Author Topic: Move American Funds Roth & Taxable account $ to Vanguard?  (Read 4044 times)

catccc

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Move American Funds Roth & Taxable account $ to Vanguard?
« on: June 30, 2014, 12:11:07 PM »
I have about 40K in taxable investments and $160K in a Roth with American Funds. 

I pay no sales charge, but I have not added anything to these accounts in years.

Is there any reason to keep these accounts?  Or should I move everything to Vanguard for the lower expense ratios?

I may take the move of the taxable investment in chunks to try to keep capital gains tax at 0%.

Cwadda

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Re: Move American Funds Roth & Taxable account $ to Vanguard?
« Reply #1 on: June 30, 2014, 12:47:58 PM »
I switched from American Funds to Vanguard a few months ago, albeit a lot less of an amount.

I paid 5.77% on a front load fee and 0.70% annual fees. When I became more financially educated I realized that Vanguard's 0% annual fee (when you go paperless) .05% ratio, and zero loading fees is far superior to anything American Funds has to offer. Not to mention is gets better returns even though it's not actively managed. You'd think a measly 0.70% isn't much. But the expense ratio is 14 times lower at Vanguard and close to that with Fidelity.

You can also check out Fidelity. They have a good website and very good low-fee (comparable to Vanguard's) investment options.

Also, a quick note. A rollover is when you move funds to two different types of accounts i.e. 401(k) to an IRA. A transfer is between the same types of accounts.

I would highly recommend moving all your money out of American Funds. There are no charges for doing so, and luckily no stupid back load fees. It'll also be safe to add money to Vanguard or Fidelity without them skimming some off the top.
« Last Edit: June 30, 2014, 12:50:40 PM by Cwadda »

catccc

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Re: Move American Funds Roth & Taxable account $ to Vanguard?
« Reply #2 on: July 02, 2014, 01:24:25 PM »
I was just looking at what taxes I would pay on this move.  I invested a total of $17,100 into a handful of American Funds.  $2,400 in 2004, $14,600 in 2006, and $100 in 2012. 

For simplicity purposes, I'm going to say I invested all of it in 2004.  It's grown to $38,661 as of today.  That's 226.1% more than what I put in.  I was reinvesting all capital gain distributions and dividends, which added about 11K to my basis.  If I cashed out today, I'd have 10K of capital gains on which to tax, and if I can stay in the 15% income tax bracket (very likely), I'd pay 0% tax on this 10K.

This linked illustration of VTSAX shows that over 10 years, a 10K investment would have grown to $22,443, so the balance would be 224.3% more than what was put it.  Can anyone see if this illustration assumes reinvestment of dividends?
https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT

It's a pretty marginal difference, but I wonder if this doesn't mean I should just leave my money where it is.  Or maybe just sell and re-buy American Funds (I pay no sales charge) to take advantage of currently low capital gains taxes.

Thoughts?

Cwadda

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Re: Move American Funds Roth & Taxable account $ to Vanguard?
« Reply #3 on: July 02, 2014, 01:45:43 PM »
Quote
When you roll over a retirement plan distribution, you generally donít pay tax on it until you withdraw it from the new plan. By rolling over, youíre saving for your future and your money continues to grow tax-deferred.

If you donít roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless youíre eligible for one of the exceptions to the 10% additional tax on early distributions.
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Rollovers-of-Retirement-Plan-and-IRA-Distributions

So basically you would only have to pay tax if you were cashing out. A transfer from American Funds to another company would not be taxable.

If you wanted to compare American Funds with Vanguard, you would have to also remove about $1000 from your American Funds because I'm assuming the front load fee on that money was about 5.7%. That's about what it is now; I'm not sure about back then.

