FIFO or average cost

[Rainbowdash]

I am not sure if this topic has been discussed before, but for the ones who are retired or close to retire, what's your withdrawal method from the taxable account when you sell a mutual fund or individual stock? First in first out or average cost? This can significantly impact on the amount of tax bill if you are expected to go above 15% tax bracket during retirement, I am currently defaulted to FIFO by vanguard, it seems like with this method you will need to pay more qualified dividend taxes at the beginning but not as much compared to average cost in the later years of retirement. Any thoughts?

 

[Blue Collar Guy]

You can also identify the specific transaction. So if you need money and have a loser you can id that one.

 

[kaneohe]

Why not specific shares so you can pick at will?

 

[Blue Collar Guy]

Why not specific shares so you can pick at will?

Yeah +1, i tried to say that, but you said it clearer.

 

[Rainbowdash]

I only invested in 2 mutual funds in my taxable account through out the years, vanguard total international stock index and vanguard total stock market index. They are both winners. I don't I think I can say, I want to sell the shares i bought in march 2009 and not the ones I bought in February or april. Am I wrong? Thanks

 

[Blue Collar Guy]

I only invested in 2 mutual funds in my taxable account through out the years, vanguard total international stock index and vanguard total stock market index. They are both winners. I don't I think I can say, I want to sell the shares i bought in march 2009 and not the ones I bought in February or april. Am I wrong? Thanks

You CAN tell them to sell the march 2009 ones.

 

[Hopeful]

Am I right though that if you use anything other than average cost with vanguard they will not provide basis? That would be a real pain to calculate basis on a fund held 20 years with all capital gains and dividends reinvested.

 

[kaneohe]

Am I right though that if you use anything other than average cost with vanguard they will not provide basis? That would be a real pain to calculate basis on a fund held 20 years with all capital gains and dividends reinvested.

You are correct. For some,it would be a real pain. For the recordkeepers,
this would be trivial. Most funds (not sure about VG) provide yr. end summary that provides all the distributions,transactions. If you save 1 piece of paper each yr , you have the entire history. Of course if you sell something,
you have update the records to show which shares you sold.....like use a yellow highlighter w/ a note.

 

[scrabbler1]

I use FIFO and keep track of my sales on a spreadsheet for each mutual fund I own, most of the funds I have owned for more than 20 years and have hundreds of purchases either through dividend/CG reinvestments or straight purchases. Because I place each transaction on a line within each fund's spreadsheet, I can easily pick up where I left off when I make a sale. I can also run what-if scenarios to see how much I would profit or lose if I make a sale.


Even with a spreadsheet, I would find doing average cost more cumbersome than simply selling my oldest shares at a certain price and working my way down the list until I sell the number of shares in the latest transaction I show at the bottom of the list.

 

[audreyh1]

I am not sure if this topic has been discussed before, but for the ones who are retired or close to retire, what's your withdrawal method from the taxable account when you sell a mutual fund or individual stock? First in first out or average cost? This can significantly impact on the amount of tax bill if you are expected to go above 15% tax bracket during retirement, I am currently defaulted to FIFO by vanguard, it seems like with this method you will need to pay more qualified dividend taxes at the beginning but not as much compared to average cost in the later years of retirement. Any thoughts?

I do specific shares and it's usually LIFO (long) to minimize capital gains.

I have converted most of my mutual funds to NOT use average cost at Fidelity. Fidelity does track basis for mutual funds, but only if you convert to specific share method. I do specify which shares to sell - the one's with the highest basis.

With rebalancing you are trimming and adding to existing funds, so I usually have some higher basis shares if I need to trim something.

Those lowest cost oldest shares? My heirs will get those - I hope never to pay tax on them.

 

[audreyh1]

I use FIFO and keep track of my sales on a spreadsheet for each mutual fund I own, most of the funds I have owned for more than 20 years and have hundreds of purchases either through dividend/CG reinvestments or straight purchases. Because I place each transaction on a line within each fund's spreadsheet, I can easily pick up where I left off when I make a sale. I can also run what-if scenarios to see how much I would profit or lose if I make a sale.


Even with a spreadsheet, I would find doing average cost more cumbersome than simply selling my oldest shares at a certain price and working my way down the list until I sell the number of shares in the latest transaction I show at the bottom of the list.

If you have the records, why not use LIFO which will usually reduce capital gains tax?

 

[scrabbler1]

If you have the records, why not use LIFO which will usually reduce capital gains tax?

LIFO would be terrible because I would be selling many shares I bought in the last 12 months and would treated as ordinary income for income tax purposes, not as LTCG and taxed at lower rates, usually zero.

Most of my sales are from bond funds and their share prices go up and down slightly over the years. The earliest shares I own in my 2 older bond funds are from 2005 and 2006. In the one stock fund, the earliest shares I own are from 2001. Unless I make a huge sale (i.e. liquidate the fund), I will never be selling any shares taxed as ordinary income.

 

[audreyh1]

LIFO would be terrible because I would be selling many shares I bought in the last 12 months and would treated as ordinary income for income tax purposes, not as LTCG and taxed at lower rates, usually zero.

Most of my sales are from bond funds and their share prices go up and down slightly over the years. The earliest shares I own in my 2 older bond funds are from 2005 and 2006. In the one stock fund, the earliest shares I own are from 2001. Unless I make a huge sale (i.e. liquidate the fund), I will never be selling any shares taxed as ordinary income.

Sorry, a simple modification of LIFO is to only sell shares held at least 12 months. I should have made it clear that I was only talking about long-term shares.

Which is usually what I do, but sometimes I'll find slightly older shares that have a higher basis.

Basically, I go for the highest basis long-term shares and it's usually the most recently purchased long-term shares. Always long-term cap gains.

 

[Blue Collar Guy]

Am I right though that if you use anything other than average cost with vanguard they will not provide basis? That would be a real pain to calculate basis on a fund held 20 years with all capital gains and dividends reinvested.

The OP said march 2009, their records online go back that far.