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This election is how you want your broker to report your cost basis for the shares you sold in the current year.
Basically you can assume you sold the oldest shares and the costs is what you paid for them. (FIFO)
Or you can sell the newest shares. (LILO)
Or you can take the total cost you paid over the years for all the shares you currently have (before the sale) and divide by the same total of shares to get an average cost per share.
I sent a message to Vanguard where our account is. I expect them to come up with the answer I need. I have all after tax money not characterized as retirement money in two mutual funds. Both balanced and are composed of both bonds and equities.
i am not sure of your question ? but if it is how to sell specific lots :
Treasury regulations section 1.1012-1(c)(1) permits taxpayers to use specific identification if they can make "adequate identification" of the shares sold. Otherwise, they are required to use FIFO, or, for mutual funds, average basis.
At Vanguard
If you sell covered shares of a mutual fund at Vanguard (shares purchased in 2012 or later), and you have chosen specific ID as your accounting method, then you will be given a list of lots at the time you place the request to sell, and you can fill in this list. If you have non-covered shares, there will be only one lot listed (even if you purchased multiple lots), and you will have to identify the shares in a secure Email. If you write a letter to Vanguard to make the sale, you also need to identify the shares in your letter.
For Vanguard Brokerage Services, you will choose an accounting method for each stock or ETF you hold. If you choose Specific ID, you will have to indicate which lots are included in your sale order when you place the order; you may change this before the settlement date. You may also use a method such as HIFO (highest-in, first-out); Vanguard will automatically assign shares to your sale order according to the rules.
Vanguard requests that you include the following information (quoted from a Vanguard form letter):
Your name.
Your address.
The last four digits of your Social Security number.
The Vanguard(R) fund and account number from which you're redeeming or exchanging shares.
The share amount to be redeemed or exchanged.
Whether the shares were redeemed or exchanged.
The specific date(s) on which the shares were originally purchased.
The number of shares purchased on each date.
The net asset value (NAV) on the date the shares were purchased.
If you sell shares online, send a secure Email on the same day with this information; if you sell by mail, include this information in your letter.
i am not sure of your question ? but if it is how to sell specific lots :
Treasury regulations section 1.1012-1(c)(1) permits taxpayers to use specific identification if they can make "adequate identification" of the shares sold. Otherwise, they are required to use FIFO, or, for mutual funds, average basis.
At Vanguard
If you sell covered shares of a mutual fund at Vanguard (shares purchased in 2012 or later), and you have chosen specific ID as your accounting method, then you will be given a list of lots at the time you place the request to sell, and you can fill in this list. If you have non-covered shares, there will be only one lot listed (even if you purchased multiple lots), and you will have to identify the shares in a secure Email. If you write a letter to Vanguard to make the sale, you also need to identify the shares in your letter.
For Vanguard Brokerage Services, you will choose an accounting method for each stock or ETF you hold. If you choose Specific ID, you will have to indicate which lots are included in your sale order when you place the order; you may change this before the settlement date. You may also use a method such as HIFO (highest-in, first-out); Vanguard will automatically assign shares to your sale order according to the rules.
Vanguard requests that you include the following information (quoted from a Vanguard form letter):
Your name.
Your address.
The last four digits of your Social Security number.
The Vanguard(R) fund and account number from which you're redeeming or exchanging shares.
The share amount to be redeemed or exchanged.
Whether the shares were redeemed or exchanged.
The specific date(s) on which the shares were originally purchased.
The number of shares purchased on each date.
The net asset value (NAV) on the date the shares were purchased.
If you sell shares online, send a secure Email on the same day with this information; if you sell by mail, include this information in your letter.
Thank you MJ the link did answer the questions I had regarding our Vanguard money. It is a small percentage of our portfolio but will grow in the future to be a bigger and possibly more than half of it. We never had much to invest that way and what we did invest in was the old fashioned conservative way. Buying and selling property and owning a company in an industry that is slowly returning.
