Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

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ninjturtles
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Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

Looking for some advice pro/cons, this is mutual funds on a taxable account. These are excess funds on top of maxing out the retirement ones already.

A good amount is in VASGX. And so far there's been $150k+ in investment returns over time. But I get hit with a taxable income each year for VASGX, whereas VFIAX doesn't. I'll have to run the numbers some, but it seems dividend wise, I'm not getting a lot more upside with VASGX vs my VFIAX. But rather similar dividends along with a tax bill each year for short term and long term capital gains for the VASGX fund.

Question is. What pros are there to keeping VASGX vs. selling it and replacing it with another mutual fund like VFIAX or VTSAX instead? If selling, do I do it in smaller quantities as to not trigger more taxes if I exceed a certain income tax bracket? Also, the majority of it has been held in excess of 1 year, so they should be taxed as long term capital gains when I sell.

Note: I'm buying to hold. So doesn't matter too much if one goes negative more in a down market. Since overall they have upward trajectory overtime. Also VASGX has 0.14% expense ratio vs. VFIAX or VTSAX has 0.04% expense ratio.

Advice is much appreciated. Thanks.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by grabiner »

Welcome to the forum!

You have two separate issues: What should your asset allocation be, and what is the most tax-efficient way to do that?

If you want your taxable account to be 100% stock, then selling the LifeStrategy Growth (VASGX) makes sense even though there will be a tax cost, as you will fix your asset allocation. (It's probably still best to wait for any share with a substantial gain until it has been held more than one year, to reduce the tax cost.) If you do this, you probably still want to keep your international allocation, so you shouldn't sell for just Total Stock Market unless you hold your desired international allocation in your IRA and 401(k).

But if you want your taxable account to be 80% stock, then it's probably better to keep the LifeStrategy Growth if it has a substantial capital gain, and just put new money in stock and bond funds as appropriate. The fund won't usually distribute that much in capital gains from internal rebalancing; this year was unusual because of a lot of sales forced by the switch to institutional funds in many 401(k) plans. Therefore, it would be better to delay the capital-gains tax as long as possible, by waiting to sell the fund until you need to withdraw the money.

Note that it doesn't make sense to compare different funds based on dividends. Bonds get almost all their return from dividends, while stocks get most of their return from price appreciation. Thus, when you switch from a bond fund to a stock fund, you increase the expected total return (and the risk), whether the dividend amount goes up or down.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

=) Thanks for the welcome.

I'll have to take a look at the Wiki more in depth later on to see. Been running a bunch of things on auto-pilot for many years, without diving too deep into my asset allocations. Are there other links around that I should also take a look at to help me decide on those 2 issues you mentioned?

What should your asset allocation be?
Yeah, I think I have to figure that out after reading some more. Usually would asset location would be based on time you have to invest and your stomach for risk?

I'm in my late 30s now, and there's a high likelihood I won't be taking anything out from my taxable accounts for the 10 years, or maybe even 20 years. Since I plan to just leave it in there, if I had a stomach for risk, would 100% stock be just fine compared to the VTI, VGTSX, and bond allocations that VASGX has?

What is the most tax-efficient way
Likely I'll have to sell portions of it as to not disqualify from being able to contribute into ROTH IRA. Just not too keen on the yearly taxable capital gain distributions from the VASGX, since it seems like paying taxes on it yearly, eats into the actual total return you're actually getting.

If I'm selling portions of VASGX and pretty much exchanging it for the other funds right after. Since I'm not trying to time the market, would it matter a ton if I sell and exchange in an up market or a down market?
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by grabiner »

ninjturtles wrote: Mon Jan 17, 2022 6:19 pm What should your asset allocation be?
Yeah, I think I have to figure that out after reading some more. Usually would asset location would be based on time you have to invest and your stomach for risk?

