Move investment from USAA to Vanguard

[Skeptic]

I have a (post-tax) USAA fund which I would like to sell and transfer to my Vanguard holdings. Is there a best practice for making this transfer in order to minimize taxes?

 

[samclem]

I have a (post-tax) USAA fund which I would like to sell and transfer to my Vanguard holdings. Is there a best practice for making this transfer in order to minimize taxes?

The first thing that comes to mind is try to take maximum advantage of any zero-rate capital gains window you may have. This depends on your income, but if you expect to be under the top of the 15% tax bracket, you could sell enough of your USAA holdings so that the gain on them remained within that bracket (where cap gains are taxed at zero%). Do the same thing every year up to the top of the 15% bracket until you've gotten all of the shares sold.
The first mutual funds I ever purchased were with USAA. I didn't know anything, especially the difference in costs of various fund options. It was a better fund than many being sold at the time, and far from the most expensive, but I'm very happy to have only Vanguard and Fidelity funds now. Good luck.

 

[travelover]

Can any of the holdings be transferred in kind, so there is no actual sale and thus no capital gains?

 

[LOL!]

There are too many best practices to mention, so I'll give just one:

1. Sell all lots that have a loss.

2. All lots with a long-term gain, just give to a charity of your choice and take the tax deduction. Do this instead of giving cash to your charity, so that ...

3. … you can use the cash instead to buy new shares at Vanguard.

 

[DrRoy]

Can any of the holdings be transferred in kind, so there is no actual sale and thus no capital gains?

This is my thought as well. I have done institutional transfers before, and the investments were transferred, not sold, so no cap gains.

 

[Skeptic]

Can any of the holdings be transferred in kind, so there is no actual sale and thus no capital gains?

The USAA "holdings" are shares of one mutual fund. Is it possible to discombobulate such shares into their constituents, which do or don't have capital gains and/or can be transferred in kind?

What I'm hearing is that it's expensive to just wash my hands quickly of this investment, and I should plan to act slowly and methodically.

Thanks very much for the advice, though.

 

[target2019]

No one can tell you if it is expensive or not, since the details are not known. You need to look at recent statement to find how many lots and cost basis for each. This statement is probably saved online. It's called the annual statement. Also, all necessary details are in the online account, if you can find them. You can also call, and ask questions.

You really should know all of this before selling, transferring or donating.

The idea of donating is good. However, maybe you need or just want this money. If you are speaking of a USAA fund, transferring it in kind to Vanguard may not be possible, or recommended.

 

[nash031]

Skeptic - I was in USAA before moving to Vanguard. I moved because I could reduce my already low expenses to less than half of what they were at USAA in equivalent funds. Here's how I handled your situation:

Inside my IRA, I transferred the funds in-kind, and eventually sold the USAA funds and purchased VTSAX/VTIAX.

In my USAA brokerage account, I transferred the equity holdings in-kind and am still holding those same shares in my Vanguard brokerage account (AAPL).

In the USAA mutual fund account, I never made the move. It didn't make sense to me to sell my USAA S&P 500 fund, move the money over to Vanguard, then purchase VTSAX. The expense difference is .26 to 0.05. I didn't do the math, but incurring a taxable event for such marginal savings didn't make sense to me (maybe I should do the math... that math, by the way, would involve knowing the ER difference, your tax bracket, your basis, the total value, the ROI, and how long you intend to hold the funds before selling them in the future. The longer your timeline and higher the ER difference, the more valuable it is to make the shift.)

Instead, my plan is that the USAA mutual fund account, being that with the highest ER, stays where it is and has a big, fat, target on it as the first funds to be spent when I start drawing down.

Obviously, if there's a bigger difference in ERs or you're flat-out stuck in a bad fund at USAA and want to sell it anyway, maybe it becomes worth it. Otherwise, MY short answer would be: do not incur a taxable event just for convenience.

 

[nash031]

Update:

Nerded out this morning while watching the baby... made some assumptions about ROI and tracked down my basis for USAA S&P.

Long story short, out to 37 years, there is never a time where the total ER difference paid over the course of time ever exceeds the CG tax hit. At 37 years (and based on all my assumptions and facts) it gets to about 25% of the total CG tax I'd pay to make the move.

You'd have to decide if the convenience is worth it. For me, we're talking about $75K, and it'd cost me ~$6000 to move it, or about $163 difference in expenses to keep it where it is. And it never really gets close to being the financially sound move to go between relatively equivalent funds.

 

[pb4uski]

The USAA "holdings" are shares of one mutual fund. Is it possible to discombobulate such shares into their constituents, which do or don't have capital gains and/or can be transferred in kind?

What I'm hearing is that it's expensive to just wash my hands quickly of this investment, and I should plan to act slowly and methodically.

Thanks very much for the advice, though.

If you are in the 15% tax bracket, you can sell just enough each year so that the gains, when added to your return, bring your taxable income to the top of the 15% tax bracket and you would pay no tax on those gains... however, it requires careful planning because if you overshoot, your marginal tax rate on the overage is likely to be 30%.

