Author Topic: should I sell these mutual funds that have high expenses?  (Read 4812 times)

citizen24128

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should I sell these mutual funds that have high expenses?
« on: February 20, 2015, 01:26:54 PM »
I am seeking advice about the logistics and tax implications of selling some mutual funds that I regret purchasing.

My retirement savings breaks down as follows:

* 43% in American Funds mutual funds, purchased through a Wells Fargo broker (some IRAs, some taxable/non-retirement accounts)
* 42% in Fidelity index funds (my 401(k))
* 15% in Vanguard index funds (Roth IRA and taxable accounts)

I regret investing in the American Funds, which have higher fees than I'd like.  I purchased the funds 7-8 years ago in one big transaction on the advice of a financial advisor.  Since then, I have learned more about index funds and minimizing expenses and fees.  All of my recent and future investments have been and will be in low-fee Vanguard or Fidelity index funds.

What should I be thinking about as I decide whether to sell the American Funds and reinvest in Vanguard funds?  Should I definitely get rid of these funds?  Are there ways for me to reduce the tax impacts?  Must I actually take possession of the money, or can I "transfer" an IRA account from Wells Fargo to Vanguard without technically cashing it out?  (And would that help me avoid paying taxes or fees?)  What about my taxable/non-retirement accounts, are there any tips on handling those and minimizing taxes?

Advice welcome, in as much detail as you are willing to give.  I'm a good saver, but I'm not so well-informed (yet) about taxes and managing investments after the initial purchase.  The actual American Funds that I own are:

CWGIX (American Funds New World Fund Class A) - Expenses 0.80%
ANWPX (American Funds New Perspective Fund Class A) - Expenses 0.79%
SMCWX (American Funds SMALLCAP World Fund Class A) - Expenses 1.13%
NEWFX (American Funds New World Fund Class A) - Expenses 1.06%

Whether I leave the money where it is or transfer it to Vanguard, I don't expect to need to touch the money for 15 or 20 years.

Gone Fishing

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Re: should I sell these mutual funds that have high expenses?
« Reply #1 on: February 20, 2015, 01:37:58 PM »
All of your IRA funds can be transferred to Vanguard Funds with no tax implications.  The technical term for what you want is a trustee-to-trustee transfer.  Call Vanguard, they will walk you through the process and you may not even need to do any paperwork, they were able to transfer my IRA electronically.  As far as your taxable investments go, in order to move them into Vanguard Funds, you will have to sell.  The good news is that you have held them long enough that any gains would be taxed at favorable long term capital gains rates which could be as low as zero depending on your tax bracket.  It may be beneficial to execute the transactions in several stages in different tax years depending on your tax situation.  If you are not already maxing out tax deferred accounts (401(k) IRA etc) you could also contribute more to offset the gains.  Waiting for a market correction would also help, but this comes with its own risks.

You can play with Tax caster here:  https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ to help get an idea of what the capital gains generated will do to your taxes.

citizen24128

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Re: should I sell these mutual funds that have high expenses?
« Reply #2 on: February 21, 2015, 11:33:16 AM »
Thank you very much, So Close.  I'm sure knowing the right term ("trustee-to-trustee") will help as I continue to research this.  Thanks also for the tax calculator recommendation.

Another Reader

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Re: should I sell these mutual funds that have high expenses?
« Reply #3 on: February 21, 2015, 12:35:12 PM »
The IRA's should transfer custodian to custodian.  Vanguard will likely charge you a fee to sell the American funds, so you may want to have the Wells Fargo people sell the funds if they do not charge you to do so and then have the proceeds transferred.  Get the costs for selling from both companies so you can decide how to do the transfer.  Wells Fargo may charge you an account closing fee.

With regard to the taxable accounts, I would look at the size of the investment and the tax implications of selling.  If it would cost a lot in taxes to sell, I would probably leave the money there for now.  You can then decide whether it makes more sense to sell some or all of the funds over time as your situation changes.  Some American funds are well managed and have performed well over long periods of time.  Look at the fund performance over the last 10 years for each fund and dump the dogs first.  If Wells Fargo is charging a front end load (sales commission) on the funds, direct the dividends and capital gains to your bank account instead of being reinvested.  Otherwise Wells Fargo will get a sales commission on your reinvested dividends and capital gains.

This process is a pain in the neck, but once you get through it, managing your accounts will be much easier.

