Swapping brokerage and IRA assets for tax efficiency - questions and strategy

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Topic Author
adam123
Posts: 164
Joined: Thu Jan 16, 2014 4:51 pm

Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by adam123 »

In order to create better portfolio tax efficiency, I am thinking about doing some buying and selling so that what’s in my taxable account is instead in one of my IRAs. I am interested in whether it’s a no brainer and the best strategy. I am in my mid 40s.

MY SITUATION:

Taxable Brokerage:
VSMGX - Lifestrategy moderate (60 stock/40 bond) - total gain 106k. No reinvest.
VTSAX - total market. No plan to sell
Stock A - total gain 22k
Stock B - total gain 33k

Inherited IRA (from 2018, stretch over my lifetime)
VTSAX

Roth IRA
VTSAX

Loss Carryover: I have about 85k in losses that I can apply against any gains. My gains are long term.

MY IDEA:

Looking at my December brokerage statement, the Lifestrategy fund is a dividend/gains tax drag because of the bond portion. If I had a time machine, I wouldn’t have put VSMGX in taxable. Next best thing, I am thinking of doing the following:

1. Sell all VSMGX in taxable, and use all proceeds to buy VTSAX in taxable (I.e. 100% exchange). I will then partially offset 106k gains from sale with 85k carryover losses (and maybe fewer gains, taking advantage of a down market).

2. On same day, buy that same amount of VSMGX in my inherited IRA by selling VTSAX.

QUESTIONS:

1. This plan seems wise to me. Am I missing something? I lose out on my loss carryover, but VSMGX is already eating up my losses anyway. In the long run my portfolio will be more tax efficient, and I wish I did it in 3/20.

2. If it’s a good idea, as a strategy, I’m correct to do the VSMGX buy in the Inherited and not the Roth, right? My reasoning is if I plan to leave it untouched maybe for decades, stocks should theoretically grow more than bonds. So, it is better to have more VTSAX in the Roth since there are no taxes on the likely larger account on withdrawal (and potentially slower growth in the taxable inherited IRA).

3. What about stocks A and B from a tax efficiency standpoint? They are virtually zero tax drag, and selling would incur even more taxable gains (as of today anyway). I assume it makes sense to start with VSMGX, and if so, I would already have exhausted my losses, but maybe I should bite the bullet and not let the tax tail wag the dog. If I want to keep them and do the same scheme, However, I would think it makes sense to rebuy them in the Roth and not the Inherited for the reasoning above in #2? Or just sell them and buy VTSAX in taxable and leave it alone elsewhere.

4. Any other thoughts or comments? I could leave it all alone and take the carryover losses for more years to come.

Thanks!
sycamore
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Re: Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by sycamore »

adam123 wrote: Thu Jan 27, 2022 12:14 am 1. This plan seems wise to me. Am I missing something? I lose out on my loss carryover, but VSMGX is already eating up my losses anyway. In the long run my portfolio will be more tax efficient, and I wish I did it in 3/20.

2. If it’s a good idea, as a strategy, I’m correct to do the VSMGX buy in the Inherited and not the Roth, right? My reasoning is if I plan to leave it untouched maybe for decades, stocks should theoretically grow more than bonds. So, it is better to have more VTSAX in the Roth since there are no taxes on the likely larger account on withdrawal (and potentially slower growth in the taxable inherited IRA).

3. What about stocks A and B from a tax efficiency standpoint? They are virtually zero tax drag, and selling would incur even more taxable gains (as of today anyway). I assume it makes sense to start with VSMGX, and if so, I would already have exhausted my losses, but maybe I should bite the bullet and not let the tax tail wag the dog. If I want to keep them and do the same scheme, However, I would think it makes sense to rebuy them in the Roth and not the Inherited for the reasoning above in #2? Or just sell them and buy VTSAX in taxable and leave it alone elsewhere.

4. Any other thoughts or comments? I could leave it all alone and take the carryover losses for more years to come.

Thanks!
1. It's a good idea. I think the "tax cost" you'll pay to switch fund is such that it's worth doing. The wiki article Paying a tax cost to switch funds has more thoughts about switching.

2. In general a good first step is to place tax-inefficient assets like bonds in tax-deferred accounts first. Next you place your remaining bond allocation in other accounts as necessary. Then proceed with tax-efficient placement, which usually means stocks in taxable and Roth. This approach is described in the wiki article https://www.bogleheads.org/wiki/Tax-eff ... _placement.

3. Assuming stocks A and B fit your risk tolerance and Investment policy statement, it's okay to keep them in taxable. The future is unknown. Maybe A and B will go to the moon and you'll wish you had them in Roth. Maybe they'll be stinkers and you can tax-loss harvest them - but only if they're in taxable. I see no compelling reason to incur a cost to move them to Roth.

