Author Topic: need some help - inherited brokerage acct  (Read 7654 times)

Frankies Girl

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need some help - inherited brokerage acct
« on: August 08, 2013, 10:49:53 AM »
So today the transfer completed for one of my father's accounts... $175K, in a brokerage account at Fidelity (where I do already have an inherited IRA and my own 401K).

As I opted out of the managed account for this (still have the IRA managed by them, but that may change down the road), they had to sell off a large portion of the funds due to them only being available to managed class, so currently I have about $100K in cash available to purchase whatever, with the remaining $75K tied up in the following:

FHIGX   Fidelity Municipal Income
FSAGX   Fidelity Select Gold
FSTFX   Fidelity Limited Term Municipal Income FD
MERFX   Merger Fund
PATAX   T Rowe Price Tax Free Income Adv. Class
SHYTX   DWS Strategic High Yield Tax Free CLS

So none of them are doing much of anything, and one of them is paying out more in fees than it's earned in the last year. At least one of them has a 12b-1 fee, and the last two I can't find through Fidelity's site a breakdown of the fees themselves, but pulling the tickers on them, none of them are great performers. When I said something about my dad probably having this account set to pretty conservative, the rep said that it wasn't that much, but it sure does look that way to me...

I vaguely understand that there are capital gains/losses assessed on this account since it is a brokerage account. I don't want to pull out any of the money; just want to move it into a better performing/low fee situation.


What I would like to do is sell off all of the current lineup and buy something like a 60/40 split into FSITX, Spartan total bond index and FSTVX, Spartan total market index fund. Might add a small amount (10-15%) of FSRVX, Spartan Real Estate Index Fund.


So my questions are:

1. Can I do this without realizing capital gains?  Will I rack up major fees and take a huge tax hit? The account just became mine literally within the last day, so I'm unclear on the ramifications. Any good reading that explains capital gains/loss in a "so simple even your dog could understand" format?

2. Are any of the existing funds worth keeping in anyone's opinion?

3. Do my picks for what I'd like to move to look good? I researched them and they are the FID equivalent (as far as I can tell) for Vanguard's top picks with low fees and good overall performance.

Some more info:

My current asset allocation is around a 50/50 split between stocks and cash/money markets. I've got around $45K just sitting in a savings account that I need to do something with. I will be putting a large amount of cash into the index funds within the next couple of months, to hopefully get the allocation to a total of 75% stock (FSTVX most likely) and then 20% into the bond/REIT, with 5% in money market/cash.

I am hoping to officially retire in the next 5 years. I'm not sure if I'll need to touch this account specifically for quite a while after that, (husband will be working, and I probably will be freelancing and we'll still bring in enough money to basically live on) but I'm figuring at least 5-10 years, and we do have other accounts in addition to this one, so it could be essentially untapped to grow or recover as needed.

Freeyourchains2

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Re: need some help - inherited brokerage acct
« Reply #1 on: August 08, 2013, 11:08:48 AM »
It looks like you are focused on Index Funds, so follow the advice in these forums.

However if you are slightly interested in High quality Dividend Growth Companies, check out this guy who is retiring by age 40 through brokerage dividends here: http://www.dividendmantra.com/

Maybe some real estate or creating some business models. Whatever investment type that makes you happy to do.

Well best of luck, if i say anything more i will get spit upon by the investor alley.

aj_yooper

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Re: need some help - inherited brokerage acct
« Reply #2 on: August 08, 2013, 12:48:55 PM »
Good going on losing the adviser for your taxable account!  As you get more experience with investing, IMO, you will see that the adviser usually does not add much value to your stash.  John Bogle, Burt Malkiel, William Bernstein, and Warren Buffett also think that too!

I think you should study the Bogleheads' website to learn more of the basics to get you started.  The site is very clear and reasonable.  http://www.bogleheads.org/wiki/Bogleheads_investing_start-up_kit 

First, you need to determine your asset allocation (%stocks/%bonds) is for  your overall portfolio (all of your investments including IRAs, Roths, 401k s, and taxable accounts).  You mentioned 40/60, which is risk averse.  Asset Allocations (AA) are personal preferences on the benefits of risk versus rewards.  Vanguard (and probably Fidelity) have online questionnaires that can help you figure out your AA preference.

