Author Topic: How to process a minor windfall  (Read 5574 times)

Merrie

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How to process a minor windfall
« on: January 09, 2016, 12:09:19 PM »
Spouse's parents gifted him $10k in a taxable brokerage account in December 2015. A nice chunk of change! It's currently invested in AWSHX, which has an expense ratio of 0.5% or thereabouts.

So I figure our first step is to get this shifted over to Vanguard and get it into a cheaper fund. From there can we roll it over into an IRA for him? We haven't made his 2016 contributions. Of course, with a max of $5500 for 2016, we have to keep the rest in the taxable account until 2017. Any other ideas, things I'm missing?

If it matters, we are still a decade or two out from retirement and have piles of mortgage/student debt, but no consumer debt. I work and he is a stay-at-home parent.

Merrie

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Re: How to process a minor windfall
« Reply #1 on: January 10, 2016, 11:27:13 AM »
I realize people are probably looking at this and going "Such a super basic question" and I almost am myself, but I'm still pretty new to investing so I just want to make sure there's nothing I missed... thanks for any input.

rockstache

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Re: How to process a minor windfall
« Reply #2 on: January 10, 2016, 11:48:39 AM »
I would probably did what you said depending on your emergency fund situation and depending what the interest rate was on the student loans. If your ER is stocked and your SL interest is low, then yes, I'd probably do the Ira for 2015 if you haven't maxed it already, then 2016.

GrowingTheGreen

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Re: How to process a minor windfall
« Reply #3 on: January 10, 2016, 12:08:50 PM »
What is the interest rate on your student loans? I'm thinking that in your case it may be better to pay off your student loans first. If you are against that, then I would do things in this order:

1) Make sure your emergency fund is topped off
2) Max the Roth
3) Option 1: put the rest in taxable mutual fund
3) Option 2: throw some money at those student loans

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johnny847

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Re: How to process a minor windfall
« Reply #5 on: January 10, 2016, 01:33:04 PM »
You can't rollover assets from a non retirement account to a retirement account. You can only contribute cash to a retirement account. So he'd have to sell his shares first if he wants to contribute to his IRA.

Merrie

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Re: How to process a minor windfall
« Reply #6 on: January 10, 2016, 02:35:04 PM »
You can't rollover assets from a non retirement account to a retirement account. You can only contribute cash to a retirement account. So he'd have to sell his shares first if he wants to contribute to his IRA.

Gotcha. But this would be fairly easily done, right? Particularly as I'd want to get it out of Edward Jones and over to Vanguard anyway.

His parents wanted him to use it towards his retirement and I know we could use it for something else, but since it's not enough to pay off one student loan anyway, putting it into retirement savings seems like a reasonable course of action, or potentially paying down the mortgage to the point where we don't have PMI anymore.



GrowingTheGreen

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Re: How to process a minor windfall
« Reply #7 on: January 10, 2016, 07:03:49 PM »
I think putting it towards your mortgage is a good idea in your situation.  You are literally pissing money down the drain.  Skip the retirement account and get rid of that PMI!

You can't rollover assets from a non retirement account to a retirement account. You can only contribute cash to a retirement account. So he'd have to sell his shares first if he wants to contribute to his IRA.

Gotcha. But this would be fairly easily done, right? Particularly as I'd want to get it out of Edward Jones and over to Vanguard anyway.

His parents wanted him to use it towards his retirement and I know we could use it for something else, but since it's not enough to pay off one student loan anyway, putting it into retirement savings seems like a reasonable course of action, or potentially paying down the mortgage to the point where we don't have PMI anymore.

woopwoop

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Re: How to process a minor windfall
« Reply #8 on: January 10, 2016, 07:46:28 PM »
I think putting it towards your mortgage is a good idea in your situation.  You are literally pissing money down the drain.  Skip the retirement account and get rid of that PMI!
Agreed.

I would also maybe have your spouse talk with your parents about their investments, if they're the kind of family who is open to that sort of thing. If they're gifting him a fund with shitty fees, they probably are pissing away tons more of their own money into high-cost funds.

Merrie

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Re: How to process a minor windfall
« Reply #9 on: January 10, 2016, 08:12:12 PM »
I think putting it towards your mortgage is a good idea in your situation.  You are literally pissing money down the drain.  Skip the retirement account and get rid of that PMI!

