The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Nate_D on April 30, 2013, 11:03:01 PM
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Hi all,
I'm a bit of an investing neophyte, so please go easy on me if my terminology is off or if I've got some crackpot ideas I need to be disabused of!
A few years ago, I was fortunate to age into a trust that my grandparents created for me. As a result, I now have about $220,000 in a managed account (this was how my grandparents chose to invest the funds in the trust). This is not a mutual fund, but a collection of equities (mostly US common stock) managed by an investment manager.
As you can imagine, the fees associated with this type of account are somewhat hefty. I'm charged a quarterly management fee of a little over $800 at this point, or around 1.5% annually. I know I should be striving for lower fees, but I'm unsure of the proper mechanics for doing this. Since this is a taxable account, I'm worried I'll get nailed with a huge tax bill if I liquidate and move the funds into something more reasonable like an index fund. I'm showing an unrealized gain of over $93,000 on the account. At the very least, won't I get stuck paying long term capital gains on that amount? At 15%, that's almost $14,000 in taxes.
I realize that, all things considered, this is a relatively good problem to have, but adding $14,000 in taxes to my 2013 budget makes me a little queasy. Do I just suck it up and count on the fact that the lower fees of an index fund will more than make up for the taxes, or is there another way?
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You should be able to transfer the shares to a new discount broker like a Vanguard or Fidelity without incurring a taxable event, as long as they stay in the same name. Trusts can be tricky, and it's important to accomplish the transfer correctly. Then if you are unhappy with the performance, you can sell the shares in small amounts over time, minimizing the taxes.
If you are not familiar with investing, study the performance of these investments after fees versus the performance of the funds you are thinking of buying. If the investments trail the indexes significantly. then moving the money immediately to avoid the management fee makes sense.
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Thanks for the info, guys. I realize that I could transfer the account's assets to another brokerage like Vanguard without having to sell anything, but then I'd still be left with a mess of about 75 different stocks to deal with. My main objective is to move to a low-cost index fund so that nothing needs to be actively managed...either by me or an account manager.
ShortInSeattle, I found your post on Bogleheads, and the impression I got is that the best I can do is time my share sales to incur long term rather than short term capital gains taxes, and to spread the sales out over time to avoid having to pay all the taxes in a single year. Am I understanding correctly? Is there any particular strategy you plan to follow?