Author Topic: Am I paying too much in fees?  (Read 819 times)

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 86
Am I paying too much in fees?
« on: February 05, 2019, 03:44:20 AM »
Hi guys,

I inherited a Merril Edge account invested in OTCAX. It seems like it slightly outperforms VTSAX on average, but has an expense ratio of 1.13. There are also other fees listed and I am not sure what I am paying.

CHART OF FEES (Not sure if all or some are applicable to me)

Detail                         OTCAX   
Expense Ratio               1.13%   
Advisor Expense Ratio   0.70%   
Admin. Expense Ratio           0.02%   
Non-Management Fee           0.19%
Maximum 12b-1 Fee           0.25%   
Actual 12b-1 Fee          0.25%   

I just use Vanguard to invest in VTSAX and don't know much else about investing, so I'm not sure how to do the math on it or how much more I am paying in fees using Merril.

Questions:

1. Should I switch this account over to Vanguard?

2. If so how do I do so? Are there tax implications?

Thanks, and excuse my ignorance!


mies

  • Bristles
  • ***
  • Posts: 387
Re: Am I paying too much in fees?
« Reply #1 on: February 05, 2019, 03:50:32 AM »
Yes. VTSAX only charges 0.04% expense ratio and as far as I know, there are no other hidden expenses if you are purchasing directly from Vanguard. The only exception I can think of is if you hold VTSAX in a 401k run by vanguard. Then youíll see some random fee charges every quarter.

Car Jack

  • Pencil Stache
  • ****
  • Posts: 951
Re: Am I paying too much in fees?
« Reply #2 on: February 05, 2019, 06:42:17 AM »
For the moment, while you're deciding, sell OTCAX and buy VTI.  As the ETF version of VTSAX, this becomes easily transferable to any other brokerage.  Also, contact ME and make sure you're not under any kind of AUM.

Later, you can make the decision where you want to move to.

And to answer your title question, geeez, yes, you're paying way too much in fees.

soccerluvof4

  • Magnum Stache
  • ******
  • Posts: 4295
  • Location: Artic Midwest
  • Retired at 50
    • My Journal
Re: Am I paying too much in fees?
« Reply #3 on: February 09, 2019, 04:21:02 AM »
Yes - I too would for sure move to VTSAX or VTI

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1531
Re: Am I paying too much in fees?
« Reply #4 on: February 09, 2019, 04:57:56 AM »
You will want to read about "step up in basis".  I'm guessing if you sell, your profit is the growth since you inherited this mid-cap fund.  If you have held it over a year, you get a lower tax rate when you sell (probably 0% or 15%, but it depends on your income).

Have you compared this mid-cap fund to Vanguard's mid-cap index fund?
MFS Mid Cap Growth Fund Class A ("OTCAX") vs  Vanguard Mid Cap Index Investor ("VIMSX"):
over 5 yrs, OTCAX beats VIMSX by 2.5%/year
over 10 yrs, OTCAX beats VIMSX by 1.1%/year
over 15 yrs, OTCAX loses against VIMSX by -2.2%/year

Do you know what a "12b-1 Fee" means?  It means for every $10,000 in the account, they spend $25 of your assets on advertising for themselves.  To attract more customers - you pay for that.

If you are only going to own one fund, it's best to make that a "target date fund" with the date being when you expect to retire.  Alternatively, if you only own stocks, Vanguard World is a very diverse fund with assets from countries all over the world (including ~53% U.S. stocks).

How long have you owned this fund?  Does your income exceed $50,000?
(12% income tax bracket pays 0% on long-term capital gains, until the gains exceed that bracket)

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 86
Re: Am I paying too much in fees?
« Reply #5 on: February 14, 2019, 05:17:51 PM »
You will want to read about "step up in basis".  I'm guessing if you sell, your profit is the growth since you inherited this mid-cap fund.  If you have held it over a year, you get a lower tax rate when you sell (probably 0% or 15%, but it depends on your income).

Have you compared this mid-cap fund to Vanguard's mid-cap index fund?
MFS Mid Cap Growth Fund Class A ("OTCAX") vs  Vanguard Mid Cap Index Investor ("VIMSX"):
over 5 yrs, OTCAX beats VIMSX by 2.5%/year
over 10 yrs, OTCAX beats VIMSX by 1.1%/year
over 15 yrs, OTCAX loses against VIMSX by -2.2%/year

Do you know what a "12b-1 Fee" means?  It means for every $10,000 in the account, they spend $25 of your assets on advertising for themselves.  To attract more customers - you pay for that.

