Minimizing capital gains taxes when moving to low-cost funds?

[Tannhauser]

Hi everybody, thanks for reading this message.

I need to sell a bunch of high expense ratio mutual funds so that I can put that money into low-cost funds. But I’m debating about when exactly I should sell, trying to understand the trade-offs between high ERs and capital gains taxes.

Here’s a bit more info. I’m in the 25% income tax bracket now. I’m already FI, and expect to be RE in three years maximum. (I’m still working because I’m interested in my job.) When I retire, I expect to be in the 0% tax bracket for long-term capital gains. I’ve provided below the list of funds I need to sell, their amounts, ERs, and unrealized capital gains. They’re all in my taxable account, and represent about 1/4th of my portfolio.

Do you think it makes more sense to sell sooner rather than later and pay the higher capital gains tax in order to get away from these high ERs? Or should I wait a couple years, put up with the high ERs, and sell when I won’t pay long-term capital gains?

I've had a look at Betterment's "switching cost calculator," which is useful, but I'm interested in what you would do in my situation.

Thanks very much for thinking about this. Any advice appreciated!


Fund         ER            Amount     Unrealized cap gains
SGENX      1.10         $216k       $65k
SGOVX      1.14         $90k        $18k
FKINX       .61           $18k        $3k
HFCSX      1.50         $59k         $11k

[Cwadda]

Correct me if I'm wrong, but a trustee-to-trustee transfer is not a taxable event. I.e. Moving funds from Fidelity to Vanguard. I very much could be wrong about this though.

Posting to follow.

[MDM]

Correct me if I'm wrong, but a trustee-to-trustee transfer is not a taxable event.

You are not wrong on that.

What the OP wants to do, however, is sell those high fee funds and buy low fee funds (e.g, VTSAX).

A little Excel work, in which one estimates
- the growth of funds with high fees vs. low fees (e.g., (1 + 5% - high fee)^n vs. (1 + 5% - low fee)^n), and
- the tax implications of selling now vs. later,
should provide an estimate of which would be better.

Note that it won't be possible to sell all those funds in one year and pay 0% tax on the LTCG, assuming the current amount of unrealized gains.

[Another Reader]

Actually, Hennessy, despite its' egregious expense ratio, has consistently beat the index, as well as the total market index.  I have had some of that fund for maybe 15 years.  I think about selling it, but it continues to beat the indices and I don't because of that.  I would probably keep that one until last.

[farfromfire]

I am not familiar with these funds, but FWIW seems like you are already taxed pretty heavily on the First Eagle distributions.

[Tannhauser]

Thanks very much for your thoughts! It does seem like I just need to dump these funds in one go.

[seattlecyclone]

I don't know. While it's not great to pay those high expense ratios for the long term, you could pay less overall by waiting until you're in the 0% tax bracket to make the switch.

Just as an example for your SGENX fund, by switching now you would pay a one-time tax of 15% of $65k, or $9,750. Meanwhile by doing nothing you pay $2,376 in overall expenses each year. Seems like if you're going to be in the 0% capital gains bracket anytime in the next four years, you could do better waiting until then.

But since you can't get the 0% rate on all the gains in one year, perhaps switching at least some of it now would be a better deal.

[Tannhauser]

Thanks, seattlecyclone... and greetings from a former Seattleite.