You need to study some more and then apply your AA to the overall portfolio (the set of all your investments-IRAs, Roth, 401k s, taxable).  So, for example, you could have your taxable account with the Total Stock Market Index only.  Your IRAs might hold REiTS and some bond funds; your 401k might hold Total International Index and some Value Index.  Bogleheads has a number of simple AA mixes.  A simple portfolio mix, per Bogleheads, might look like this:

With Fidelity, for example, you could construct a three-fund portfolio using:

Fidelity Spartan Total Market Index Fund (FSTMX)
Fidelity Spartan Global ex U.S. Index Fund (FSGDX)
Fidelity Spartan U. S. Bond Index Fund (FBIDX)

Naturally, the bond fund would go in a tax advantaged fund, like an IRA or 401k. 

Personally, none of the listed bond funds you list from your dad's account have much appeal.   

Your capital gains basis (or initial point) is the date  that you inherited your father's taxable account.   A short term capital gain or loss occurs when you sell the mutual fund(s) before a calendar year elapses for more or less than the basis; similarly, if a calendar year elapses after you inherited the account, then a long term capital gain or loss may occur when you sell the equities.  This link explains how capital gains, dividends, and qualified dividends are taxed:   http://taxes.about.com/od/capitalgains/a/CapitalGainsTax_4.htm  Selling a fund triggers the capital gains tax possibility, not taking the money in cash.  So, if you sold fund A, you may have a capital gain or loss on A even if you did not put the $ in your checking account.  Thus, a taxable fund should have a Do Not Disturb sign on it in your head.  Similarly, if the fund you choose sells a lot of stocks over the year, the turnover (turnover ratio) triggers capital gains tax possibilities.  So a low turnover rate fund is very good for a taxable account, like the Total Stock Market Index or a Total International Index.  Further, Bogleheads recommends that income generating funds (taxable bonds, dividend stocks, REiTs, etc.) not be placed in a taxable account as that means more taxes for you. 

Frankies Girl

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Re: need some help - inherited brokerage acct
« Reply #3 on: August 08, 2013, 01:32:09 PM »
Just to clarify, I'm shooting for an overall AA of my entire portfolio of about 75/25  (75% stocks/25% bonds & short term).

This particular brokerage account, I was thinking of doing as a 60/40 (not 40/60 - accidentally put the bond fund first but I meant to say 60 on the stock market index and 40 split on the bond/REIT) as I look at my overall holdings, that will put me closer to the AA I'm aiming for.


The bond fund being held by the IRAs/401K - I wasn't aware of that being a better idea, so I will do some more reading on it. I had planned on opening a Roth IRA soon, but wasn't to the point of doing hard research on it, so that's definitely something to check as well.

The capital gains/loss thing still confuses the hell out of me, so I definitely need to figure that out soon as I don't want to hold on to the original brokerage account's selections as just from what I can tell, they are all poor choices.


I'm definitely going to do more reading on the Boglehead site, but I tend to start getting overwhelmed with all of this and it's slow going for me unfortunately.

Thanks so much for the info so far - and please anyone else that has some insight, I'm all ears!

« Last Edit: August 08, 2013, 01:34:56 PM by Frankies Girl »

aj_yooper

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Re: need some help - inherited brokerage acct
« Reply #4 on: August 08, 2013, 01:52:55 PM »
The AA applies to the set of all your investment accounts.  I would recommend you do a diagram of your accounts and write in what you want to have in each one, say taxable-Total Stock Market Index, IRA-Total Bond Index,  Roth-Value Index, etc.  Try not to think- I am going to do some number/some number in this account.  Rather, this 100% allocation in the taxable gets me to 60% stocks overall in my portfolio, so I need to find a good place to put the other 15% of the stocks to get to 75%.  Then I need to figure out where I have room for my 25% to bonds.  IRA and 401k looks good. 

