy the Vanguard funds you want.

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    • #3
      +1 yeah this is likely a capital gain.  Also you might have 3.8% obamacare tax on top of that depending on income etc.

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      • #4




        You pay a 15% LTCG on the difference between the difference in value at the time of sale and the time of purchase for anything you hold for more than a year.
        Click to expand...


        If you move your investments "in kind", there are no taxes. Might be worth a little tax planning before you hop on the Vanguard bandwagon. The taxes you pay will sure eat into the long-term returns of those "cheap" VG funds.

        PS for other readers: taxpayers in the top tax bracket pay 20% LTCG. Not applicable to the OP, just adding for the benefit of others following this thread.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5







          You pay a 15% LTCG on the difference between the difference in value at the time of sale and the time of purchase for anything you hold for more than a year.
          Click to expand…


          If you move your investments “in kind”, there are no taxes. Might be worth a little tax planning before you hop on the Vanguard bandwagon. The taxes you pay will sure eat into the long-term returns of those “cheap” VG funds.

          PS for other readers: taxpayers in the top tax bracket pay 20% LTCG. Not applicable to the OP, just adding for the benefit of others following this thread.
          Click to expand...


          The expense ratios and loads on most American funds I've seen are pretty horrible.  I'd dump them and pay the tax simply out of principle.

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          • #6
            The capital gains tax is something you can defer, but unless you're going to hold on to those until you die (which would be a terrible idea), it's something you can't avoid forever.  Who knows, with US tax law, I think we'll be lucky if the rate doesn't get worse.

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            • #7




              The capital gains tax is something you can defer, but unless you’re going to hold on to those until you die (which would be a terrible idea), it’s something you can’t avoid forever.  Who knows, with US tax law, I think we’ll be lucky if the rate doesn’t get worse.
              Click to expand...


              +1

              You could see if any tax reform is passed soon (Mnuchin says the bill is imminent) but realistically we can only hope it just doesn't get any worse in the coming decades.

              Even a step-up in basis at death could go away if the estate tax is repealed.  And legislation between now and death?  Anything can happen.

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              • #8
                Since no one has mentioned it, state income tax is also typically applied to long-term capital gains (it's usually treated as ordinary income by the state).

                If it were me, I'd go ahead and take the tax hit now and get into some ultra-low cost Vanguard funds. If your cost basis is in the range of $10,000 to $20,000, you'll owe LTCG tax on the $20,000 to $30,000 in gains. Depending on where you live, and whether or not you are subject to the 3.8% NIIT, the tax hit will be probably be in the range of $4,000 to $7,000.

                If you stay in those actively managed funds, you'll continue paying unnecessary short and long-term capital gains every year until you sell. I made a similar decision to get out of some actively managed T. Rowe Price funds with higher expense ratios and it made sense to cut and run, taking the tax hit.

                If you don't want to pay the taxes and do annual charitable giving, you could gift those funds and start a donor advised fund with Vanguard or Fidelity. That's one way to avoid taxes, but you also don't get the money to spend, of course, either. But you can choose where it goes and when.

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                • #9




                  Since no one has mentioned it, state income tax is also typically applied to long-term capital gains (it’s usually treated as ordinary income by the state).

                  If it were me, I’d go ahead and take the tax hit now and get into some ultra-low cost Vanguard funds. If your cost basis is in the range of $10,000 to $20,000, you’ll owe LTCG tax on the $20,000 to $30,000 in gains. Depending on where you live, and whether or not you are subject to the 3.8% NIIT, the tax hit will be probably be in the range of $4,000 to $7,000.

                  If you stay in those actively managed funds, you’ll continue paying unnecessary short and long-term capital gains every year until you sell. I made a similar decision to get out of some actively managed T. Rowe Price funds with higher expense ratios and it made sense to cut and run, taking the tax hit.

                  If you don’t want to pay the taxes and do annual charitable giving, you could gift those funds and start a donor advised fund with Vanguard or Fidelity. That’s one way to avoid taxes, but you also don’t get the money to spend, of course, either. But you can choose where it goes and when.
                  Click to expand...


                  Thumbs up to donor advised fund (DAF)! If your long term plan includes charitable giving, transfer the appreciated funds to start a DAF. You get a big deduction this year of the appreciated value.

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