Author Topic: Tax implications for moving from Schwab brokerage to Vanguard index fund?  (Read 6877 times)

Uncephalized

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Hey all,

I have about $8500 worth of stock in a Schwab brokerage account that was set up for me by a family member a while back. I want to move this money to Vanguard VTSMX (don't have enough for VTSAX yet) because I'd rather have my money in a low-expense index fund than at a broker with picked stocks. However, I have a sneaking suspicion that if I have made gains during the lifetime of this account (which I probably have, though I would need to check to be sure) and I cash it out, I will need to pay income tax on the realized gains, right? Which would suck up some of the money that I want to put into VTSMX.

Is there a way to make this transfer where it doesn't register as income, since I am reinvesting it immediately? Or do I just have to choose between taking a tax hit to streamline my finances, and leaving it messy and sub-optimally distributed? Thanks for help!

Uncephalized

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UPDATE more information:

Beginning value 1/1/2009: $5,720.16
Current value: $8,558.88

So that means I have an unrealized gain of $2,838.72 by my calculation. This would be taxed as long-term capital gains, at 15% regardless of my earned income level, right? I'm just wondering if there's any way to shelter the gains from taxes given that I am not intending to cash them out, just move them to a different investment.

arebelspy

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You may also hit wash sale rule problems if there was a loss on something in particular.

I'd suggest that your first step is to call Vanguard.
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tannybrown

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Do you have any investments that are at a loss currently?  You could sell those to offset the gains here.

Jamesqf

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So that means I have an unrealized gain of $2,838.72 by my calculation. This would be taxed as long-term capital gains, at 15% regardless of my earned income level, right?

I don't believe this is the case.  I am not a tax lawyer, but per Wikipedia http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States the tax is zero if you're in the 10% or 15% brackets.

Uncephalized

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Do you have any investments that are at a loss currently?  You could sell those to offset the gains here.
No, I'm just starting out with investing so this is pretty much my whole portfolio besides a few hundred dollars in my 401k--which I also just became eligible to contribute to.

So that means I have an unrealized gain of $2,838.72 by my calculation. This would be taxed as long-term capital gains, at 15% regardless of my earned income level, right?
I don't believe this is the case.  I am not a tax lawyer, but per Wikipedia http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States the tax is zero if you're in the 10% or 15% brackets.
Interesting. Problematically, we might be in the 25% bracket (filing jointly) this year because of a trust distribution my parents made to me, to help us put a down payment on a house. But I suppose I could always increase my 401k contributions to shelter more of my income and make sure that doesn't happen. Actually I probably should do that anyway.

Hmm, now I need to figure out how much additional money I can funnel into my 401k before the end of the year, without running too short on cash...

My salary is $52K gross. I get a quarterly trust distribution that adds up to about $4K per year. I'm the only earner in the household (my wife is semi-self-employed from home but as of yet her income is negligible and we're not bothering to report it). This year I received an additional $28K for a house fund (yay Mom!), so that puts my total income at $84K expected for the year. That's in the 25% bracket filing jointly, so I wouldn't be eligible for the 0% tax on capital gains. I'm currently contributing 6% to my 401k, which is the minimum to get full match from my employer. I've only been eligible for a month, so I have barely put anything away this year. Even if I up the contribution to 25%--which is the most I'd be comfortable with reducing my paycheck--I can't make up a $14K gap, so I'll be in the 25% bracket regardless. But it looks like next year the brackets are shifting and the 0% gains tax opportunity will be gone, so I'll be paying tax on it either way.

I should be back in the 15% bracket next year, barring a giant raise or my wife's work really taking off, so I guess I should just wait to move the money until Jan. 1st of 2013 and pay the 10% indicated in the table then instead of 15% now. It's "only" about $140 difference but it grates me to have to take any tax loss when I'm not actually using it as income, just moving to a different vehicle. But I guess that's just how it works.

skyrefuge

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Quote from: Uncephalized link=topic=1239.msg18198
I should be back in the 15% bracket next year, barring a giant raise or my wife's work really taking off, so I guess I should just wait to move the money until Jan. 1st of 2013 and pay the 10% indicated in the table then instead of 15% now.

Don't put too much faith in those 2013 numbers, because that's just what's due to happen under "current law".  But in recent times, "current law" changes pretty quickly and hasn't been very useful for predicting the future: the numbers now listed to change on Jan. 1 2013 were originally supposed to go into effect on Jan 1. 2011, but didn't.  Jan. 1 2013 is now the date that we'll arrive at the oncoming "fiscal cliff", and surely some sort of deal will be hacked together between the November election and the end of the year to avoid that cliff, which could involve a further extension of the current rates, a change in rates as shown in that table, or (less likely but still possible) a total rejiggering of the whole table.  Chances that things will be different are so great that it might not be worth planning a specific course of action for 2013, though for your situation the magnitude of the changes are unlikely to make an enormous difference.

Quote from: Uncephalized link=topic=1239.msg18198
It's "only" about $140 difference but it grates me to have to take any tax loss when I'm not actually using it as income, just moving to a different vehicle. But I guess that's just how it works.

A couple things that might make you feel better: 1) if you were one of those guys with a singular focus on dividend-paying stocks, you would have already been forced to pay taxes on your gains already, so at least with capital gains you have a choice if and when you want to pay tax on your gains; 2) You would have had to realize this income at some point anyway, and possibly at a time when your capital gains tax rate is higher than it is now. 

Another Reader

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If your mom gave you $28,000, that's a gift, not income.  She will have to file a gift tax return, but no tax is owed.

James

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You may also hit wash sale rule problems if there was a loss on something in particular.

I'd suggest that your first step is to call Vanguard.


I second the suggestion to call Vanguard.  I'm very happy with my personal agent there, let me know if you want his number.  They can let you know the implications of moving the money and the possibilities of guarding it.  Once you have their suggestion you could research it online to verify the information.

Uncephalized

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If your mom gave you $28,000, that's a gift, not income.  She will have to file a gift tax return, but no tax is owed.
Not exactly. It's technically a distribution from a trust that was originally set up by my mom and grandfather to pay for my educational expenses. Now that I'm done "gettin' educated" (and I saved a bunch of money going to state school) the money is available for other things. My mom is a trustee or whatever so she can make distributions, but it wasn't a gift from her to me, legally speaking.

Uncephalized

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OK, so I realized I was using my total income instead of my taxable income after exemptions. So if standard personal exemption for a couple filing jointly is $11,900, and I up my 401(k) contributions to 25% through the end of the year:

$84,000 total regular income
-$11,900 standard married-joint exemption
-2 * $3,800 = $7,600 personal deductions (I do get to take both of these right?)
-6% * ($52,000/yr work income) * (5 months/12 months) = $1,300 401(k) contribution deduction
__________________________________________________________________________

= $64,200 taxable income!

Which avoids bumping me into the 25% bracket by several grand. I also plan to increase my 401(k) contribution anyway, probably to 20%, which would bring my taxable income down to ~$62K for the year.

So assuming that all goes according to plan, we should have enough breathing room to go ahead and move that money to Vanguard without a tax penalty, taking advantage of the soon-to-end 0% capital gains loophole and save a couple hundred bucks. :-)

Is there anything obviously wrong with my math here?

Another Reader

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I'm still not clear on why the money you receive from a trust as a distribution is taxable.  Was the trust funded with money that was not taxed before it went into the trust? 

Uncephalized

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It's entirely possible that I'm just wrong on that, AR.

I obviously need to ask a tax person about this...