Tax Strategy

[TromboneAl]

What do you think of this idea:

I have a good amount of money in my VG S&P 500 fund in my taxable accounts. At some point over the next few years, I will need to sell some of that for living expenses. I will simultaneously buy the same amount of a similar stock fund in my IRA accounts. Thus, there will be no consequences related to the current state of the market, since I will sell and buy on the same day. That is, there's no change in my market allocation.

But as far as tax consequences, I was thinking it might make sense to do this now, while the market is down. That is, I might realize less of a gain doing this now.

Thoughts?

[d]

i'm always wary of shooting myself in the foot. selling txable now will result in a lower cap gains tax, but when (and if) the market recovers you'll have increased the value of the IRA accounts, and hence the tax at time of distribution.

[Art G]

Not if the IRA is a Roth.

[FIRE'd@51]

You might want to consider selling some shares of the fund now (at the current attractive capital gains rates), and repurchasing the shares (with a stepped-up basis). To maintain your current equity exposure, you may have to do offsetting trades in your IRA to accomplish this, since I believe Vanguard has a 60-day waiting period before you can rebuy in the same index fund account. Nobody knows for sure what is going to happen to the current favorable rates on dividends and capital gains, but we do know that withdrawals from an IRA are taxed as ordinary income. In general, I think you are better off keeping long-term equity holdings in a taxable account, as the long-term capital gains rate will likely remain below ordinary income rates.

[Art G]

I would think that Vanguard would allow you to rebuy shares in a different account. I can't imagine how they'd know?
The advantage to an IRA is supposed to be the tax deferred status, and growth upon growth. I don't know how old Al is, but this would probably make a difference (is he approaching mandatory distribution age?). I'd also want to consider how healthy he is and how much profit he has in his mutual fund currently.
I'd probably be considering selling a bit each year though as opposed to all at once, but then again, there are other variables to consider in my mind.

[Lsbcal]

Quote:

Originally Posted by TromboneAl ...But as far as tax consequences, I was thinking it might make sense to do this now, while the market is down. That is, I might realize less of a gain doing this now.

I'd sell with the largest possible cap gain, i.e. don't try to lock in a temporary low market state for cap gains purposes. This is because you are pushing the money into a tax advantaged account that, when it comes out, will be taxed at regular income levels. Also I'd expect tax rates to go up in the future on regular income. Current cap gains tax rates are unlikely to stay so low in the future. Of course, if you're talking about doing the repurchase in a Roth then that would be just fine since there's no tax on the money coming out.

BTW, you probably know this -- cap gains taxes are zero for 2008 - 2010 if you can squeak into the 15% bracket.

LSBCAL (just guessing on this stuff as I'm not a tax pro, just a tax payer)

[LOL!]

One cannot sells shares for a tax loss and immediately rebuy them ... even if you re-buy in another account or an IRA account.

But you can buy something else. I would suggest selling any and all taxable shares that have a loss. You can replace your SP500 with total stock market and not have a wash sale.

Your strategy has been discussed at length on the bogleheads forum. Tax-loss harvesting a very positive thing to do.

You can extend your strategy to keep your cash in tax-deferred accounts and not pay taxes now on your interest and dividends.

[Art G]

Ooops. Forgot about the wash sale rule. I'm not sure if you're going from a joint to single name acct. if it's a concern. Check with an accountant.

[jIMOh]

Quote:

Originally Posted by TromboneAl What do you think of this idea: I have a good amount of money in my VG S&P 500 fund in my taxable accounts. At some point over the next few years, I will need to sell some of that for living expenses. I will simultaneously buy the same amount of a similar stock fund in my IRA accounts. Thus, there will be no consequences related to the current state of the market, since I will sell and buy on the same day. That is, there's no change in my market allocation. But as far as tax consequences, I was thinking it might make sense to do this now, while the market is down. That is, I might realize less of a gain doing this now. Thoughts?

I don't see enough information to make a comment/ give advice.

I assume you sell to raise cash, then spend the cash. The question is whether to raise the cash now, or raise the cash later?

Wouldn't your asset allocation change because you have less equity (you need to raise cash, so some equity is moving to cash, correct?).