Author Topic: Advice Needed  (Read 2343 times)

Kjmiller1984

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Advice Needed
« on: October 15, 2015, 09:45:39 AM »
This might be a long post, so i will try and keep it short and update it with information as soon as i have that information.

I am new to the mustachian way, I like to say i just recently had my financial revolution! Anyways. I have moved all my investments to low cost vanguard funds, so im good on that front. However, my MIL (who lives with us and takes care of my children) has her investments with Fidelity, All her investments are 1% -4% in ER, which to me is outrageous. Plus on top of that she is paying them to manage for her at 1.05% on top of the ER. I have explained to her that they are raking her over the coals and that i can help her manage her investments and put them in low cost index funds that will likely produce better returns and DRASTICALLY reduce her expenses.

She currently has an IRA ($123k) and a Taxable account ($123k).

With the IRA i can move it to Vanguard or keep at Fidelity  and sell the high cost funds and replace with lower cost funds without paying any capital gains taxes. Is this right?

With the Taxable, I can have her move it to Vanguard, or keep at Fidelity) but to swap out the funds, it would require selling and paying capital gains tax. Is this Right?

She is on SS disability and has farm income. Her total income is around 50k a year. She is a widow. So if she files as a married widow, she could transfer around 20k a year to new funds without paying any capital gains because she would be in the 15% tax bracket. Is this correct?

Can she sell some of the funds with tax loss harvesting and buy different funds? Not sure how that works.

Sorry for the long post. Any help would be appreciated, I will get any information for you that you need to help answer my questions.

terran

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Re: Advice Needed
« Reply #1 on: October 15, 2015, 10:48:03 AM »
Fidelity has some perfectly good funds that are just as good as vanguard, so I'd probably leave things there. See https://www.bogleheads.org/wiki/Fidelity -- You're looking for their Spartan branded index funds.

No tax consequences of trading in the IRA's so go ahead and do that.

You can tax loss harvest by selling any funds that currently have losses (if any). These losses will first offset gains, and if there are still losses left over they will offset up to $3000 of regular income in a year.

The 0% capital gains tax rate happens up to the top of the 15% bracket, but that includes the gains, so it's not just a matter of whether the regular income is in the 15% bracket.

I don't know much about widows filing jointly, but a quick google leads me to believe that this is only valid for the first two years.

seattlecyclone

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Re: Advice Needed
« Reply #2 on: October 15, 2015, 11:55:30 AM »
With the IRA i can move it to Vanguard or keep at Fidelity  and sell the high cost funds and replace with lower cost funds without paying any capital gains taxes. Is this right?

Yes.

Quote
With the Taxable, I can have her move it to Vanguard, or keep at Fidelity) but to swap out the funds, it would require selling and paying capital gains tax. Is this Right?

Yes.

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She is on SS disability and has farm income. Her total income is around 50k a year. She is a widow. So if she files as a married widow, she could transfer around 20k a year to new funds without paying any capital gains because she would be in the 15% tax bracket. Is this correct?

Firstly, she can only file as married if her husband died this year. After that she will need to file as single (unless she has dependent children, in which case she can file as a "qualifying widow" for two more years).

Secondly, social security income is a bit tricky. Only a percentage of it counts as income for taxation purposes, and that percentage increases as your total income increases, up to a maximum of 85%. Depending on her income, even tax-free capital gains income could cause more of her social security to be taxed, which means the capital gains weren't really tax-free in the first place!

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Can she sell some of the funds with tax loss harvesting and buy different funds? Not sure how that works.

Sure. When you compute your taxes you take all of your gains and then subtract your losses to get the net gain. If this net gain is zero, no capital gains tax will be due. If there's a net loss, you can use up to $3,000 of it to offset other income. It sounds like you're really just interested in offsetting as many of the gains as possible so that might not be as relevant to you.
« Last Edit: October 15, 2015, 11:57:50 AM by seattlecyclone »

MDM

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Re: Advice Needed
« Reply #3 on: October 15, 2015, 08:02:59 PM »
She is on SS disability and has farm income. Her total income is around 50k a year. She is a widow. So if she files as a married widow, she could transfer around 20k a year to new funds without paying any capital gains because she would be in the 15% tax bracket. Is this correct?
Good advice already from terran and seattlecyclone.

For the tax question, perhaps the easiest way to evaluate is to take her 2014 return, update with 2015 estimates and your "what if?" scenarios, and examine the results.  This is easiest if she/you did the taxes with some tax software.  If done by hand or by a CPA, try https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ and/or build your own spreadsheet (e.g., see http://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/).

Kjmiller1984

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Re: Advice Needed
« Reply #4 on: October 20, 2015, 07:24:21 AM »
Ok, So im not too happy with Fidelity. They have said, since it was a managed account that for us to manage it ourselves she will have to close it out to cash and then open an investor account and purchase the funds she wants. With the IRA its not a big deal because we can roll it over to another IRA. For the taxable account though it sucks.

I have a question about Tax Loss Harvesting

All the funds in her taxable account are down for the year but 1 fund and its barely up, like maybe 400$ dollars versus the 10k+ she is down. Would she be able to sell all the funds in her taxable without paying any capital gains since they are down this year? Im not really sure how TLH works.

terran

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Re: Advice Needed
« Reply #5 on: October 20, 2015, 08:44:53 AM »
Yeah, if that's true it's pretty messed up. Is this the advisor telling you this? If so, you might try calling fidelity just to make sure the advisor isn't giving you bad information just to get you to stay.

The gains/losses since the purchase of the fun are what you need to look at. The losses YTD don't matter if there is still a gain over when the fund was purchased. I would probably at least start selling and transferring the money to whatever self-managed option you decide. It's going to have to be sold at one point or another anyway, so just do it in the most tax efficient way you can figure.