I'm in my late 30s now, and there's a high likelihood I won't be taking anything out from my taxable accounts for the 10 years, or maybe even 20 years. Since I plan to just leave it in there, if I had a stomach for risk, would 100% stock be just fine compared to the VTI, VGTSX, and bond allocations that VASGX has?
Yes. 100% stock is reasonable at your age if you can tolerate it. In March 2020, did you have a stock-heavy portfolio, and were you comfortable when the stock lost a third of its value in a month?
What is the most tax-efficient way
Likely I'll have to sell portions of it as to not disqualify from being able to contribute into ROTH IRA. Just not too keen on the yearly taxable capital gain distributions from the VASGX, since it seems like paying taxes on it yearly, eats into the actual total return you're actually getting.
See Backdoor Roth on the wiki; as long as you don't have a traditional IRA, you can still make a Roth contribution indirectly even if you are over the limit. (If capital gains taken this year put you over the Roth income limit, you can recharacterize any contribution you already made to a Roth as a non-deductible Traditional IRA contribution, and then convert it immediately.)
If I'm selling portions of VASGX and pretty much exchanging it for the other funds right after. Since I'm not trying to time the market, would it matter a ton if I sell and exchange in an up market or a down market?
If you are going to sell, you should sell as soon as possible (subject to waiting for gains to become long-term). When you move from stock to stock, your returns do not depend on the market, but your tax bill does. Since the market is more likely to go up than down, your gain will probably increase if you wait.

In addition, if you sell fund A to buy fund B and the market goes down, you don't miss out on the reduced capital gain. You can sell fund B to take the capital loss, buying fund C so that you stay invested, and then either hold fund C forever or switch back after 31 days. (The reason for 31 days is that if you sell a fund for a capital loss, and buy the same fund within 30 days before or after, you have a wash sale and cannot deduct the capital loss until you sell the replacement shares.)
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

grabiner wrote: Mon Jan 17, 2022 8:36 pm In March 2020, did you have a stock-heavy portfolio, and were you comfortable when the stock lost a third of its value in a month?
Well, majority of it was still in VASGX and that's only weighted at 80% stock. At that point in time, loss about 20% during Feb & Mar 2020. Although, looking at the chart now, lost over half of my cumulative returns.

Consequently, March is the month I maxed my ROTH for 2019, since I hadn't allocated it for monthly contributions, and was just waiting for a drop to buy in.

Yes, was comfortable with it. Usually if there's large drops like that, that's when I actually end up buying some more.

Thanks for all the advice.
Last edited by ninjturtles on Wed Jan 19, 2022 10:52 pm, edited 3 times in total.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

grabiner wrote: Mon Jan 17, 2022 8:36 pmif you sell fund A to buy fund B and the market goes down, you don't miss out on the reduced capital gain. You can sell fund B to take the capital loss, buying fund C so that you stay invested, and then either hold fund C forever or switch back after 31 days.
Just wanted to double check to see if I understood this correctly.

Taking my VASGX for example. Say for 2022, I sell a portion of VASGX, and there's $50k of returns on that portion, which counts as capital gains. Then I turn around and buy VFIAX. But then the same tax year, the market goes down and I sell VFIAX (say for a loss of $25K). Then I buy up VTSAX instead afterwards. I can sell VTSAX after 30 days and buy back VFIAX.

So for tax year 2022 $50k capital gains - $25k capital losses = $25k capital gains. Tax wise, I'd just have to pay taxes on $25k in capital gains?

But all this has to be done in 2022? Otherwise, if I sell at a $25k capital loss in 2023, that'll just allow me to deduct $3K capital loss each year to offset ordinary income, with remaining amount carried over to subsequent years?

If I never end up selling VFIAX after the market goes down. And continue to hold forever, doesn't that mean, I just missed out on deducting the $25k from my capital gains? And end up paying extra taxes on the $25k?

Thanks.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by grabiner »

ninjturtles wrote: Wed Jan 19, 2022 10:46 pm
grabiner wrote: Mon Jan 17, 2022 8:36 pmif you sell fund A to buy fund B and the market goes down, you don't miss out on the reduced capital gain. You can sell fund B to take the capital loss, buying fund C so that you stay invested, and then either hold fund C forever or switch back after 31 days.
Just wanted to double check to see if I understood this correctly.

Taking my VASGX for example. Say for 2022, I sell a portion of VASGX, and there's $50k of returns on that portion, which counts as capital gains. Then I turn around and buy VFIAX. But then the same tax year, the market goes down and I sell VFIAX (say for a loss of $25K). Then I buy up VTSAX instead afterwards. I can sell VTSAX after 30 days and buy back VFIAX.

