If you’ve got a microphone on your computer you can visit YourMoneyYourWealth.com, scroll
down and click “Ask Joe and Al On Air.” Hit the button, click “Record” and boom.
Just like Jack did from Atlanta:
“Hello. I'm trying to figure out the best way to simplify my portfolio. For years I've
been investing monthly into a number of mutual funds and taxable accounts at four different
institutions. Now I want to combine it all under one fund before I retire early next
year. How can I do this and avoid a high tax bill on capital gains? This is Jack from Atlanta,
by the way. Thanks.” All right Jack, thank you for doing that.
Again, go to YourMoneyYourWealth.com, scroll down, click on the button. See, this a lot
of fun, isn't it? It is a lot of fun.
So he's trying to consolidate, it sounds like. Right. He's got four different institutions,
so that's like different custodians. So he's got an account at maybe Fidelity,
T.D. Ameritrade, Merrill Lynch, Vanguard, whatever, and he's like, "OK, well I'm getting
all these statements, I'm looking to retire, I want to simplify my life. How do I go about
doing this to avoid capital gains?" Well, I got a first thought here. You can always
consolidate your investments and not incur any type of capital gain. So let's say you
want to hold all of your money at, I don't know, Charles Schwab. Charles Schwab is not
paying me for this. (laughs) (laughs) Are you sure?
(laughs )Yeah Chuck and I go way back. All you need to do is just do a transfer. You
can transfer all these different accounts and you can consolidate all of your investments
under one roof if you choose to. Yeah. So that would make it much simpler,
instead of four statements every month you have one statement from Charles Schwab and
so like you say, you don't sell the assets, you just transfer in kind. So it goes over
in kind, the investment you had at Fidelity, you still have a Charles Schwab. There was
no sale, there is no tax consequence. A lot of times people think that that is diversification.
Different custodians. I got $200,000 here, I got $300,000 there, I got $50,000 here and
I got ten bucks over here - I'm diversified. Well no. I mean sure, but when you're looking
at securities, you are an owner of that particular company. People I think might get confused
with CDs. Yes, if you have millions of dollars and you want to buy FDIC insured CDs, then
you have to use several different institutions. Right. That is true.
Not with securities, because Charles Schwab is like a grocery store. Charles Schwab and
Fidelity, let's say you've got Albertson's vs... Kroger. Pretty good huh? I go grocery
shopping a lot. (laughs) And there is actually Kroger in Atlanta,
so there you go! And then there's Vons.
Yeah. I thought you would say Vons and Ralph's. Those are the common ones here.
Got it. Or HyVee. (laughs) I think that's one. So you go to that grocery store. You
could buy beans at all of those grocery stores for the same price, roughly.
And that's that's usually what you buy first? (laughs) "Does Ralph's or Vons have a better
selection of beans?" Or bananas or whatever. If you want frozen
chicken, you can just go there and all of those stores will have it.
They got the same stuff. So if I want to buy Apple stock, I can buy
that Apple stock through Fidelity, through TD Ameritrade, through Charles Schwab, through
E-Trade, through whatever. So I can buy a can of beans at Ralph's and
Vons. That's not diversification. (laughs) (laughs) Right! So if I'm running to Ralph's
and buy one can of beans and then I'm like, "oh, I need another can, but I can't buy two
cans here. (laughs) I gotta go to Vons." So what I'm saying is that you go to the supermarket
and then you buy all of your stuff at that one supermarket, it's very simple, it's very
easy. Same with your investments. You can go to one place to buy all of those different
- like Charles Schwab doesn't necessarily have more options for you than
a Fidelity is my point. Agreed. So the other thing that you can do,
so now you'll end up with a bunch of different investments inside, to use your example, Charles
Schwab. And maybe you don't want that many investments, or maybe they're not the best
investments for you going forward. Right. So now then you're looking at selling,
then that's where the capital gains comes in.
And what I like to do in a case like that is look investment-by-investment and look
at the amount of gains in each investment relative to the investment itself. And then
I come up with a gain percentage. Like if you bought Apple stock, let's just say, you
had the fortune to buy that 10 years ago, it might have gone up five times or whatever.
So that'd be a tough one to sell from a tax standpoint. It might be the right thing to
sell from an asset diversification standpoint but from a tax standpoint. So if you're just
thinking taxes, that would be at the bottom of the list. On the other hand, you might
have an S&P 500 fund that you bought the beginning of last year and it's actually down. So you
could sell that one, you actually create a tax loss that would allow you to sell some
other stuff. So you just kind of rank these investments and then come up with a strategy
on how to gradually sort of get this reallocated without paying a ton of tax.
So put it this way: get a spreadsheet. Name your investments on one column of your spreadsheet.
And then the second column of the spreadsheet, I would put market value. So if I bought Apple,
it's worth $100,000. Then the next column what you would want to put down is cost basis
- what you purchased it for. So my first is what the investment is - Apple. The second
column is going to be the market value - $100,000, and then my cost basis, let's say it's $50,000.
Then on the third column it's going to say "gain or loss." And in that particular example,
I have a $50,000 gain. So you want to do that with all of your investments. Just put together
a simple spreadsheet, put the name of the investment, the market value, the cost basis,
and then gain or loss. And then what Al, I think what you're saying is just rank those
from the lowest to the highest. So you could probably diversify - maybe you have 50 different
investments. But maybe you could diversify out of 30 of them, and then your full gain
on all those 30 investments might be only $20,000 versus if you did everything it
could be $150,000. Right. Or it could be zero if you have some
positions that are at a loss and you net that with other positions where you don't have
a lot of gain in it but it's a lot of proceeds. So anyway, that's really how you look at it
- and I'm proud of you. That's an accountant's answer. "Here, let's get a spreadsheet. Here's
column 1, here's column 2." Right. But I think that would help someone
quite a bit. Just because that's what we do when we look at this is, it's like, "OK well
what is the most that we can diversify out with the least amount of tax?"
Yeah. And then the next thing we do, once we've done that, it's like now let's look
at your tax bracket. If you're in the lowest tax bracket, call it the 10 or 12% bracket,
your capital gains are taxed at zero. So maybe you can accommodate another $40,000 of gains,
still stay in that low bracket, and pay zero taxes - at least zero federal taxes. You'll
still have to pay state taxes, probably. So just some things that you can use there
to help you. But another piece of advice, Jack from Atlanta, is it's the beginning of
the year, and I would worry more about the diversification. Don't let the tax dog shake
the... tail? Yeah. You always ask me and I always forget.
Don't let the tail wag the dog. Don't let the tax tail wag the
investment dog. (laughs) That sounds weird.
That sounds bad. (laughs) I don't think that's right. Anyway, so it's the beginning of the
year. I would look at, now I did my spreadsheet. I see what the total gain is. I probably would
want to diversify out to have the right portfolio for me now that it sounds like you're transitioning
into an early retirement next year. You want to make sure that you have the right portfolio
put in place. Then you want to tax manage the heck out of that account because stocks
are volatile. This sounds like you're in a brokerage account because you're worried about
capital gains. You could tax loss harvest along the way, and then that would offset
any gain. You have the next 12 months to tax manage the overall account because you're
full gain or loss is not going to be totally calculated until December 31st.
Yeah I think that's exactly right. Investments are more important, the right investments
for you are more important than the taxes. You always consider taxes, but that's not
really the first thing you look at.