So I understand how the brokerage account will work for us somewhat. It will require some calculating and tax preparation as we figure out the spending scheme we use. I think we will probably consult with Vanguard when we make the large deposit of the sale of the house. That money will have a specific goal and rule for us.
just be aware that while holding equities in a brokerage account (funds or stocks ) sounds like a good idea since you can write off losses and get special capital gains rates , studies show it is not a good idea if you can avoid it ..
unless you are sure you are in the zero capital gains bracket as little as a 1% distribution wipes out any tax savings over the years and it just gets worse .
it is best to keep the interest bearing stuff in the brokerage account since interest is low and to keep the equities in a deferred account .
it isn't easy to do this a lot of times just because of how things work out .
because of all our real estate sales about 1/2 our money is outside of retirement accounts .
so i squeezed as much in the equities as i could in the retirement accounts and then spilled over to the brokerage account.
Definitely something we will be consulting professionals with when that time comes. We might use these current accounts as our 2nd and 3rd year buckets. The sale of our house to act as a safety net in the need of LTC will require us to put the money in a special way so that withdrawals are not subject to large tax bites. With the amount we will have invested with Vanguard we will have access to people in the company that can guide us. And of course we will also double check the recommendations and the reasons they are recommended.
I was curious so I checked my TIAA accounts. For mutual funds my cost basis accounting is average. I suspect this was a default choice. For my brokerage accounts, the cost basis is FIFO. I vaguely remember making that choice.
it is best to keep the interest bearing stuff in the brokerage account since interest is low and to keep the equities in a deferred account .
it isn't easy to do this a lot of times just because of how things work out .
.......
I understand the concept of keeping high return assets in qualified accounts. I have not found that feasible and certainly for me that is not "how things work out".
I have stocks that I purchased decades before the start of 401k accounts. I have always reinvested the dividends. In addition they have gone through numerous splits and have grown to many times my initial investment. My qualified accounts are 401k/403b rollovers. They were always about 60:40 and I have tried to keep them that way. One account is with Fidelity. It is currently about 70:30. I rebalance about once a year trying to keep the equities for getting too far out of hand. My other account is with TIAA. It is a managed account pegged at a fixed 60:40. My non-qualified assets sat in CDs from 2006 to 2009. I was either lazy or worried but mostly lucky they did not get hit with the recession. Towards the end of 2009, I transferred those assets to self directed mutual funds with TIAA. At the time I felt like going with a high stock allocation but my TIAA advisor recommended caution and we went with 50:50. Of course over the past 8 years the stock portion keeps growing. I have spent down some of the stock mutual funds. I have also transferred some stock funds to bond funds, which incurs taxes. I am still over 50% in stock funds.
In any case I see no trend for things to work out so non qualified accounts have low equity allocations. It can take decades of planning to make that work.
I was curious so I checked my TIAA accounts. For mutual funds my cost basis accounting is average. I suspect this was a default choice. For my brokerage accounts, the cost basis is FIFO. I vaguely remember making that choice.
You will probably get a choice of method each time you sell as long as you have not used the average cost.
The specific identification, LIFO, FIFO all use the actual cost you paid. You pick one method each time you sell depending on your total tax situation.
The average takes all of your costs and comes up with an average per share. That is why I am guessing that you can not change it once you pick it.
jrkliny With you and mathjak chiming in here I am sure many of us just got a real education in finance. I for one am very grateful. It completely means the sale of my primary residence will need special attention. Between the two of us DW and I will hammer out the details. I'm sure that Vanguard and us will come up with the right combination of investments that will not cause us to be upside down and on the brink. Thank you both.
It sounds like I-bonds are more like the inflation adjusted CD alternative I had in mind, rather than TIPS. The funds would have to come out of the IRA (or out of current income) so they could be purchased from Treasury Direct, but it looks like taxes on the interest could be deferred until the funds were used.
I also appreciate the idea that a cash bucket is mostly a matter of mental accounting and establishing a reasonable asset allocation and rebalancing by withdrawals would accomplish the same thing in terms of not withdrawing equity during a down market.
And thank you MathJak for the reminder that strategy must change according to the state of the market. By the time I retire in 10 years or so the bond markets in particular will probably look much different (hopefully better).
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