4. a) You don't need to sell all of VSMGX at once. Sell enough to get $85k in gains to can be offset with the $85k losses. Then make a separate decision about whether to sell the remainder now or later.

b) Some will argue against using a all-in-one fund like VSMGX at all - just stick with single asset funds like VTSAX, Total International Stock, and Total Bond Market Fund and the like. Why do you want to use VSMGX: convenience, simplicity, automatic rebalancing? (Note: I use a LifeStrategy fund myself.)
aristotelian
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Re: Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by aristotelian »

Keep in mind you can use $3k per year of carryover losses to offset income. I would hate to give that up just to liquidate a position that is sub optimal but really doesn't need to be liquidated. Consider doing something like $60k-70k of gains this year. That would give you $3k to use this year plus several additional years of carryover. Continue liquidating the position gradually if/when you accumulate additional losses. Then you get the best of both worlds, no tax on realized gains and the full $3k deduction annually at your marginal rate (which I assume is high).
livesoft
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Re: Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by livesoft »

Your plan is a good one. However, I might modify it a little bit myself.

I would not realize ALL the capital gains in the VSMGX shares in the taxable account. Instead I would set the Cost Basis Method to Specific Identification and after that change went through, then I would realize up to $85K of gains in order to offset the carryover losses. You can also select which lots to sell in order to sell the most shares for that $85K loss usage.

At this point in time I would not realize the other gains in VSMGX as it will not pay a distribution again until perhaps maybe June. Instead, I would consider whether it made more sense to donate some shares to a Donor-Advised Fund if you were charitably inclined. Fidelity has a DAF with a low minimum. If you decided to do that, then the shares with the highest percentage of gains that have been held long-term should be donated. Maybe even do this before selling any shares.

But if you decide not to donate shares, then I think a couple of things may play out:
1. VSMGX will not have as much gains going forward in 2022 as VTSAX, and
2. You may be able to tax-loss harvest your newly purchased shares of VTSAX in your taxable account.

Anyways, I just think splitting up the VSMGX sales into 2 different transactions (and maybe a 3rd donation transaction) would keep some options open for you without creating any special hardships or issues.
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Topic Author
adam123
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Joined: Thu Jan 16, 2014 4:51 pm

Re: Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by adam123 »

aristotelian wrote: Thu Jan 27, 2022 7:42 am Keep in mind you can use $3k per year of carryover losses to offset income. I would hate to give that up just to liquidate a position that is sub optimal but really doesn't need to be liquidated.
I was thinking of that downside too. But, because of the bonds, the fund sheds dividends too, which I believe are taxed at income rates? In other words, if I am using my $3k carryover on income from VSMGX that is not too helpful. Plus, I figure if I nip this in the bud, I can avoid a lot of taxable dividends many years down the line.

But, I agree. Point taken.
aristotelian
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Re: Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by aristotelian »

adam123 wrote: Thu Jan 27, 2022 11:01 am
aristotelian wrote: Thu Jan 27, 2022 7:42 am Keep in mind you can use $3k per year of carryover losses to offset income. I would hate to give that up just to liquidate a position that is sub optimal but really doesn't need to be liquidated.
I was thinking of that downside too. But, because of the bonds, the fund sheds dividends too, which I believe are taxed at income rates? In other words, if I am using my $3k carryover on income from VSMGX that is not too helpful. Plus, I figure if I nip this in the bud, I can avoid a lot of taxable dividends many years down the line.

But, I agree. Point taken.
Only the bond portion of VSMGX would be taxable as income. But yes, if you would be left with enough VSMGX to produce more than $3k of bond dividend then you would be offsetting the carryover. Back of napkin you would need to have around $500k of VSMGX for that to be the case.
Topic Author
adam123
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Joined: Thu Jan 16, 2014 4:51 pm

Re: Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by adam123 »

sycamore wrote: Thu Jan 27, 2022 6:44 am b) Some will argue against using a all-in-one fund like VSMGX at all - just stick with single asset funds like VTSAX, Total International Stock, and Total Bond Market Fund and the like. Why do you want to use VSMGX: convenience, simplicity, automatic rebalancing? (Note: I use a LifeStrategy fund myself.)
Good point. To the extent I rebuy in the IRA, perhaps I will simply rebuy Total Bond in the amount of the bonds that I sell in taxable. That may eliminate overlap.

On this point, I would love to give advice to my younger self (and new investors). From a tax perspective a balanced fund poses a double whammy in taxable. Not only would I be taxed less if the bonds were in my IRA, but because they are tied in a balanced fund, when I sell I am forced to sell the 60% stock portion too, even though I intend to keep the stock portion (when I buy VTSAX). If I had originally only purchased a smaller isolated bond market fund, I would only be selling/swapping that, and would have been able to keep most of my carryover loss.

Lesson: a bond find can be a tax drag, but a balanced fund in taxable (as opposed to a la carte) can force you to take gains you don’t want to.
Topic Author
adam123
Posts: 164
Joined: Thu Jan 16, 2014 4:51 pm

Re: Swapping brokerage and IRA assets for tax efficiency - questions and strategy

Post by adam123 »

Just to confirm, based on your general approval of my plan, it seems that you are in implicit agreement if I buy the bonds in an IRA, it makes better sense to buy them in my stretch inherited rather than my Roth.

Nevermind - reading more closely, you answered this.
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