SMA accounts/index funds in taxable account

[steady saver]

I'd like to hear your thoughts on Fidelity's SMAs AND how you would best approach using index funds in retirement that are already in a taxable account.

I have an individual account at Fidelity, along with our company 401K. In the individual account, I have cash, individual stocks, and index funds.

My Fidelity advisors suggested I consider an SMA to help introduce a tax managing strategy. The suggestion was to take the cash (about 150K, tax loss harvest some stocks, and start with about $250K to be managed through an SMA at a cost of .65%

My initial reactions was guarded skepticism, then I become intrigued (I need to take taxes into my retirement planning, something I've never looked at before). When it comes down to it, I'm still not sure it's right for me for 2 reasons:'

1. If I was simplifying it, then I could just continue with my stocks and do my own tax loss harvesting once a year,

2. I'm not clear that I'm necessarily coming out ahead enough to warrant someone else taking over that portion of my investments.

That said, my DH is all for letting someone else do the work. I understand that.

Since we have about 400K in index funds in that account (VTI and VB - way more in VTI...) then I'm still stuck with index funds in a taxable account that I'm not sure how best to use.

Would love to hear your thoughts on these issues.

Many thanks!

 

[pb4uski]

I'm not getting it... they want you to pay them 0.65% to invest in losers? Around here we prefer to invest in winners rather than losers.

(Boho can do point out losers to you for a lot less.... )

Are any of your current purchase lots have unrealized losses?

 

[LOL!]

I'm also not getting it. Why pay 0.65% for no benefit?

Also, I don't understand what you mean by "how best to use" your index funds. I know how to use them if you don't. So I will accept them if you give them to me.

I know how to tax-loss harvest VTI and VB, but I suspect you do as well. I know how to use the dividends from these funds, too. I know how to sell them to pay expenses. I know how to let them sit with their unrealized capital gains so that I don't have to pay any taxes on them. I know how to donate them to charity to avoid taxes, too. So what did I miss with your question?

 

[bingybear]

My Fidelity advisors suggested I consider an SMA

Who are your "Fidelity Advisors"? Is this your Private Client rep? I would listen to your advisor if you found an advisor worth paying.
I don't see tax loss havesting as a once a year thing. Harvest losses when losses become enough. If you are in low enough income, tax gain harvesting can be a good way to save on taxes. Many different ways to help taxes.

If you find a SMA that provides you with some benefit that you don't or can't do yourself, then use them. So far I don't with Fido. I've tried some at schwab. They weren't bad, but they weren't stellar... I replaced them with something less expensive.
I've found my PC rep as a good resource. You just need to train them. They are partially sales people which can be bad. But they are also retention people which means they can make getting things done easier.

To take a small part of your assets and tax manage it is not really what you want to do. You want your whole investment process to be tax efficient. Put the right investments in the right accounts. You need this discipline or pay more than you need to the tax man.

 

[OldShooter]

... Why pay 0.65% for no benefit? ...

There is a benefit. Just not to the OP.

 

[MRG]

I'm also not getting it. Why pay 0.65% for no benefit?

This year fidelity has been pushing hard for add on services. Have you seen their commercial for wealth management?

This aligns with my experience and later conversation with a branch manager.

 

[steady saver]

Pb4uski - Yes I do have stock lots with unrealized losses.

LOL! - No I don't know how to tax loss harvest the index funds. The whole term "tax loss harvesting" is a new one to me, and one I need to embrace for the sake of managing our tax hit better. I've always just bought and held. Steady saver, that's me...Yes I know how to let them sit since that's all I've done with them. No, I don't know how to donate them to charity to avoid taxes. This is all new to me and quite frankly I find my head spinning. I want to learn more, do the "right" thing. I am here to learn from all of you.

bingybear - Yes, this is a Private Client type thing through Megacorp. I went in wary (we even changed advisors once) but I really do like this advisor and she's brought in a second advisor in the last two meetings b/c he is very knowledgable about Megacorp, which has been helpful. We have not felt pressured or pushed in any way. I get info from them, I research it, run it through my numbers, come here for advise...My hesitancy about the SMA, I guess, is that they've proposed it for such a small percentage of our portfolio so I think, why bother? I imagine the thought is if it does well then we'd increase our holdings in it. I don't know. When it gets out of my hands, I get nervous. DH is happy to let someone else manage it but that wasn't how I was raised! I figure no one is going to care as much about my finances as me. But I am painfully aware of how much I don't know when it comes to strategy. I know how to not spend money, how to save money, how to buy stocks and mutual funds...but withdrawal strategies, managing for tax efficiencies...this is all a learning curve for me. And yes, you hit the nail on the head! I want to manage the whole thing for tax efficiencies; not just part of it.

 

[Al18]

The Fidelity representative is suggesting managing $250K @.65% or $1625 per year. Ask them to run a simulation and advise how much in taxes Fidelity will save you per year. If it's more than their fee, I would consider it.

 

[bingybear]

No I don't know how to tax loss harvest the index funds. .

say you own VO that has some shares with losses above some nominal level. You sell the shares with those losses and use the proceeds to buy something similar, but not too similar like IJH. So you have the same $ amount in mid cap ETF, but you realized the loss on the VO shares.

 

[steady saver]

The Fidelity representative is suggesting managing $250K @.65% or $1625 per year. Ask them to run a simulation and advise how much in taxes Fidelity will save you per year. If it's more than their fee, I would consider it.

Thanks Al18. I will do that!

 

[steady saver]

say you own VO that has some shares with losses above some nominal level. You sell the shares with those losses and use the proceeds to buy something similar, but not too similar like IJH. So you have the same $ amount in mid cap ETF, but you realized the loss on the VO shares.

I'm embarrassed to say that I didn't even realize until last week that I could go in and find those specific lots on my account. Thank you for that. I wasn't thinking through that I could sell and then buy something similar, rather than just selling and being stuck with the cash. It seems so obvious now but honestly I'd just never explored that.

Thank you.

 

[OldShooter]

say you own VO that has some shares with losses above some nominal level. You sell the shares with those losses and use the proceeds to buy something similar, but not too similar like IJH. So you have the same $ amount in mid cap ETF, but you realized the loss on the VO shares.

@Saver, since you want to learn: When @bingybear mentions "not too similiar" that is because of something called the "wash sale rule." When you run into terms like this, https://www.investopedia.com is a pretty good place to go for explanations. I won't endorse them completely because I don't use them that much and I don't know how they make their money, but IMO it is a useful site.

Another good place for learning via mostly short and accessible videos is here: https://famafrench.dimensional.com/videos.aspx Fama and French are among the most respected gurus of investing.

For books, download "If You Can" by William Bernstein (If You Can and Rational Expectations). It's worth reading (16 pages) on its own although it is targeted at young people, but his suggested reading list is excellent.

 

[steady saver]

Old Shooter -
Thanks for the explanation and the recommendations. I will certainly look into them. Ironically, I just ran across Investopedia today to look up some terminology and it was helpful.
I will check out the videos and the book with the recommended readings as well.

Many thanks.

 

[pb4uski]

That is the beauty of knowing the unrealized gain or loss position of each lot that you own.... you can easily simulate what selling all your loss lots would do... how much loss would be generated... and the simulate selling some of your gainers to offset the losses.

At the end of the day you have generated a lot of cash with zero tax cost.

Then you can think about where that cash can be reinvested consistent with your target AA and liquidity needs.