Worth trading non-retirement funds for funds with lower expense ratio?

[jhrobbin]

This is my first post on the Mr. Money Mustache forums! :)  Please excuse my ignorance...

I have several non-retirement investments in Vanguard that I've had for many years.  These funds have considerably higher expense ratios (VGSTX = 0.32%, VQNPX = 0.34%) than VTSAX (0.04%).  Considering my time horizon and risk tolerance, I think VTSAX an appropriate fund for this bucket of $.

Given these are non-retirement investments, I will have a tax burden of some kind if I sell these shares and purchase VTSAX.  Is that correct?  If so, how can I determine if selling these funds with higher expense ratios in favor of VTSAX is worth the effort?   

Please let me know if I have not included information that is needed for this question.  Thanks in advance!

[seattlecyclone]

If you've had these for "many years," there's probably a significant amount of unrealized gains at this point. The funds you have don't have huge expense ratios as compared to a lot of investments out there.

If I were you I might turn off dividend reinvestment but otherwise let it ride for now. If you have a low income year that might be a good opportunity to harvest some gains and reinvest into cheaper funds.

[Telecaster]

Hard to say, since there is no way to know what your future tax brackets will be but...probably worth it.

As a rule of thumb it is good to defer taxes as long as possible (hey, why pay bills before you have to?), but math is associative, so as long as the tax bracket is the same, it doesn't matter when you pay the tax.  It works out the same in the end.  You can pay 20% on a small amount now and have less money in the future.  Or you avoid taxes now, and pay 20% on a larger amount in the future.  Math is the same.

But you never know what the actual taxes will turn out to be.  You do know however the expenses are a guaranteed loss, so I'd go ahead and consolidate those funds in VTSAX.  Bird in the hand and all that. 

[Goldielocks]

I would just start buying VTSAX, and leave the others alone, until you want to sell them.

BUT - it depends on the size of these

0.3% on $100k is $300/yr.      Are you much higher or lower than $100k invested?  Do the $$'s matter to you, or do you have capital losses to offset your gains right now that you can use?

[terran]

What tax bracket are you in? If income (including the capital gains) is under $38600/$77200 single/married after subtracting your standard or itemized deductions then you'll pay 0% long term gains tax. You'll still pay state taxes.

[jhrobbin]

Thanks guys.  That's a lot of food for thought.  To answer a few of the questions:

> If you've had these for "many years," there's probably a significant amount of unrealized gains at this point.
Yes, over a decade.

> Are you much higher or lower than $100k invested?
About 100k

> What tax bracket are you in?
Pretty high right now.  Will be lower once i'm FE

Considering my laziness quotient, I'll likely hold these assets and just put new contributions into VTSAX

[seattlecyclone]

Hard to say, since there is no way to know what your future tax brackets will be but...probably worth it.

As a rule of thumb it is good to defer taxes as long as possible (hey, why pay bills before you have to?), but math is associative, so as long as the tax bracket is the same, it doesn't matter when you pay the tax.  It works out the same in the end.  You can pay 20% on a small amount now and have less money in the future.  Or you avoid taxes now, and pay 20% on a larger amount in the future.  Math is the same.

But you never know what the actual taxes will turn out to be.  You do know however the expenses are a guaranteed loss, so I'd go ahead and consolidate those funds in VTSAX.  Bird in the hand and all that. 

The bolded bit is not quite true in this scenario. If you sell now, you need to pay taxes out of the proceeds, and this reduces the amount you have left to reinvest. The reduced fees going forward can make up for this in the long run, but it can take a while. I made a spreadsheet to model this phenomenon.

Supposing you have an investment in a 0.35% expense ratio fund that has doubled in value since you bought it, you assume annual growth of 7% before fees, and your tax rate is 15%, switching to a 0.05% expense ratio fund will only pay off if you hold the new fund for 21 years before selling. The exact break-even point can vary greatly depending on the difference in fees between the current and new fund, and also on how much unrealized gain you already have in the current fund. The higher the fees in the current fund and/or the less it has gone up in value since you bought it, the quicker you can expect a switch to pay off.

[Babybalrog]

Thanks guys.  That's a lot of food for thought.  To answer a few of the questions:

> If you've had these for "many years," there's probably a significant amount of unrealized gains at this point.
Yes, over a decade.

> Are you much higher or lower than $100k invested?
About 100k

> What tax bracket are you in?
Pretty high right now.  Will be lower once i'm FE

Considering my laziness quotient, I'll likely hold these assets and just put new contributions into VTSAX

This doesn't sound like tax loss harvesting is applicable.

I liked the idea of turning off automatic dividend investments. That that as cash and start investing it in a lower cost fund. Fidelity now has a zero cost one. If you can get free trades through your broker, that would help as you build the position. And you may be able to tell them to just automatically change where the dividends are invested. I think Betterment will do that.

[moof]

Let's assume it is half gains today (wild guess), so half is taxed at 15% if you converted it all today.  Let's also assume that in retirement you will be in 0% LTCG by keeping your total income under ~100k in 2018 dollars (mustachian assumption).  Let's also assume a 7% return for both options and and average 0.33% load if you do nothing vs. a 0.04% load.  By my spreadsheet estimate you will break in 29 years by pulling the trigger now.  So if it were me I'd turn off re-investing, and look for tax gain harvesting opportunities along the way, both before and after your FIRE date.

Year   Do Nothing   VTSAX   Net Advantage
0   100000   92500   -7500
1   106710   98975   -7735
2   113870   105903   -7967
3   121511   113316   -8194
4   129664   121249   -8416
5   138365   129736   -8629
6   147649   138818   -8832
7   157556   148535   -9022
8   168128   158932   -9196
9   179410   170057   -9352
10   191448   181962   -9487
11   204294   194699   -9596
12   218002   208328   -9675
13   232630   222911   -9720
14   248240   238514   -9726
15   264897   255210   -9686
16   282671   273075   -9596
17   301639   292190   -9448
18   321879   312644   -9235
19   343477   334529   -8948
20   366524   357946   -8578
21   391118   383002   -8116
22   417362   409812   -7550
23   445367   438499   -6868
24   475251   469194   -6057
25   507140   502038   -5103
26   541169   537180   -3989
27   577482   574783   -2699
28   616231   615018   -1213
29   657580   658069   489
30   701703   704134   2430

[bognish]

I have the same legacy higher than index expense ratio funds in a taxable account. I plan to leave these in place while I am working. I have turned off dividend reinvestment. These funds will be the first place I cash out once I FIRE. At that point my tax rate on long term capital gains should be 0%.