Keep posting your questions and you will get ideas.  Sorry, if I did not explain things well.  It might help to practice a deep breathing mantra to get over the tension you are feeling-I can solve this puzzle, one piece at a time. If I get stuck, I can take a breather or ask for help.  My dad gave me a great gift.  I can solve this puzzle and will.

seattlecyclone

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Re: need some help - inherited brokerage acct
« Reply #5 on: August 08, 2013, 04:06:44 PM »
The capital gains/loss thing still confuses the hell out of me, so I definitely need to figure that out soon as I don't want to hold on to the original brokerage account's selections as just from what I can tell, they are all poor choices.

Capital gains is just a tax you pay when you sell shares in a stock or fund. The tax is paid on the difference between the sale price and your cost basis. Your cost basis is normally the amount you originally paid for the shares. In the case of inherited shares, the cost basis is the value of the shares on the date you inherited the shares.

If you inherited the account recently, the current value is probably pretty close to your cost basis, so you shouldn't have to worry about much capital gains tax on these shares. Sell them and use the cash to buy investments you trust better.

There are two varieties of capital gains tax: short-term and long-term. You're charged the short-term rates (which are the same as your regular income tax rates) if you sell the shares less than a year after buying or inheriting them. You pay the lower long-term rates if you sell the shares more than a year after buying or inheriting them. Again, if you inherited the account recently, the capital gains tax you will owe on these shares will not be very expensive.

Does this help?

Frankies Girl

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Re: need some help - inherited brokerage acct
« Reply #6 on: August 08, 2013, 06:33:05 PM »
The AA applies to the set of all your investment accounts.  I would recommend you do a diagram of your accounts and write in what you want to have in each one, say taxable-Total Stock Market Index, IRA-Total Bond Index,  Roth-Value Index, etc.  Try not to think- I am going to do some number/some number in this account.  Rather, this 100% allocation in the taxable gets me to 60% stocks overall in my portfolio, so I need to find a good place to put the other 15% of the stocks to get to 75%.  Then I need to figure out where I have room for my 25% to bonds.  IRA and 401k looks good. 

Keep posting your questions and you will get ideas.  Sorry, if I did not explain things well.  It might help to practice a deep breathing mantra to get over the tension you are feeling-I can solve this puzzle, one piece at a time. If I get stuck, I can take a breather or ask for help.  My dad gave me a great gift.  I can solve this puzzle and will.

It's not you; you're explaining things quite well, it's just that dealing with stuff like this is really out of my league. I'm fine with the basics, but I get so muddled when it comes to the idea that I'm managing large sums of money and trying to figure out all of these things on my own. I have no one else to ask - and I'm so worried I'm going to do something stupid or lose a large amount through a mistake.

I am actually doing a "keep calm" kind of mantra; I keep telling myself that nothing horrible is going to happen just letting it sit there for a little while until I understand things better. :)

Frankies Girl

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Re: need some help - inherited brokerage acct
« Reply #7 on: August 08, 2013, 06:43:14 PM »
The capital gains/loss thing still confuses the hell out of me, so I definitely need to figure that out soon as I don't want to hold on to the original brokerage account's selections as just from what I can tell, they are all poor choices.

Capital gains is just a tax you pay when you sell shares in a stock or fund. The tax is paid on the difference between the sale price and your cost basis. Your cost basis is normally the amount you originally paid for the shares. In the case of inherited shares, the cost basis is the value of the shares on the date you inherited the shares.

If you inherited the account recently, the current value is probably pretty close to your cost basis, so you shouldn't have to worry about much capital gains tax on these shares. Sell them and use the cash to buy investments you trust better.

There are two varieties of capital gains tax: short-term and long-term. You're charged the short-term rates (which are the same as your regular income tax rates) if you sell the shares less than a year after buying or inheriting them. You pay the lower long-term rates if you sell the shares more than a year after buying or inheriting them. Again, if you inherited the account recently, the capital gains tax you will owe on these shares will not be very expensive.

Does this help?

Yes, it helps quite a bit! Thank you!! :)
I just figured out it's going to be under $400 to sell off all of the crappy stuff... so now I just need to figure out what to buy in its place.


