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@Junkster: in my experience, Schwab will automatically debit the cash balance in our joint brokerage account to cover an Investor Checking account shortfall. It just happened recently when I had to pay taxes and estimated taxes. It’s not necessary to transfer from the brokerage account in anticipation of writing a check or scheduling an ACH transfer. I’m not sure what they do if there’s no cash to move quickly.
as of today's close the purchased lots information (purchase date and price (cost basis)) seems to have been fixed. But please check your accounts if that information is important to you.
They are not going to fix the dividend reinvestment selection that did not carryover from TD. So, you have to manually change for each position to your desired choice.
I will re-read the various transition issues I posted here and will post the status of resolution of those if they are to be fixed by Schwab. If I already said that a specific issue has to be fixed by the customer themselves, I do not plan to post about those issues again, unless I encounter a new problem.
Per IRS requirements, Schwab defaults to the "On" setting for amortizing and accreting the cost basis on your fixed income positions.
Amortization applies to bonds bought at a premium (above par). The value of the bond is gradually adjusted downwards to par over the remaining life of the security.
Discount is accrued on bonds bought or issued at a discount (below par). The value of the bond is gradually adjusted upwards to par over the remaining life of the security."
I wanted to change the Schwab default so I do not include accretion until the bonds mature but that also required submitting a paper form (no electronic signature form).
The default setting in my IRAs is "OFF" and in my taxable account it is "ON." Strange.
There's no cost basis accounting in tax-sheltered vehicles.
The field is to whether to currently take into account Amortization / Accretion and also whether to pick constant yield method or straight line method, which drive adjusted purchase price, which likely has no relevance for retirement accounts. “On” and “Off” have the connotation of an election at Schwab. Why even have the field in retirement accounts. Same for the lot methods for stocks and mutual funds.
Interestingly, I use the lot methods in IRAs to track my trading behavior.
There's no cost basis accounting in tax-sheltered vehicles.
You might find the following relevant:
I have a long standing mutual fund holding in my IRA but in March I had some idle cash in the account and I added to that mutual fund, which is subject to a 2% redemption fees if sold within 90 days of purchase.
The fund prospectus says, "In determining whether a redemption fee is applicable to a particular redemption, it is assumed that the redemption is first of shares acquired pursuant to the reinvestment of dividends and capital gains distributions, and next of other shares held by the shareholder for the longest period of time."
I tried to sell shares I bought a few years ago.
Schwab Rep and supervisor are adamant that cost basis method in IRA controls for purpose of applying the 2% redemption fees. They say the March purchase taints the sale because average cost basis is used in that account and thus they have to apply the 2% redemption fees. (The strange part is, their reps are not trained and their system are not designed for their own literature, which correctly says, "Assets using the Average Cost Method will default to the FIFO Lot Selection Method when disposed." We already know the brokerages thoroughly confuse the distinction between cost method and lot selection. If they actually applied the FIFO lot selection as their literature says, there is no redemption fees in my case.)
The above issue is also there at Fidelity. We discussed this in the Fidelity Community in the past year - I go there very rarely these days but anyone active there probably can pull up that discussion. My memory is not good re Fidelity's exact process but they might even just apply average cost basis method (means test the last purchased shares to see if there is a taint) in applying the fund level redemption fees, not withstanding what the customer's selection is. Posters should pay attention to what Fidelity does or read that discussion in Fidelity Community where Fidelity employees participated.
It is interesting how these brokerages' own short term redemption fees ($50) is applied on a FIFO basis but these brokerages use some other method for purposes of applying the fund's redemption fees, irrespective of what the prospectus says. I guess it is easy for them to have a simpler punitive system, rather than customize for each fund. Most customers do not select a cost (or lot) method in retirement accounts and so they are defaulted to a average method. Something to be aware of.
While it is likely differences among funds exist, I have only seen funds apply FIFO.
the distinction between cost method and lot selection
Exactly. Further, each - cost basis and lot selection - is a distinct legal (accounting) fiction. In reality shares owned are nothing but fungible writings in an electronic ledger. For the tax purpose of computing gain, the IRS offers two different methods of ascribing cost - average and actual. If there is no gain to be calculated for taxes (as is the case for tax-sheltered accounts), then there is no cost basis.
That doesn't preclude investors from thinking about how much money they made in buying and selling shares, regardless of whether they are taxed on cap gains. To facilitate this, brokerages often provide their own tax-sheltered "cost basis" calculations for investors to track gains in their minds. Though not on their 1040s.
To illustrate this dichotomy between tax purposes and investor perceptions, consider income averaging. Say you make $100K in a single year, but the IRS lets you average that income over five years. From your perspective, you made $100K up front; you've got $100K in your pocket. From the IRS perspective, you made $20K that year, and you'll make $20K over each of the next four years. Which is real, $100K all at once or $20K each of five years? You may say the former, since you've got $100K now, but if you're talking taxes, the $20K/year is the "real" interpretation.
Likewise, funds and brokerages have their own rules for calculating holding periods. These rules need not be consistent with each other or with tax rules.
Typically, funds (a) waive short term redemption fees on shares purchased via div reinvestment (including cap gain divs), and (b) apply the redemption fee (e.g. 2%) only to those shares sold within the short-term period as opposed to all shares sold in the transaction.
In contrast to (b), brokerages typically charge a flat short term trading fee if any of the shares sold are subject to the brokerage's short term fee. Fidelity, at least, explicitly waives fees on reinvested divs:
[Fidelity's short-term trading fee] does not apply to ... shares purchased through dividend reinvestment.
