Trying to move large portfolio into Vanguard - Tax consequences?

[anydaynow12]

Hi!  Long time lurker, first time poster!  After stumbling on MMM about a year ago, I'm convinced that simple Vanguard index funds are the way to go.  The "problem" is that I already have ~$700,000 invested in a taxable account that has about 13 different actively mutual funds with expense ratios between .84-2.0%.  I'm concerned about the tax consequences of selling these funds and reinvesting in Vanguard.  As I understand it, that would result in a long-term taxable gain (held the majority of these for more than 1 yr) and would thus be taxed at 15% (I'm in the 33% tax bracket).  BUT, if I wait until FIRE (hopefully December of 2017) and keep my income below $37,950 (upper limit of the 15% tax bracket) going forward, I should be able to entirely avoid paying long term capital gains on amounts I withdraw from the portfolio, right (because long-term gains are taxed at 0 for the 15% tax bracket)?  That would seem to suggest it is better to wait and not try to sell these now to reinvest in a lower-cost Vanguard fund.  I'd appreciate any insights! 

[seattlecyclone]

Let's suppose you actually do retire by the end of this year, making 2018 your first full tax year of retirement.

Between now and January you'll pay roughly 1.33% on the entire balance of your 2% funds (eight months between now and then times a 2% annual rate). If you sell now, you'll pay 15% on the gains. If the funds have doubled in value since you bought them, that will be 7.5% of the entire balance. If they've only gone up by 25%, your taxes will be 3% of the balance. Unless the gain is only a few percent, you're right that waiting until January to sell may be the right call in your situation.

Keep in mind that if you're planning to keep your income below the top of the 15% bracket during retirement, you'll likely need to split your sales over a number of years. That 2% fee will keep weighing your portfolio down more and more each year until you sell the last share, while the tax is a one-time expense. You'll need to compare the amount of the unrealized gain against the amount of time you would otherwise keep the shares.

Also Congress is supposedly discussing a comprehensive income tax reform. It's entirely possible that this reform would eliminate the special 0% rate on capital gains, but I wouldn't make any plans based on what Congress might do. Just be ready to change your plans when and if the laws change.

[anydaynow12]

Thanks so much for the thoughtful response.  I think I will at least sell the 2% fund (only one has a fee that high), and then run the numbers on the others.  Thanks again!

[triangle]

I think you are on the right track to sell your highest expense fund (2%) and start selling the remainder in small increments to avoid taking a big tax hit from Uncle Sam. My only caution is to not look at this absolute number (2%) but at the largest difference between fund rates on whatever roughly equivalent Vanguard fund you are considering....assuming you are keeping the same diversification balance when moving between companies. As I might otherwise expect that the 2% expense ratio must be for some foreign fund, which does tend to be more expensive to buy/sell even at Vanguard when compared to what is listed on US exchanges. Where as an example, it would be unfair to directly compare the expense ratio of a S&P500 index fund with some AsiaPacific or BRIC growth fund.