So for tax year 2022 $50k capital gains - $25k capital losses = $25k capital gains. Tax wise, I'd just have to pay taxes on $25k in capital gains?
This is correct. (Short-term losses would offset short-term gains first, but if you don't have any short-term gains, they offset long-term gains.)
But all this has to be done in 2022? Otherwise, if I sell at a $25k capital loss in 2023, that'll just allow me to deduct $3K capital loss each year to offset ordinary income, with remaining amount carried over to subsequent years?
This is also correct. If the market crashes in 2023, you can't directly offset the 2022 gains on which you have already paid tax, but your 2023 losses will be deducted at a higher rate if they offset ordinary income. (You may also offset gains in the future; if you have a $22K carryover to 2024 and then sell something for a gain in 2024, the carryover loss offsets that gain.)
If I never end up selling VFIAX after the market goes down. And continue to hold forever, doesn't that mean, I just missed out on deducting the $25k from my capital gains? And end up paying extra taxes on the $25k?
Yes, this is correct, which is a reason that you should harvest your capital losses whenever they become significant.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

grabiner wrote: Wed Jan 19, 2022 11:02 pm Yes, this is correct, which is a reason that you should harvest your capital losses whenever they become significant.
Hmm... interesting, so if I'm understanding this correctly. If you happen to purchase close to the top and it drops significantly (would that be say 10%, 15%, 20%, etc?) that year, or even some years after, below what you had purchased it for. It serves you better to just sell. Then buy back in to something equivalent, so you're still in, when stocks eventually go back up. That way you can harvest the capital losses (assuming one is still earning some type of income, that the capital losses can offset).
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by grabiner »

ninjturtles wrote: Thu Jan 20, 2022 11:03 pm
grabiner wrote: Wed Jan 19, 2022 11:02 pm Yes, this is correct, which is a reason that you should harvest your capital losses whenever they become significant.
Hmm... interesting, so if I'm understanding this correctly. If you happen to purchase close to the top and it drops significantly (would that be say 10%, 15%, 20%, etc?) that year, or even some years after, below what you had purchased it for. It serves you better to just sell. Then buy back in to something equivalent, so you're still in, when stocks eventually go back up. That way you can harvest the capital losses (assuming one is still earning some type of income, that the capital losses can offset).
This is correct; it is known as tax loss harvesting, and it is an important benefit from proper tax management of a taxable account.

When the stock market crashed in 2008-2009, I sold a lot of stock for a capital loss, and bought back other stock, and I have continued to do this with other declines, while keeping my stock investments. The net effect is that I have taken $3000 of capital losses against ordinary income every year. In addition, I had capital losses to offset the gains I took when selling stock to make a home down payment in 2013, and to buy a car in 2017, and paid no federal tax on the gains.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

grabiner wrote: Fri Jan 21, 2022 4:09 pm In addition, I had capital losses to offset the gains I took when selling stock to make a home down payment in 2013, and to buy a car in 2017, and paid no federal tax on the gains.
Ah so, when capital losses carry over year to year. For year(s) that you don't sell, it'll just take $3k capital losses against ordinary income. But for the year(s) that you do sell and have capital gains, the carry over capital loss can help to negate those gains.

:o Wow, thanks so much. Still got loads to learn.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

grabiner wrote: Fri Jan 21, 2022 4:09 pm When the stock market crashed in 2008-2009, I sold a lot of stock for a capital loss, and bought back other stock, and I have continued to do this with other declines, while keeping my stock investments.
Had a follow-up question, since I've actually never sold my funds before thus far.

For example, I hold VASGX and VFIAX. VFIAX shares were purchased prior to 2020. Anticipating tax loss harvesting. If I'm selling off my VASGX, I shouldn't use the money to buy more VFIAX. Since if I purchased additional VFIAX using money from selling VASGX, if the market goes down later, and I sell VFIAX, would it do like a first in first out type of sale. Where my prior purchases of VFIAX from 2020 and before be sold first, before it even get's to the VFIAX that's purchased more recently (triggering a capital gains instead of a capital loss)?

Should I buy funds I don't currently own instead? Like VTSAX. VOO would probably be a no, no, since it's too identical to VFIAX? Could I also buy similar funds (but not identical), from other companies like Fidelity FNILX, FZROX, FLCEX?

And don't turn on re-investing the dividends and capital gains to the fund I buy to be safe? (Tax loss harvesting wiki says its safer, since it may accidentally trigger a wash sale somehow).
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by grabiner »

ninjturtles wrote: Sun Jan 23, 2022 2:45 pm Had a follow-up question, since I've actually never sold my funds before thus far.

