Harvest unfavorable fund or go Roth conversion

[JoeWras]

YARCD (Yet Another Roth Conversion Discussion). Looking at planning for next year.

I have a skeleton in my taxable portfolio, namely, VBIAX. This is an index balanced bond/stock fund. In my younger days, I thought that it would be a good idea to own this in my taxable. A visit with a Vanguard CFP (remember when you had that Flagship benefit?) convinced me to stop this. I've also met with Fido advisors and they are also of the opinion to get rid of this out of taxable. And I don't have to mention that ya'll would agree. It is a good fund, but doesn't belong in taxable.

I've been donating some of it away, but it isn't my highest gain holding. I also can also donate only so much. And I really should be donating from my highest gain ETF lots instead, which far outpace this fund in gains. VBIAX throws off a lot of distributions on a yearly basis so the unrealized gains over time go pretty slow.

So I'm thinking of selling a bunch of it next year instead of doing a Roth conversion. Of course, per other YARCD discussions, I'm watching IRMAA, brackets, etc. With no kids, we don't care much about step up basis on death.

Yet, I feel uneasy about this. I've been comfortable with the Roth conversions with the hope of lower RMDs, and the convenience of having a pool of Roth money to make a large purchase without tax consequences.

On the other side, VBIAX had a large Cap Gain distribution this year. This stuff is unpredictable and a little maddening. I'd like it out of my taxable life (or at least minimized), leaving me only with ETFs and one well behaved mutual fund left in taxable. VBIAX has a lot of old money with a lot of unrealized gain in the NAV. I suspect estate liquidations and internal rebalancing are creating increasing distributions over time.

Is it worth getting rid of a skeleton over Roth conversions? My gut feel is to just go 50/50 and do both up to just short of IRMAA.

 

[mrfeh]

Not ideal to have this in taxable, but not the end of the world either.

Without knowing how it affects your taxes, I can't provide an opinion. How many dollars in taxes will you pay for distributions from this fund this year?

Don't let the tax tail wag the dog in most situations...

 

[SecondCor521]

LTCG harvesting and Roth conversions are both good things. Which is better is situation dependent.

I generate LTCG each year as a result of selling taxable for living expenses. I then Roth convert up to my target AGI.

If you really wanted to get rid of it, I think I'd just pick some sort of reasonable time frame - two years, three years, five years? - and then sell that fraction of it each year, then Roth convert up to a sensible point.

Your tax bill might even go down somewhat while you're doing this, because LTCG harvesting will generate more spendable cash per dollar of tax paid than a Roth conversion will. This effect sort of depends on where/how you get your spending money though.

 

[JoeWras]

Thanks for the thoughtful replies. It has been very helpful as I think about a plan. A few inline replies then my plan.

Not ideal to have this in taxable, but not the end of the world either.

Without knowing how it affects your taxes, I can't provide an opinion. How many dollars in taxes will you pay for distributions from this fund this year?

Don't let the tax tail wag the dog in most situations...

Yeah, not the end of the world. I think I need to relax a bit. I don't mind the dividend and interest income as it gives us something to put towards living expenses. The unpredictable short and long term gains have been irritating and above $10k these last few years. These are likely due to the fund manager's mandate to rebalance as the bond market and stock market move differently. I'd like to see that below $10k.

If you really wanted to get rid of it, I think I'd just pick some sort of reasonable time frame - two years, three years, five years? - and then sell that fraction of it each year, then Roth convert up to a sensible point.

Your tax bill might even go down somewhat while you're doing this, because LTCG harvesting will generate more spendable cash per dollar of tax paid than a Roth conversion will. This effect sort of depends on where/how you get your spending money though.

Yes, this helped me form a plan now. Harvest part of this fund next year. I can get rid of the newest shares without a lot of LTCG. This will reduce my share count down significantly and bring the fund's typical Cap Gain distributions below $8k at the current pattern. I can live with that going forward. I'll still have some head room for Roth conversions next year, and going forward I'll focus on Roth conversions until RMDs hit in 10 years. For our donations to charity, I'll use my old ETFs which have significant gains compared to this one. This will capture the benefit of donating highly appreciated assets.

 

[junkanoo]

Impossible to advise, given the information that you have provided. For example, how could anyone tell you about Roth Conversions when we don't know the size of both Roth and Tax-deferred accounts and unavoidable income streams (now and in the future)?

Would you be in the 0% LTCG bracket *if* you weren't doing Roth Conversions? If so, that might be a reason to tackle Conversions and Capital Gain sales in different years ...

That said, it looks like you have a good handle on the pertinent issues. I've also found that gifting highly appreciated stock quite helpful when doing Roth Conversions. Just as long as you first and foremost wish to be charitably-minded.

 

[JoeWras]

Yeah, I've also been doing "what ifs" with Turbotax. It is interesting to see the difference between Cap Gains and Roth Conversions.