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.