I think the better way to compare them would be to take data from the past 10 years for the average % in returns. We can assume the dividends are approximately close. Then subtract the expense ratios from each for each year. Finally, input that into a compound interest calculator (and don't forget to change the AF adjusted principle value after any front load fees).
« Last Edit: July 02, 2014, 01:48:08 PM by Cwadda »

Cheddar Stacker

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Re: Move American Funds Roth & Taxable account $ to Vanguard?
« Reply #4 on: July 02, 2014, 02:00:38 PM »
It's a pretty marginal difference, but I wonder if this doesn't mean I should just leave my money where it is.  Or maybe just sell and re-buy American Funds (I pay no sales charge) to take advantage of currently low capital gains taxes.

Thoughts?

Whatever you do, if you're in the 15% tax bracket you might as well harvest those gains to increase your cost basis. It does seem like a marginal difference in total return for the taxable account.

Did you run similar numbers for the Roth? Do you have data for the Roth?

Either way, it's hard to argue with low fees and a similar return. I'm not sure what I'd do in your situation. It's a good situation to be in though, so good job there.

catccc

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Re: Move American Funds Roth & Taxable account $ to Vanguard?
« Reply #5 on: July 03, 2014, 07:07:46 AM »
Quote
When you roll over a retirement plan distribution, you generally donít pay tax on it until you withdraw it from the new plan. By rolling over, youíre saving for your future and your money continues to grow tax-deferred.

If you donít roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless youíre eligible for one of the exceptions to the 10% additional tax on early distributions.
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Rollovers-of-Retirement-Plan-and-IRA-Distributions

So basically you would only have to pay tax if you were cashing out. A transfer from American Funds to another company would not be taxable.

If you wanted to compare American Funds with Vanguard, you would have to also remove about $1000 from your American Funds because I'm assuming the front load fee on that money was about 5.7%. That's about what it is now; I'm not sure about back then.

I think the better way to compare them would be to take data from the past 10 years for the average % in returns. We can assume the dividends are approximately close. Then subtract the expense ratios from each for each year. Finally, input that into a compound interest calculator (and don't forget to change the AF adjusted principle value after any front load fees).

Thanks for your input.  A couple of things, my last post was specifically about the taxable account.  I understand the tax impact (or lack of) for the rollover of the IRA.

Here's another reason I'm so tempted to stay:  The 5.75% load doesn't apply to my purchases.  I pay NO sales charge, no front load fees.  It's a unique situation: an immediate family member, the one who would be getting the sales commission, was allowed to waive it.  I don't pay a sales charge, she doesn't get any commission.  So I feel like I have something special and I'm getting a deal.  I often hear "American Funds do well, but the sales charge is killer" kind of stuff, and I wonder if I shouldn't stay.  Now, the expense ratios in the funds are still higher than Vanguard, but I've still done marginally better.

Why is it safe to assume the dividends are close?  Also, it appears that VTSAX pays dividends, but I can't find data on capital gains distributions?

catccc

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Re: Move American Funds Roth & Taxable account $ to Vanguard?
« Reply #6 on: July 03, 2014, 07:17:38 AM »
It's a pretty marginal difference, but I wonder if this doesn't mean I should just leave my money where it is.  Or maybe just sell and re-buy American Funds (I pay no sales charge) to take advantage of currently low capital gains taxes.

Thoughts?

Whatever you do, if you're in the 15% tax bracket you might as well harvest those gains to increase your cost basis. It does seem like a marginal difference in total return for the taxable account.

Did you run similar numbers for the Roth? Do you have data for the Roth?

Either way, it's hard to argue with low fees and a similar return. I'm not sure what I'd do in your situation. It's a good situation to be in though, so good job there.

Thanks for your input.  I haven't run similar data for the roth.  I just did it for the taxable account because it was a very simple analysis given that I'd invested larger lump sums early on.  I should do the same for the Roth, it's just slightly trickier as it has more regular contributions, rollovers, etc.

matchewed

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Re: Move American Funds Roth & Taxable account $ to Vanguard?
« Reply #7 on: July 03, 2014, 07:22:40 AM »
It's a simple math problem. Assuming you can find funds which perform relatively equal compare the expense ratios. If American Funds can't beat it then move the Roth for sure. The taxable account will be a trickier question as you'll probably have to run some of the numbers for how much you'll pay in taxes for selling versus annual cost of the funds.