Fidelity Tax Managed Accounts

[FireDreamer]

Hi All

I recently met with my Fidelity private client group advisor where I was introduced to Separately Managed Accounts focused on Tax Loss Harvesting.

Searching the forum, I found the last discussion on this topic from 2017-
https://www.early-retirement.org/fo...-managed-u-s-equity-index-strategy-87330.html

My understanding of this Tax Managed account is that I move cash into this account and fidelity then buys the same individual stocks that are in the target index fund (US or foreign equity index). The fidelity team (computer aided, I'm speculating), then sells stocks at a loss to offset stocks that gain and re-purchase similar stocks in the index to minimize taxes. The net effect is an index fund behavior, but with minimized taxes. The fee associated with this account is 0.3 and 0.4% for US and Foreign respectively.

I'm simply equating this to a mutual fund with a 0.3/0.4% expense ratio with the same performance as the the target index, but with minimal tax impact. Am I missing something?

I'm curious, have others have considered and invested in this approach?

If you have invested in this strategy, what was your experience?

 

[CRLLS]

I have no clue. I have very little money invested outside of tIRA's and Roths. Not enough to even mention. I prefer to keep that in either a cash holding or in ETF. I would offer the oft mentioned adages, "if you do not fully understand how it works, stay away." and "don't let the tax tail wag the dog." Of course, there may be valid reasons for it.

 

[COcheesehead]

Tax loss harvesting definitely has its advantages. The question is do you want to pay for something that is pretty easy to do on your own? I get the index angle, but it seems overly complex.

 

[Aerides]

We met with a FIDO rep a few years ago when they offered a consultation after we moved a bunch more stuff there. All very convincing, but way too expensive.

And...with a portfolio of mostly index funds and other broad things - very few individual stocks, most of the time there is little I want to sell to juggle and play this game. If you want to manage dozens of individual smaller investments, it might make sense. But if you have a bogle-style portfolio of maybe a half dozen or so funds...less so.

We passed.

 

[COcheesehead]

Don’t forget you can also tax loss harvest by individual lot. Your entire position in an index doesn’t have to be negative. If you purchased anything in the last 6-8 months you might have lots with a tax loss advantage. Just be careful of the wash rule.

 

[ncbill]

Even if your retirement money is mostly all in taxable instead of tax-deferred much of the money coming out can be heavily tax-advantaged (qualified dividends, long-term capital gains)

And as others note you pick specific tax lots when selling.

 

[Freedom56]

I would be weary of any services from Fidelity's private client group. We know a retired couple who were both and still are physicians and high net worth clients of Fidelity's private wealth management. They are still in arbitration with Fidelity for losses in excess of $6 million in 2021 and now much worse in 2022. They were paying 0.9% of asset value annually for fees. Their wealth management advisor no longer works at Fidelity and their case has yet to be resolved. Fortunately for them, they have seven rental homes that provide income to cover their expenses during retirement and they didn't heed the advice of their Fidelity advisor and sell them in 2020 and invest in the market. Some wealth management services such as Morgan Stanley's Private Wealth Management in Menlo Park California are really good, but their fees are high and they are the rare exception.

As long as I'm mentally sound, I will never turn over my portfolio to someone else to manage. When time comes that I can no longer have the capacity to manage a bond portfolio, I will just buy CDs and Treasuries or just draw down funds from money market accounts.

 

[athena53]

Two family members who are experienced investors tried this and decided it wasn't worth it. I've found that the only way to track investments tat's meaningful to me is annualized internal rate of return by holding. With all the in-and-out transactions of tax-loss harvesting, that would be too complicated.

But maybe that's Fidelity's plan..

 

[COcheesehead]

Two family members who are experienced investors tried this and decided it wasn't worth it. I've found that the only way to track investments tat's meaningful to me is annualized internal rate of return by holding. With all the in-and-out transactions of tax-loss harvesting, that would be too complicated.

But maybe that's Fidelity's plan..

Fidelity provides a separate performance return page which includes the transactions.
Tax loss harvesting can save you a lot of bucks at tax time.

 

[OldShooter]

Thoughts:

1) Rule of Thumb: The more complicated an investment product is, the more likely it is that it was designed to make money for the seller, not to make money for you.

2) As others have said, you can do tax loss harvesting yourself.

3) To pay 30-40bps on an entire portfolio in order to do some minor tax optimization seems rapacious. Remember, an index fund is pretty tax-efficient already. If you decide to pursue this, insist on getting a worked-out example based on your portfolio and tax rate. What additional tax savings will this scheme get you over a year and what is your net after fees?

 

[Ncc1701]

Buy some VTMFX and some VFIAX. Problem solved, total cost less than 9bps.

