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Post by archer on Apr 26, 2023 4:38:29 GMT
Currently the great majority of my PF is in a SEP and a Roth account. As such I can trade with abandon and not worry about taxes. As time goes on I will likely be growing surplus money in my taxable account, and at some point will need to consider consequences of making trades, eg. if I want to exit the market at strategic times, and re-enter, again based on my genius market timing abilities (yeah, dream on archer!).
How to? I know ETFs are more tax efficient than mutual funds, but when it comes to selling, capital gains will still be taxed after a certain income level. So, a taxes become a consideration anytime assets are sold even if not withdrawn.
Muni funds are tax advantaged, but still subject to capital gains when sold.
I know a lot of investors just buy and hold regardless of the account, but I am specifically researching tax management for traders within taxable accounts.
I'm curious because it is hard enough for good fund managers to beat the market, let alone amature traders. Yet some people make a living doing so. Add taxes into the mix and trading becomes even less viable.
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Post by steelpony10 on Apr 26, 2023 19:53:30 GMT
archer , We hold VWAHX in our taxable account on reinvestment. All bonds trade within a range this one say $10-12. Any distributions are tax free for us, Fed and state. Rates have varied over the 40+ years we’ve held it maybe 2.6%-4%+. As with all bonds there are few cap gains. That’s what equities are for. We also are working towards all our equity money being in VTI. We are down to that and 3 stocks. These are both marked for LTC and/or wants not needs. These all are long term cap gains after 40+ years. There is no disincentive to make as much as you can. No one ever declined a raise during their working years. Tax rates can and do change. I’ve been paying cap gains taxes on something for years as a precautionary measure because nothing goes up in value forever. They can be spread out. Whether taxable, tax free, long term, short term etc. all income gets considered when taxing SS. We’ll be at 85% forever. We live on CEF distributions which is all ordinary income. We look at that like a paycheck to supplement SS. Rght now we get to keep over 90% of our income each year. My opinion is all and all it’s way better to protect your investment income using what the tax system allows or make as much as you have the ability to and consider taxes just a minor obligation as the price we all pay to live in the U.S.
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Post by FD1000 on Apr 26, 2023 21:57:49 GMT
Know yourself is the best way to invest. You would probably pay the lowest taxes using buy and hold and stock ETFs in taxable accounts Another good option could be lower volatility funds such as PRWCX,VWIAX and all the way to munis.
Do trading only in deferred accounts. I have about 20% in taxable and trading is working well for me. I don't mind paying higher taxes but avoid bigger losses.
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Post by archer on Apr 27, 2023 3:27:04 GMT
Thanks steelpony10, FD1000, Your input pretty much confirms what I thought. I agree it makes most sense to use the taxable account for holdings more conducive to letting them ride. Moving in and out of the market can be reserved for my IRAs.
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Post by colorado on Apr 29, 2023 16:58:31 GMT
I have never focused on tax management as a major factor in investing. I will occasionally use Muni Funds in my taxable account, because of periodic strong performance trends.
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Post by steadyeddy on Apr 30, 2023 13:35:18 GMT
I have never focused on tax management as a major factor in investing. I will occasionally use Muni Funds in my taxable account, because of periodic strong performance trends. I am in the same camp. I maintain tighter stops in tax deferred accounts so I cut my losses before they grow big. Conversely, I am ok letting paper losses grow in taxable accounts since I can turn them into TLH. Beyond that I pay no attention to taxes in making my investment decisions.
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Post by retiredat48 on Apr 30, 2023 13:55:09 GMT
Know yourself is the best way to invest. You would probably pay the lowest taxes using buy and hold and stock ETFs in taxable accounts Another good option could be lower volatility funds such as PRWCX,VWIAX and all the way to munis. Do trading only in deferred accounts. I have about 20% in taxable and trading is working well for me. I don't mind paying higher taxes but avoid bigger losses. PLUS ONE... Use ETFs in taxable. Smartly do your asset allocations between your small taxable, and larger IRA type spaces. Like, own a small cap ETF in taxable...you have limited annual divy income, and minimal annual cap gains. Yes, sell if needed sometime, and the cap gain may fall within the cap gain zero tax boundary. If not, plan to hold forever. Shift some percentage of "core holding(s)" into taxable, and hold forever. Also do strategic selling from your IRAs etc if needed to rebalance things. R48
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Post by archer on Apr 30, 2023 14:56:30 GMT
So what I am gathering here is that there isn't a way with taxable accounts to strategically go to cash without paying taxes to do so. Any money saved by avoiding a severe downturn will be offset to some extent by taxes. That extent is determined by the severity of the downturn, (not much of a downturn and you lose), and the amount of taxes, (size of sale).
There is always an inherent risk in market timing, and doing it in a taxable account adds to the risk of loss.
In my case, I could get away with it early in the life of my taxable, because there isn't much in there, and LTC gains tax would be zero, other than a small effect on SS being taxed more, and a small amount in state. On the other hand, since the taxable portion of my PF is small, there is no point in bothering with trying to prevent loss by going to cash. The risk/reward of doing so just isn't favorable.
