Author Topic: Parent wants to switch to index fund investing  (Read 3361 times)

Frankies Girl

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Parent wants to switch to index fund investing
« on: October 11, 2014, 08:34:17 PM »
Need some help/advice please!

My mom is turning 70 this year, and will have to start taking required distributions in 2015 out of her 403b and IRAs. We had discussed a few months ago about moving her out of all the load funds (she's in with companies like Valic and the like right now, former school teacher) and maybe getting her into a simple 2- 3-fund index portfolio. Based off of the idea of simple and efficient - she agrees she wants Vanguard and will eventually move all of her accounts over (hooray!). She has one taxable, a 403b and at least one traditional IRA that I know of, in addition to a savings account.

Her entire investment/retirement portfolio is not necessary for her living expenses at all. She has a very generous pension and SS - more than she can spend - and it will last as long as she does. So she said her comfort level with risk/volatility is high, and wants a portfolio that equals roughly 80% stocks, 20% bonds.

She has about 40K sitting in a savings account. She wants it moved to a new account at Vanguard and wants it all in VTSAX.

My first thought is for her to open a taxable account and since VTSAX is at least tax efficient, it will be the best fund to hold in there.

But since she will be having to start the RMDs next year, there is also the possibility to open a Roth IRA to use for eventual conversions. But at this point, she's kind of screwed (from what I can tell) on taxes - her pension/SS + RMD is going to push her solidly above a 25% tax rate, and adding a conversion to a Roth is just going to push her taxes up even further. Should I even try to start her on Roth conversions at this point? And then there is the fact that her current taxable account holds several different types of funds including bonds so that is creating even more taxable events (and I'll have to research how to best liquidate those to get her moved over to her AA without causing even more of a mess).

So my current first run at a game plan is:

1. Open Vanguard taxable account, link to her checking account and transfer cash to buy VTSAX.

2. Move over her existing accounts to Vanguard; consolidate the existing to reduce accounts down to one of each kind and convert any 403b to a traditional IRA to simplify her holdings. Try to accomplish this before December 31st. There is an annuity in there that I need more info on, but I'll get her to give me the account details soon.

3. Sell off loaded funds or any others that don't fit with her AA, and buy into the indexed mutual funds VTSAX/VBTLX and possibly some international as she does like the idea so could add some VTIAX. All dividend/cap gains are probably going to be reinvested as she doesn't need to take any payouts.

Will have to be very careful with the existing taxable account fund transition as I don't want to add to the already high tax bill that is coming.
 
4. Do major research on minimizing her taxes - because I think this is the biggest issue at this point.

5. Open Roth IRA? Conversions? Or something else...


So any suggested reading or advice on how to proceed with this is GREATLY appreciated.  Please poke holes in this plan if you see any!

« Last Edit: October 26, 2014, 02:19:47 PM by Frankies Girl »

RapmasterD

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Re: Parent wants to switch to Vanguard
« Reply #1 on: October 12, 2014, 12:44:01 PM »
I think you're fine with 1-3. What percentage of her liquid net worth is the 40K?

Frankies Girl

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Re: Parent wants to switch to Vanguard
« Reply #2 on: October 12, 2014, 01:43:03 PM »
Not sure about the percentage of net on the 40K but it's definitely less than 10% of her total liquid. She has another account with 20K as her "fun money" fund, and accumulates over 2K a month in unspent money received from pension/SS.

I have to get her account info details so I can see what is where and what amounts I'll need to invest in each category, but the 40K could easily go into the VTSAX and will only be a small percentage of AA stock percentage.

I guess I'm going to get that taxable account set up at Vanguard and get things processed as much as I'm able to on my end and let her know what steps she'll need to take to complete.

