Long Term Gains vs. Adjusting portfolio

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dan7800
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Joined: Wed Apr 07, 2021 5:49 am

Long Term Gains vs. Adjusting portfolio

Post by dan7800 »

I was just wondering everyone's philosophy on adjusting to more "efficient" funds vs paying the tax man. For example, I own:

- VGPMX Vanguard Global Capital Cycles ER=.38
- VHGEX Vanguard Global Equity Fund ER=.45

With about $7k in LTG between the funds. I was considering moving to VTSAX/VTIAX to both reduce ER and increase tax efficiency - I am in the 15% bracket. Would folks generally adjust, or just stay steady for the course?

Thanks all. This forum is incredibly educational
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arcticpineapplecorp.
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Re: Long Term Gains vs. Adjusting portfolio

Post by arcticpineapplecorp. »

if you don't want to generate the cap gains tax you could:

1. change dividends/cap gains to cash (turn off reinvestment of cap gains and dividends)

2. use dividends generated from these funds to buy the vtsax/vtiax

3. keep the current shares to:
a. donate now or later
b. gift to children later (they get a step up in cost basis)
c. sell later if need costly nursing home (medical expenses will reduce income so low/no tax might be owned when sold)
d. sell later if in 0% cap gains tax bracket.

4. sell something else that has a loss (or wait for a loss if possible and sell then) and use gains to offset losses if possible.

i wouldn't pay an investment tax unless absolutely necessary or if you really didn't like the current investments, but wouldn't do so just to rebalance in and of itself.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
UpperNwGuy
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Re: Long Term Gains vs. Adjusting portfolio

Post by UpperNwGuy »

dan7800 wrote: Fri Apr 16, 2021 8:53 pm I was just wondering everyone's philosophy on adjusting to more "efficient" funds vs paying the tax man. For example, I own:

- VGPMX Vanguard Global Capital Cycles ER=.38
- VHGEX Vanguard Global Equity Fund ER=.45

With about $7k in LTG between the funds. I was considering moving to VTSAX/VTIAX to both reduce ER and increase tax efficiency - I am in the 15% bracket. Would folks generally adjust, or just stay steady for the course?

Thanks all. This forum is incredibly educational
If these funds are in a taxable account, don't sell them if you have $7,000 of long term capital gains. Just stop adding to them. Direct dividends and new contributions to VTSAX and VTIAX.
Topic Author
dan7800
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Joined: Wed Apr 07, 2021 5:49 am

Re: Long Term Gains vs. Adjusting portfolio

Post by dan7800 »

arcticpineapplecorp. wrote: Fri Apr 16, 2021 9:05 pm if you don't want to generate the cap gains tax you could:

1. change dividends/cap gains to cash (turn off reinvestment of cap gains and dividends)

2. use dividends generated from these funds to buy the vtsax/vtiax

3. keep the current shares to:
a. donate now or later
b. gift to children later (they get a step up in cost basis)
c. sell later if need costly nursing home (medical expenses will reduce income so low/no tax might be owned when sold)
d. sell later if in 0% cap gains tax bracket.

4. sell something else that has a loss (or wait for a loss if possible and sell then) and use gains to offset losses if possible.

i wouldn't pay an investment tax unless absolutely necessary or if you really didn't like the current investments, but wouldn't do so just to rebalance in and of itself.
Wonderful advice. I will hold onto those funds for now and I will perform steps 1 and 2.

As a side question, for funds that I plan on keeping (eg VTSAX) should I just leave div/cap gains reinvestments turned on if I plan on keeping those for a while?
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arcticpineapplecorp.
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Re: Long Term Gains vs. Adjusting portfolio

Post by arcticpineapplecorp. »

dan7800 wrote: Fri Apr 16, 2021 9:19 pm
arcticpineapplecorp. wrote: Fri Apr 16, 2021 9:05 pm if you don't want to generate the cap gains tax you could:

1. change dividends/cap gains to cash (turn off reinvestment of cap gains and dividends)

2. use dividends generated from these funds to buy the vtsax/vtiax

3. keep the current shares to:
a. donate now or later
b. gift to children later (they get a step up in cost basis)
c. sell later if need costly nursing home (medical expenses will reduce income so low/no tax might be owned when sold)
d. sell later if in 0% cap gains tax bracket.

4. sell something else that has a loss (or wait for a loss if possible and sell then) and use gains to offset losses if possible.

i wouldn't pay an investment tax unless absolutely necessary or if you really didn't like the current investments, but wouldn't do so just to rebalance in and of itself.
Wonderful advice. I will hold onto those funds for now and I will perform steps 1 and 2.

As a side question, for funds that I plan on keeping (eg VTSAX) should I just leave div/cap gains reinvestments turned on if I plan on keeping those for a while?
i wouldn't if you plan to do tax loss harvesting as you should be (markets do fall every year which provide some tax loss harvesting opportunities).

Also depending upon the size of the dividends accumulated and or the size of the lots you'd be purchasing you could just deploy the cash once a year (or more depending upon the size or if you are planning on adding other monies to vtsax/vtiax in addition to the dividends).

if you consider tax loss harvesting, it's best not to reinvest dividends so you have better control over reducing the chance of a wash sale (not illegal but not optimal).
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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grabiner
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Re: Long Term Gains vs. Adjusting portfolio

Post by grabiner »

See Paying a tax cost to switch funds on the wiki.

Your two funds are probably tax-inefficient enough that they are worth selling; the capital-gains tax you pay for selling them now will be less than the tax on the capital gains they distribute if you continue to hold them.
dan7800 wrote: Fri Apr 16, 2021 9:19 pm As a side question, for funds that I plan on keeping (eg VTSAX) should I just leave div/cap gains reinvestments turned on if I plan on keeping those for a while?
Probably not, since it is easier to manage your portfolio if you take the dividends in cash and reinvest them into the appropriate fund. I hold both US and foreign stock in my taxable account, and since I am overweighted in US stock (both because US stock has done better recently and because I donate a foreign stock fund to charity), the dividends usually go to purchase foreign stock funds.

Another reason I don't reinvest is that the December dividends get invested into my IRA in January, rather than into any fund in my taxable account.
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peter_s
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Re: Long Term Gains vs. Adjusting portfolio

Post by peter_s »

It might be worthwhile trying to estimate how long it would take the savings from the reduced ER to compensate for the capital gains taxes. Also tax loss harvesting opportunities will arise in the next few years which would also allow you to offset some of these gains as you switch to the lower er funds.
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