You can't rollover assets from a non retirement account to a retirement account. You can only contribute cash to a retirement account. So he'd have to sell his shares first if he wants to contribute to his IRA.

Gotcha. But this would be fairly easily done, right? Particularly as I'd want to get it out of Edward Jones and over to Vanguard anyway.

His parents wanted him to use it towards his retirement and I know we could use it for something else, but since it's not enough to pay off one student loan anyway, putting it into retirement savings seems like a reasonable course of action, or potentially paying down the mortgage to the point where we don't have PMI anymore.

If I'm going to get it out of the market to do something with it other than invest, not sure whether to do it now or wait a bit... the value has already dipped in the last month.

I think putting it towards your mortgage is a good idea in your situation.  You are literally pissing money down the drain.  Skip the retirement account and get rid of that PMI!
Agreed.

I would also maybe have your spouse talk with your parents about their investments, if they're the kind of family who is open to that sort of thing. If they're gifting him a fund with shitty fees, they probably are pissing away tons more of their own money into high-cost funds.

LOL, I did think of that. My own parents use Vanguard. I'll mention it to my spouse, he can do what he wants with the information.

terran

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Re: How to process a minor windfall
« Reply #10 on: January 12, 2016, 06:44:19 AM »
You should consider the effect of selling the fund. Find out what the cost basis is. The brokerage should be able to get this information if it is the same one used by your in-laws.

What is your tax bracket? If 15% or less you won't pay capital gains taxes on the sale, so that's good.

Are you receiving any Adjusted Gross Income based tax credits like the Savers Tax Credit, or the Earned Income Tax Credit? If so, then capital gains count towards AGI even if you don't pay tax on them, so you may want to be careful about how you sell.

None of this is to say you shouldn't sell, but you might find that being careful about when you sell is important (some this year, some next year), and you may want to set some aside for taxes.

zephyr911

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Re: How to process a minor windfall
« Reply #11 on: January 12, 2016, 07:14:35 AM »
His parents wanted him to use it towards his retirement and I know we could use it for something else, but since it's not enough to pay off one student loan anyway, putting it into retirement savings seems like a reasonable course of action, or potentially paying down the mortgage to the point where we don't have PMI anymore.
Getting out of PMI potentially carries a high ROI with no risk at all. You'd have to do your own math on that, but (just a quick and dirty example) if you put the whole $10K in to kill off a $100/mo PMI payment, that's a 12% guaranteed, risk-free return, PLUS whatever basic APR you're paying.

Plus, that equity doubles as an EF once you've established it.

Merrie

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Re: How to process a minor windfall
« Reply #12 on: January 12, 2016, 06:03:30 PM »
You should consider the effect of selling the fund. Find out what the cost basis is. The brokerage should be able to get this information if it is the same one used by your in-laws.

What is your tax bracket? If 15% or less you won't pay capital gains taxes on the sale, so that's good.

Are you receiving any Adjusted Gross Income based tax credits like the Savers Tax Credit, or the Earned Income Tax Credit? If so, then capital gains count towards AGI even if you don't pay tax on them, so you may want to be careful about how you sell.

None of this is to say you shouldn't sell, but you might find that being careful about when you sell is important (some this year, some next year), and you may want to set some aside for taxes.

We're in the 25% tax bracket. I'll have to figure out what's up with the capital gains. The statement is kind of confusing to look at. I think they transferred shares to him rather than putting cash into the funds.
His parents wanted him to use it towards his retirement and I know we could use it for something else, but since it's not enough to pay off one student loan anyway, putting it into retirement savings seems like a reasonable course of action, or potentially paying down the mortgage to the point where we don't have PMI anymore.
Getting out of PMI potentially carries a high ROI with no risk at all. You'd have to do your own math on that, but (just a quick and dirty example) if you put the whole $10K in to kill off a $100/mo PMI payment, that's a 12% guaranteed, risk-free return, PLUS whatever basic APR you're paying.

Plus, that equity doubles as an EF once you've established it.