If you also do Roth conversions by amounts that would exceed any overage you could address the overage through recharacterization and avoid the 30% I mentioned in the previous paragraph.

 

[pb4uski]

Update:

Nerded out this morning while watching the baby... made some assumptions about ROI and tracked down my basis for USAA S&P.

Long story short, out to 37 years, there is never a time where the total ER difference paid over the course of time ever exceeds the CG tax hit. At 37 years (and based on all my assumptions and facts) it gets to about 25% of the total CG tax I'd pay to make the move.

You'd have to decide if the convenience is worth it. For me, we're talking about $75K, and it'd cost me ~$6000 to move it, or about $163 difference in expenses to keep it where it is. And it never really gets close to being the financially sound move to go between relatively equivalent funds.

If you're going to sell it eventually rather than keep it until an heir inherits it and gets a stepped up basis, won't you eventually pay the $6,000 either way?

 

[nash031]

If you're going to sell it eventually rather than keep it until an heir inherits it and gets a stepped up basis, won't you eventually pay the $6,000 either way?

Absolutely.

That said, it doesn't make sense to sell, pay the $6,000 and transfer $71k over to Vanguard rather than let the $77k sit at USAA and continue to grow. Based on my calculations this morning, I'd never catch up (assuming the same return and lower expenses). It'd take two decades to draw even, and I plan on selling the shares and spending the funds before then.

If OP wants to move from a more expensive fund than my case (which was .26 to .05) or to a wholly different fund promising better return, OR he won't pay any CG tax, then yes, it might make sense to make the move.

 

[LOL!]

The USAA "holdings" are shares of one mutual fund. Is it possible to discombobulate such shares into their constituents, which do or don't have capital gains and/or can be transferred in kind?

What I'm hearing is that it's expensive to just wash my hands quickly of this investment, and I should plan to act slowly and methodically.

Thanks very much for the advice, though.

I don't own investments at USAA, but at all my other places, it would be trivial to discombobulate such shares into the dates acquired and the number of shares acquired on each of those dates. All would be able to be transferred in-kind AND the transaction info would transfer over as well. This might not be true at USAA for so-called 'non-covered' shares, but would be true of covered shares.

And presumably you have kept all your annual statements for decades with all the transaction information, so you can discombobulate things yourself anyways.

 

[Skeptic]

Skeptic - I was in USAA before moving to Vanguard. I moved because I could reduce my already low expenses to less than half of what they were at USAA in equivalent funds. Here's how I handled your situation:

Inside my IRA, I transferred the funds in-kind, and eventually sold the USAA funds and purchased VTSAX/VTIAX.

In my USAA brokerage account, I transferred the equity holdings in-kind and am still holding those same shares in my Vanguard brokerage account (AAPL).

In the USAA mutual fund account, I never made the move. It didn't make sense to me to sell my USAA S&P 500 fund, move the money over to Vanguard, then purchase VTSAX. The expense difference is .26 to 0.05. I didn't do the math, but incurring a taxable event for such marginal savings didn't make sense to me (maybe I should do the math... that math, by the way, would involve knowing the ER difference, your tax bracket, your basis, the total value, the ROI, and how long you intend to hold the funds before selling them in the future. The longer your timeline and higher the ER difference, the more valuable it is to make the shift.)

Instead, my plan is that the USAA mutual fund account, being that with the highest ER, stays where it is and has a big, fat, target on it as the first funds to be spent when I start drawing down.

Obviously, if there's a bigger difference in ERs or you're flat-out stuck in a bad fund at USAA and want to sell it anyway, maybe it becomes worth it. Otherwise, MY short answer would be: do not incur a taxable event just for convenience.

My USAA fund is USCRX, with expenses of over 1%, I think, and I'd want to move 'em to some combination of VWENX/VWNAX. What more info do I need in order to figure how long it will take to amortize the tax hit?

 

[samclem]

My USAA fund is USCRX, with expenses of over 1%, I think, and I'd want to move 'em to some combination of VWENX/VWNAX. What more info do I need in order to figure how long it will take to amortize the tax hit?

To determine the tax hit:
1) Determine the tax rate you'll pay on cap gains. This depends on our tax bracket. Specifically, you need to know how much income you'll likely have in 2016 so you'll know how much CG you can take before going into the next bracket. Note the CG tax rate in each bracket and the cutoff points between brackets.
then:
2) Take a look at your USCRX holdings and see how much cap gains you've got built up. If you bought them over the years, each purchase ("lot") will show a different amount that you paid for it, so each lot will have a different amount of cap gains per share.

As you'll see, the amount of cap gains you'll be taxed on may depend strongly on which lots you sell. You may want to use the "specific shares" method for identifying the shares to be sold (assuming you still have that option--depends on whether you've sold some in the past and when you sod them "covered" or "uncovered" shares, I think)

You can do some "what ifs" to see how much tax you'd pay if you sold everything this year, if you spread it out to remain within certain tax brackets, etc.

 

[LOL!]

Did anybody mention that there are different cost basis methods that can be used for mutual funds? Specific Identification and Average Cost come to mind. One must use Specific Identification if one wants to specify different lots when selling.