When to sell Wellington and Wellesley

[BarbWire]

I have inherited Wellington and Wellesley in a taxable account, and Wellington in a IRA.

In the course of rebalancing, I want to exchange the W & W in my taxable accounts (fortunately the cap gains are smallish) for equities, and exchange the Wellington in the IRA for Wellesley and Total Bond Index.

My instinct is to wait and sell the W&W after the dividends are paid in mid-December.

Yesterday an advisor at Vanguard told me that it doesn't make a difference: when the dividends are paid, the W&W prices are immediately corrected downward to reflect the dividend, so it is just a matter of which pocket the money is coming from/going to.

Huh?

QUESTION: should I wait until after dividends are paid to to my exchanges, or in fact does it not make a difference to my "worth?"

(Another newbie question...I know. But I am learning a lot!)

 

[REWahoo]

Yesterday an advisor at Vanguard told me that it doesn't make a difference: when the dividends are paid, the W&W prices are immediately corrected downward to reflect the dividend, so it is just a matter of which pocket the money is coming from/going to.

^ This.

 

[BarbWire]

Thanks!

 

[audreyh1]

In the taxable account distributions paid will be taxed regardless of your basis, whereas equities won't pay out cap gains distributions, so my instinct would be to do it before.

Just take a look at the tax situation to know for sure. Vanguard has posted distribution estimates, and you should know what any realized gain may be from selling the funds in your taxable account. Cap gains are usually low for a recent inheritance.

 

[N02L84ER]

The sales timing is not the critical part and is a wash for total invested balance before taxes. Focus on the tax implications of selling before or after the distribution date(s). If you sell before 1 year, the gains will be considered short term capital gains and will be taxed at your marginal rate. Also, don't sell the W & W funds this year and buy equity funds that are planning on large capital gain or dividend distributions shortly after you purchase them because that will cause even more taxable income.

 

[BarbWire]

Thanks!

Audreyh1: yes, low cap gains on recent inheritance is one of the many reasons I want to sell the W&W in the taxable accounts in 2016.

NO2L84ER: That's not quite right for inheritance: although the cost basis reset to reflect market value on the date of death, the long-term vs short-term did not. So the only short term gain I have is for shares acquired by my mother or by me (dividendent reinvestment) in the past year.

I am planning to buy Total Stock Market ETF and a bit of Total International Stock Market ETF in the taxable account. I suppose Vanguard should be able to tell me if either is scheduled for a cap gain or dividend distribution, and when.

 

[audreyh1]

Thanks!

Audreyh1: yes, low cap gains on recent inheritance is one of the many reasons I want to sell the W&W in the taxable accounts in 2016.

I am planning to buy Total Stock Market ETF and a bit of Total International Stock Market ETF in the taxable account. I suppose Vanguard should be able to tell me if either is scheduled for a cap gain or dividend distribution, and when.

For this reason you might want to consider doing so before (Dec 22?), but you can check the actual numbers involved.

Vanguard has published the projected distributions per share for their mutual funds (not ETFs) to be paid in Dec 2016 - the date is given with each fund here: https://personal.vanguard.com/us/insights/article/preliminary-capital-gains-112016

ETFs also pay distributions, but they may not be as large. You might want to ask about that.

 

[Alan]

While the total money will be the same if you sell just before or just after, then for a taxable account my take on this is that it would be better to sell before the dividend distribution, particularly if the dividends are currently re-invested.

Wellesley dividends are mostly non-qualified so are taxed as regular income. Selling before dividends are distributed means that the NAV price is slightly higher so the money received in the sale will have slightly higher cap gains, than selling after when the total money will be a mix of non-qualified dividend, a little qualified dividend plus cap gains.

Automatic reinvesting also means that the new shares bought by the dividends a few days earlier are short term gains, plus you may run afoul of wash-sale rules if you then purchase Wellesley funds in the IRA within a 30 day period because of the newly invested dividends. (This is not much money but a real pain filling in the tax forms)

In the course of rebalancing, I want to exchange the W & W in my taxable accounts (fortunately the cap gains are smallish) for equities, and exchange the Wellington in the IRA for Wellesley and Total Bond Index.

 

[pb4uski]

Alan makes a good point... in the taxable account while the total amount received will be no different since the NAV changes by the amount of the dividend, the tax treatment is different... a portion of the dividend (arising from bond interest) will be ordinary income but if sold then that undistributed interest portion of the value would be LTCG assuming the holding period is met. A nuance for sure, but a minor difference.

 

[BarbWire]

Automatic reinvesting also means that the new shares bought by the dividends a few days earlier are short term gains, plus you may run afoul of wash-sale rules if you then purchase Wellesley funds in the IRA within a 30 day period because of the newly invested dividends. (This is not much money but a real pain filling in the tax forms)

I asked the Vanguard guy about this (though not as clearly articulated) and he said that wash-sale rules only apply to transactions within the same account, not to sales and purchases in different accounts. As long as I am selling Wellesley or Wellington in a taxable account, and purchasing in a non-taxable account, he said I'd be fine.

But then, I've had some really bad advice (and some really good advice) from Vanguard reps before .....

 

[Alan]

I asked the Vanguard guy about this (though not as clearly articulated) and he said that wash-sale rules only apply to transactions within the same account, not to sales and purchases in different accounts. As long as I am selling Wellesley or Wellington in a taxable account, and purchasing in a non-taxable account, he said I'd be fine.

But then, I've had some really bad advice (and some really good advice) from Vanguard reps before .....

Vanguard may not report it but I think even across accounts wash-sales should be reported. It is too easy a loophole for folks to manage.

A Primer on Wash Sales

If I purchase and sell shares of a stock at a loss in one of my Schwab accounts and then repurchase them in another Schwab account, will I still trigger the wash sale rule?
Yes. Wash sale rules apply to the investor rather than to a particular account when an investor holds multiple accounts. IRS regulations only require Schwab to track and report wash sales on the same CUSIP number (a unique nine-character identifier for a security) within the same account. Individual taxpayers are responsible for tracking sales in different accounts (their own and their spouse's) for the purposes of the wash sale rule.

What happens if I sell at a loss in a taxable account and then immediately repurchase it in a retirement account, such as an IRA?
The IRS has ruled (Rev. Rul. 2008-5) that when an individual sells stock or securities for a loss and causes his or her IRA or Roth IRA to buy substantially identical stock or securities within 30 days before or after the sale, the loss on the sale is disallowed under section 1091 and the individual's basis in the IRA or Roth IRA is not increased by virtue of section 1091(d).