I scheduled an appraisal. If our home value has gone up enough, we can potentially refinance and get rid of PMI. If we don't refinance, we have to pay $25k on our current mortgage and wait 2 more years before we can get rid of it.

zephyr911

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Re: How to process a minor windfall
« Reply #13 on: January 14, 2016, 11:49:02 AM »
I scheduled an appraisal. If our home value has gone up enough, we can potentially refinance and get rid of PMI. If we don't refinance, we have to pay $25k on our current mortgage and wait 2 more years before we can get rid of it.
That two-year thing really pisses me off. A higher starting (past) LTV increases present risk? Bullshit.

We're 14 months into our current mortgage, and overlooked that detail when we bought. We started paying down from 90% to 80% thinking we'd get it off fairly soon, but then stopped when we realized no amount of equity would kill PMI before 2 years. We could easily scrape up the last few $K and refi, but the loan value is small enough and the PMI is low enough that it's not worth the transactional costs, so we're just gonna wait till November.

Merrie

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Re: How to process a minor windfall
« Reply #14 on: February 24, 2016, 06:13:33 PM »
I am so baffled by our taxes now. We got this 1099-DIV and it looks like so:

Box 1a: Total Ordinary Dividends ---- 62.92
Box 1b: Qualified Dividends ---- 62.92
Box 2a: Total Capital Gain Distributions --- 383.61

(All other lines blank)

I flip it over and it looks like the dividends were only 62.92 anyway... why is that number on there twice? I plugged it all into my form 1040 but I'm still confused by it. All the stuff I'm reading online is making my head spin. Why do we have to pay capital gains tax on something we just got? Is that standard? And it also looks like someday when we sell this we'll get taxed on the difference between our basis and the price we sell it at, and I have no idea what to do with any of that information either.

johnny847

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Re: How to process a minor windfall
« Reply #15 on: February 24, 2016, 07:49:08 PM »
I am so baffled by our taxes now. We got this 1099-DIV and it looks like so:

Box 1a: Total Ordinary Dividends ---- 62.92
Box 1b: Qualified Dividends ---- 62.92
Box 2a: Total Capital Gain Distributions --- 383.61

(All other lines blank)

I flip it over and it looks like the dividends were only 62.92 anyway... why is that number on there twice? I plugged it all into my form 1040 but I'm still confused by it. All the stuff I'm reading online is making my head spin. Why do we have to pay capital gains tax on something we just got? Is that standard? And it also looks like someday when we sell this we'll get taxed on the difference between our basis and the price we sell it at, and I have no idea what to do with any of that information either.

That means you were issued $62.92 of dividends. Of that $62.92 in dividends, $62.92 are qualified dividends--meaning they will be taxed at the lower long term capital gains rate.
One common misconception is that reinvested dividends aren't subject to tax. They are. It doesn't matter what you do with a dividend--reinvest it, spend it, send it to your bank, withdraw, and burn it, you still owe taxes on it.

You pay capital gains tax on capital gain distributions because whatever fund issued those distributions sold securities for a gain. Those distributions are passed on to you. It is as if you sold those securities.
A tax efficient index fund such as VTSAX has zero capital gains distributions.
As for maintaining your cost basis information, your brokerage must record it for you for any shares bought after 1/1/2011. Any shares bought before that date are up to you to keep records of.

Merrie

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Re: How to process a minor windfall
« Reply #16 on: February 24, 2016, 08:22:40 PM »
I am so baffled by our taxes now. We got this 1099-DIV and it looks like so:

Box 1a: Total Ordinary Dividends ---- 62.92
Box 1b: Qualified Dividends ---- 62.92
Box 2a: Total Capital Gain Distributions --- 383.61

(All other lines blank)

I flip it over and it looks like the dividends were only 62.92 anyway... why is that number on there twice? I plugged it all into my form 1040 but I'm still confused by it. All the stuff I'm reading online is making my head spin. Why do we have to pay capital gains tax on something we just got? Is that standard? And it also looks like someday when we sell this we'll get taxed on the difference between our basis and the price we sell it at, and I have no idea what to do with any of that information either.

That means you were issued $62.92 of dividends. Of that $62.92 in dividends, $62.92 are qualified dividends--meaning they will be taxed at the lower long term capital gains rate.
One common misconception is that reinvested dividends aren't subject to tax. They are. It doesn't matter what you do with a dividend--reinvest it, spend it, send it to your bank, withdraw, and burn it, you still owe taxes on it.

