selling assets for tax efficiency

[Mill]

I need some help as I will have a big decision coming up with buying a new car. Hopefully my current one will last awhile, but its not looking very likely. Im concerned about the most tax efficient way to draw out some money from my taxable accounts. Speaking with another Boglehead friend of mine, I agree that cash is fungible, so I decided not to grow an online savings account raising cash for a car purchase, and have instead invested as follows.

VTSMX 10K admiral shares held less than a year (about even from cost basis, maybe slightly down)

VWITX 19K currently DCA'ing but most has been held less than 1 year (up a few hundred dollars from cost basis)

VGPMX 3K (Prescious metals stocks index) held less than a year (down a few hundred dollars from cost basis)

VTSMX 16K investor shares held for 3 years (up about 6000 dollars from cost basis)

Cash 13K (most $ needed for Roth IRA 2012 contribution, and e-fund)

Ok, so the question is: IF I NEED APPROXIMATELY 25K CASH TO BUY A CAR ONE MONTH FROM TODAY, WHATS THE MOST TAX EFFICIENT WAY FOR ME TO MAKE THAT HAPPEN? Keeping in mind the following...

-Im in the 25% tax bracket
-My portfolio allocation (as a whole) is about 70/30 stocks/bonds, which is where I want it to be. But Im not too concerned about throwing it off too much, as my plan will to be to quickly buy my way back into proper 70/30 allocation after I buy the car.
-I cant really spare much cash for this, so I will have to sell at least 20K of taxable assets
-I dont want to finance

I cant think of anything else that would be relevant, but if so, please ask.

Thanks.

Side question, before I click submit...Do you all agree that cash is fungible, or should I stop DCA'ing into VWITX, while I agressively raise cash, and hope my current car can last awhile? Any other thoughts are appreciated.

 

[justplainbll]

I'd take 10K from VWITX, 15K from VTSMX and pay the 15% LTCG tax while it's still available; or transfer ~13K of the VTSMX to a Vanguard ROTH account, take 2K in cash from VTSMX and 10K from VWITX.

 

[LOL!]

Sell every single share that has an unrealized capital loss. This is called tax-loss-harvesting.

Next sell shares with the highest cost basis and thus the least gains to get to the amount you need.

The realized capital losses should offset the small gains, so you will have no net gains and you will owe no taxes.

 

[efv1]

I would definitely buy a used car instead of new. There are so few buy ers in the marketplace that you can get a great deal on a late model of your choice. Check with craigslist or ebay. New car dealers can't lower their price enough. Check it out!

 

[jerome len]

If you're going to need cash in the next 12 months, take it out of the market now. You never know when the market will tube and then you're out of luck. And, trade BEFORE your current car has a major problem. Whenever your current car is appraised, the dealer subtracts the cost of repairs.....so, if you have a major repair YOU take the entire loss.

Years, ago, I paid $450 for an old car. A week later it lost an engine rod......it was junk and I learned my lesson. If you buy a used car, get one with a warranty or buy a good service contract. There is a reason the car is for sale......sometimes it just the previous owner got tired of it, sometimes it's because the car has a major problem....you don't want to buy someone elses problems.

I never bet on short term on the market or a used car. I always buy new, drive the car until repairs start getting expensive and save worry, time and it doesn't cost me much, if anything, in cash.

Good luck......be safe and happy!

 

[arebelspy]

If you're going to need cash in the next 12 months, take it out of the market now. You never know when the market will tube and then you're out of luck.

You never know when it will shoot up, either. Shouldn't dollar cost averaging work both ways, not just on deposits?

Moot in this case, as he mentioned one month, rather than 12.

 

[Nords]

Cash may be fungible, but I'm not so sure about stock shares.

I know new cars are a personal decision, but it seems like you're going through an awful lot of hassle to come up with the money for a new car. Perhaps it'd work better this way:
Hassle(raising $15K)+Hassle(used car) < Hassle(raising $25K) + Hassle(new car dealer)

Plus you'd have $10K left over...

 

[tjwolf]

If and only if you need a need a new car, I would not sell anything. Leave the stocks alone! You may never get that money back into the market again. You are now selling at a market low, having bought high. A bad scenario.

Car companies are offering 0 % financing. Go to one of the many web sites and price the car you want, then take that quote to the dealer(s). Cheap money if you do a proper evaluation, going in!