Finally, to illustrate the difference that ordering rules make, consider the following transactions:
Jan 4 - purchase 100 shares Nov 25 - purchase 100 shares Dec 28 - div reinvest - purchase 10 shares Jan 16 (next year) - sell 110 shares
On a strict FIFO basis, 10 shares (purchased Nov 25) will have been sold within 60 days of purchase. If for the purpose of calculating a short-term redemption fee, reinvested divs are deemed to have been sold first, then the 110 shares sold will be the 10 purchased on Jan 16 and the 100 purchased on Jan 4. No fee will be assessed (assuming no fee is charged for redeeming div reinvestment shares).
Comments
as of today's close the purchased lots information (purchase date and price (cost basis)) seems to have been fixed. But please check your accounts if that information is important to you.
They are not going to fix the dividend reinvestment selection that did not carryover from TD. So, you have to manually change for each position to your desired choice.
I will re-read the various transition issues I posted here and will post the status of resolution of those if they are to be fixed by Schwab. If I already said that a specific issue has to be fixed by the customer themselves, I do not plan to post about those issues again, unless I encounter a new problem.
Interestingly, I use the lot methods in IRAs to track my trading behavior.
I have a long standing mutual fund holding in my IRA but in March I had some idle cash in the account and I added to that mutual fund, which is subject to a 2% redemption fees if sold within 90 days of purchase.
The fund prospectus says, "In determining whether a redemption fee is applicable to a particular redemption, it is assumed that the redemption is first of shares acquired pursuant to the reinvestment of dividends and capital gains distributions, and next of other shares held by the shareholder for the longest period of time."
I tried to sell shares I bought a few years ago.
Schwab Rep and supervisor are adamant that cost basis method in IRA controls for purpose of applying the 2% redemption fees. They say the March purchase taints the sale because average cost basis is used in that account and thus they have to apply the 2% redemption fees. (The strange part is, their reps are not trained and their system are not designed for their own literature, which correctly says, "Assets using the Average Cost Method will default to the FIFO Lot Selection Method when disposed." We already know the brokerages thoroughly confuse the distinction between cost method and lot selection. If they actually applied the FIFO lot selection as their literature says, there is no redemption fees in my case.)
The above issue is also there at Fidelity. We discussed this in the Fidelity Community in the past year - I go there very rarely these days but anyone active there probably can pull up that discussion. My memory is not good re Fidelity's exact process but they might even just apply average cost basis method (means test the last purchased shares to see if there is a taint) in applying the fund level redemption fees, not withstanding what the customer's selection is. Posters should pay attention to what Fidelity does or read that discussion in Fidelity Community where Fidelity employees participated.
It is interesting how these brokerages' own short term redemption fees ($50) is applied on a FIFO basis but these brokerages use some other method for purposes of applying the fund's redemption fees, irrespective of what the prospectus says. I guess it is easy for them to have a simpler punitive system, rather than customize for each fund. Most customers do not select a cost (or lot) method in retirement accounts and so they are defaulted to a average method. Something to be aware of.
While it is likely differences among funds exist, I have only seen funds apply FIFO.
Exactly. Further, each - cost basis and lot selection - is a distinct legal (accounting) fiction. In reality shares owned are nothing but fungible writings in an electronic ledger. For the tax purpose of computing gain, the IRS offers two different methods of ascribing cost - average and actual. If there is no gain to be calculated for taxes (as is the case for tax-sheltered accounts), then there is no cost basis.
That doesn't preclude investors from thinking about how much money they made in buying and selling shares, regardless of whether they are taxed on cap gains. To facilitate this, brokerages often provide their own tax-sheltered "cost basis" calculations for investors to track gains in their minds. Though not on their 1040s.
To illustrate this dichotomy between tax purposes and investor perceptions, consider income averaging. Say you make $100K in a single year, but the IRS lets you average that income over five years. From your perspective, you made $100K up front; you've got $100K in your pocket. From the IRS perspective, you made $20K that year, and you'll make $20K over each of the next four years. Which is real, $100K all at once or $20K each of five years? You may say the former, since you've got $100K now, but if you're talking taxes, the $20K/year is the "real" interpretation.
Likewise, funds and brokerages have their own rules for calculating holding periods. These rules need not be consistent with each other or with tax rules.
Typically, funds (a) waive short term redemption fees on shares purchased via div reinvestment (including cap gain divs), and (b) apply the redemption fee (e.g. 2%) only to those shares sold within the short-term period as opposed to all shares sold in the transaction.
In contrast to (b), brokerages typically charge a flat short term trading fee if any of the shares sold are subject to the brokerage's short term fee. Fidelity, at least, explicitly waives fees on reinvested divs: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/Brokerage_Commissions_Fee_Schedule.pdf
Finally, to illustrate the difference that ordering rules make, consider the following transactions:
Jan 4 - purchase 100 shares
Nov 25 - purchase 100 shares
Dec 28 - div reinvest - purchase 10 shares
Jan 16 (next year) - sell 110 shares
On a strict FIFO basis, 10 shares (purchased Nov 25) will have been sold within 60 days of purchase. If for the purpose of calculating a short-term redemption fee, reinvested divs are deemed to have been sold first, then the 110 shares sold will be the 10 purchased on Jan 16 and the 100 purchased on Jan 4. No fee will be assessed (assuming no fee is charged for redeeming div reinvestment shares).