You pay capital gains tax on capital gain distributions because whatever fund issued those distributions sold securities for a gain. Those distributions are passed on to you. It is as if you sold those securities.
A tax efficient index fund such as VTSAX has zero capital gains distributions.
As for maintaining your cost basis information, your brokerage must record it for you for any shares bought after 1/1/2011. Any shares bought before that date are up to you to keep records of.

Thanks! Are the qualified dividends really qualified because it looks like to be "qualified" one has to hold the shares for a certain period of time, and Spouse just got these... or does the time his parents held them count? Is the basis the cost that they bought them at, or the cost they were at when they transferred them to him?

johnny847

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Re: How to process a minor windfall
« Reply #17 on: February 24, 2016, 09:59:54 PM »
Thanks! Are the qualified dividends really qualified because it looks like to be "qualified" one has to hold the shares for a certain period of time, and Spouse just got these... or does the time his parents held them count? Is the basis the cost that they bought them at, or the cost they were at when they transferred them to him?

What I am about to say about qualified dividends applies to the general case. I don't know what happens for dividends issued from shares obtained as a gift from someone else.

I forgot to mention about the holding period.
Dividends are qualified if
Quote
  • The dividend must have been paid by an American company or a qualifying foreign company.
  • The dividends are not listed with the IRS as dividends that do not qualify.
  • The required dividend holding period has been met.

When the brokerage gives you a tax form and says $62.92 of your dividends are qualified, it means that to the best of their knowledge, all three conditions have been met.
However, it is possible that the 3rd requirement is not met. The holding period is you need to have held the shares from which the dividend was issued for 60 days out of the 121 days centered on the ex-dividend date (the first business day following the declaration of the dividend). So if, for example, you bought some shares right before the ex dividend date in mid December, and the brokerage issued you a 1099 DIV in January, they can't possibly know if you held it for 60 days b/c it hasn't been 60 days yet. However, they will still mark it as qualified dividends if it satisfies 1 and 2 above, and you are on track to meet the holding requirement.

I don't know if brokerages try to wait until 60 days after your last dividend to issue 1099 DIVs. I don't believe Vanguard does.

The cost basis for gifted shares is either the fair market value at the time of the gift, or the original cost basis of the gifter, depending on the situation. Here's a link for an explanation of which number applies: https://www.schwab.com/public/schwab/resource_center/expert_insight/ask_carrie/taxes/how_do_you_value_a_gift_of_stock.html

MustacheAndaHalf

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Re: How to process a minor windfall
« Reply #18 on: February 25, 2016, 01:25:56 AM »
The question "What did you do with my gift?" is not going to be a pleasant conversation if you directly contradicted the gift-givers request.  You should weigh the impact of ignoring their request - it might make more sense to follow their request for retirement investing rather than paying down debt.  The optimal choice for $10,000 may be different from the best way to deal with your in-laws.

Speaking of free money, your first priority should always be investing in 401k matching, if any.  If your company gives you free money for contributing to a 401k, take that gift first.  Even credit card interest rates can't overcome the benefit of 401k matching (50%-100% on your contributed money).

Something else to consider: the maximum gift that the IRS allows without tax implications is $14,000.  Your in-laws might be rounding down to $10,000 and waiting until next year to see if they should contribute more.  If you're feeling cheeky, you could point out two things: the gift limit is $14,000... and it applies individual to individual.  The mom can give you $14000 and another $14000 to your husband.  The dad can do the same, for another $28000 and a total of $56,000 per year for one couple transferring money to another couple.  It's a bit rude to mention it - but if they ever mention the limits of the gift tax, maybe it's worth knowing it.

Merrie

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Re: How to process a minor windfall
« Reply #19 on: February 25, 2016, 08:59:01 PM »
I might call the brokerage and see if they have any more information about the dates/timing for a gift. I know I should probably ask an accountant, but previously I went with an accountant recommended by my friend and he made some dumb mistakes on our in hindsight not so complicated taxes, so it's kind of hard to know who to rely on.

Or I could just suck it up and pay the $10 worth of tax on the dividends and not worry about it anymore LOL. I just realized we're actually in the 15% tax bracket because even though our AGI is just north of 100k our actual taxable income is only around 65k.