Cost Basis -- transferring Vanguard to Vanguard

[Indianrock]

I'm dividing our taxable/brokerage account at Vanguard into two individual accounts to facilitate adding beneficiaries. I'm unfamiliar with cost basis and wondering which to choose as I begin these transfers to new individual accounts.

We're required by law to report your cost basis to the IRS on your Form 1099-B for mutual fund shares acquired on or after January 1, 2012.
Our records show that you haven't chosen a preferred cost basis method for this holding. Vanguard's default method for mutual funds is average cost. Unless you select another method prior to requesting this transaction, the default method will be applied to this and future transactions until you select another method.
Please make a selection below.

Do you want to use average cost?
Yes, use average cost.
No, I want to use another method.
Cost basis method considerations
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Choosing the appropriate cost basis method is important in determining your tax liability when relieving shares, since you will not be able to change your chosen method after settlement.
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Vanguard offers the following cost basis methods for mutual funds: minimum tax (MinTax); first in, first out (FIFO); highest in, first out (HIFO); specific identification (SpecID); and average cost (AvgCost). Learn more here.
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The default method for mutual funds is average cost, while the default for all other holdings is first in, first out. These defaults may not be in your best tax interest.
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If you use a method other than average cost for mutual funds, you'll need records for any shares acquired before January 1, 2012, since Vanguard only has average cost information available for these shares. Find out why.
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Some methods (such as average cost) may limit your ability to get the full benefit of other methods in the future.
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Average cost cannot be revoked once a closing event (such as a sale) takes place. If revocation is not available, a change to original cost can be made prospectively.
Find out which cost basis methods are available at Vanguard

[Gryphon]

Cost basis is what your investment was worth at the time you originally purchased it. As you move money in & out of various stocks or mutual funds over a period of time you can end up with multiple sets of shares (or lots), each of which has its own cost basis. Part of what Vanguard is asking is whether you want to preserve that cost basis information or not.

The reason this is important is because you have a taxable account, which means you're potentially going to be on the hook for capital gains taxes every time you sell. If you preserve the cost basis of the individual lots, you can tell Vanguard how to choose which lot to sell & influence how much capital gains tax you'll have to pay. You could choose to sell the lot with the lowest gains to minimize your taxes, or you might choose to sell the lot with the highest gains if you have other losses to offset those gains. OTOH, If you choose to average the cost of all the lots of each investment, you no longer have that opportunity - no matter which shares you sell the capital gains will be the same.

It's up to you whether that's something you want to keep track of & deal with.

[Murdock7591]

See if you can do an "In Kind" transfer. If you can you avoid selling shares. (Unless you can do some TLH)

[Indianrock]

Thanks, all of this money is in VTSAX and I expect it to stay that way. But I don't think I want to keep track of lots. So far in retirement we're just putting all RMDs into this joint taxable account ( which will change if we essentially split them into two individual accounts so we can assign beneficiaries). Those RMD transfers are pretty much the only "trades" we do.
I already pay income tax on the dividends from this account. As individual accounts we can set up TOD beneficiaries and keep this aspect out of our Will.
I know some say do it in the Will and go through probate but that's not my choice.

[jebmke]

I strongly urge you to call VG and do this by phone to avoid triggering a capital gain. Explain what you are trying to do

[rob]

But I don't think I want to keep track of lots.

Do some reading as I'd never give up specific ID.... Vanguard (post 2012) does the tracking, so it's not a taxing process (apologies for that pathetic pun)....

[Murdock7591]

I strongly urge you to call VG and do this by phone to avoid triggering a capital gain. Explain what you are trying to do

Agree call Vanguard, I did something similar recently and was able to do a "In Kind" transfer. No selling and no capital gains.

[Indianrock]

I strongly urge you to call VG and do this by phone to avoid triggering a capital gain. Explain what you are trying to do

Agree call Vanguard, I did something similar recently and was able to do a "In Kind" transfer. No selling and no capital gains.

Calling again. I was just talking to them and they walked me through creating the individual account but didn't mention questions that would come up transferring. I was able to get the TOD beneficiaries set up the way I wanted. Wife will have to take the same steps for hers.

[Doctor Rhythm]

I would strongly recommend SLID as your cost basis method. There are no downsides to doing this, and no extra record-keeping or efforts required from you if you never sell. If you do sell, selecting lots will take an extra two minutes of your busy day, but potentially save you thousands in taxes. This is especially true if the government

I use SLID at Vanguard, bought and sold shares maybe a dozen times last year. I keep no records of my funds’ cost basis.

[Indianrock]

I would strongly recommend SLID as your cost basis method. There are no downsides to doing this, and no extra record-keeping or efforts required from you if you never sell. If you do sell, selecting lots will take an extra two minutes of your busy day, but potentially save you thousands in taxes. This is especially true if the government

I use SLID at Vanguard, bought and sold shares maybe a dozen times last year. I keep no records of my funds’ cost basis.

Is this needed if I do an "in kind" transfer? ( assuming that's possible here)

[Indianrock]

Changed the joint taxable account to Specific ID cost basis. In a day or two when that rolls through, I can make the transfers in kind from joint to the two new individual accounts where we've assigned the desired beneficiary structure.

Customer Support/change of ownership confirmed that since it's all remaining in the same fund at Vanguard, VTSAX, we aren't actually selling shares so no negative aspects.