Taxes on Selling/Transferring Mutual Funds?

[mrbattleship]

I have mutual funds at Raymond James, Pioneer Investments, and Vanguard (VIMAX and VWELX). In the next 6 months, I'd like to buy a house as well as consolidate my investments through Betterment.

To get there, I have a really basic question about taxes and mutual funds. What kinds of taxes do I have to pay if I want to a) sell shares to use for my downpayment and b) transfer/roll over/sell and reinvest the rest of it in Betterment?

I've got around $70k in a Savings account through Ally and would potentially be looking to transfer $40k from these various funds to that account, and roll the rest into Betterment.

Thanks for any help.

[forummm]

Firstly, I don't see the appeal of moving from Vanguard to Betterment. You'll still have Vanguard funds in Betterment--Betterment just charges you extra for owning them.

If you a) sell the shares, then you owe capital gains taxes on the gains if you have net gains. If you have net losses then you can deduct the losses instead.

I don't know why you would b) transfer RJ or PI funds elsewhere. I don't know what the fees are for those, but you probably would be long term better off not owning them. What benefit would you get from transferring them?

If you could provide more specifics such as the fund names and expense ratios for the funds you are in, the amount of capital gains/losses with each fund, and your rationale for moving into Betterment, perhaps we could provide more specific advice.

[mrbattleship]

Thanks for the feedback, forummm, and please forgive my ignorance! I'm looking to switch to Betterment because I really like the visualization tools, they pick cheap funds, and I can get a complete picture in one place (instead of having funds dispersed across brokerages). And, for just $100ish/year it seems worth it, especially with tax loss harvesting/rebalancing and simplifying tax forms.

For my current portfolio of investments, we have some (expensive) accounts through Raymond James, Pioneer, and American Funds that my wife has held for a while, as well as some Vanguard investments that I picked (admittedly not very strategically):

Vanguard:
VIMAX - 0.09% expense ratio - $22k
VWELX - 0.26% expense ratio - $25k

Pioneer:
PINDX - 1.14% expense ratio - $21k

Raymond James
PQNAX - 1.26% expense ratio - $3.5k
MNNAX - 1.49% expense ratio - $3.5k
FGSAX - 1.22% expense ratio - $4k

American Funds
AEPGX - 0.83% expense ratio - $11.5k

Would I pay taxes on the net gains if I sell the shares, even though I pay taxes on them every year?

I also don't know if I'm using the word "transfer" correctly. Basically, I just want to move the money I have in those investments to somewhere cheaper and better performing. If this requires selling shares, placing the money in a savings account, and then buying more shares, then that's what I'd like to do.

Thanks again for any help.

[forummm]

You are describing "selling" the shares and "buying" something else. Which is good.

I can't know if you'd pay taxes or not because I don't know what your basis (i.e. what you paid for) the shares are for the various funds.

Honestly, if it were me I would just sell all the non-VG stuff and move the money to VG. If your goal is to have things be simple, just put it all in the Target Retirement Fund that corresponds approximately with the year you turn 65. VG has some visualization tools, you'd have all your money in one place, you'd have low-cost funds, and the TRF has you invested in the entire world's stocks (about 10,000) and bonds and automatically rebalances and gets more conservative as you age. There's literally nothing to do except keep putting money into it over time. VG has a simple tax form, and since you'd only own a couple funds it's still simple when you eventually take out some money.

[mrbattleship]

Thanks, that's helpful.

This may sound naive, but if I buy $10k in shares on Jan 1 2015 and they earn $1k in a 2015, then when I file taxes in Apr 2016 I have to pay taxes on that $1k, right?

So if I sell all my $11k in shares in May 2016, do I pay taxes on the $1k again?

Also, does anyone know of any visual guide or flowchart to these really basic questions? I'm more of a systems thinker and it's hard to assemble and make sense of the nuggets of insight (which may be why I was initially drawn to a UX like Betterment).

