Author Topic: Question: Moving Individual Stocks to Index Funds  (Read 4553 times)

sabertooth3

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Question: Moving Individual Stocks to Index Funds
« on: November 04, 2014, 08:28:01 AM »
First post, long-time lurker. As a note- this is not a question about asset allocation; there are plenty of other threads where I can get that info.

About 3 years ago I got control of an investment account from my parents that had about $250k worth of individual stocks. Pretty well diversified, about 25-30 stocks including AMZN (which is currently 25% of the portfolio. I know, big red flag.). After some ups and downs, the overall value of the account is about $320k now.

After reading about index funds and their benefits, I want to switch from individual stocks to the index funds. The problem is that I would incur over $150k in capital gains to make the switch, and I (obviously) don't want to pay taxes just to switch from stocks to funds.

Has anyone done this before? Did you have to pay huge taxes on the transfer? If not, how did you avoid it?

My broker is TD Ameritrade. Thanks everyone!

themagicman

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #1 on: November 04, 2014, 08:34:21 AM »
What is your income? If you are in the 15% bracket or below then you could sell enough to keep you in that bracket each year and there would not be any taxes (assuming these have been held over a year)

sabertooth3

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #2 on: November 04, 2014, 08:38:27 AM »
Filing jointly, my wife and my combined income exceeds $110k, which will put us in the 25% bracket. Just about all of the cap gains are long term, the rest will be in April.

themagicman

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #3 on: November 04, 2014, 08:53:51 AM »
Any way you could change to traditional IRA and bump up 401k or HSA or find any more deductions? Any kids?

We have a similar income and our in the 15% bracket with room to spare.

sabertooth3

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #4 on: November 04, 2014, 11:02:46 AM »
Already getting the max employer match for 401k (through TSP, we're both civil servants), no kids, no HSA. We will have some mortgage deduction (bought our first house in August) and some student loan interest deduction, though probably not enough to drop our taxable income low enough.

surfhb

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #5 on: November 04, 2014, 11:36:56 AM »
Unless someone here is a good tax accountant, I'd be consulting one in your near future :)

gimp

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #6 on: November 04, 2014, 12:58:43 PM »
How would you incur 150k tax on 320k investment if you're earning 110k jointly?

themagicman

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #7 on: November 04, 2014, 01:04:12 PM »
How would you incur 150k tax on 320k investment if you're earning 110k jointly?
I believe he means the gain would be 150k, so $22,500 in taxes. Plus state

Already getting the max employer match for 401k (through TSP, we're both civil servants), no kids, no HSA. We will have some mortgage deduction (bought our first house in August) and some student loan interest deduction, though probably not enough to drop our taxable income low enough.

How much are you putting into the 401k $ wise? You can probably put much more in than the match. Assuming each of you have access to a 401k you can put in 18k each next year

themagicman

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #8 on: November 04, 2014, 01:12:11 PM »
If you all make $110k then the breakdown could be below at least. For 2015

Income                          $110k
less:
Standard deduction       $12,600    (Or more if you are itemizing due to mortgage interest!)
Two personal exept       $8,000
Two IRA's                       $11,000
Max out both 401k        $36,000
Total adj income            $42,400

The top of the 15% bracket in 2015 is $74,900
This means that you would be able to sell $32,500 in cap gains each year federal tax free. You could do this each year for 5-6 years to convert all of the money to index funds tax free!

Make sure to sell the shares that have appreciated the least first! That way you can get most of your money into index funds quickly!                             

Psychstache

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #9 on: November 04, 2014, 01:31:06 PM »
Also, what does 'got control of from my parents mean'. Did they pass away and you inherited it? Was it invested in on your behalf?

beltim

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #10 on: November 04, 2014, 01:54:56 PM »
Even if you move into the 15% income tax bracket, you'll only pay 0% long-term capital gains tax on any capital gains that stay in the 15% tax bracket.  Any capital gains that brings your total income over that threshold ($92500 I think?) will be taxed at 15%.

sabertooth3

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #11 on: November 05, 2014, 09:22:17 AM »
Thanks for the replies everyone, very helpful! Especially the comment on keeping the tax-free gains only on the gains that stay in the 15% bracket- I did not know that at all.

By "got control from my parents" I do not mean inherited. I don't believe it was invested on my behalf, I believe they basically gave me a chunk of their portfolio and said here you go, don't lose it.

I'll definitely think over maxing out the 401k contributions, we're definitely not maxing out. Question though- does the cap include employer matching? Thanks for the suggestions! 


themagicman

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #12 on: November 05, 2014, 09:32:19 AM »
I'll definitely think over maxing out the 401k contributions, we're definitely not maxing out. Question though- does the cap include employer matching? Thanks for the suggestions! 



No, it does not include the employer contribution

GGNoob

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Re: Question: Moving Individual Stocks to Index Funds
« Reply #13 on: November 05, 2014, 09:41:56 AM »
Thanks for the replies everyone, very helpful! Especially the comment on keeping the tax-free gains only on the gains that stay in the 15% bracket- I did not know that at all.

By "got control from my parents" I do not mean inherited. I don't believe it was invested on my behalf, I believe they basically gave me a chunk of their portfolio and said here you go, don't lose it.

I'll definitely think over maxing out the 401k contributions, we're definitely not maxing out. Question though- does the cap include employer matching? Thanks for the suggestions!

Here's a thought...

If you currently cannot afford to max out 401k/IRA contributions, you could withdraw money from this taxable account to live off of while putting as much of your income as possible through the end of the year to 401k. Also withdraw enough to max out an IRA and HSA if available.

Then do the same next year. So next year to max out a 401k at $18,000 would be $1,500 a month per person. So if needed, you could sell enough stocks each month to make up for the difference in your paycheck. Then you could withdraw $11,000 to put into Traditional IRA's for both you and your wife.

Basically in this case, the tax benefit of contributing to a traditional IRA and 401k would offset the taxes from the long term capital gains. But if you get the math correct, you should be able to stay in the 15% tax bracket so you won't have to pay any taxes on the gains.