Spec ID vs Average cost in Roth IRA

[droh82]

I've been thinking about cost basis a lot lately. Specifically for a ROTH IRA account as I was about to contribute 5500 for this year.

Currently, I have VSTAX which vanguard only offers only average cost in roth ira. But I just learned that you can convert VSTAX to VTI ETF and i'm assuming it would allow me to choose Spec ID.

So I've been contemplating if this would be a good move. Generally I like to min/max as much as I can (even if it is a minimal gain). I like having more control of which shares I can sell but in a ROTH IRA  would this even matter?

Hoping someone should shed some light on stuff that I may not be aware of as far as advantages/disvantages?

[droh82]

I got some questions about average cost basis then just to see if i understand correctly.

Say for example..

Year 1 I buy 100 shares at $10
Year 2 I buy 100 shares at $20
Year 3 I buy 100 shares at $30
Year 4 I buy 100 shares at $40

Average cost basis is $25 a share correct?

Lets say one day i need $5000. On the day i sell, the share price is $35.
So i need to sell roughly 143 shares.

I'm assuming it sells shares from Year 1 and 2 first?

So after i sell those 143 shares. I'm left with 257 shares. Avg cost basis still $25?

Next 2 years i buy..
100 shares at $35
100 shares at $15

Is cost basis now $28.75??

[MDM]

I got some questions about average cost basis then just to see if i understand correctly.

Say for example..

Year 1 I buy 100 shares at $10
Year 2 I buy 100 shares at $20
Year 3 I buy 100 shares at $30
Year 4 I buy 100 shares at $40

Average cost basis is $25 a share correct?

Lets say one day i need $5000. On the day i sell, the share price is $35.
So i need to sell roughly 143 shares.

I'm assuming it sells shares from Year 1 and 2 first?

No, that's what it would do if you are using First In First Out.

So after i sell those 143 shares. I'm left with 257 shares. Avg cost basis still $25?

Yes, if using average cost.

Next 2 years i buy..
100 shares at $35
100 shares at $15

Is cost basis now $28.75??

No, it's still $25.  After buying the 100 shares at $35, it was $27.80.

See Cost basis methods available at Vanguard | Vanguard for more.

Back to that first sale of 143 shares.  Using average cost, your gain is 143 * ($35 - $25) = $1,430.  15% tax costs $214.50, so your net is 143 * $35 - $214.50 =  $4790.50.

If using SpecID, you could have chosen to sell the lot of 100 with $40 cost basis, plus 43 of the $30 basis.  Now you would have a 143 * 35 - (100 * $40 + 43 * $30) = $285 loss.  If your marginal rate for ordinary income is 25% (and you have no other capital gains or losses), this would save $71.25, giving you a net of 143 * $35 + $71.25 =  $5076.25.

[droh82]

Next 2 years i buy..
100 shares at $35
100 shares at $15

Is cost basis now $28.75??

No, it's still $25.  After buying the 100 shares at $35, it was $27.80.

See Cost basis methods available at Vanguard | Vanguard for more.

Back to that first sale of 143 shares.  Using average cost, your gain is 143 * ($35 - $25) = $1,430.  15% tax costs $214.50, so your net is 143 * $35 - $214.50 =  $4790.50.

If using SpecID, you could have chosen to sell the lot of 100 with $40 cost basis, plus 43 of the $30 basis.  Now you would have a 143 * 35 - (100 * $40 + 43 * $30) = $285 loss.  If your marginal rate for ordinary income is 25% (and you have no other capital gains or losses), this would save $71.25, giving you a net of 143 * $35 + $71.25 =  $5076.25.

Thanks i see where i messed up on the calculation for the avg cost basis senario.

Where did you get $71.25 in the Spec ID calculation?

[MDM]

Next 2 years i buy..
100 shares at $35
100 shares at $15

Is cost basis now $28.75??

No, it's still $25.  After buying the 100 shares at $35, it was $27.80.

See Cost basis methods available at Vanguard | Vanguard for more.

Back to that first sale of 143 shares.  Using average cost, your gain is 143 * ($35 - $25) = $1,430.  15% tax costs $214.50, so your net is 143 * $35 - $214.50 =  $4790.50.

If using SpecID, you could have chosen to sell the lot of 100 with $40 cost basis, plus 43 of the $30 basis.  Now you would have a 143 * 35 - (100 * $40 + 43 * $30) = $285 loss.  If your marginal rate for ordinary income is 25% (and you have no other capital gains or losses), this would save $71.25, giving you a net of 143 * $35 + $71.25 =  $5076.25.

Thanks i see where i messed up on the calculation for the avg cost basis senario.

Where did you get $71.25 in the Spec ID calculation?

The $285 loss (with the qualifiers given above) means you would pay $285 * 25% = $71.25 less in tax to the IRS.