How to record Vanguard mutual funds to ETF conversion

dhammabob

BE WARNED, the process of converting a Vanguard mutual fund account type to brokerage and from mutual funds to equivalent ETFs has been a nightmare in Quicken trying to sort out the cost basis if you wish to retain lots purchase/cost basis history.

While it is not a taxable event in a taxable account to convert a mutual fund, e.g. VTSAX, into its equivalent ETF , e.g., VTI, figuring out how to track it in Quicken is confounding at best and damn near impossible at its worst. Vanguard recorded the transactions as 2 adjustments, one to remove the current number of VTSAX shares and the other to add the newly purchased VTI shares with no cost basis information. For those of you who have done this, how did you resolve this in Quicken?

Thanks for your help in advance.

P/S: I didn't even bother to call Quicken Support as this would be way over their heads, so I am asking the community at large which generally gives much better answers than support.

Mark1104

as I've asked in other posts, unless you have lots from prior to 2011, why do you care? Vanguard's records remain the "system of record" and is what is reported to the IRS in the event of a sale.  Why maintain the COST BASIS and CAPITAL GAINS in two places? I stopped trying to maintain that level of detail years ago and have had no issues.

Vanguard has its "mintax" approach, so it is always easy to determine which lots to sell

And if this is a discussion about IRA accounts, the cost basis of individual holdings doesn't matter either 

is maintaining cost basis in Quicken an old habit for us pre-2011 users???? just curious and just my two cents. 

dhammabob

@Mark1104 yes you did ask and I thought I answered, I have lots as far back as 2007 in a taxable account that I want to track. Maintaining it in Quicken is an easier way for me to decide which lots to sell come time and also allows me to track realized gains and losses in one central place daily. It's also an easy way for me to see the overall gain/losses for each mutual fund.

Not sure what you mean by mintax approach? I never realized this until this week but it's super important that people correctly select the cost basis type as early as possible because if it defaults to average cost, then Vanguard won't track the individual lots information. Many people, including me, didn't know this because I was delaying the selection because I needed to finalize which method to report on my taxes and that's a whole headache in itself.

jacobs

All my Vanguard mutual funds -- the heart of my investments -- are set up for Average Cost. I didn't realize at the time that this might not be best for tax purposes, but I don't believe I can change it now unfortunately. Quicken Mac doesn't even support Average Cost for calculating gains (which I find infuriating!) -- so I'm forced to rely on what Vanguard tracks and reports, even though I have tons of detail in Quicken. So for me, moving a mutual fund to its ETF equivalent could be done without recording the detail cost basis in Quicken.

But I understand why you'd want to do this, @Mark1104, and I don't think there's any easy way to do it. If you've got mutual funds with 15 years of dividends and capital gains transactions, let alone any buy and sell transactions, there's no easy way to move the cost basis to the ETF in Quicken that I'm aware of.

dhammabob

@jacobs I hear you! So I have spent a couple of hours this week with the Vanguard investment team getting into the bowels of how the backend tracks cost basis, e.g., how they track the VSTAX to VTI adjustment transactions in the backend and related cost basis, I should have more details next week. Bit of good news for you, they were able to submit a request to the cost basis team to re-add the individual lot details into the cost basis screen even though my account defaulted to average cost. You can try and ask for the same thing and they might be able to help you out.

Yeah, I always knew that Quicken, especially Mac version, isn't full-feature in some ways, so essentially we are paying for a half-baked product. I am way past trying to find an easy way to do this in Quicken, I am simply trying to find a sensible workaround but coming up a bit empty-handed so far.

Mark1104

@dhammabob - at Vanguard, you can designate securities in your non-qual accounts as 'min-tax' so when you sell some of your holdings within a security,  Vanguard will automatically choose the lots that have the least capital gain impact to sell... 

dhammabob

@Mark1104 good to know, thanks.

jacobs

Mark1104 said:

@dhammabob - at Vanguard, you can designate securities in your non-qual accounts as 'min-tax' so when you sell some of your holdings within a security,  Vanguard will automatically choose the lots that have the least capital gain impact to sell... 

@Mark1104  I'm just curious about this strategy... While it helps you in the short run, doesn't it just delay the capital gains tax on the holdings which have the gains until later? (And if we assume capital gains taxes will likely be higher in the future than they are today, it makes deferring taxes on gains a short-term win with a bigger back-end payout.

