Selling bonds for improved tax efficiency

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Selling bonds for improved tax efficiency

by stilts1007 » Wed Jun 26, 2013 1:33 pm

I started a taxable account with Vanguard about a year ago, and at the time I started I didn't really have an idea of the concept of tax-efficient fund placement (http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement).
As a result, my 401(k), my wife's 457(b), and the taxable account all looked pretty similar in terms of asset allocation (each appx 80:20 stocks:bonds, with mix of large/mid/small cap and international in each account). I have been gradually working towards improving the overall tax efficiency, mostly by putting new money into large cap and international in the taxable account. We are both adding the max to our retirement accounts. I still have plenty of room to add bonds or move money into bonds in the tax-advantaged accounts, to balance everything out.
My question is, is there any reason/consideration NOT to sell the ~10k in bonds in the taxable account now, shift that money into stocks in the taxable account, and move money from stocks to bonds in my 401(k)? There would be about a $300 loss, which could offset a small capital gain I have from closing a small Chase brokerage account earlier this year. My allocation would be slightly simpler and more tax efficient.
Am I missing anything here? Any input is appreciated.

stilts1007

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Re: Selling bonds for improved tax efficiency

by ogd » Wed Jun 26, 2013 1:44 pm

stilts1007 wrote:My question is, is there any reason/consideration NOT to sell the ~10k in bonds in the taxable account now, shift that money into stocks in the taxable account, and move money from stocks to bonds in my 401(k)? There would be about a $300 loss, which could offset a small capital gain I have from closing a small Chase brokerage account earlier this year. My allocation would be slightly simpler and more tax efficient.

You should definitely do it, if you're sitting on a loss rather than a large capital gain.

The extreme situation people are sometimes worried about is: say you are likely to withdraw money from the taxable account before retirement (future house or leave of absence) and you were worried about a market crash forcing you to sell stocks at the wrong time. Even then you'd be able to sell taxable stocks and buy them back in the retirement account, as if you'd sold bonds, provided the taxable account is large enough to cover the expense after the decline. So it's not much of a reason to keep the taxable account balanced.

ogd

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Re: Selling bonds for improved tax efficiency

by LAlearning » Wed Jun 26, 2013 2:04 pm

stilts1007 wrote:I started a taxable account with Vanguard about a year ago, and at the time I started I didn't really have an idea of the concept of tax-efficient fund placement (http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement).
As a result, my 401(k), my wife's 457(b), and the taxable account all looked pretty similar in terms of asset allocation (each appx 80:20 stocks:bonds, with mix of large/mid/small cap and international in each account). I have been gradually working towards improving the overall tax efficiency, mostly by putting new money into large cap and international in the taxable account. We are both adding the max to our retirement accounts. I still have plenty of room to add bonds or move money into bonds in the tax-advantaged accounts, to balance everything out.
My question is, is there any reason/consideration NOT to sell the ~10k in bonds in the taxable account now, shift that money into stocks in the taxable account, and move money from stocks to bonds in my 401(k)? There would be about a $300 loss, which could offset a small capital gain I have from closing a small Chase brokerage account earlier this year. My allocation would be slightly simpler and more tax efficient.
Am I missing anything here? Any input is appreciated.

Nope, looks like you got it. Pull the trigger while you have the loss. Even if you had a $300 gain, it's pittance in the long run.

Use it to fund IRAs, add to emergency fund, or put aside for a vacay/new car.

LAlearning

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Re: Selling bonds for improved tax efficiency

by stilts1007 » Wed Jun 26, 2013 10:53 pm

Thanks for the input. Plan is to exchange the ~10k bonds in the taxable account for stocks, then exchange ~10k of comparable stocks for bonds in my 401(k). Same asset allocation, better placement, and I can offset the small capital gain I will have for the year. Win-win-win?

stilts1007

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Joined: 25 Jan 2013

Location: Chicago IL

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Re: Selling bonds for improved tax efficiency

by stilts1007 » Thu Jun 27, 2013 12:13 am

stilts1007 wrote:Thanks for the input. Plan is to exchange the ~10k bonds in the taxable account for stocks, then exchange ~10k of comparable stocks for bonds in my 401(k). Same asset allocation, better placement, and I can offset the small capital gain I will have for the year. Win-win-win?

I would have to wait at least 30 days to add the bonds to my 401(k) to avoid it being considered a "wash sale," correct? My 401(k) has Vanguard Total Bond Market Index for its bond fund, which is what I currently own in the taxable account. If I am not mistaken, that would still count as a wash sale even though it is in a tax-deferred account?

stilts1007

Posts: 54

Joined: 25 Jan 2013

Location: Chicago IL

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