Best moves to make for taxable accounts?

[jeromedawg]

Hey all,

So I'm looking for some advice on how to offload a couple funds and a bunch of stocks in my *taxable* accounts. Most of these were generously gifted to me by my dad within the past 15 years or so and I've done some minor trading in that time resulting in the following:

Mutual Funds:
FSCGX - $19736
FDVLX - $24317

Stocks:
RIO           248 - 41.90
ESRX           61 - 81.37
N           20 - 92.98
VMW           30 - 81.15
GLOB   6 - 104.34
ITYBY   25 - 91.67
MRK           80 - 56.20
GPRO   8 - 40.13
AMBA   8 - 68.44
(Total portfolio of stocks value currently fluctuating around $27-30k)


Any strategies on how to liquidate these accounts (I'm planning to just reinvest in index funds) so that I don't get completely destroyed on capital gains taxes for the 2015 tax year? Some advice was offered previously to just liquidate a few of the funds/stocks this year and do the same thing next year so it's 'spread out' - is that typically the best way to go about this? Or is it better just to suck it up and sell everything off and just pay the cap gains taxes? I believe we'll be in the 15% bracket for capital gains. If I did spread out selling funds off (per year) are there certain ones on the list above I should target/group first? Like mutual funds first then stocks? And certain stocks ahead of others?

[seattlecyclone]

Spreading out the taxes only really benefits you if you're close to the top of a tax bracket. If you're solidly in the 15% capital gains bracket, you'll pay the same amount of tax whether you sell it all now or save half of it for next year (ignoring any price changes in the stocks). If you can't afford to pay all those capital gains taxes this year and still achieve your other financial goals for the year (living expenses, retirement account contributions, etc.), that might be another reason to wait. Otherwise, selling it all now to make your portfolio more diversified sooner is probably the way to go.

[jeromedawg]

Thanks!

I forgot to mention I have ESPP that I contribute to as well. I'm not exactly sure I understand how it fully works but I just know I contribute about 5-6% of my paycheck to it. I do have the ability to transact my shares and transfer out everything since the first time I contributed (end of 2012), including what appears to be "RSU" and "ESPP" line items. If I were to transact today (or rather on Monday) under the assumption of the current stock price, I'd have a gain of $2648, I'm pretty sure. I know a common strategy with ESPP at least here at at Bogleheads is to sell the shares off once they've fully vested so you can take that money and reinvest in index funds. I'm thinking I should probably do this as well.

[seattlecyclone]

Yep, you generally shouldn't hold much of any one stock, especially that of your employer. Sell your shares as soon as possible.

[jeromedawg]

Yep, you generally shouldn't hold much of any one stock, especially that of your employer. Sell your shares as soon as possible.

Thanks! I'll have to get on that train. Since the market has been down a bit, I think I may hold a little before pulling the trigger. Not sure if that's the right strategy.

While on the topic of ESPPs, is it always a good idea to max out on the full % I can contribute to an ESPP? Or is that just asking for trouble? I suppose part of the answer depends on how much of my take-home paycheck I can survive off of, right?

[seattlecyclone]

Yep, you generally shouldn't hold much of any one stock, especially that of your employer. Sell your shares as soon as possible.

Thanks! I'll have to get on that train. Since the market has been down a bit, I think I may hold a little before pulling the trigger. Not sure if that's the right strategy.

This is exactly the wrong thing to do! Two reasons:
1) In general, lower prices right now work to your advantage because you'll pay less tax on the transaction. Keep in mind that the index funds you'll buy to replace these stocks have also gone down recently, so it's not like you're in a "sell low, buy high" situation.
2) Don't time the market. Nobody has any good reason to believe anything about short-term stock market movements. If you want to switch up your asset allocation, do it now. There are no guarantees tomorrow will be a better time. On average, it won't be.

While on the topic of ESPPs, is it always a good idea to max out on the full % I can contribute to an ESPP? Or is that just asking for trouble? I suppose part of the answer depends on how much of my take-home paycheck I can survive off of, right?

In an ESPP where the stock is sold at a discount and you're allowed to keep participating even if you sell the stock right away, the best thing is generally to max it out and sell the shares as soon as possible. Just like with a 401(k) match, failure to max this out is leaving easy money on the table.

Of course, if doing this makes it so that you have to put your living expenses on a credit card until you receive your ESPP shares, the math might be a bit different.

[jeromedawg]

Yep, you generally shouldn't hold much of any one stock, especially that of your employer. Sell your shares as soon as possible.

Thanks! I'll have to get on that train. Since the market has been down a bit, I think I may hold a little before pulling the trigger. Not sure if that's the right strategy.

This is exactly the wrong thing to do! Two reasons:
1) In general, lower prices right now work to your advantage because you'll pay less tax on the transaction. Keep in mind that the index funds you'll buy to replace these stocks have also gone down recently, so it's not like you're in a "sell low, buy high" situation.
2) Don't time the market. Nobody has any good reason to believe anything about short-term stock market movements. If you want to switch up your asset allocation, do it now. There are no guarantees tomorrow will be a better time. On average, it won't be.

While on the topic of ESPPs, is it always a good idea to max out on the full % I can contribute to an ESPP? Or is that just asking for trouble? I suppose part of the answer depends on how much of my take-home paycheck I can survive off of, right?

