Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
SMH - huge surprise capital gains in taxable
Old 01-23-2022, 03:13 PM   #1
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 131
SMH - huge surprise capital gains in taxable



I can't believe I did this. I am typically uber-careful and plan all my portfolio activities with a ton of spreadsheets and deliberate consideration of all the angles. Have been doing this successfully for 20+ years and have learned a ton from the collective wisdom here. We are nearing the end of our accumulation mode and have for years been fortunate enough to max out pre-tax contributions, do mega backdoor Roths, 529s, and taxable investments. All good.

Well this past August I was doing some very infrequent re-balancing (once every couple of years) and accidentally did it in our taxable Vanguard account. I KNOW that "exchanging" one equity index fund (S&P 500, VTSAX) for another one (International, VTIAX) means selling one and buying the other but perhaps because I've always had room in our 401ks or Roths to rebalance or it's been so long since I've done anything in the taxable account except deposit funds automatically that I had this lapse in judgement. And it was a big one to the tune of ~$500k.

Fast forward to this morning when I'm starting to import 1099s into TurboTax. Everything is looking as expected....W2s, 1099-DIVs, and then BOOM the tax bomb goes off to the tune of $92k extra due with the 1099-B from Vanguard. I was floored and so upset with myself once I realized how it occurred. It was nearly all long-term gains of course but I really didn't have an immediate need to take it and because our income has been fortunately been high it's at the 20% CG + 3.8% net investment income tax. Argh!

I think I'm mostly venting here. I mean I could have put it into some crazy risky investment and done worse. And eventually the tax will have to be paid anyway, but I'm so frustrated by the inefficiency I've caused on a smaller portion of our overall investments. And now I need to go sell part of the new position because of course I didn't withhold anything for taxes.

Am I making too big a deal out of this and/or is there any other strong upside / opportunity I should now consider with the higher basis on the new investment?

Thoughts and advice welcome. Thanks!!!
jblack is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-23-2022, 03:23 PM   #2
Recycles dryer sheets
gamboolman's Avatar
 
Join Date: Sep 2012
Location: Spring, Texas
Posts: 473
jblack

I just did basically the same thing last week. Swapped from Mutual Funds to ETF's for ~$550K - so very similar to your amount.

Here's a picture ms gamboolgal took of me just after I realized I had whopped up:

__________________
Retired 1-Feb-21 at age 61
AA 50/30/20 ish....
gamboolman is offline   Reply With Quote
Old 01-23-2022, 03:28 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2016
Location: Colorado
Posts: 8,816
I keep close tabs on taxes. Not sure if Vanguard has it, but Fidelity has year to date tax info for taxable accounts so you always know where you stand. I also run proforma 1040’s on Dinkytown so I have a pretty good idea on taxes throughout the year. It helps me to send in estimated taxes or do tax loss harvesting to offset gains.

If the gains were incurred earlier in the year, you might get hit with a penalty too if you didn’t send in estimated taxes.
COcheesehead is offline   Reply With Quote
Old 01-23-2022, 03:31 PM   #4
Full time employment: Posting here.
 
Join Date: Oct 2015
Posts: 900
First world problems... better than a sharp stick in the eye!

I really try to minimize rebalancing in my after tax accounts that create capital gains for the very reason you noted. I am recently "retired" and expect to take my first withdrawal this year. My ETFs/MFs naturally create dividends/CGs/interest on their own each year that will cover almost 2/3rds of my planned FAT FIRE spend. My next exercise is Roth conversions for the next 15 years and all the joys of calculating my annual taxes!

Just remind yourself you are lucky to pay all those taxes! None the less, feel your pain.
DawgMan is offline   Reply With Quote
Old 01-23-2022, 03:59 PM   #5
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 131
Wow, thanks for the quick responses already.

gamboolman - ha, that is pretty much what my wife wanted to do to me when I showed her the updated taxes due. On the plus side, though, we have been considering a vacation home that would likely require us to sell some equities anyway so I tried to sell her on the glass half full view that it's that much easier now

COcheesehead - good point on the potential underpayment penalty. The unplanned gains were recognized in mid-August but most of our taxes are paid throughout the year in normal paychecks and Spring bonuses. We should be in the safe harbor with more taxes already paid (extra W4 payments) than the prior year, but I won't feel good until I actually see it at the end of all the tax prep.

DawgMan - your approach is exactly our plan as well for funding our ER. Hopefully soon if OMY syndrome doesn't delay us too much!
jblack is offline   Reply With Quote
Old 01-23-2022, 04:02 PM   #6
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 39,818
Quote:
Originally Posted by jblack View Post


Am I making too big a deal out of this and/or is there any other strong upside / opportunity I should now consider with the higher basis on the new investment?

Thoughts and advice welcome. Thanks!!!
As a renowned forum member reminds us, ďnumbers is hardĒ. Look at the bright side. You didnít make a stupid investment or lose the money. Itís still painful, but your money is still there, and what youíve really done is give Uncle his share ahead of time.