If you are only going to own one fund, it's best to make that a "target date fund" with the date being when you expect to retire.  Alternatively, if you only own stocks, Vanguard World is a very diverse fund with assets from countries all over the world (including ~53% U.S. stocks).

How long have you owned this fund?  Does your income exceed $50,000?
(12% income tax bracket pays 0% on long-term capital gains, until the gains exceed that bracket)

Hi, thanks for your detailed response!

This would be probably the last year I make 50k or less so it would be time to sell if I do.

Iím just wondering if I should have a mid cap fund at all or just go for all index.

Based on the chart you shared, it seems like it grows well? Not sure if that justifies the expense ratio.

I donít really know much about investing other than this site and jhcollins to be honest, and this fund would account for almost half of my net worth so I want to invest it wisely.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 1885
  • Age: 49
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Am I paying too much in fees?
« Reply #6 on: February 14, 2019, 07:10:12 PM »
You will want to read about "step up in basis".  I'm guessing if you sell, your profit is the growth since you inherited this mid-cap fund.  If you have held it over a year, you get a lower tax rate when you sell (probably 0% or 15%, but it depends on your income).

Emphasis added.  If OP is in the US and the investment was inherited, then any sale would be treated as long term regardless of how long the OP holds the investment.  In other words, they could inherit it, hold the investment one day, then sell it and pay taxes at LTCG rates.

As you correctly point out, they would also generally receive a step up in basis to the value as of date of death.

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 86
Re: Am I paying too much in fees?
« Reply #7 on: February 17, 2019, 04:29:40 AM »
Thanks everyone! I have another question.

This is the last year my taxable income will be under the 39k threshold. I will earn about 48k this year, so after the standard deduction, my taxable income should come down to around 36k. (Is this a correct assumption?)

If that's the case, I should technically be able to just sell OTCAX and put it in VTSAX tax free? Since 0% capital gains tax is paid on $0-$39,375 of taxable income?

Are you tax for selling and buying another stock?

This is the last year my income will be this low so I should sell it this year?

Please let me know your thoughts, and if I am assuming incorrectly or making bad calls. I'm basing my information off of: https://www.gocurrycracker.com/never-pay-taxes-again/

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 1885
  • Age: 49
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Am I paying too much in fees?
« Reply #8 on: February 17, 2019, 09:52:12 AM »
Thanks everyone! I have another question.

This is the last year my taxable income will be under the 39k threshold. I will earn about 48k this year, so after the standard deduction, my taxable income should come down to around 36k. (Is this a correct assumption?)

If that's the case, I should technically be able to just sell OTCAX and put it in VTSAX tax free? Since 0% capital gains tax is paid on $0-$39,375 of taxable income?

Are you tax for selling and buying another stock?

This is the last year my income will be this low so I should sell it this year?

Please let me know your thoughts, and if I am assuming incorrectly or making bad calls. I'm basing my information off of: https://www.gocurrycracker.com/never-pay-taxes-again/

In order:

1.  Yes, assuming you are single and have no other deductions or adjustments to income.

2.  Not really, and no.  Your capital gains stacks on top of your taxable income and are taxed accordingly.  The first $9,700 of your ordinary income will be taxed at 10%.  Assuming you earn less than the $39,475, the rest of your ordinary income will be taxed at 12%.  Then any capital gains above that and up to $39,275 (yes, the numbers are slightly different - it's a quirk in the new tax laws) will be taxed at 0%.  Then any capital gains above that will be taxed at 15%.

3.  You're taxed on the capital gain (or loss) when you sell a stock.  You are not taxed when you buy a stock.

4.  Whether to sell depends on a lot of things - how much you want to get rid of it, how much you have in the investment, what the rest of your financial picture looks like.  The 15% long term capital gains tax bracket goes from $39,275 to $434,550, although there is a separate and additional 3.8% NIIT tax that kicks in at $200K AGI.  It is possible that any sale you make will be in the 15% bracket for a while.  Another thing some people do is sell it over years to spread out the tax burden and avoid getting into higher brackets.