In an ESPP where the stock is sold at a discount and you're allowed to keep participating even if you sell the stock right away, the best thing is generally to max it out and sell the shares as soon as possible. Just like with a 401(k) match, failure to max this out is leaving easy money on the table.

Of course, if doing this makes it so that you have to put your living expenses on a credit card until you receive your ESPP shares, the math might be a bit different.

Thanks for confirming - so would there ever be to case to sell some ESPP at a loss then?

And on that note, it seems like prioritizing selling the ESPP that I have might be #1 on the list in comparison to everything else?

[jeromedawg]

One other question - is it a good idea to sell the ESPPS and RSUs even if it's a a "disqualified disposition" ? I think I read somewhere that this just means that I haven't waited 2 years to hold the stock before selling and that I will be taxed at the earned income rate (25% in my case...) versus the relative 15% capital gains rate. That seems like a big deal but a lot of people seem to be saying it's not.

[hodedofome]

If you plan on making charitable contributions this year, you can donate the stock instead. It'll save you from having to sell and pay capital gains.

[jeromedawg]

If you plan on making charitable contributions this year, you can donate the stock instead. It'll save you from having to sell and pay capital gains.

Do you just report sell as you normally would and then report it as a charitable contribution come time to file? Or are there special provisions that need to be taken up front?

[hodedofome]

There's a process how to do it and the charity, if they accept stock, should tell you how to do it. There's probably a form to fill out to send to your broker and they transfer it to the charity's account. Then you'll get a statement showing the amount of stock you gave and it's just the same as giving money. When you do your taxes I'm sure it'll be a noncash donation.

[jeromedawg]

There's a process how to do it and the charity, if they accept stock, should tell you how to do it. There's probably a form to fill out to send to your broker and they transfer it to the charity's account. Then you'll get a statement showing the amount of stock you gave and it's just the same as giving money. When you do your taxes I'm sure it'll be a noncash donation.

Thanks! So the stock transfers are tax deductible too aren't they? And in that case, how is the deductible amount determined? Is it based on whatever the price was at closing on the day that it was transferred out? I'm assuming/hoping the donor organization would send a receipt indicating the amount and value contributed so I would just be able to [easily] enter that amount when filing taxes in 2015...

Also, can stock transfers be a monthly-repeated thing? Or is it generally better to do it all at one time?

[hodedofome]

I would talk to the charity to see how they handle it. Most likely it's the closing price of the day of the transfer and they will send you a statement at the end of the year giving the amount of the donation.

The charity is motivated to accept stock because it means more donations for them. If you sell the stock first, you pay taxes so the donation is lower by 20%. Directly transferring the stock gives them the maximum amount and saves you taxes as well as getting charitable deductions. It's a win-win.

[jeromedawg]

I would talk to the charity to see how they handle it. Most likely it's the closing price of the day of the transfer and they will send you a statement at the end of the year giving the amount of the donation.

The charity is motivated to accept stock because it means more donations for them. If you sell the stock first, you pay taxes so the donation is lower by 20%. Directly transferring the stock gives them the maximum amount and saves you taxes as well as getting charitable deductions. It's a win-win.

Just came across this article - http://www.fool.com/FoolCharityFund/Donating_Stock.htm

"But there ARE a few cautions: While this plan works for Jerry in the above example, it will not work if the stock has NOT been held for more than a year. If the shares were held for a year or less, the shares would be treated as "ordinary income property" for these purposes, and the charitable deduction would be limited to the stock's $5,000 cost. So remember that if you are considering the contribution of appreciated stock, you need to make sure that the shares have been held for more than one year and qualify for the "qualified appreciated stock" deduction."

So it sounds like this is the same rule making a donation a "disqualified disposition" if I try to transfer it within a year. But it sounds like I'd really just be donating the price I purchased the stock at right? If I donate stock that appreciates it's an even bigger win though. Am I understanding this correctly?

[hodedofome]

Yeah you need to hold the stock more than a year. Less than a year will only allow you to deduct the cost of the mutual fund.

You mentioned your dad has been gifting this for the past 15 years, so you should have plenty of shares held more than a year to donate.

[jeromedawg]

Yeah you need to hold the stock more than a year. Less than a year will only allow you to deduct the cost of the mutual fund.

You mentioned your dad has been gifting this for the past 15 years, so you should have plenty of shares held more than a year to donate.

Oh actually for the ESPP those are my own contributions. For the stocks in the first post, alot of those were gifted over to me earlier on as a one-time thing over 10 years ago. And since then I've also sold/purchased some on my own. In either case though, I believe most of them have been held from over a year.

I'm not sure if it makes a difference donating those first versus the ESPP shares that I've held for over a year.

[jeromedawg]

Well, I just ended up placing a sell order for the two mutual funds. I have a realized gain of about $20k on both and they've done relatively well overall, but the fees are high. These are two that my dad handed over to me a while ago and I never touched them. I guess "yesterday" was the time to sell though. So if I'm 15% cap gains tax brackets, looks like I'm gonna get hit with almost $6000 on this come 2015 if I decide to proceed. However, we're expecting a child in August and there's a good possibility we'll be on a single income (around $100k roughly) in 2016. Would it be better to wait until then (potentially lower tax bracket) to sell everything?

As far as the stocks go, I may start slowly transferring those for donations, etc.