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Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5069  
Subject: Tax managed accounts Date: 11/14/2006 8:40 AM
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I am thinking of opening some mutual funds outside of tax sheltered ones. Gasp.

Has anyone found some good ones? I am thinking some spyders to start out.. but also am concerned about keeping track of original purchase prices. Scottrade does not send me any paperwork on my tax sheltered accounts, so I am thinking of going with another brokerage.

Any suggestions on investments or brokerages?
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Author: TMFDj Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3887 of 5069
Subject: Re: Tax managed accounts Date: 11/14/2006 9:38 AM
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Has anyone found some good ones? I am thinking some spyders to start out.. but also am concerned about keeping track of original purchase prices. Scottrade does not send me any paperwork on my tax sheltered accounts, so I am thinking of going with another brokerage.

The difference between tax-privileged and non-retirement investing is you are relieved from contribution and withdrawal rules, and you don't turn captial gains and dividend income into ordinary income. There is wide agreement among the pros that the preferred strategy is to max your 401(k), max your IRA (including a spousal IRA if eligible), and then to save for long-term financial goals in non-retirement accounts.

I urge investors to treat their investment portfolios as a total portfolio, rather than a collection of mini-portfolios. For example, if the only decent investment in your 401(k)/403(b) plan is an S&P 500 index fund, then invest in that index fund there, and invest in other asset classes or sectors elsewhere.

Your desire to invest with a different brokerage is based on incorrect information. Brokerages comply with different rules for retirement and non-retirement accounts. Before you turn your desire into a decision, I urge you to call Scottrades customer service department and allow one of their reps to explain the reporting rules they will follow for non-retirement accounts.

David Jacobs
TMFDj

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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3888 of 5069
Subject: Re: Tax managed accounts Date: 11/14/2006 10:45 AM
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I am thinking of opening some mutual funds outside of tax sheltered ones. Gasp.

Good move!
You'd be amazed how many people think you can only save for retirement in tax-sheltered accounts. I don't let the government tell me how much I can save, and you shouldn't either.

Suggestion: Do NOT have dividends re-invested to make keeping track of things easier. If you keep the fund for 20 years, do you really want to track down 20 years of quarterly dividend payments to find out your basis? And do you want to have to worry about accounting for the last year differently because it's short-term capital gains from the three dividend payments?

If you meet the minimums, Vanguard is good. Anmd they have the STAR fund until you do meet the minimums.

Schwab tries to compete with Vanguard and has similar funds with slightly lower minimums to get the low-expense deal.
I don't know a lot about other brokerages.

Vickifool

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Author: FoolNBlue Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3895 of 5069
Subject: Re: Tax managed accounts Date: 11/15/2006 7:23 PM
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Suggestion: Do NOT have dividends re-invested to make keeping track of things easier. If you keep the fund for 20 years, do you really want to track down 20 years of quarterly dividend payments to find out your basis? And do you want to have to worry about accounting for the last year differently because it's short-term capital gains from the three dividend payments?

I dissagree, unless you spend the dividends you will have to invest them somewhere and whatever investment vehicle you choose will probably involve tax planning/record keeping. It is not that difficult to keep a spreadsheet with all transactions on it to track cost basis. (I've been doing it for over a decade tracking DRIPS, taxable accounts and even my Roth). The key is to populate the spreadsheet as time goes on; one transaction punched in every three months when you get your statement is a lot less painful than figuring things out using yellowed statements 20 years from now.

FoolNBlue (Reinvesting his dividends and closer to FIRE from doing so)

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3896 of 5069
Subject: Re: Tax managed accounts Date: 11/16/2006 5:49 PM
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Any suggestions on investments or brokerages?

I opened brokerages at both Fidelity and Vanguard to compare them.

IMHO, Fidelity is far better than Vanguard in several areas. For example, if you have made several purchases on different dates and for different NAVs, and then you sell 60% of the position, Vanguard does not allow you to identify lots, and computes your gain on an 'average cost method'. I don't like that. Fidelity lets you identify lots when you sell, which puts you in control of how much gain will be realized, and how much might be short/long-term.

I have also found that Fidelity is more prompt in reporting expected year-end distributions on their website, which makes planning for estimated taxes a bit easier.

