Author Topic: How to simplify portfolio in a tax-efficient manner?  (Read 1912 times)

Rockies

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How to simplify portfolio in a tax-efficient manner?
« on: February 27, 2017, 04:52:58 PM »
I've overcomplicated myself by buying lots of silly overlapping funds, and would like to pair it down to 3 or 4. However, I feel like selling most of my funds and then buying a few could trigger substantial capital gains taxes. What are some best practices for simplifying portfolio's, and what do you have to watch out for? Can I sell everything and just buy the 3 that I want? All of these are in non-registered taxable accounts.

For example, here are some of the overlapping and silly funds I own that could obviously be paired down to just a few that represented the same market allocation and stock to bond ratio:

Vanguard balanced (60% stocks, 40% bonds)
Vanguard S&P 500 ETF (VOO)
Vanguard small cap
Vanguard Total Market
Vanguard International ex US
Canadian Index ETF
Oilfield Services ETF

Vanguard Total Bond Market Fund
Barclays Aggregate bond market ETF (AGG)

I think preferably I'd have a single bond market index fund, a US total market fund (VTI), and an international index fund that would represent a similar scenario to the mix of the above funds.
« Last Edit: February 27, 2017, 04:55:14 PM by Rockies »

Ocinfo

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Re: How to simplify portfolio in a tax-efficient manner?
« Reply #1 on: February 27, 2017, 05:03:25 PM »
Would need more info to know what makes sense, mainly how much money are in these funds, how long has it been invested, and if you're in the 15% tax bracket (assuming you're in the US). Basically if you're in the 15% tax bracket you pay 0% for long-term gains (shares held longer than 1 year).

Barring that, I would focus on simply redirecting new investments to your desired funds and that will take care of most of your issues without triggering any taxable sales (assuming we aren't talking about hundreds of thousands in each of these funds that you no longer want)


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MustacheAndaHalf

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Re: How to simplify portfolio in a tax-efficient manner?
« Reply #2 on: February 27, 2017, 05:48:24 PM »
The highest expense is probably "iShares U.S. Oil Equipment & Services ETF" (IEZ) assuming that's the fund you own.  It's costing 0.44% / year and is very specialized.  If you bought it 1 year ago it has a substantial profit, but 3 or more years ago and you're probably looking at a loss.

You should check out the "cost basis" page of your account, specifically "unrealized gains".  That shows you the amount of gain that would be taxed when sold.  I assume all of these are in a taxable account - not an IRA or 401(k) where selling incurs no tax impact.

You should aim to sell the highest expense ratio at the least gain.  If you hold a fund for 366 days or more before selling, you get a special "long-term capital gains" rate that is typically 15% for those in the Federal 25-33% tax brackets.

To answer the question accurately requires knowing your tax bracket and the cost basis of each fund vs current value.  If you're not selling everything, knowing the expense ratio can help to prioritize which funds to sell first.

Indexer

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Re: How to simplify portfolio in a tax-efficient manner?
« Reply #3 on: February 27, 2017, 06:38:50 PM »
I'm not as familiar with Canadian tax laws around capital gains as I am US laws. Here stock dividends are taxed at a lower rate than bond income and gains on stocks aren't taxed until you sell them and then they are still taxed at a lower rate. From what I've read the rules aren't exactly the same in Canada, but they are close enough the same logic would apply. Conclusion: stock index funds are tax efficient. Bond funds are not.

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Vanguard S&P 500 ETF (VOO)
Vanguard small cap
Vanguard Total Market
Vanguard International ex US

Leave these alone if they have any gains. These are all low cost tax efficient investments that belong in a taxable account. Yes, some of them overlap. If you caught it in advance you could do something about it. If they have gains now leave them alone.

In my opinion selling these funds at a gain so it 'appears' more simplified would be a big tax expense just to make your portfolio appear pretty. This is a huge waste of money.

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Canadian Index ETF

Since you live in Canada you can probably assign the same logic here.

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Oilfield Services ETF

I have no opinion. Sell it if you want.

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Vanguard balanced (60% stocks, 40% bonds)
Vanguard Total Bond Market Fund
Barclays Aggregate bond market ETF (AGG)

I wouldn't want these in a taxable account. They go in a tax deferred account, and if you can shift your portfolio to get the bonds in a tax deferred account then it makes sense to sell them out of your taxable account even at a gain(in most cases). If you don't have a tax deferred account to move them to and they have gains, then you should probably leave them alone. Yes they overlap. Selling AGG at a gain and paying taxes just to put the money back into Vanguard Total Bond would be a big waste of money.

NOW, the good news! If we go through a down market you have a great portfolio for tax loss harvesting. As a matter of fact your portfolio looks like the result of past successful tax loss harvesting. ;) Simplify it then, when you can harvest losses(instead of realizing gains) in the process.

I also agree with everything MustahceAndAHalf said. In this case most of these investments are very low cost so unless your gains are miniscule the tax cost will likely be higher than the one or two basis points you might save on the expense ratios by shifting everything.

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I think preferably I'd have a single bond market index fund, a US total market fund (VTI), and an international index fund that would represent a similar scenario to the mix of the above funds.

You can still do this with all of your future contributions.
« Last Edit: February 27, 2017, 06:42:10 PM by Indexer »

Rockies

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Re: How to simplify portfolio in a tax-efficient manner?
« Reply #4 on: February 28, 2017, 08:02:05 PM »
Thanks! All of these comments are really good. I guess I don't need to worry so much about selling everything to simplify.

I still will sell the Oilfield services funds (its way less than 1% of my portfolio, but its a stupid purchase anyways), and probably the Canadian ETF in exchange for total international.