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Post by FD1000 on Apr 30, 2023 16:49:50 GMT
Archer, I clearly stated above and for years that managing risk/volatility is extremely an important goal for me and what I have done since retirement in 2018. I made more than the SP500 since 2018, which isn't my goal, but let's assume my portfolio performance was equal or lower. I prefer to trade with a 3% max loss (it was only 1%) from any last top and pay all the taxes than holding the SP500 and hardly pay taxes. There is no way any account of mine is losing 5-10-20-30% and I just keep losing to avoid taxes. On the other hand, if your history doesn't have good trading and/or you are an accumulater, care about taxes...then holding stock ETFs is proper.
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Post by Mustang on Apr 30, 2023 21:43:48 GMT
We invest all RMDs and most of our social security in taxable accounts. I understand why traders worry about capital gains. For them short-term capital gains are taxed as ordinary income but a buy and hold investor will have long-term capital gains which are taxed at a lower rate. I really don't worry about taxes. In my opinion the only reason to defer taxes is if investors believe they will be in a lower tax bracket later. That is not always the case. Our income is in the middle of a tax bracket. It is unlikely to change as long as both of us are still alive. If I am gone my wife will fall into a higher tax bracket because of filing as single. Because of this increasing the cost basis now will result lower future taxes and likely result in lower overall taxes--especially if the tax brackets are changed to bring in more revenue. This is likely to become true. I have difficulty understanding why our government wants to punish people who work and pay their bills on time by increasing fees on borrowers with good credit ratings but they do. That same attitude will also punish those who have deferred spending to build retirement accounts. Tax brackets used to be a lot higher. I suspect that will be true in the future. If so those that defer taxes lose.
P.S. I cannot see the future. I just don't worry about taxes. Increasing the cost basis by itself will lower future taxes without a change in tax rates.
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Post by archer on May 1, 2023 4:49:04 GMT
Archer, I clearly stated above and for years that managing risk/volatility is extremely an important goal for me and what I have done since retirement in 2018. I made more than the SP500 since 2018, which isn't my goal, but let's assume my portfolio performance was equal or lower. I prefer to trade with a 3% max loss (it was only 1%) from any last top and pay all the taxes than holding the SP500 and hardly pay taxes. There is no way any account of mine is losing 5-10-20-30% and I just keep losing to avoid taxes. On the other hand, if your history doesn't have good trading and/or you are an accumulater, care about taxes...then holding stock ETFs is proper. I guess I could have done some calcs before my OP, but better later than never. In my case, a few years from now, I will be making $43K and change from SS. Most years this will cover all my expenses. My taxes will be 0 for Fed and state under current tax law. If I have $100K in a taxable account and go to cash for whatever reason, like a 5% downturn, selling $95K, my total tax for fed and state would be $26,667, If I did this once a year. Less than once a year, LTCG, taxes would be $18,444. More often than not, my trades are good, but not good enough to handle an 18-26% tax loss. It is seldom my predictions/sales have prevented that much loss.
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Post by Mustang on May 1, 2023 8:39:54 GMT
Archer, I clearly stated above and for years that managing risk/volatility is extremely an important goal for me and what I have done since retirement in 2018. I made more than the SP500 since 2018, which isn't my goal, but let's assume my portfolio performance was equal or lower. I prefer to trade with a 3% max loss (it was only 1%) from any last top and pay all the taxes than holding the SP500 and hardly pay taxes. There is no way any account of mine is losing 5-10-20-30% and I just keep losing to avoid taxes. On the other hand, if your history doesn't have good trading and/or you are an accumulater, care about taxes...then holding stock ETFs is proper. I guess I could have done some calcs before my OP, but better later than never. In my case, a few years from now, I will be making $43K and change from SS. Most years this will cover all my expenses. My taxes will be 0 for Fed and state under current tax law. If I have $100K in a taxable account and go to cash for whatever reason, like a 5% downturn, selling $95K, my total tax for fed and state would be $26,667, If I did this once a year. Less than once a year, LTCG, taxes would be $18,444. More often than not, my trades are good, but not good enough to handle an 18-26% tax loss. It is seldom my predictions/sales have prevented that much loss. Sorry but I had a hard time following this. This is a taxable account. What is your cost basis? Are you using FIFO (first in first out), LIFO (last in first out or weighted average to determine the cost of the shares sold?
Example 1: You invest $100k. Your cost basis is $100k. It drops to $95k and you sell. You have an actual loss of $5k. No additional taxes are due. You might even be able to write off the loss. You taxes are based on profit not sales price.
Example 2: You buy 10,000 shares at $4 each ($40,000) and 10,000 shares at $5 each ($50,000). You own 20,000 shares with a total cost of $90,000 now valued at $100,000. The market drops and total value is now $95,000 ($4.75 per share) and you sell. The entire $95,000 is not taxable. You have a $90,000 cost basis. Your taxable income is $5,000. Whether it is short-term capital gains or long-term depends upon how long you have owned the shares.
