Cash for large expense: Money market @ 5%, or Sell bond funds for a tax loss?

[Amethyst]

I need a very large amount of money for a purchase.

I hate to take it out of my VMRXX which is paying 5.06%.

I'm considering, instead, selling VBTLX, which has lost more than 10% since I bought it 20 years ago. As I am in the 32% marginal tax bracket, this would seem to make more sense than giving up the money market dividends (even though those, too, are taxed).

It does go against the grain to sell at a loss, but it seems to make the most sense at this juncture.

Can anyone see errors in my thinking?

 

[pb4uski]

A couple things. First, while the share price of VBTLX might be lower than when you bought it, with dividends it hasn't been a total loser... but also didn't keep pace with inflation either. So no need to lament too much.

Second, I think your plan makes sense. Do you have tickers in taxable accounts with unrealized gains that you can use to gains trade and use the loss and increase your basis in those tickers? Or you can always use $3k a year of losses against ordinary income.

 

[Major Tom]

I hesitate to give financial advice, as I am not particularly financially sophisticated. However, the only reason I own VBLTX is to reduce volatility in my portfolio, and not to make money. I assume you own it for the same reason. If that's the case, my question would be - are you comfortable with what would, presumably, be a little more volatility in your portfolio going forward, depending on what investments will remain?

(EDIT - +1 to the folk who have commented on selling gains to offset the losses if possible.)

 

[MarieIG]

Can you use/ offset any of the losses?

You may wish to consider selling a bit of each.

I sold some funds that I loathed last year. As I held them for a long time, they had gains. I sold some shares of a barking dog for tax loss harvesting, took the $3,000 deduction and carried over the rest.

Keep in mind that if/when the interest rates decrease, the value of bond funds typically increase.

 

[COcheesehead]

Tax loss harvest up to the point of it being beneficial which is usually the point where it covers your gains and gives you $3000 to deduct against current income. You can do more if you want tax loss carry overs for future years.
Note, the tax loss will usually offset gains which are taxed at 0%, 15% or 20%, not your income rate unless your gains are all short term.

In your income tax bracket, having muni instruments may make sense. Some now are paying close to 5% and the tax equivalent yield is 6.6%.

 

[njhowie]

Well, the first question is do you have gains which you can use the losses to offset? If not, then I don't believe it is an argument in your favor for doing this.

I'd also suggest you think longer term. SEC Yield on VBTLX is currently 4.38%, not so big a difference from your 5% MM. However, more importantly, what are we looking at going forward? Of course nobody has a functional crystal ball, however, the Fed is forecasting rates next year to drop to 4.5%, 3.5% in 2025, and 2.5% longer term. Should it be the case that rates simply begin to drop, VBTLX will go up in value, more than 10%, while MM yields will be falling.

So, as far as your decision, I think the question you should be asking is "Am I simply looking at the short term, or longer term"? Longer term, I believe you'll be better off keeping the VBTLX and taking funds from the money market account. There's also nothing wrong with taking some from each - so you don't fully go one way or the other.

 

[Amethyst]

Thanks, I knew I'd get good insights here. You have put forth several angles I hadn't thought of.

It's easy for me to find $3,000 of ordinary income, against which to put $3,000 of losses. So I think that, alone, is almost no-brainy.

To a degree, I don't even remember why I purchased VBTLX in the first place, because I have pensions now - don't they function, in a portfolio rather like bonds?

 

[COcheesehead]

Thanks, I knew I'd get good insights here. You have put forth several angles I hadn't thought of.

It's easy for me to find $3,000 of ordinary income, against which to put $3,000 of losses. So I think that, alone, is almost no-brainy.

To a degree, I don't even remember why I purchased VBTLX in the first place, because I have pensions now - don't they function, in a portfolio rather like bonds?

Keep in mind you can’t pick how to apply. If you have any cap gains, the loss will be applied to that first. Any additional losses would result in the $3000 application.