Donít beat yourself up over this, there are much worse money mistakes. Pay the tax and put it behind you.
MichaelB is online now   Reply With Quote
Old 01-23-2022, 04:02 PM   #7
Full time employment: Posting here.
 
Join Date: Oct 2021
Posts: 554
Ugh - sounds like something I will do in my retirement for certain. On the bright side, it'll be easier to move $ around for a bit if you choose to do so, especially with the market down you can maybe generate some tax loss for the next few years given the pullback...
Magus is offline   Reply With Quote
Old 01-23-2022, 04:11 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 16,689
File this under misery loves company.

Interesting article in today's WSJ about how Vanguard distributed some huge capital gains in their Target Date funds. It seems that if the TD funds were not in a tax sheltered account, well.... you can guess what happened. Check Jason Zwieg's column of 1/21/2022.

https://www.wsj.com/articles/vanguar...se-11642781228
Quote:
These funds are tailored for investors in 401(k)s or other retirement plans where taxes are deferred. So target funds aren’t managed to minimize dividends or capital gains. Hold them in a taxable account instead of a retirement plan, and you will owe taxes on those payouts—sometimes much more than you would in other types of funds.
Quote:
In the Bogleheads area on Reddit, another online forum, an investor posting as “Sitting-Hawk” said he received about $550,000 in distributions in Vanguard’s Target Retirement 2035 fund. So he owes 23.8% in federal tax and 4.95% in Illinois state tax—all told, more than $150,000.
__________________
Comparison is the thief of joy

The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 01-23-2022, 04:53 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,611
Like you, I try very hard to optimize my taxes. In general I think I do a pretty good job, but occasionally I make mistakes. Because of my personality, this is a hard pill to swallow.

In the grand scheme of things, given the amount of money you're talking about, 23.8% is actually probably a pretty good rate to have paid. I doubt you'll pay much less than that on average when you hit your RMD ages. And if you were going to sell it to spend on something anyway, it's not that big of a deal really given that the cash would have made nothing and the investments could have moved against you between when you did sell and when you would have sold.

The only scenario where it seems like a moderate error is where you would have and could have held that $500K in that taxable investment until death and then your heirs would have avoided the 23.8% via basis step up (assuming that's still around then). But then in that case, you've lived (presumably well) off other money, and your heirs are probably still getting a moderate to large inheritance.

You're still probably doing far better than most and making far fewer mistakes than most. I'm pretty sure I am.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 01-23-2022, 05:18 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Feb 2021
Posts: 2,183
I feel your pain. I didn't do anything intentional to generate a big tax bill but two of our taxable MFs paid out large CGs for 2021 to the tune of over 40K between them. I had to send off a 4th quarter tax estimate payment of over 9K and will likely owe another thousand or so at tax time.
disneysteve is offline   Reply With Quote
Old 01-23-2022, 06:15 PM   #11
Thinks s/he gets paid by the post
CaliKid's Avatar
 
Join Date: Apr 2016
Location: Ex-Cali
Posts: 1,202
Quote:
Originally Posted by jblack View Post

... and then BOOM the tax bomb goes off to the tune of $92k extra due with the 1099-B from Vanguard.

I think I'm mostly venting here.

...

Thoughts and advice welcome. Thanks!!!

Venting and maybe a little flexing, no!? $92k extra due is a pretty large gain. Almost large enough that I'd keep the dollar amount to myself if I were ever in such a position.

Good problems to have! We should all have such problems!
__________________
______________________
The plan was September 1, 2022 and I am 95% there. Still working a few hours a week at the real job.
CaliKid is offline   Reply With Quote
Old 01-23-2022, 06:23 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 36,744
Quote:
Originally Posted by gamboolman View Post
jblack

I just did basically the same thing last week. Swapped from Mutual Funds to ETF's for ~$550K - so very similar to your amount.
If you switched from a mutual fund to the same ETF, I donít think thatís a taxable event. Check with Vanguard.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 01-23-2022, 06:41 PM   #13
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 131
Quote:
Originally Posted by CaliKid View Post
Venting and maybe a little flexing, no!? $92k extra due is a pretty large gain. Almost large enough that I'd keep the dollar amount to myself if I were ever in such a position.
No, not intending to flex at all. I agree 100% this is a first world problem and I acknowledge I'm quite fortunate to be in this position. I come from a very middle class background in one of the lowest 2-3 economic states (yes, which is still in the US), have worked as smart and hard as I can for many years and do try to stay humble. And again these are gains that mostly came from 20+ years of investment & compounding in boring index funds.

I debated putting the actual #s but thought it made it more impactful and real. Apologies if this comes across to anyone as bragging. Next time I will only use a % or omit such details.