Another Reader

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Re: Parent wants to switch to Vanguard
« Reply #3 on: October 12, 2014, 05:34:00 PM »
You might want to talk to your mom about going with Fidelity instead.  As you know, there is better customer support and bricks and mortar offices your mom can visit if she needs help.  Vanguard is fine for 30 year old folks that have done some research and know exactly what they want.  Your mom would likely benefit from having a contact person at Fidelity that would handle questions and paperwork as they come up.

Good luck getting her out of the annuity.  More taxable income is not what she needs and the fees for this product are likely very high.

Frankies Girl

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Re: Parent wants to switch to Vanguard
« Reply #4 on: October 12, 2014, 08:23:02 PM »
I do agree - I did tell her that she would get more attention and knowledgeable customer service from Fid, but she really liked the idea of Vanguard being a not for profit model, and I get that she wants to go with a company that isn't in any way going to try to profit off of her at the cost of her own growth. As I may be the one actually dealing with all of this for her, I might ask if Fid would be okay as it would be more comfortable for me to deal with and I know they'll back off the sales pitch (my assigned rep is awesome and likes index investing).

I'm kind of horrified at how the school systems screw over teachers for their retirement funding. They push annuities first and foremost, and then give them primarily a ton of horrible front/back loaded funds with high expense ratios. My mom even has "C" class funds that are costing her 2% a year. She was aware of the bad choices, but hasn't felt up to dealing with the mess for a while.

I'm just hoping to help her get everything simplified and streamlined for her so she doesn't have to even think about this stuff unless she needs to tap into it.

I'll have to do some more reading on the tax implications, but this part may be way over my head.

GardenFun

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Re: Parent wants to switch to Vanguard
« Reply #5 on: October 12, 2014, 08:37:03 PM »
I'm just hoping to help her get everything simplified and streamlined for her so she doesn't have to even think about this stuff unless she needs to tap into it.

I'll have to do some more reading on the tax implications, but this part may be way over my head.

Kudos for helping her through all the paperwork.  I have been doing the same actions for my parents over the past 5 years.  Dealing with the taxable funds was the biggest pain.  As you pointed out, selling them all at once may cause capital gains to kick in. 

Do you have access to her taxes from the last 3 years?  Assuming her income is similar over those years, it will give you an ideas regarding how much taxable you can sell without triggering capital gains.  Also helps with asking whether a Traditional to Roth conversion is worth it.  From other parts of this forum, the consensus seems to be that the 15% tax rate is a break-even whether to convert, but the 25% is a no. 

But from an estate planning standpoint, the Roth can be very powerful if turned into an inherited IRA with an extremely long, tax-free payout timeframe.     

Frankies Girl

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Re: Parent wants to switch to Vanguard
« Reply #6 on: October 26, 2014, 02:19:27 PM »
So discussed the basic plan with my mom today, and she is okay with Fidelity (which makes it easier for me) and is going to figure out what she has where and get the account numbers and basic info gather up to try to figure out what we can easily transfer over to Fid. She is authorizing me to open accounts, will give me bank info and other details and pretty much wants to leave everything up to me. I'm pretty excited and also pretty floored at the idea that she trusts me that much, so I do want to right by her and hope I don't screw up anything too much.

I've been given the go-ahead to open a taxable account for her and will link up her checking account as soon as she figures out which one she wants to link to that, and then get the cash transferred and invested into the Spartan total stock market index fund hopefully within the next few weeks.


I told her my goals for now were as follows:
  • Consolidate as many of her accounts as we can into one place (Fid) so it makes it easier to keep up with
  • Simplify everything into passive/index investing so she can understand it and easily make changes if she wishes
  • Minimize taxes/taxable events (and get a decent accountant for her to make sure that the tax burden is managed going forward)


She said that she has an annuity with General American but doesn't exactly understand how it works. I will need to wait for her to find the papers and maybe work on it with her when I can go for a visit in February (I live several states away).

I think if we can at least get the taxable account started at Fid and get what we can moved over by year end are the big goals (even if that means letting the accounts move over "as is" and not selling off anything for now until we can really sit down and go over things when I go for a visit).