 

[Finance Dave]

I'll try to answer directly and not stray into the new/used car opining.

I agree with one poster to tax-loss harvest and use some gains to offset. Looks like you have two funds which would put you at $22k and come pretty close to zero gain, so no taxes.

Good luck!

 

[Animorph]

If and only if you need a need a new car, I would not sell anything. Leave the stocks alone! You may never get that money back into the market again. You are now selling at a market low, having bought high. A bad scenario.

Car companies are offering 0 % financing. Go to one of the many web sites and price the car you want, then take that quote to the dealer(s). Cheap money if you do a proper evaluation, going in!

We've done this twice with great results. Heck, the first car (bought in 2002 I think) must have been practically free after the market recovered. Bought it used with a super-low-interest loan from the manufacturer and left the balance in equities. Same thing with our "cash for clunkers" new car with the same kind of loan. Not all loans are bad!

Other than that, you sound like you have plenty of stuff you can sell with a small loss or gain. Probably not worth worrying about timing the market, though you could use your cash and replenish it again before April '12 for the IRA. Given the current global economy, I'd take it out sooner rather than later.

 

[LOL!]

I think you all have seen this where cash is definitely fungible:
Wiki article link: Placing Cash Needs in a Tax-Advantaged Account
It really does work and it does not matter if stocks are up, down, sideways, whatever. If you need more explanation than the link gives, please feel free to ask. If you do things right, you will never pay taxes on your investments again.

 

[pb4uski]

I would agree with others to take advantage of manufacturer 0% financing to get the car, leave the investments alone. Since you don't have any significant losses the tax loss harvesting option doesn't seem worth the effort.

If you are really adverse to financing, then use a bit of cash and sell some of the stocks.

BTW, why do you have both investor and admiral shares of VTSMX? Can't you convert the investor shares to admiral shares?

 

[Nords]

I think you all have seen this where cash is definitely fungible:
Wiki article link: Placing Cash Needs in a Tax-Advantaged Account

I think your example of the "fungible" concept is more appropriate than the situation where you have $13K cash and need $25K cash.

Putting $12K cash into a stock fund does not mean that you'll be able to remove $12K from that stock fund at any particular time. The Bogleheads scenario is an example of fungible cash, but raising cash from a stock fund is not.

 

[ATC KH]

There are several ways in which you could utilize the boglehead concept, but the most tax efficient is likely using VWITX/cash to pay for the new car. To be clearer: The most tax efficient plan would likely be to use all $13k of cash plus $12k VWITX to purchase the car. The main question is how extreme do you want to be in applying this boglehead concept? In theory, you could keep only tax efficient index funds in taxable and sell specific shares as you needed liquidity, and then rebalance between taxable/tax-advantaged accounts. By using the specific ID of shares cost basis method, you could always ensure that you are only selling shares which result in the least tax burden. The problem is that this would be too time consuming and burdensome for most people, myself included. Not only would tracking the basis this way be more complicated (although starting next year you could have Vanguard do it for you), but you also have several other potential complications that make this extreme implementation difficult to utilize.

I would still favor using mostly cash and VWITX to buy the new car; however, I would also favor a "buffer" layer in taxable comprised of cash/VWITX. For example, something like a month's worth of expenses in cash and five months' worth of expenses in VWITX. This way you do not always have to sell equities to meet liquidity needs. This method would be a simpler implementation and it still results in increased tax-efficiency compared to "bucketing money management."

I would also put VGPMX in tax-advantaged space versus taxable, but I would wait until you held it a year to avoid the redemption fee.

Like another poster, I'm also wondering why you haven't converted individual shares to Admiral?

 

[Mill]

Thanks for the responses. To answer the question, my other VTSMX is at Scottrade and they want 17 bucks to convert it to admiral. I talked to Vanguard, and they can do a rollover for me though.

 

[arebelspy]

I would agree with others to take advantage of manufacturer 0% financing to get the car, leave the investments alone. Since you don't have any significant losses the tax loss harvesting option doesn't seem worth the effort.

If you are really adverse to financing, then use a bit of cash and sell some of the stocks.

BTW, why do you have both investor and admiral shares of VTSMX? Can't you convert the investor shares to admiral shares?

I agree also, and I hate car loans. Buy used with the cash you have, or buy new with low interest loan, but don't sell low to get a brand new car for cash.