 

[GoBears]

My father had a Fidelity tax-managed account last year. The account was actively traded (and by the end of the year it held 13 stock funds (only 2 index funds), 6 bond funds, 7 stock ETFs, 1 REIT ETF, 1 bond ETF, and a money market fund. When I called my father at tax time, I asked how he was doing. He replied he was distressed because he had $77,000 in taxable capital gains (on a $1Million account). Not only did he owe income tax on those gains, which he had not planned on, IRMAA will be triggered next year. In contrast, my 3-fund portfolio (total US stock, total international, total U.S. bond) had 0 capital gains. Dad is now in a self-managed account. I would stay away from the advisory services.

 

[euro]

It’s hard for me to envision or calculate the actual impact of such a process, but just on its face, it seems to be too expensive for a process that requires little or no human involvement. Once’s set up, it seems that it should be a purely number crunching activity that can be performed by a computer with basically no effort.
In any event, my particular account still contains many stocks and funds for which Fidelity does not have/list a cost basis (they were moved to Fidelity before the cost basis tracking requirement came into play). Fidelity would let me provide that information myself, but I doubt they would just “trust” those self-provided numbers for “real” tax purposes. Without that info, I don’t think they could even execute a tax harvesting scheme.

 

[COcheesehead]

It’s hard for me to envision or calculate the actual impact of such a process, but just on its face, it seems to be too expensive for a process that requires little or no human involvement. Once’s set up, it seems that it should be a purely number crunching activity that can be performed by a computer with basically no effort.
In any event, my particular account still contains many stocks and funds for which Fidelity does not have/list a cost basis (they were moved to Fidelity before the cost basis tracking requirement came into play). Fidelity would let me provide that information myself, but I doubt they would just “trust” those self-provided numbers for “real” tax purposes. Without that info, I don’t think they could even execute a tax harvesting scheme.

You’ll need your cost basis eventually.

 

[SecondCor521]

3) To pay 30-40bps on an entire portfolio in order to do some minor tax optimization seems rapacious. Remember, an index fund is pretty tax-efficient already. If you decide to pursue this, insist on getting a worked-out example based on your portfolio and tax rate. What additional tax savings will this scheme get you over a year and what is your net after fees?

This.

I happen to own some VFIAX in a taxable account. In 2021, it paid out approximately 1.3% in distributions. In my case, because I held the shares all year, 100% of the distributions were either qualified dividends (97%) or Section 199A dividends (3%).

In my case, the qualified dividends were 100% federally income tax free, and I paid an average state income tax rate of 48 bps on them.

The 3% of Section 199A dividends actually reduced my federal and state taxable income due to the QBI deduction and therefore reduced my taxes by 20% of that amount times my marginal combined rate of 16.5%.

So in terms of taxes as a percentage of my VFIAX asset value, I paid:

0.48% * 97% * 1.3% = 0.0060528%
-16.5% * 20% * 3% * 1.3% = -0.001287%

Which appears to net out to 0.0047658%.

This ignores any underlying investment expenses. I would wager that any Fidelity tax-managed funds have a higher expense ration that VFIAX (4 bps).

YMMV, of course.

 

[euro]

You’ll need your cost basis eventually.

Yes, and I have all the relevant numbers in a Quicken file, but whilst Fidelity will let me transfer (entry by entry.... oooof) the info into their system, I'm not sure that they would in fact trust it? I could just make up some stuff and then have THEM report it to the IRS? Seems risky for them although I suppose they could attach some disclaimer.

 

[G-Man]

My father had a Fidelity tax-managed account last year. The account was actively traded (and by the end of the year it held 13 stock funds (only 2 index funds), 6 bond funds, 7 stock ETFs, 1 REIT ETF, 1 bond ETF, and a money market fund. When I called my father at tax time, I asked how he was doing. He replied he was distressed because he had $77,000 in taxable capital gains (on a $1Million account). Not only did he owe income tax on those gains, which he had not planned on, IRMAA will be triggered next year. In contrast, my 3-fund portfolio (total US stock, total international, total U.S. bond) had 0 capital gains. Dad is now in a self-managed account. I would stay away from the advisory services.

Can you share what your 3-fund portfolio index funds are.

 

[GoBears]

Can you share what your 3-fund portfolio index funds are.

VOO - Vanguard S&P 500 Index
VXUS - Vanguard Total International Index
CMF - Ishares California municipal bond etf

All are held in a taxable brokerage account at Fidelity.

 

[COcheesehead]

Yes, and I have all the relevant numbers in a Quicken file, but whilst Fidelity will let me transfer (entry by entry.... oooof) the info into their system, I'm not sure that they would in fact trust it? I could just make up some stuff and then have THEM report it to the IRS? Seems risky for them although I suppose they could attach some disclaimer.

Fidelity isn’t on the hook for cost basis, you are. You are the one filing the tax return.

 

[euro]

Fidelity isn’t on the hook for cost basis, you are. You are the one filing the tax return.

Yes, As I said in post #16 in response to your first comment, I do have that information, so it is not an IRS relevant problem. You are still missing my point though and that point is whether Fidelity would accept stockholder provided cost basis information for this program. My hunch is that they might not. I could find out if I were truly interested in pursuing it, but as I already said, the program is too expensive for my taste anyhow.