For example, I hold VASGX and VFIAX. VFIAX shares were purchased prior to 2020. Anticipating tax loss harvesting. If I'm selling off my VASGX, I shouldn't use the money to buy more VFIAX. Since if I purchased additional VFIAX using money from selling VASGX, if the market goes down later, and I sell VFIAX, would it do like a first in first out type of sale. Where my prior purchases of VFIAX from 2020 and before be sold first, before it even get's to the VFIAX that's purchased more recently (triggering a capital gains instead of a capital loss)?
You can avoid this issue by using specific identification for your sales. Thus, if you buy VFIAX and the market then drops, you can tell Vanguard to sell the new shares of VFIAX and keep the old ones. (I did this for my 2008-2009 harvests, in a similar situation; I had been buying the same fund from 2002-2008, and sold the shares bought in 2005-2008 at a loss while keeping the shares bought in 2002-2004.)
And don't turn on re-investing the dividends and capital gains to the fund I buy to be safe? (Tax loss harvesting wiki says its safer, since it may accidentally trigger a wash sale somehow).
This is advisable. It also has other advantages in a taxable account; you may want to use the dividends from one fund to buy another fund. If you reinvest dividends you would have preferred to use to buy something else, you may have a capital gain when you sell the shares bought with the reinvested dividends.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by retire2022 »

op

go through this Vanguard Question to objectively measure your AA

https://investor.vanguard.com/calculato ... tionnaire/
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

grabiner wrote: Sun Jan 23, 2022 5:20 pm You can avoid this issue by using specific identification for your sales.
Thanks, definitely did not know about that. I'll have to remember this for the future. May just grab some VTSAX this time around to keep things simple.
grabiner wrote: Sun Jan 23, 2022 5:20 pm This is advisable. It also has other advantages in a taxable account; you may want to use the dividends from one fund to buy another fund. If you reinvest dividends you would have preferred to use to buy something else, you may have a capital gain when you sell the shares bought with the reinvested dividends.
Yeah, that's the issue I have right now. VASGX was my first fund and I plowed a bunch of my extra early savings into that for many years. Had reinvest dividends on, and it just kept buying up more VASGX automatically.
retire2022 wrote: Sun Jan 23, 2022 5:28 pm op

go through this Vanguard Question to objectively measure your AA

https://investor.vanguard.com/calculato ... tionnaire/
Didn't know they had that. Also reminded me to calculate my current allocations. Seems like I'm only at 56% stocks right now. Whereas it suggests me to be at 100% stocks. :oops: Have some reallocating to do this year and next. Thanks.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

grabiner wrote: Sun Jan 23, 2022 5:20 pm
After talking to a Vanguard rep (the wait time is brutal today), it's impossible to know exactly what your realized gains when putting in a sale, since we won't know what the new share price of the fund would be until after 4pm. Can only ballpark calculate it myself based on my best guess assumed closing share price. Exchanging funds, would allow me to sell the first fund at today's share price and purchase the 2nd fund at today's share price, calculated after 4pm.

Hmm... if I wanted to better control and calculate exactly what my capital gains would be in the future. Wouldn't it serve me better to buy an ETF equivalent instead?

But since the market closes at 4pm. I'm assuming the mutual funds get sold at 4pm, then I won't be able to purchase the ETF with that money until start of trading tomorrow?
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by retire2022 »

ninjturtles wrote: Mon Jan 24, 2022 11:48 am
Hmm... if I wanted to better control and calculate exactly what my capital gains would be in the future. Wouldn't it serve me better to buy an ETF equivalent instead?

But since the market closes at 4pm. I'm assuming the mutual funds get sold at 4pm, then I won't be able to purchase the ETF with that money until start of trading tomorrow?
Yes I would consider waiting for 3:30pm to get a better idea before you decide to execute a sell, one needs to figure out the percentage close to a target.

ETFs are better to figure out exactly where the price is sitting at the market.
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Re: Keep VASGX or exchange for VFIAX, VTSAX or equivalent?

Post by ninjturtles »

Thanks grabiner and retire2022 for all your help.

Initiated my first sell/exchange ever for a little over $150K from VASGX to VTSAX. Hopefully my math on the estimated total capital gains are correct ::Crosses fingers::
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