…once you do you might not like what you see.
But before dumping everything and moving on to better choices, you’ll want to think about some important considerations, mostly around the tax implications of selling an investment. But also how and where you want your assets invested going forward. Ideally you want to get this set up right and then, other than occasionally rebalancing, leave it alone.
First you’ll want to decide what your asset allocation should be. Selecting your asset allocation discusses ways to approach this and in it I share what we do personally.
When thinking about your allocation, think across all your investments and, if you are married, across all your investments for the both of you. For instance, our personal allocation to bonds is 25% and I hold our bond fund in my IRA. We could just as easily hold it in my wife’s IRA. Either way, it is 25% of our total holdings and keeping it in one place makes rebalancing easier.
Once you’ve decided where you want your investments to be, it is time to figure out how to move them around.
Tax-advantaged accounts
For those stocks and funds you hold in your tax-advantaged accounts, this is easy and there will be no tax consequences to your moves.
IRAs
In your IRAs you are free to buy and sell without tax considerations. However:
- If you are moving from one IRA custodian to another be sure you do this as a “rollover” that goes direct from the one to the other. Vanguard, or any other custodian, will be happy to help you move to them. Just give them a call and they’ll walk you thru the process.
- The above also applies if you are moving an old 401(k) to an IRA.
- If you have a Roth IRA and decide you want to use a traditional IRA (T-IRA) for the tax deduction going forward, create a new T-IRA.
- Do not transfer your Roth into a T-IRA. You’ve already paid tax on the money in the Roth. Just keep it and let it grow.
- Remember, Roth IRAs and T-IRAs (and the employer sponsored plans below) are not investments themselves. They are “buckets” in which you can hold investments. For more on this, see Part VIII.
Employer sponsored plans: 401(k), 403(b), TSP and the like
Here again you can move your investments around without tax considerations. You will, of course, be restricted to the choices offered by your plan.
- My suggestion is to look for the total stock market and or total bond market index funds in your plan, if offered.
- S&P 500 index funds are more frequently offered in these plans than the total stock market funds. No worries, these will serve your needs just fine.
- The easiest way to find these index funds in your plan is to scan down the column on ERs (expense ratios). The lowest ERs will be the index funds.
- What if you can’t buy VTSAX, or even Vanguard?
Rolling over a tax-advantaged account can be subject to a variety of rules such as the one-rollover-per-year rule. To avoid taxes and penalties, you’ll want to get this right. Vanguard and other similar firms will help guide you successfully thru. This chart from the IRS might also be useful:
Taxable accounts
Here again it is easy to make changes to your holdings, but now you must consider the tax consequences. If any.
In the old days (2017 and before) your capital gains tax rate was tied to your tax bracket.
Then, as now, capital gains enjoyed favorable tax treatment. But with the new tax law in place, for 2018 the rate is tied to your income rather than your tax bracket. It looks like this:
2018 Chart
Personal exemptions have been eliminated, but the Standard Deduction has been increased:
- Single: $12,000
- Married: $24,000
- Head of Household: $18,000
- Married, filing separately: $12,000
Because your Standard Deduction reduces your taxable income, you can add your Standard Deduction to the income levels in the chart above to find your capital gains tax rate. For instance, if you are married filing jointly and your total income (including any capital gains) is $101,400, your capital gain tax rate will be 0%: $101,400 – $24,000 = $77,400.
But remember, your capital gains add to your taxable income level.
Here’s a useful reference:
2018 Federal Tax Rates, Personal Exemptions and Standard Deductions
If you have short-term capital gains, these will be taxed at your ordinary income tax rate. Short-term gains are gains on assets held less than one year before being sold.
If you are facing capital gains taxes on the sale of your assets, only you can decide if making a change is worth it and you’ll have to do some math. But here are some considerations:
- Figure out how much in capital gains you have in each fund or stock.
- Do any have capital losses you can take to offset the gains?
- Are they long-term or short term?
- What is your income level?
- Can you defer income to 2019 and get down to the 0% or 15% bracket for 2018?
- Just how ugly are the investments you have and how critical is getting rid of them?
Your capital losses offset your capital gains dollar for dollar.
From Turbo Tax:
“Losses on your investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.”
After you run the numbers, if you find you have a net capital loss you can apply up to $3000 of that loss against your ordinary income. If the loss is more than $3000 you can carry the leftover balance forward for use in future years.
Selling the cats and dogs in retirement
If you are currently living on your portfolio and you have holdings with taxable gains you’d like to unload, you might consider the simple strategy we used.
Assuming your unwanted investments aren’t too horrible, sell them off a little at a time to cover your living expenses in the first year or two. Start with your least favorite assets first and work on thru them bit by bit. This keeps the tax impact low and allows your preferred assets to grow unmolested.
*************************************************************
There you have it. If you have your own strategies for unloading investments with taxable capital gains, please let us know in the comments below.
Meanwhile I’ll close with this instructional ( 🙂 ) how-to clip:
********************************************************************
Note:
This was Part II of a post that originally included two parts, Part I being a review of Personal Capital now covered in this post: Tracking your holdings. Since they both deserve an update and second look, and since I thought them more useful separated, tax laws have changed and I wanted to make this one part of the Stock Series, here you are. If you are interested, this is the original.
********************************************************************
Note 2:
Tax laws change all the time. The specific tax rate details used in this post are for illustrating concepts. While they were current at the time it was written, they may not be current at the time you read it. Check and verify for yourself.
***********************************************************************
Podcast:
NGPF Podcast: Tim Talks to JL Collins About Financial Independence and Investing
Recently I had a great time talking with Tim Ranzetta on the New Gen Personal Finance Podcast. Good guy and a great interviewer. Thanks, Tim!
********************************************************************
FIRE Anthem:
A few years back, my pal Kevin wrote, performed and recorded the awesome Ballad of Chautauqua, which you can find in this post and this one. Now he is back with an anthem to true meaning of FIRE:
********************************************************************
Just for fun:
********************************************************************
Unrelated, but here’s what I’m currently or have just finished reading and enjoyed*:
Last Line: “This ends my true account of how I avenged Frank Ross’s blood over in the Choctaw Nation when snow was on the ground.”
How we came to be what we are, behave the way we do and believe what we believe. My favorite in this group.
Where people who live to be 100+ live, how they live and what they eat.
Why the future might be incredibly good. Unless the grey goo gets us.
This might be the most enlightening and entertaining take on American history I’ve yet to read.
And here are three of my all time favorites:
The book that has most influenced how I live my life.
*If you click on the books you’ll go to Amazon, an affiliate partner. Should you choose buy them, or anything else while you there, this blog will receive a small commission. This doesn’t affect what you pay.
If you have come here, read thru the Stock Series and decided the simple low-cost approach described makes sense, you are now faced with the problem of how do you get from where you are to where you want to be. That is, what do you do with all the investments you already have? How, exactly, do you move from point “A” to point “B”?
If you are like many readers, you’ve come to this blog having already spent years, maybe even decades, investing. You very likely have a wide range of stocks and/or funds that seemed like a good idea at the time but now, maybe not so much.
But the first order of business is to get a grasp on exactly what you currently own, what it is costing you in fees and how/if it might fit into your new and future plans.
You may already have this well organized and at your fingertips. If so, well done. If not so much, you might want to read my last post, Tracking your holdings.
How to unload your unwanted stocks and funds
OK, now that you have the tools in place to assess what you own…