I don't buy ETFs, so I'm not sure how Fidelity treats them, but I would imagine they have something similar to the 'lot' identification option.

After 4 years I've decided to move everything to Fidelity--I just sent in my transfer form last week to move all out of Vanguard.

Just MHO,
2old


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Author: jthrelkeld Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3897 of 5069
Subject: Re: Tax managed accounts Date: 11/17/2006 7:06 PM
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Funny, I'm in the process of moving everything from Fidelity over the Vanguard!

Vanguard has lower initial investment minimums in many of the mutual funds types I wanted to invest in. Since our retirement money is spread over many different accounts, the high minimums at Fidelity made it impossible to construct the portfolio/allocation I wanted.

But I mostly moved because Fidelity's customer service and reliability has plummeted in the past few years. They've made major screwups -- like messing up Roth IRA contributions in April...they didn't go through, so there went that opportunity to invest for that tax year. Or they screwed up accounts transfer so a $5.40 divident was left in the account, requiring multiple letters to get moved over.

I finally gave up on Fidelity. And I originally moved to them because their customer service was excellent.

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Author: jthrelkeld Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3898 of 5069
Subject: Re: Tax managed accounts Date: 11/17/2006 7:07 PM
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Pardon the typos. It's been a long week. :)

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3899 of 5069
Subject: Re: Tax managed accounts Date: 11/18/2006 1:38 PM
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I finally gave up on Fidelity. And I originally moved to them because their customer service was excellent.

I have always found their customer service to be excellent, and I've never had a problem with any transactions I've done with them. I also like the fact that when I do call, I can easily get a live person to speak with, who, in my experience, is always knowledgeable and very helpful.

I have heard horror stories about Vanguard's customer service as well. You haven't yet had an account with Vanguard, so you really can't judge what you will think until you do so. I've held an account there for over 4 years. I don't like at all how they handle their brokerage accounts separately from their own fund accounts--it's a pain. Also, as stated before, I think their 'average cost method' is the worst way to report gains, which forces me to track every transaction myself to ID lots, etc.

That said, each individual's experience will differ, and I believe it's up to each individual to choose a brokerage based on how he/she intends to use the account, how much work he/she is willing to put in tracking trades, etc.

The OP wanted to know which brokerage he could use that would make it easier to track his trades--IMO, that's Fidelity.

2old


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Author: CheersSRX One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3900 of 5069
Subject: Re: Tax managed accounts Date: 11/18/2006 2:28 PM
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I concur with 2old. I've been with Fidelity for about 20 years, and I cannot imagine another company providing superior service. As noted, you can get a live person at any time, day or night. And that person is highly knowledgeable. If they do not have the answer, they have virtually instant access to a real expert.

One anecdote... When another brokerage firm charged me to transfer assets to Fidelity, I called Fidelity and let them know. I'm not sure why, it wasn't Fidelity's concern. But on the spot, they said that they would make up for that charge, and so they did. They deposited that amount into my account. I can't recall how much, but I think it was at least $50.

Their website is excellent, their statements are understandable, yada, yada, yada. I could not recommend them highly enough.

Cheers

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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3902 of 5069
Subject: Re: Tax managed accounts Date: 11/20/2006 11:12 AM
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I finally gave up on Fidelity. And I originally moved to them because their customer service was excellent.

Please write them a letter and tell them why you are moving. It might improve things over-all for everybody. Heck, copy Vanguard so they don't make the same mistake!

Vickifool

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3903 of 5069
Subject: Re: Tax managed accounts Date: 11/20/2006 5:10 PM
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For example, if you have made several purchases on different dates and for different NAVs, and then you sell 60% of the position, Vanguard does not allow you to identify lots, and computes your gain on an 'average cost method'. I don't like that. Fidelity lets you identify lots when you sell, which puts you in control of how much gain will be realized, and how much might be short/long-term.

I don't think it matters what your brokerage does as far as selling lots, it's how you want it calculated and reported to the IRS. It may be a convenience to have Fidelity do the calculations for you, but I always do them myself anyway so it doesn't really matter what the brokerage reports.