I can see this strategy making sense if you have very high earnings now, and expect your income to drop significantly when you're retired. But once you're of age to be taking RMDs on your retirement accounts, if you're also incurring large capital gains on selling investments where all that remains are lots with very large gains, you could be setting up for large taxes (plus the impact that the higher income has on your Medicare premiums). 

Or am I missing something? 

Mark1104

if you die, the cost basis is "stepped up' and the capital gains is ZERO!  That is part of what you are missing!

Rather die with large unrealized capital gains than small unrealized capital gains as the implication is otherwise, the lots with the larger unrealized gain was sold before your died (and you paid real cash money to the IRS in the form of capital gains tax) when that cash would NEVER be paid by your heirs because they inherit at the market value and not your cost basis. 

for us living, the capital gains tax is quite flat: 15% if your ORDINARY income is between $80,000 and $497,000,  so if in retirement your ordinary income goes down, the capital gains will remain at 15% (and depending on your specific post working career income, could be 10% or even zero).  You'd have to have an incredibly large IRA to create an RMD that drives your income to higher than $500,000 (capital gains is 20%) and in that case, suggest finding a financial planner asap! (just a $200,000 RMD at age 72 implies a TRAD IRA with a value of $5.5mm!!)

If you have multiple lots of the same security, and you decide to sell SOME of your holdings in that security, why not sell the lots that yield the lowest capital gains (and that includes the losses) so that the lots with the highest imbedded gain is deferred into the future? Why lay out cash now that you may not have to later (esp. if you die!)

as far as the Medicare tax (IMRAA), that is capped at around $400 per month per person BEYOND the Standard Medicare premium, which in my mind is just an additional capital gains tax and it is REGRESSIVE. The more capital gains I have, the less the IMRAA tax is as a percent of my gains.  Having the IRS as a 'partner' is a good problem to have as it is a reflection of a great working and investing career.

worrying  about the 'what ifs' - what if the capital gains rate goes up? what if the IRS taxes capital gains step-up at death, what if IMRAA changes, what if the RMD is deferred to even later than 72 years old, etc - may cause a good decision to never be made.    I make decisions on the laws as they currently exist. 

this is a complex subject, but if you google any financial website, I would be shocked to find one that suggests selling the lots with high unrealized gains prior to lots with small unrealized gains (and that would include lots with losses). Please post the link if you find one as I'd be intrigued to the unusual circumstance that makes it a good idea.

jacobs

@Mark1104  Thanks! I think the only difference in my thinking is that I'm not planning for or concerned about what we pass on when we die. I hope to use up most of our money traveling and enjoying life in retirement, if health allows! (And if not, healthcare will suck up the rest!).

I also mildly disagree with your statement about making decisions on the laws as they currently exist. Of course, no one knows what the future will bring, but I think almost every financial planner today would tell you to expect tax rates, in general, to be higher in the future and to do your planning with that in mind. Common sense tells us that with lower taxes enacted several years ago, and higher spending even before the surge of spending during the pandemic, taxes will need to be higher in the future. Now, will capital gains taxes, specifically, be higher? I'd say it seems likely, because it's currently a tex rate which most benefits the wealthy, but of course no one knows what will emerge from the wacky world of late-night, backroom wheeling and dealing in Washington. 

That all said, I understand your points about selling shares with the minimum gains first to keep current taxes as low as possible. Thanks for replying. 

Mark1104

@jacobs - current tax law TEMPORARILY reduces tax rates from their 2017 marginal rates and will go back to those levels in 2026 (unless Congress does something between now and then).  So I do plan on tax rates going up beginning in 2026, because that is the law.  otherwise, it's all 'what if' and 'worry',  

dhammabob

@Mark1104 @jacobs FYI the mintax feature is only available for Vanguard's managed accounts, mine are all self-managed.

jacobs

@dhammabob Ah, thanks. I didn't think I had ever seen that option, but I figured I must have just missed it. Good to know it's not available to me currently.

th08fiore

I'm using Quicken for Windows but hopefully the tool is in there for the MAC as well. Under Enter Transaction there is a type of Mutual Fund Conversion. It did the job for me and looks like it changed the previous transactions.

jacobs

th08fiore said:

I'm using Quicken for Windows but hopefully the tool is in there for the MAC as well. Under Enter Transaction there is a type of Mutual Fund Conversion. It did the job for me and looks like it changed the previous transactions.

Unfortunately, Quicken Mac does not have a transaction type for Mutual Fund Conversion.