Simplifying/consolidating/rebalancing my accounts

[jeromedawg]

Hey guys,

My wife and I each have a Traditional & Roth with Fidelity. Between all of the accounts, we're solely invested in these three funds, which seem to be overlapping a bit:

FSTVX
FUSVX
FSEVX

My understanding is that FSTVX is essentially the same as FUSVX and FSEVX. Is there any reason or strategy to choose one or more of these funds to hold in particular in a Roth IRA vs Traditional IRA vs 401k vs taxable account? In my 401k, which is with Wells Fargo, I'm holding WFIOX which is their version/equivalent of FUSVX/S&P500.

In one of my taxable accounts I'm holding FSTVX, FUSVX and FSGDX currently. I previously had FSIVX in lieu of FSGDX and ended up trading it for FSGDX for TLH purposes. And in our other taxable account I'm holding various ETFs as I wanted to pick up a few to check out.

Any suggestions on rebalancing or consolidating things?

[seattlecyclone]

I agree that it doesn't make a lot of sense to hold both FSTVX (total market) and FUSVX (S&P 500) unless you really want to tilt toward large-cap stocks for some reason.

All of those funds should be pretty similar in terms of tax-efficiency. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement indicates you should have a slight preference toward holding your international fund in your taxable account, largely because of the foreign tax credit you get for owning it. However it probably isn't worth eating a bunch of capital gains rebalancing out of your US funds in the taxable account. Do consider this for future purchases though.

[jeromedawg]

I agree that it doesn't make a lot of sense to hold both FSTVX (total market) and FUSVX (S&P 500) unless you really want to tilt toward large-cap stocks for some reason.

All of those funds should be pretty similar in terms of tax-efficiency. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement indicates you should have a slight preference toward holding your international fund in your taxable account, largely because of the foreign tax credit you get for owning it. However it probably isn't worth eating a bunch of capital gains rebalancing out of your US funds in the taxable account. Do consider this for future purchases though.

I definitely am not planning on rebalancing the US funds in the taxable accounts unless there's another TLH opportunity that presents itself. I'm a bit overweight on the intl funds as it is.

So as far as consolidation then, it seems it wouldn't hurt to at least do some in my IRAs - and in that context, would it be best then just to track the total market? Or should I stay with tracking S&P500 only (which seems to be the general advice I keep hearing)?

[seattlecyclone]

I prefer the total market (because why limit yourself to only 500 stocks if you can own all of them for roughly the same cost?), but there's honestly not much difference between the two. See this graph. They pretty much move in tandem, with the total market having slightly outperformed over the past decade.

[jeromedawg]

I prefer the total market (because why limit yourself to only 500 stocks if you can own all of them for roughly the same cost?), but there's honestly not much difference between the two. See this graph. They pretty much move in tandem, with the total market having slightly outperformed over the past decade.

Thanks! I think that reaffirms the fact that I should stick with FSTVX across all my IRAs then! I'm gonna have to see if the WF 401k account has a total market fund... I don't think they do though.

BTW: what would be a 'similar' (but not like-kind) fund to FSTVX/Total Market that could be swapped out for TLH purposes? Is there anything?

[seattlecyclone]

I've swapped between Vanguard's Total Market and S&P 500 funds. As you can see, they perform about the same, while being enough different that I feel comfortable claiming they aren't "substantially identical."

[jeromedawg]

I've swapped between Vanguard's Total Market and S&P 500 funds. As you can see, they perform about the same, while being enough different that I feel comfortable claiming they aren't "substantially identical."

Hm so similarly, swapping between fstvx and fusvx shouldn't be a problem...

[seattlecyclone]

Seems reasonable to me.

[jeromedawg]

Was just reviewing the wash sale rule here, https://www.bogleheads.org/wiki/Wash_sale, and was curious about this:
"If you hold the same fund in your IRA or 401(k) as in your taxable account, make sure that there are no recent contributions to that fund if you might want to sell your taxable fund at a loss. Direct distributions in the IRA or 401(k) to a different fund in the same account. In a 401(k) in which contributions are made from every paycheck, direct your new contributions to a different fund as well."

I have FSTVX and FUSVX in my taxable account and there's a potential opportunity to TLH on the FSTVX now. I'm concerned if I sell and buy the FUSVX though, what implications there are for the IRAs. The 401k I'm not as worried about since I'm only holding the WFIOX in it. But with the IRAs, I made contributions earlier this year (maxed them out). The contributions went directly to cash reserves but shortly after I purchased some FSTVX in each account transferring funds out of the cash reserves. I also setup automatic reinvestment of dividends back into their respective funds.

Would any of this count as "recent contributions" according to the IRS? Or are "contributions" solely defined as money that I contributed that was *directly* invested in the respective fund without any other intervention?

[seattlecyclone]

It's the same 30-day window in the retirement accounts. Any purchase of that same fund within that account (including automatic contributions and dividend reinvestments) can trigger a wash sale. These wash sales are even worse than wash sales where the replacement shares are in your taxable account, because at least with the latter type you get to claim credit for that loss eventually. Wash sales where the replacement shares are in a retirement account just have the loss completely wiped out.

For that reason I might suggest turning off dividend reinvestment in retirement accounts for funds that you also hold in your taxable account.

[jeromedawg]

It's the same 30-day window in the retirement accounts. Any purchase of that same fund within that account (including automatic contributions and dividend reinvestments) can trigger a wash sale. These wash sales are even worse than wash sales where the replacement shares are in your taxable account, because at least with the latter type you get to claim credit for that loss eventually. Wash sales where the replacement shares are in a retirement account just have the loss completely wiped out.

For that reason I might suggest turning off dividend reinvestment in retirement accounts for funds that you also hold in your taxable account.