-murray


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Author: FIgirl Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3904 of 5069
Subject: Re: Tax managed accounts Date: 11/20/2006 6:03 PM
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Can anyone recommend a book that can introduce the basics of investing in a taxable account?

I will start doing it next year, and I am totally unfamiliar with the tax issues - this is the first I've heard of needing to track lots, etc.

Thanks!

Figirl



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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3905 of 5069
Subject: Re: Tax managed accounts Date: 11/20/2006 6:52 PM
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Can anyone recommend a book that can introduce the basics of investing in a taxable account?

I will start doing it next year, and I am totally unfamiliar with the tax issues - this is the first I've heard of needing to track lots, etc.


I don't know about a book, but here are some basics.

When you collect dividends, they come in two categories and it's mostly up to you to keep track: dividends from shares that you will hold a total of at least six months (contiguously, and it doesn't matter whether the bulk of it comes before or after the dividend payment - or even if you've already sold the shares before actually receiving the payment), which are taxed at the same rate as long-term capital gains, and dividends from shares you sell after a holding period of less than six months (taxed as ordinary income).

For reference, long-term capital gains are taxed at a lower rate than ordinary income.

Also when you sell shares, they come in two categories: shares you have held at least a full year (365 days - you can sell on the 366th day, not counting Feb 29), which will produce long-term capital gains and losses, and shares you have NOT held that long, which produce short-term capital gains and losses (taxed more or less as ordinary income).

On each side of that magic one-year threshhold on any given share, you don't absolutely have to track lots. Instead you can use an average-cost basis. That is, if you buy 1000 shares for $10 each, and then later buy another 1000 shares of the same thing for $20 each, your *average* cost per share is $15. You can sell 1500 shares with "various" purchase dates and a basis of $15*1500 (I'll let you do the arithmetic). You can even do the sale in several parts; it's the total that matters.

Yes, reinvesting dividends DOES mean you have taxable income immediately and then another tiny purchase at yet another price.

Now all of that is of some limited assistance to the buy-and-hold-more-or-less-forever investor. Which is a legitimate approach (I recommend it more for mutual funds than for stocks though).

But if you're a trader, likely to sell shares and use the proceeds to buy other investments on an ongoing basis, you really do need to track each lot for as long as you hold it. (Which may well be less time than the buy-and-hold-forever investor is tracking a lot because of the one-year and six-month threshholds.)

Fortunately...

Quicken and MS Money can download transactions from quite a number of brokerages and mutual fund companies. They make it pretty easy. Other comparable applications, such as gnuCash, may have similar capabilities.

(Unfortunately... they don't necessarily handle everything correctly. Quicken users have been complaining about the program's poor handling of buyouts and mergers since at least 1995. Such things are going to be an issue, at some point, for long-term holders of individual stocks. I am less familiar with the other programs I mentioned.)

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Author: FIgirl Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3906 of 5069
Subject: Re: Tax managed accounts Date: 11/20/2006 7:33 PM
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Warrl, thanks for the info. I understood mostly everything excelt this:

Yes, reinvesting dividends DOES mean you have taxable income immediately and then another tiny purchase at yet another price.

So how does this affect me if I am a LTBH investor? The purchase price wouldn't need to be tracked as long as I did average cost basis, right?

As for the dividend, since I'd plan to hold, it would be taxed at the long-term capital gains rate, right? BUT:
-what if I get the dividend after less than six months of holding the investment? How can I prove that I'm going to hold it longer?
-Do I need to keep track of my dividends? (I think so, based on the thread). Or will the brokerage house do that for me?


(Am I even asking the right questions?)

Thanks,
FIgirl


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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3907 of 5069
Subject: Re: Tax managed accounts Date: 11/20/2006 7:51 PM
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Yes, reinvesting dividends DOES mean you have taxable income immediately and then another tiny purchase at yet another price.

So how does this affect me if I am a LTBH investor? The purchase price wouldn't need to be tracked as long as I did average cost basis, right?


You wouldn't if you're extremely confident that you will hold the shares (the ones you buy with reinvested dividends) for more than a year.


As for the dividend, since I'd plan to hold, it would be taxed at the long-term capital gains rate, right? BUT:
-what if I get the dividend after less than six months of holding the investment? How can I prove that I'm going to hold it longer?
-Do I need to keep track of my dividends? (I think so, based on the thread). Or will the brokerage house do that for me?