[forummm]

Thanks, that's helpful.

This may sound naive, but if I buy $10k in shares on Jan 1 2015 and they earn $1k in a 2015, then when I file taxes in Apr 2016 I have to pay taxes on that $1k, right?

So if I sell all my $11k in shares in May 2016, do I pay taxes on the $1k again?

Also, does anyone know of any visual guide or flowchart to these really basic questions? I'm more of a systems thinker and it's hard to assemble and make sense of the nuggets of insight (which may be why I was initially drawn to a UX like Betterment).

There are 2 ways you make money investing in stock index funds. The first way is that they pay you a dividend. This is a cash payment made to you. You can either do whatever you want with it or have it setup to automatically buy more of the fund (typical) at that day's market price. When you get a dividend, that is taxable in the year you receive it, even if you reinvest it. The second way is price appreciation. If you buy 100 shares at $10 each and then you later sell them all for $11 each you have a $100 capital gain. And that is taxable only once you've sold the shares. So theoretically you could buy 100 shares at $10 each and then never ever sell them. So even if the market price is  $1 million per share, you wouldn't have to pay capital gains taxes until you sold the shares. You would have to pay taxes each year on whatever dividends were issued though.

[mrbattleship]

Thanks for the explanation, forummm! I know it's pretty remedial but actually really helpful to me.

[forummm]

At the end of the year, Vanguard sends out fairly simple tax forms that you can just hand to your tax preparer. And if you do your own taxes, they actually tell you (instructions on the back) what box on your 1040 and/or Schedule D (if needed) to report the transactions. If you aren't doing a lot of selling, the taxes are simple to report.

[PhysicianOnFIRE]

You've gotten good answers from Forummm.

I'm assuming these are in a taxable account.  If not, the answers would be different.

Additionally, if you have held the shares that you sell for more than a year, you will owe long-term capital gains (LTCG) taxes on the difference between your original cost (cost basis) and the price at which you sell.  If your taxable income is low enough, that might be 0 in federal income tax.  The cutoff is about $75,000 in taxable income if married, filing jointly.  Half that if filing single.

For shares held less than a year, you pay short-term capital gains taxes at your marginal tax rate, which is generally quite a bit higher than the LTCG rate.

If your state has a state income tax, both long and short term gains are usually subject to state income tax at your marginal rate.

I would definitely sell the non-Vanguard funds if I were in your case.  I have no experience with Betterment.  It will cost a bit more than a total DIY approach, but I can see the appeal.

Best,
PoF

[MustacheAndaHalf]

Besides the advice above, just a big picture point: money you need in 6 months should not be in the stock market.  If some event makes the market drop, do you want to lose out on a house purchase?

Once you know you want the money soon, it's a good time to plan what you will sell.  In general long-term is best, and the higher cost basis is best.  That aims at the lowest category (long-term vs short-term) and the smallest profit (cost basis... just think of "cost", your cost).

[mrbattleship]

Thanks, makes sense.

Is it possible to only sell the long-term shares of a fund and hold on to the short term shares for a year to avoid the tax penalty?

[MustacheAndaHalf]

Yes, you need to "select lots".  The brokerage should display all your prior purchases, and have you select where the sale comes from.  You'd want anything over 1 year old, and those with the highest purchase price.  The brokerage should do the tracking work - you just pick the best thing to sell.

[PhysicianOnFIRE]

Thanks, makes sense.

Is it possible to only sell the long-term shares of a fund and hold on to the short term shares for a year to avoid the tax penalty?

The fund company will give you options for your cost basis.  You want to set it to Specific ID.  That is, all lots will be labeled with the cost you paid for them.  Vanguard's default is average cost, which you don't want.  Other options are FIFO, LIFO.

When you sell or exchange shares, you will see the cost, the date of purchase, and the size of your gain or loss.  With Vanguard, losses are in red, gains in green, making it really easy to sort through.