Sunday, December 21, 2014

Help Needed ETF Picking: Tax Implications / Discussion

Over at we came across the following discussion: 

Help Needed ETF Picking: Tax Implications

Postby HumbleInvestor09 » Sat Dec 20, 2014 12:58 am
Hello all,

I am new to the forum and have enjoyed learning. I have been convinced that indexing is the way to go. I'm 28 yo, income currently 80-90k/yr, saving approx 50% of income. Pretty naive when it comes to investing.

I currently have about 100k in retirement accounts (IRA) and about 100k in a taxable investment account. In an ideal world, after reading this forum, I'd like to allocate with a "3 fund" portfolio at 80/20 stocks to bonds. Perhaps something like 60% VTI, 20% VXUS, 20% BND. My retirement accounts now match very closely with this allocation (although I can change if I should!)

This is the problem: I made some investments along the way in my earlier years in the taxable account that are currently carrying sizable unrealized capital gains.

I have VV (Vanguard Large Cap) Market Value: 45k, Unrealized Gain 20k
I have IJH (Ishares Mid Cap) Market Value: 6.5k Unrealized Gain 3k
I have IJR (Ishares Small Cap) Market Value: 6.5k Unrealized Gain 3k

I feel like it would be quite dumb for me to sell these instruments, have to pay 4-5k in taxes now, and then reinvest in similar instruments to get my desired "3-fund" portfolio. Does anyone have any suggestions for how to build a portfolio that matches the allocation I am looking for without having to realize the gains on these products? Are the Ishares ETFs quite bad, to the point of which I should dispose of them despite the gains?

Thanks in Advance!
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Re: Help Needed ETF Picking: Tax Implications

Postby livesoft » Sat Dec 20, 2014 7:40 am
I would just keep the investments you have unless they really bother you. Here are some things one can do:

1. Do not automatically reinvest dividends on your existing ETFs.
2. Do not buy more of your existing ETFs.
3. Start your new phase of VTI, VXUS, BND.
4. Consider that your VV, IJH, IJR shares are equivalent to same dollar amount of VTI ($58K) in your asset allocation. I don't think you need to be more precise than that.
5. In the future, if you feel you must get rid of VV, IJH, and IJR, then you may have opportunities to do so without paying taxes on them:
a. You may need to tax-loss harvest VTI and VXUS in taxable. That means selling for a loss and buying replacement shares. You can sell shares with gains to offset the losses.
b. (Sorry Gill) One can donate appreciated shares held longer than a year to charity and take a tax deduction on Schedule A if one itemizes. If you are one to make charitable contributions, then consider this. You may also wish to read up about Donor-Advised Funds.
c. If you have children that pay a lower tax rate than you, then you can give them appreciated shares which they can sell. Sometimes their long-term capital gains are tax-free.

You may find that when you have to tax-loss harvest that you will end up with other ETFs anyways. For instance, I tax-loss harvested Total Stock Market Index in 2009 and bought the Large-cap Index which I hold to this day. Many folks sold VXUS for a loss recently and bought VEU.

I think that it would be rare for a taxable account more than 5 years old to have only one fund for each asset class. In the future, with roboadvisors like Betterment, folks may end up with 3 different ETFs for the same asset class.
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Re: Help Needed ETF Picking: Tax Implications

Postby jimkinny » Sat Dec 20, 2014 8:10 am
At one time I wanted perfection but eventually realized that most of this stuff is pretty trivial. It looks to me like you got the important stuff nailed. I would not do anything.

I would simply count the large,mid and small as a close enough equivalent to VTI to just count it as such. You can find on the Wiki, or morningstar style box, what % of large, mid and small VTI has but it is close enough in light of cap gains that I would keep things as is and not sell.

Maybe we will be unfortunate in the next several years and those gains will turn to losses or maybe the gains will be lower.

I have all of my fund distributions going into a MM account to make life simple and avoid wash rules when harvesting a cap loss so I think it is generally a good approach to do this.

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Re: Help Needed ETF Picking: Tax Implications

Postby Epsilon Delta » Sat Dec 20, 2014 11:34 am
livesoft wrote:5. In the future, if you feel you must get rid of VV, IJH, and IJR, then you may have opportunities to do so without paying taxes on them:

d. If you are (or get) married and family income stays at the 90k level you may have a few thousand of 0% capital gains tax.
e. You may have a low income year (return to school, working for a startup, unemployment, ...) that gives you the chance to realize gains at 0%.
f. There are probably others. IIRC there's a corner case with AMT.

Sitting tight until or unless you get such an opportunity is reasonable.


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