The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: EngiNerd on March 08, 2015, 10:14:54 AM
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First I’d like to introduce myself. I am a 28-year-old engineer and have always been frugal and have a similar outlook on money as MMM. However, I am just now learning the importance of optimizing investments. I have roughly $50k in post tax investments in a brokerage account. They are in actively managed mutual funds: AWSHX, CWGIX, and AGTHX. I inherited this money as a child and my parents put it into these funds. From this site and bogleheads I see that actively managed funds are not only inferior to the index funds but are also less tax efficient. So if I want to transfer the money to an index fund would I have to liquidate, pay capital gains, and then reinvest? It is my understanding that if your AGI is above the 15% tax bracket you have to pay 15% on capital gains up to a certain income level that I am not close to hitting. For 2014 after deductions my AGI was 36,600 so maybe I can still save taxes on $300 of capital gains if I sell before I file taxes? But in 2015 even with maxing out my HSA and 457(b) my AGI will be above the 15% tax bracket so it looks like I will have to pay capital gains tax. Are there recommend manners for changing an after tax investment vehicle in an efficient manner. Or maybe a trick I should use to lower my AGI even more? Right now I own my current home, paid off in full ☺, so I just use the standard deduction but will probably buy another house in the not so distant future and possibly will need some of this $ for the down payment. Any and all advice or face punches welcome. Thanks!
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I would recommend switching these investments this year. At the end of this year, I'd probably just sell them all, because you'll be above the 15% bracket, meaning you'll be in the 25% bracket, and the 25% - 35% brackets all have a 15% LTCG.
As far as switching taxable investments in an efficient manner, the only good way that I know of is to just lower your AGI as much as you can. If you have unrealized capital losses in other funds, purposely realize them to offset the gains from these funds. Contribute the max to your retirement plans. If your AGI is low enough for deductible contributions to a traditional IRA, contribute to that.
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You can't sell now and claim them on your 2014 taxes. The tax year for capital gains (and everything, I think except IRAs) ended December 31st 2014.
There's a couple of things you can do.
The easiest, and maybe most expensive, is to just sell, pay the capital gains in 2015, and never look back. You'd have to go back and figure out how much of the 50K is capital gains and how much is the cost basis (which would include reinvested dividends and internal capital gains).
Do you donate to charity in any significant way? If so you could donate the appreciated stock. You'll get the charitable deduction (if you itemize) but won't have to pay capital gains. Fidelity has a Charitable Gift Trust to facilitate this maneuver - I assume other fund families/brokerages have something similar.
If you do decide to going the charitable route or otherwise spread out the liquidation, set it up so that for not on all dividends and internal capital gains are paid out rather than re-invested.
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Thanks for the advice, I was hoping there was a way to game the system a bit so I could recoup some of the tax loss from just changing investment vehicles. I guess now would be a good time to make an aggressive bet or investment because if I get good returns hey that's great but if I lose some I only feel 85% of the loss. What would you say to that line of thinking?
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I would change to a Vanguard index fund like VTSAX and just leave it alone. I would make that change now, and just pay whatever CG taxes are due. Your income is so low that the tax rate should be low as well. You'll save so much on the fees over the coming decades that it will outweigh paying a little tax now.