Example 3: If you sell only 10,000 shares ($47,500) then your gains are based on which inventory cost valuation method you have chosen - FIFO, LIFO, or weighted average. If you are using weighted average the cost basis is $45,000 for 10,000 shares, half of the total cost of $90,000. Your taxable gain is $2,500. If you are using FIFO then the first lot cost $40,000 and you are selling at $47,500. That is a $7,500 taxable gain. If you are using LIFO then the second lot cost $50,000 and you are selling at $47,500. That would be a $2,500 taxable loss.
The entire sale is not taxable and the portion that is taxable depends upon which cost method you have chosen. If you are investing in mutual funds the fund will track your cost basis for you.
Edit: Note that in example 3 the FIFO gain of $7,500 and the LIFO loss of $2,500 together is a $5,000 gain. Since both lots are sold that is the same as example 2.
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Post by archer on May 1, 2023 12:36:15 GMT
Mustang, My calcs were based solely on capital gains, which I didn't explain in my example, and I was not figuring in cost basis. While it could be possible to have say 90% of total PF as capital gains after many years, this would only apply to a one time sale. After that, future sales would be a new cost basis, and the taxable portion would be much smaller as you pointed out above. Thanks for pointing that out.
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Post by mnfish on May 1, 2023 12:39:58 GMT
My taxable acct is equal to the sum of all my IRAs combined. Last year I took a fair amount of cap gains and purchased a MMFund and Tbills and got clipped on my health insurance tax credit which resulted in a largish tax payment. The end result was my health insurance wound up costing me about the same per month as it would have had I not received the credit. The last 4 years total Fed tax paid averages out to less than 5% of my taxable income for those years combined.
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Post by Fearchar on May 1, 2023 15:04:17 GMT
Mustang, My calcs were based solely on capital gains, which I didn't explain in my example, and I was not figuring in cost basis. While it could be possible to have say 90% of total PF as capital gains after many years, this would only apply to a one time sale. After that, future sales would be a new cost basis, and the taxable portion would be much smaller as you pointed out above. Thanks for pointing that out. My 92 year old mom is nearer to 99% cap gain in her major holding SPGI. Fortunately, she does not need to sell. So it makes for the perfect inheritance vehicle with stepped up cost basis!
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Post by retiredat48 on May 1, 2023 18:04:09 GMT
I guess I could have done some calcs before my OP, but better later than never. In my case, a few years from now, I will be making $43K and change from SS. Most years this will cover all my expenses. My taxes will be 0 for Fed and state under current tax law. If I have $100K in a taxable account and go to cash for whatever reason, like a 5% downturn, selling $95K, my total tax for fed and state would be $26,667, If I did this once a year. Less than once a year, LTCG, taxes would be $18,444. More often than not, my trades are good, but not good enough to handle an 18-26% tax loss. It is seldom my predictions/sales have prevented that much loss. Sorry but I had a hard time following this. This is a taxable account. What is your cost basis? Are you using FIFO (first in first out), LIFO (last in first out or weighted average to determine the cost of the shares sold?
Example 1: You invest $100k. Your cost basis is $100k. It drops to $95k and you sell. You have an actual loss of $5k. No additional taxes are due. You might even be able to write off the loss. You taxes are based on profit not sales price.
Example 2: You buy 10,000 shares at $4 each ($40,000) and 10,000 shares at $5 each ($50,000). You own 20,000 shares with a total cost of $90,000 now valued at $100,000. The market drops and total value is now $95,000 ($4.75 per share) and you sell. The entire $95,000 is not taxable. You have a $90,000 cost basis. Your taxable income is $5,000. Whether it is short-term capital gains or long-term depends upon how long you have owned the shares.
Example 3: If you sell only 10,000 shares ($47,500) then your gains are based on which inventory cost valuation method you have chosen - FIFO, LIFO, or weighted average. If you are using weighted average the cost basis is $45,000 for 10,000 shares, half of the total cost of $90,000. Your taxable gain is $2,500. If you are using FIFO then the first lot cost $40,000 and you are selling at $47,500. That is a $7,500 taxable gain. If you are using LIFO then the second lot cost $50,000 and you are selling at $47,500. That would be a $2,500 taxable loss.
The entire sale is not taxable and the portion that is taxable depends upon which cost method you have chosen. If you are investing in mutual funds the fund will track your cost basis for you.
Edit: Note that in example 3 the FIFO gain of $7,500 and the LIFO loss of $2,500 together is a $5,000 gain. Since both lots are sold that is the same as example 2.
archer, Mustang,...I agree with Mustang here. archer, IMO you are not representing capital gains properly. There is no way you should ever have this large a gain/or this much tax due. But if your accounts grew to this size to have such gains , gladly pay the tax. R48
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Post by archer on May 1, 2023 18:48:43 GMT
retiredat48, I agree completely. In the context of a complete exit to cash, if capital gains and their taxes was as high as I posited, the total amount of money that was sold would be much greater. This would mean the % of total that went to taxes would be much smaller, and the savings of avoiding a market decline would be much greater. In my case the tax ramifications would be very minor as my taxable account is small will likely remain so now that I am retired.
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