 

[Phroig]

Given your tax rate, your taxable account isn't a good location for VBTLX anyway. You could consider selling all of it and investing what you don't need in VWIUX. Second, if you reinvested June VBTLX distributions, there'll be some wash sale complications. Finally, whether you should hold bonds despite your pension depends on your risk tolerance. Having both certainly is more conservative, but some folks prefer that.

 

[Amethyst]

WRT wash sale: I just need to hold the proceeds for >30 days before reinvesting, yes?

Given your tax rate, your taxable account isn't a good location for VBTLX anyway. You could consider selling all of it and investing what you don't need in VWIUX. Second, if you reinvested June VBTLX distributions, there'll be some wash sale complications. Finally, whether you should hold bonds despite your pension depends on your risk tolerance. Having both certainly is more conservative, but some folks prefer that.

 

[MichaelB]

WRT wash sale: I just need to hold the proceeds for >30 days before reinvesting, yes?

Yes

 

[arcyallen]

VBTLX has almost doubled over the last twenty years. Definitely don't sell it because you think it went down. Or up, for that matter. I'd take a step back and look at your total allocation. Do what you need to do to maintain that. Usually if you need to spend it soon, a money market is where you'd keep the money. Was that your intention to begin with? If so, I would stick to your plan unless your plan...or you...have changed.

 

[pb4uski]

WRT wash sale: I just need to hold the proceeds for >30 days before reinvesting, yes?

No, because VBTLX and VWUIX are not sufficiently similar to cause a wash sale concern IMO.

However, if it were me I would sell VBTLX and reinvest the proceeds in VMMXX which is currently yielding 5.05%. That would avoid any wash sale concerns as well.

Then do some studying and over time put together a ladder of brokered CDs, US Treasury securities and GSE (government sponsored entity) issues. You should easily be able to get about a 5% yield or more as rates rise over the next 6 months and you have much more control over your fixed income portfolio with a rolling ladder of high quality fixed income securities. You could even consider some A rated corporate bonds if they become attractive. Then clip coupons and reinvest as securities mature.

 

[pb4uski]

VBTLX has almost doubled over the last twenty years. ....

At 7/7/2003 VBTLX NAV was $9.19. Today it is $9.42. So nowhere near a double.

According to Portfolio Visualizer, a $10,000 investment in VBTLX on June 1, 2003, with dividends reinvested would be $17,970 at the end of June 2023, a 2.96% annual yield. I used June because that is the most recent information available.

Meanwhile, $10,000 in May 2003 would have the same buying power as $16,574 in May 2023. For that same May-to-May period, $10,000 of VBTLX, with dividends reinvested would be $18,366. So VBTLX has slightly outpaced inflation based on CPI

 

[Phroig]

Yes

Unless you bought some VBTLX with your distributions or otherwise less than 31 days prior. In that case, it’s still a wash sale.

 

[arcyallen]

At 7/7/2003 VBTLX NAV was $9.19. Today it is $9.42. So nowhere near a double.

According to Portfolio Visualizer, a $10,000 investment in VBTLX on June 1, 2003, with dividends reinvested would be $17,970 at the end of June 2023, a 2.96% annual yield. I used June because that is the most recent information available.

The share price of VBTLX (which I consider near meaningless for a mutual fund) has not doubled, correct. An investment in VBTLX (which matters quite a bit) has indeed almost doubled as you confirmed. I thought that my sentiment was clear. I could have specified "An investment in VBTLX has almost doubled", but that seemed unnecessary.

 

[MarieIG]

When / if you sell, a lot of brokers give you the option of choosing something such as "tax efficient" rather than FIFO or LIFO . . .

 

[rk911]

We just bought a new '23 Jeep Wrangler and faced the same question as the OP...take cash from our high-yield account or sell some shares in a fund at a loss. We chose to harvest a tax loss.

 

[Franklin]

We just bought a new '23 Jeep Wrangler and faced the same question as the OP...take cash from our high-yield account or sell some shares in a fund at a loss. We chose to harvest a tax loss.

agree with this post. Take the $3K loss and hold on to the 5%

 

[target2019]

Amethyst, thanks for asking this question. The answers are helping me make a similar decision.

 

[DrRoy]

What is the return at current value?