Gahh, didn't realize that. I'm turning it off right now. Guess I'll wait another month or so before trying to TLH the total market fund. Not a huge deal, I still have losses that carry over from last year I think... I should actually double-check that there were no wash sales which would prevent that. Though, how is that actually reported or figured? Would Fidelity factor wash sales into the tax statements for my taxable accounts?

Also, would it be considered a wash sale if I sold a fund in my IRA but bought the same fund in my wife's IRA? Or are wash sales limited to the context of an individual's account?

[MustacheAndaHalf]

I agree in the past decade large-cap stocks have done better than small-cap, which is why S&P 500 (100% large cap) outperformed Total Stock Market (~72% large cap).  Looking at the past 40 years (1976-2015) in portfoliovisualizer.com shows 7.38% / year real returns (includes inflation) for Total Stock Market, versus 7.14% / year real returns for large cap (S&P 500).

It's actually more important to have low expenses (0.05% for those two funds) than which fund you pick.

[jeromedawg]

I agree in the past decade large-cap stocks have done better than small-cap, which is why S&P 500 (100% large cap) outperformed Total Stock Market (~72% large cap).  Looking at the past 40 years (1976-2015) in portfoliovisualizer.com shows 7.38% / year real returns (includes inflation) for Total Stock Market, versus 7.14% / year real returns for large cap (S&P 500).

It's actually more important to have low expenses (0.05% for those two funds) than which fund you pick.

Thanks for the insight! I ended up cancelling all the orders I was making to consolidate per the wash sale rules. And also turned off automatic dividend reinvestments. Will wait until May/June before deciding what to consolidate, if any. I may just leave everything alone though. This seems like a very minor optimization of funds in the big picture.

Yea, I've been trying to get expenses as low as possible now. I just dumped a bunch of FSCGX that had been in the account for years (my dad bought this a long time ago when he had setup an account for me). I'm gonna end up incurring cap gains on it but I figure now is the time to do it since I should still have losses to carryover from last year.

[seattlecyclone]

It's the same 30-day window in the retirement accounts. Any purchase of that same fund within that account (including automatic contributions and dividend reinvestments) can trigger a wash sale. These wash sales are even worse than wash sales where the replacement shares are in your taxable account, because at least with the latter type you get to claim credit for that loss eventually. Wash sales where the replacement shares are in a retirement account just have the loss completely wiped out.

For that reason I might suggest turning off dividend reinvestment in retirement accounts for funds that you also hold in your taxable account.

Gahh, didn't realize that. I'm turning it off right now. Guess I'll wait another month or so before trying to TLH the total market fund. Not a huge deal, I still have losses that carry over from last year I think... I should actually double-check that there were no wash sales which would prevent that. Though, how is that actually reported or figured? Would Fidelity factor wash sales into the tax statements for my taxable accounts?

Brokerages do need to report wash sales when the replacement shares were purchased in the same taxable account that the sale for a loss occurred in. You'll see this on your 1099-B with code "W" marked.

I don't think brokerages are required to report wash sales that occur across accounts. They also don't report any trades within retirement accounts at all. Any reporting of these is up to you and your conscience.

Also, would it be considered a wash sale if I sold a fund in my IRA but bought the same fund in my wife's IRA? Or are wash sales limited to the context of an individual's account?

This may technically be a wash sale, but it really doesn't matter because there's no benefit to selling for a loss within an IRA, and your cost basis is irrelevant.

You only need to care about wash sales when you sell stock in your taxable account. Any purchases within 30 days before or after that taxable sale in any other account can cause your taxable sale to become a wash sale.

[jeromedawg]

It's the same 30-day window in the retirement accounts. Any purchase of that same fund within that account (including automatic contributions and dividend reinvestments) can trigger a wash sale. These wash sales are even worse than wash sales where the replacement shares are in your taxable account, because at least with the latter type you get to claim credit for that loss eventually. Wash sales where the replacement shares are in a retirement account just have the loss completely wiped out.

For that reason I might suggest turning off dividend reinvestment in retirement accounts for funds that you also hold in your taxable account.

Gahh, didn't realize that. I'm turning it off right now. Guess I'll wait another month or so before trying to TLH the total market fund. Not a huge deal, I still have losses that carry over from last year I think... I should actually double-check that there were no wash sales which would prevent that. Though, how is that actually reported or figured? Would Fidelity factor wash sales into the tax statements for my taxable accounts?

Brokerages do need to report wash sales when the replacement shares were purchased in the same taxable account that the sale for a loss occurred in. You'll see this on your 1099-B with code "W" marked.

I don't think brokerages are required to report wash sales that occur across accounts. They also don't report any trades within retirement accounts at all. Any reporting of these is up to you and your conscience.

Also, would it be considered a wash sale if I sold a fund in my IRA but bought the same fund in my wife's IRA? Or are wash sales limited to the context of an individual's account?

This may technically be a wash sale, but it really doesn't matter because there's no benefit to selling for a loss within an IRA, and your cost basis is irrelevant.

You only need to care about wash sales when you sell stock in your taxable account. Any purchases within 30 days before or after that taxable sale in any other account can cause your taxable sale to become a wash sale.

So just to reiterate, if I buy a fund [or more of a fund] in one of my IRAs/non-taxables and then sell the same fund that is held in a taxable account, that would technically be considered a wash sale.
The caveat is that with the non-taxable accounts, you have to manually track your purchases to see if there could potentially be a wash sale *if* you were to buy a fund there yet sell the same fund in your taxable account.

[seattlecyclone]

Yes. To avoid wash sales, avoid buying shares of a fund in any account within 30 days before or after selling that same fund for a loss in your taxable account. That's all!