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 86
Re: Am I paying too much in fees?
« Reply #9 on: February 18, 2019, 03:20:17 AM »
Thanks everyone! I have another question.

This is the last year my taxable income will be under the 39k threshold. I will earn about 48k this year, so after the standard deduction, my taxable income should come down to around 36k. (Is this a correct assumption?)

If that's the case, I should technically be able to just sell OTCAX and put it in VTSAX tax free? Since 0% capital gains tax is paid on $0-$39,375 of taxable income?

Are you tax for selling and buying another stock?

This is the last year my income will be this low so I should sell it this year?

Please let me know your thoughts, and if I am assuming incorrectly or making bad calls. I'm basing my information off of: https://www.gocurrycracker.com/never-pay-taxes-again/

In order:

1.  Yes, assuming you are single and have no other deductions or adjustments to income.

2.  Not really, and no.  Your capital gains stacks on top of your taxable income and are taxed accordingly.  The first $9,700 of your ordinary income will be taxed at 10%.  Assuming you earn less than the $39,475, the rest of your ordinary income will be taxed at 12%.  Then any capital gains above that and up to $39,275 (yes, the numbers are slightly different - it's a quirk in the new tax laws) will be taxed at 0%.  Then any capital gains above that will be taxed at 15%.

3.  You're taxed on the capital gain (or loss) when you sell a stock.  You are not taxed when you buy a stock.

4.  Whether to sell depends on a lot of things - how much you want to get rid of it, how much you have in the investment, what the rest of your financial picture looks like.  The 15% long term capital gains tax bracket goes from $39,275 to $434,550, although there is a separate and additional 3.8% NIIT tax that kicks in at $200K AGI.  It is possible that any sale you make will be in the 15% bracket for a while.  Another thing some people do is sell it over years to spread out the tax burden and avoid getting into higher brackets.

Hi, thanks for the detailed information!

I have a little over 70k in it, so looks like even if I get some out, I wouldn't be able to get it all out this year.

Maybe I can sell it and buy a similar stock with a lower expense ratio that would be considered a "wash sale"? Is that an option and how would I figure out which other stock to pick?

If there are any other known loopholes or ways of approaching the problem, please let me know!

Extra info that may help or may just be oversharing:

The rest of my NW is a bit over 60k, of about 1/3 is in tax advantaged accounts. In all around 135k.

I do want to FIRE in 5 - 13 years, so increasing my income is really important, and I can do so this year if I so choose. (Not astronomically though haha)

Not sure how much having this stock impacts my FIRE goals, especially considering it's taxable so I'll probably get to it first.

My FIRE # range is 600k - 1.2 mil. It's hard to say because I'm fairly young and in the future I will be getting married, moving and etc so I can't know exactly. The lower end of the range will be more than enough to cover my current living expenses.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 1885
  • Age: 49
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Am I paying too much in fees?
« Reply #10 on: February 18, 2019, 11:43:33 AM »
You could sell it all this year and pay only 15% capital gains tax.  Note that the gains would be the difference beween the value you sell it at (say $70K) and the value on the date that you inherited it (say $68K).  So $2K * 15% = $300 in taxes.

Stocks don't have expense ratios.  Mutual funds have expense ratios.  Selling a mutual fund and buying another mutual fund with a lower expense ratio does not create a wash sale.  You probably don't want a wash sale anyway.

Selling $70K of a high-expense mutual fund to move it to another mutual fund that is better for you and paying a few hundred dollars in income tax ... what problem are you trying to solve again?

FIstateofmind

  • 5 O'Clock Shadow
  • *
  • Posts: 86
Re: Am I paying too much in fees?
« Reply #11 on: February 19, 2019, 04:50:05 AM »
You could sell it all this year and pay only 15% capital gains tax.  Note that the gains would be the difference beween the value you sell it at (say $70K) and the value on the date that you inherited it (say $68K).  So $2K * 15% = $300 in taxes.

Stocks don't have expense ratios.  Mutual funds have expense ratios.  Selling a mutual fund and buying another mutual fund with a lower expense ratio does not create a wash sale.  You probably don't want a wash sale anyway.

Selling $70K of a high-expense mutual fund to move it to another mutual fund that is better for you and paying a few hundred dollars in income tax ... what problem are you trying to solve again?

Thanks for your response! I thought a wash sale meant you didn't pay any taxes. (lol)