Cost basis method question, or take money from my Roth?

[Retch The Grate]

A question about cost basis accounting on mutual funds held at Vanguard, advice from people who understand better would be great.

So I'm working at a startup and my cash flow in my checking account has just gotten tight and I need to sell a bit of my regular investment account's mutual fund holdings to get some cash buffer back (totally my fault, I thought I had disabled my monthly automatic investment but it turned out I'd only done it temporarily and it turned back on while I'm still in a low cash on hand state). I'm going to sell about $10k of stock, and I want to minimize taxes paid (the startup just went to full salaries so my yearly income will be high enough that taxes matter, , so presumably I should set the cost basis method to specific ID and sell my recent investments that don't have much in the way of gains.

The question I have is, it talks about needing to know my basis for all of my investments prior to 2012 if I turn on Specific ID, and I haven't been keeping records of that (monthly investments, plus dividend reinvestment means there are packets of shares at all sorts of prices), when I started the account I didn't realize I had to do that part of the record keeping. From my reading of Vanguard's webpages, I can turn on Specific ID, and if I want to sell old shares, they just get reported at the Average Cost basis, which seems fine, since I'd just been planning on Average Cost in general for when I intend to be accessing these investments. So my concern/question is, is it ok to turn on Specific ID, sell my most recent investments to minimize gains, and can I still sell the older shares using Average Cost accounting?

Alternately I could take money out of my Roth, which I'm loath to do because I want that pile to grow, but my understanding is I can pull out some of my contributions without any penalty since those are already taxed. Would that make more sense, I'm assuming no since I want as much in there for later when I'm getting all my money from my investments so I can manage how much is taxable each year to control rates.

What makes the most sense to do? Income this year from the new job will be $81.5k now that we are up to full salary and my taxable investment capital gains are generally a few thousand dollars each year. And yes, I understand that all told given I'm only going to move a 5-10k cash buffer back into my checking account the taxes are only a few hundred dollars even on the Average Cost method, but I want to understand the best way to do this for the future too, since at some point I'll hopefully be FIREd and having to do more withdrawals.

 

[stepford]

Maybe the OP's problem is Vanguard-specific, but I thought in general that when you sold using the specific share ID method the rules only required that that method be used for all further sales of that particular asset - not ALL your assets.

For instance, about 12 years ago I sold some shares in one mutual fund using specific share ID. Last year I liquidated my position in that fund and was obliged to go over 12 years of paper records to determine the true cost basis of all the individual shares. While this was something of a PITA I was still able to use the average method for all my sales of other equities.

I'm not an expert on all the details, but if sales of only one (or perhaps a few) assets are involved the short term tax savings may make the record keeping hassle worthwhile.

 

[DrRoy]

I believe that stepford is correct. The specific ID would only apply to the security sold. You should just call Vanguard and discuss it. They can give you the exact information that you need. I agree that you should leave the Roth alone.

 

[pb4uski]

....So my concern/question is, is it ok to turn on Specific ID, sell my most recent investments to minimize gains, and can I still sell the older shares using Average Cost accounting?...

Yes. Unless you expect to be in the 15% tax bracket (or lower) then your best option is probably going to be to turn on Specific ID and sell $10K, cherrypicking the lots with the lowest gains.

OTOH, if you expect to be in the 15% tax bracket for 2016 with the gain, then your tax rate on LTCG is 0% so you should just pick some lots of covered or non-covered shares and not fret too much about it.

If you have the time and care about wringing out the last nickel then you could go back over your purchases of covered shares and determine your purchase lots and basis but in your case it sounds like it would be a lot of effort for little benefit.

 

[Sunset]

A question about cost basis accounting on mutual funds held at Vanguard, advice from people who understand better would be great.....

Well nothing like cutting down the number of responses you could get

Don't sell the Roth. Sell with specific ID (as all previous folks suggested).

 

[Texas Proud]

Just to throw in my 2 cents....

I have Vanguard and have specific ID for all my funds... they have a list of what I own where they say they are non-covered shares... they do not give me an option of specific ID, but they have kept track of the total basis.... so, like you say an avg cost basis...

You do not have to try and recreate anything prior to 2012....

 

[RE2Boys]

I do know, and confirmed it this morning from IRS Pub 550, that once you use average cost basis in a mutual fund, you no longer can use specific ID or other cost basis options. So if this is the first time that your selling units from the mutual fund, you should be OK, but if ever used average cost basis (such as to pay mutual fund fee), you must continue to use average cost basis.

See Chapter 4 of IRS Pub 550: https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink1000250005

 

[RunningBum]

The OP can look it up for him/herself, but I'm pretty certain you can use different methods for non-covered (bought before 2012) and covered (bought since 2012) shares. They are essentially considered different assets. In fact if you do average cost, you will have an average cost for the non-covered shares, and a different average cost for the covered shares. So if you haven't yet sold any covered shares, you can use whichever type of basis you want.

 

[kaneohe]

I do know, and confirmed it this morning from IRS Pub 550, that once you use average cost basis in a mutual fund, you no longer can use specific ID or other cost basis options. So if this is the first time that your selling units from the mutual fund, you should be OK, but if ever used average cost basis (such as to pay mutual fund fee), you must continue to use average cost basis.

See Chapter 4 of IRS Pub 550: https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink1000250005

This might be true retrospectively....that is looking back at shares you now own since the average has been established. However looking forward to shares you do not yet own, you can change methods since the new shares will be considered a different group.
http://fairmark.com/investment-taxation/mutual-fund-tax-guide/averaging/changing/

 

[Retch The Grate]

Thanks all, the confusion around covered and non-covered and if the different accounting methods can be mixed was part of what made this hard to figure out! Appreciate the help!