What is the best way to simplify my portfolio and avoid a high tax bill on short- and long-term capital gains?
I have several mutual fund holdings at four different institutions. These holdings are in taxable (non-IRA) accounts that I have invested in monthly for 30 years. I plan on retiring at the end of the year and want to simplify my holdings. I would like to combine all under one fund. What is the best way to simplify my portfolio and avoid a high tax bill on short- and long-term capital gains?
Minimal holding appraoches are an excellent solution for many folks. Nearly all of the management (rebalancing, tax loss selling, tactical moves) are pushed off to a prfoessional and all asset clases are held within one or two funds. Otherwise you might start engaging in mutual fund "horsepicking", incur trading costs through rebalancing, etc. I really like this low maintenance approach.
Depending on what you want there are so many options. For ETFs, both Blackrock and iShares have good, low cost names that give worldwide equity exposure for a few basis points. You could pair one of those with an actively managed "core plus" bond fund that has the majority of holdings in investment grade bonds, with smaller allocations to high yield, floating rate, etc. Doubleline and PIMCO have good solutions there, along with many others.
Unfortunately I can't give out specific ticker symbols, but for a well funded retirement a simple holding appraoch might look like this.
- All world equity ETF - 50% (one holding)
- Core Plus Bond Mutual Fund - 35% (one holding)
- 15% - two or three holdings giving exposure to uncorreleated assets (Real estate, Commodities, Etc.)
Sounds like you're on the right track.
It sounds like you have four different taxable accounts, with several mutual funds and there are likely good-sized unrealized capital gains (the difference between what you bought the investments for and what they are worth now). Your goal is to consoildate to one institution and fewer funds. I hope I have that right.
The simple move is to transfer all your accounts to one institution, which could be one of the four you already have or a new one. The place you are moving to will have the transfer forms for you to fill out. The securities will transfer over to the new institution so you don't have to sell them and move cash. The cost basis (what you bought them for and part of the capital gains calculation) will transfer to the new instiution.
The more difficult part is consolidating funds. If you hold some of the same funds at each of the institutions then the consolidation will happen for you at the new institution, with no need to sell. If not, selling to consolidate could result in capital gains taxes. To manage those, one option is to choose an amount you want in capital gains each year, and sell that amount. I should note down markets are a good time to sell investments you need to sell because you'll pay less in capital gains tax. Another option is to wait until you need the money and start selling the funds as you need them (as part of your overall plan).
Finally, if you have any unrealized losses, you can sell those. Those losses will offset any gains that you'll have. If you do, though, you'll have to wait a month before investing in those same mutual funds, though.
I hope that helps.
You can transfer shares of mutual funds, stocks, bond, and ETFs without selling them. So, consolidating accounts should not have any effect on your taxes. However, as you move shares from one institution to another, cost basis information could be lost. When you do go to sell those shares, it may be harder to know how much tax you should fairly pay on the transaction. Before your transfer, call your broker to see if they will send the cost basis information to the new custodian or to you so you have the information for future sells.
Is your goal to combine all of your investments into an account at one firm, or to reallocate all of your different investments into just one mutual fund, or both?
If the end goal is to hold all of the investments currently spread among the four institutions at just one, an important and practical step will be to identify where you wish to consolidate your holdings and confirm that the one firm can and will hold the various mutual funds. Once you have identified your target brokerage or custodial firm, you will likely want to have that firm initiate a "transfer in kind" of your investments held at the other firms. "In kind", in this case, means that your actual investments move from place to place, and there are no sell and buy transactions involved.
Ideally, your cost basis information specific to each current holding should follow the shares, but it may be prudent to capture that data prior to initiating the transfers, just in case it does not follow or does so incorrectly.
Also, it may be valuable to research whether the involved firms charge a fee to transfer your investments out, and/or charge a fee to "close" your account.
If the goal is to go from having, for example, ten different mutual funds to just one mutual fund, you will most likely be realizing capital gains on those positions you "close out". Whether that action is itself prudent will depend on the role these investments play in your overall financial strategy, and whether the one target fund is an appropriate investment for that goal.
Simplification is a good strategy as you embark on retirement. Combining all of your funds at one place is straightforward once you choose a custodian. This is the business that will hold the assets, provide your tax reporting, allow you to view your asset transactions, etc. TD Ameritrade, Schwab, and Fidelity all provide these services and can assist you with the transfer itself.
Requesting that the funds transfer in kind rather than selling your positions before the transfer is the key to avoiding short term and long term capital gains. All of your funds will be together in one place with a consolidated statement without triggering a sale and any attendant gains.
Once in one place, if you wish to consolidate several funds into one or two investments you will need to consider the gains due on sale if you change from one specific fund to another. This can be accomplished over time to lessen the tax bill on an annual basis. Having a plan for the asset allocation you eventually want to achieve will help keep you on track.