Thanks for all the other responses as well! I will simply take my medicine and be wiser in the future.
jblack is offline   Reply With Quote
Old 01-23-2022, 06:43 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2016
Location: Colorado
Posts: 8,816
Not sure I’d call it flexing when these gains could have been rolled off at a lower rate over time and without the 3.8% kicker. Its not what you earn, it’s what you keep.
COcheesehead is offline   Reply With Quote
Old 01-23-2022, 06:49 PM   #15
Recycles dryer sheets
gamboolman's Avatar
 
Join Date: Sep 2012
Location: Spring, Texas
Posts: 473
Quote:
Originally Posted by audreyh1 View Post
If you switched from a mutual fund to the same ETF, I donít think thatís a taxable event. Check with Vanguard.
Thank you Audreyh1,

Messages have been sent to VG and our CPA.

I'll try to post back the more accurate determination from the experts and estimate of my mistake so that others can learn.

If there is not one already - we might ought to start a "I Messed Up" Thread.....
Who know's - I may dubiously be in the lead for 2022 worst / costliest error...
__________________
Retired 1-Feb-21 at age 61
AA 50/30/20 ish....
gamboolman is offline   Reply With Quote
Old 01-23-2022, 06:53 PM   #16
Full time employment: Posting here.
 
Join Date: Oct 2020
Posts: 846
Quote:
Originally Posted by audreyh1 View Post
If you switched from a mutual fund to the same ETF, I donít think thatís a taxable event. Check with Vanguard.
Correct, at least at Vanguard, if you just have them put you in the ETF equivalent, it's not taxable, the shares were never sold, just switched the ownership type. They told me they couldn't do that with the Total Bond Market Mutual Fund, that had to be sold to switch to the ETF. I said to just forget about that one, I intend to spend those bonds down soon anyway.
Exchme is offline   Reply With Quote
Old 01-23-2022, 06:55 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Feb 2019
Location: St Pete
Posts: 1,075
If one wanted to flex, they'd go elsewhere, I don't think anyone here is trying to impress anyone else here... if so, they are in the wrong place. $92K is 2+ years expenses to me and I'm not impressed and don't think my modest portfolio impresses anyone else even though most in the overall population would consider me "rich"... until find out I live off about $40K and most of that is taxes and insurance. I'm just "rich" enough to live "poor."
__________________
FIREd 7/2021 at age 47
FLSUnFIRE is offline   Reply With Quote
Old 01-23-2022, 07:07 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Feb 2021
Posts: 2,183
Quote:
Originally Posted by jblack View Post
I debated putting the actual #s but thought it made it more impactful and real.
I see absolutely nothing wrong with posting real numbers if you are comfortable doing so. We do that here all the time.


This post wouldn't have been nearly as meaningful without the numbers.
disneysteve is offline   Reply With Quote
Old 01-23-2022, 07:30 PM   #19
Thinks s/he gets paid by the post
Souschef's Avatar
 
Join Date: Dec 2015
Location: Santa Paula
Posts: 4,024
I have little control over my taxes. Our SS and pensions are fixed, and the biggest ordinary income comes from our RMD's. I am using QCD's to cut that down, however.

They totally overshadow and dividends or capital gains.
First world problem.
__________________
Retired Jan 2009 Have not looked back.
AA 60/35/5 considering SS and pensions a SP annuity
WR 2% with 2SS & 2 Pensions
Souschef is online now   Reply With Quote
Old 01-23-2022, 11:39 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 16,264
Quote:
Originally Posted by disneysteve View Post
I feel your pain. I didn't do anything intentional to generate a big tax bill but two of our taxable MFs paid out large CGs for 2021 to the tune of over 40K between them. I had to send off a 4th quarter tax estimate payment of over 9K and will likely owe another thousand or so at tax time.
We detest MF's in regular accounts. I would complain about them yearly, but DW didn't mind as I do the tax return.

Then one year, I'm out of the country and she gets her tax statement from a MF, and in it she has $70K CG. She phoned me in shock

Now she agrees, no more MF in taxable accounts, and we are working on converting to all ETF's over the years.

That $70K CG was not normal, but I even hated the $5K ones as I can't plan and have no control over them.
__________________
Fortune favors the prepared mind. ... Louis Pasteur
Sunset is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Another converting funds / avoiding capital gains / taxable event post georgemoe FIRE and Money 7 04-17-2021 07:15 AM
Confused by interplay of capital gains and taxable income Austin704 FIRE and Money 11 04-09-2021 07:39 PM
Capital gains effect on taxable Social Sec. upset264 FIRE and Money 3 02-26-2017 08:59 AM
Surprise, surprise! For a happier, healthier life, retire! Walt34 Life after FIRE 4 12-27-2015 08:58 PM
Capital gains and dividend distributions from taxable account trustee FIRE and Money 9 12-19-2013 07:10 PM

» Quick Links

 
All times are GMT -6. The time now is 12:18 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2023, vBulletin Solutions, Inc.