Cwadda

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Re: should I sell these mutual funds that have high expenses?
« Reply #4 on: February 21, 2015, 12:40:42 PM »
Quote
* 43% in American Funds mutual funds, purchased through a Wells Fargo broker (some IRAs, some taxable/non-retirement accounts)

I used to hold American Funds. I'm still angry about it to this day.

Yes, transfer it all. The expense ratios are 15 times less. Vanguard index funds tend to outperform American Funds on top of that. It sucks if you've already paid a frontload charge but I would say it's still worth transferring everything.

The transfer process is actually very simple. All you do is initiate it and in a few weeks everything will be done for you. Also, this would not be a taxable event for IRAs. What So Close has said about the taxable accounts seems right!

Another Reader

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Re: should I sell these mutual funds that have high expenses?
« Reply #5 on: February 21, 2015, 02:00:45 PM »
Being angry about being sold a particular investment is not a good reason to dump it all without regard to tax consequences. 

There was a time when American Funds were the best deal out there, back when the mutual fund industry was in its infancy.  Some highly principled and knowledgeable managers run a number of their funds, and those funds have performed well for many years, even after operating expenses.  However, in the current market, few people would voluntarily sign up for these funds because of the sales load and the ability to get similar performance elsewhere at a much lower cost.

In the OP's shoes, I would transfer the IRA's, before or after selling the funds, depending on the cost, to the chosen custodian.  The taxable accounts require more careful planning that takes taxes into account.  I would look at the numbers and develop a strategy for these investments as part of an overall investment policy.  If the OP's goals include simplifying account management, then moving these funds to Vanguard might make sense. 

Keeping these funds or liquidating them efficiently over time are something the OP needs to consider carefully.  After 7 or 8 years, the capital gains tax implications of just selling and transferring the proceeds may make that a poor choice.

Goldielocks

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Re: should I sell these mutual funds that have high expenses?
« Reply #6 on: February 21, 2015, 07:12:43 PM »
There are a few mutual funds out there that out perform their class, year after year, even with higher fees.  Do you research, which of your funds falls into this category?

For new money, I am a fan of index investing, but if you have any sort of sale fee, you are better off to keep the best funds and transfer the average ones.

After all, your new funds will grow so large that the old ones will be a very small % soon.

citizen24128

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Re: should I sell these mutual funds that have high expenses?
« Reply #7 on: February 23, 2015, 06:56:19 AM »
Thanks for the additional advice, everyone.

I'm planning to transfer the IRAs to Vanguard immediately and then do a bit more research on what to do about the taxable accounts.  Unfortunately, the bulk of the American Funds I own are in the taxable accounts, and it seems like I could expect a significant (to me, at least) tax hit if I sold them now.

I will look more closely at the funds I own as a few of you suggested, to see if any of them are performing well enough to consider keeping.  I will also run some numbers with calculators to get more of an idea of how much I'd be paying in taxes if I sold versus how much I'd pay in fees if I didn't.

If a market downturn comes along while I still own the taxable funds, I might take that opportunity to sell while the cost basis is more in my favor.  Also, there's a chance that I may take a 5-6 month sabbatical in the next couple of years.  If I did this, I could sell during the sabbatical year, when my income would be half of normal and I would be in a lower tax bracket.

Thanks for the help, and please feel free to comment on the logic of what I've just said if you have additional thoughts.

Gone Fishing

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Re: should I sell these mutual funds that have high expenses?
« Reply #8 on: February 23, 2015, 08:17:25 AM »
Thanks for the additional advice, everyone.

I'm planning to transfer the IRAs to Vanguard immediately and then do a bit more research on what to do about the taxable accounts.  Unfortunately, the bulk of the American Funds I own are in the taxable accounts, and it seems like I could expect a significant (to me, at least) tax hit if I sold them now.

I will look more closely at the funds I own as a few of you suggested, to see if any of them are performing well enough to consider keeping.  I will also run some numbers with calculators to get more of an idea of how much I'd be paying in taxes if I sold versus how much I'd pay in fees if I didn't.

If a market downturn comes along while I still own the taxable funds, I might take that opportunity to sell while the cost basis is more in my favor.  Also, there's a chance that I may take a 5-6 month sabbatical in the next couple of years.  If I did this, I could sell during the sabbatical year, when my income would be half of normal and I would be in a lower tax bracket.

Thanks for the help, and please feel free to comment on the logic of what I've just said if you have additional thoughts.

Sounds like a good plan.