How the dividend itself is taxed is based on your holding of the share that *pays* the dividend - not of the share you buy with it.

If you've attended to your paperwork with the brokerage, they won't withhold any taxes from the dividend (unless you ask them to). So you don't need to actually deal with tax issues until your next regular filing. (Thinking ahead about how to deal with them when the time comes, is a good move of course.)

At THAT point, if you've held the share (the one that you had before collecting the dividend, and that paid the dividend) at least six months, you are obviously in the clear. If not (but you still hold the stock)... you don't normally have to prove intent. You just actually have to hold the stock for the remainder of the six months, or longer. If not, then you'll need to make appropriate adjustments on your next quarterly return (if you haven't already filed the 4th-quarter return, and are filing quarterly) or file an amendment to the annual return (if you've already filed it).

But what does it take to get into this situation?

(1) The dividend must be officially paid not later than Dec 31, which typically means that its ex-dividend date (a date on which you MUST HAVE held the stock, or you wouldn't be collecting the dividend) is at least three weeks and often six weeks earlier.

(2) You have until April 15 to file. So you already know what happened in the first three months of the year.

Right there we have already covered four months and change out of a six-month threshhold. There are only about 8 weeks of the year, roughly October and November, when you could acquire stock, THINK you'll hold it for at least six months, and then NOT DO SO and mess up your tax filings bad enough to mention. (And then only to the extent of the DIFFERENCE in tax on the DIVIDEND.)

Special note regarding all of the above and people who are non-citizens or non-residents of the US: all bets are off, it very well could be totally wrong, all I know about the US tax rules for you folks is that they are even weirder and stupider than the ones we citizen-residents have to deal with.

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Author: kaudrey Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3908 of 5069
Subject: Re: Tax managed accounts Date: 11/21/2006 7:18 AM
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So how does this affect me if I am a LTBH investor? The purchase price wouldn't need to be tracked as long as I did average cost basis, right?

------

FIGirl,

I am basically a LTBH investor, but on the few occasions I have sold stocks where I have reinvested dividends, Schwab has given me all the information I needed to do my taxes.

I don't have to keep track of lots or when the dividends occur or anything. I guess if I wanted to pick specific lots I might have to do that myself, but I just use average cost. That's probably the difference.

Karen



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Author: FIgirl Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3909 of 5069
Subject: Re: Tax managed accounts Date: 11/22/2006 2:06 PM
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Thanks warrl and Karen!

FIgirl

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3910 of 5069
Subject: Re: Tax managed accounts Date: 11/23/2006 9:39 PM
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...it's how you want it calculated and reported to the IRS. It may be a convenience to have Fidelity do the calculations for you, but I always do them myself anyway...

And I also do them myself, but the OP said:

"...but also am concerned about keeping track of original purchase prices."

which implied to me that he wasn't sure about doing them himself.

2old


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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3918 of 5069
Subject: Re: Tax managed accounts Date: 11/26/2006 2:10 PM
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Can anyone recommend a book that can introduce the basics of investing in a taxable account?

Here are the IRS instructions for Schedule D.
http://www.irs.gov/pub/irs-pdf/i1040sd.pdf

On-line, you can check out Fairmark. (I'm not sure all the pages have been updated to reflect that qualified dividends are now taxed at the same rates as capital gains.)
http://fairmark.com/capgain/
http://fairmark.com/mutual/index.htm

The Tax board is good at answering questions.
http://boards.fool.com/Messages.asp?bid=100155

Basically, you need some way (a spreadsheet has advantages) of keeping track of stock and mutual funds. When you bought it, how much you paid, when you sold. I put in the number of shares, because we also track splits in case we sell only part of a lot. If you re-invest dividends, you need to track that also, exactly the same as if it was a purchase.

With mutual funds, you can choose to use an average cost basis if you want to.

I'm sorry that I can't recommend an actual book. I like those, too, but taxes change quickly and everything I read starting out is out of date.

Vickifool

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Author: FIgirl Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3920 of 5069
Subject: Re: Tax managed accounts Date: 11/26/2006 7:56 PM
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Thanks, Vickifool

FIgirl

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