Knowing that it would be best to hold tax free funds in a brokerage, anyone have any suggestions on what to start looking at? I was working off the premise of doing the stocks/bonds, but I'm open to ideas here.




aj_yooper

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Re: need some help - inherited brokerage acct
« Reply #8 on: August 08, 2013, 07:14:58 PM »
According to Bogleheads, these two Fidelity funds would be suitable for a taxable account:  Fidelity Spartan Total Market Index Fund (FSTMX) and
Fidelity Spartan Global ex U.S. Index Fund (FSGDX).  This would be a set and forget fund choice.  Personally, I would not put bonds, even tax free municipal bonds in a taxable account, if you have room for the bond component in your tax advantaged accounts-401k, Roth, IRA. 

What is the total value of your portfolio, in round terms? 

When you have that number, you would then need to use your 75/25 asset allocation to the total of your portfolio, the whole deal.  Suppose you have a total of $233k in your portfolio.  75% stocks means $175k that you could buy in your taxable account.  You would then need to buy $58k in bonds in the tax advantaged accounts.  If you have more or less $, then you need to adjust the amounts. 

Technical point:  Brokerage account usually means an account where you buy individual stocks, etc.  A taxable account is one where you buy mutual funds, like an index fund.

Suggestion:

Figure out a tentative plan for your total portfolio, using your 75/25 stock/bonds split using the Fidelity funds you have available.  What funds in what amount will be in the taxable, the IRA, 401k, Roth, etc.  Then post it here and you can get further suggestions. 

You, like us, are human, so you will make mistakes, but this is not brain surgery.  Do the best projection of your portfolio that you can.  I think it will help diminish your worries.  It's a dress rehearsal, OK?

Best wishes!


Frankies Girl

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Re: need some help - inherited brokerage acct
« Reply #9 on: August 08, 2013, 09:05:40 PM »
aj_yooper - (thanks so much for all your help!!)

I'm definitely going to take a good look at the two funds you recommended.

My total portfolio is around $600K. I do need to sit down and look at everything and get my investment breakdown up here soon. I'm very interested in getting the opinions of the MMM forum to see if I'm heading in the right direction.

We've also got a large sum of money just sitting in a savings account, which seems dumb with what I know now (but it ain't hay, so I guess not too dumb), so in a way my dad has not only given me a huge boost to being able to retire early and be financially independent, but it is a great incentive to be more informed and involved with making the money work for me, and it will be as soon as get my ducks in a row.

Considering that both the husband and I are artists and have the typical flaky creative type personalities, we've done pretty well on our own (pretty frugal, no debt, and over $100K in the plus column of our own), but the idea that we are going to be able to retire by age 45 (if I'm figuring it right) is kind of awesome. I really am glad I found this forum because it's helped me immensely with my financial education. :)

LinCO

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Re: need some help - inherited brokerage acct
« Reply #10 on: August 09, 2013, 07:25:45 AM »
I'm in a very similar situation! FWIW, when my mom passed away I kind of froze in fear of a loss: it was bad enough to lose my mom, but if I lost all she had left for me, I'd be distraught! At that time, an account she had started for my second son had just been looted for 90% of its value (eventually, after all the criminal charges v. Salomon Smith Barney & AT&T, my son got $27 back, yay). Not much has happened since to restore my faith in Wall Street!! I put that inheritance  into rental real estate, after reading like 20 books on investing. My parents and both sets of my grandparents had rental properties.

Now that my dad has just passed away, I am looking again at stocks. I have always really like the Motley Fool vibe and paid for a subscription to one of their newsletters. One thing for you to be grateful for is that he had a brokerage account! My dad was doing direct purchase, so our stock transfer paperwork has been HUGE. And now that most of it has been transferred, I am also looking at selling. This will incur more transaction costs than tax consequences.

It sounds like another similarity is we need to adjust our mindset about assets. I am playing around with different retirement scenarios-that's one thing I really like about THIS site. I'm also keeping in mind, like MMM would point out, that you don't KEEP assets by SPENDING assets.

aj_yooper

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Re: need some help - inherited brokerage acct
« Reply #11 on: August 09, 2013, 07:37:02 AM »
Considering that both the husband and I are artists and have the typical flaky creative type personalities, we've done pretty well on our own (pretty frugal, no debt, and over $100K in the plus column of our own), but the idea that we are going to be able to retire by age 45 (if I'm figuring it right) is kind of awesome. I really am glad I found this forum because it's helped me immensely with my financial education. :)

I think being an artist is wonderful preparation for the FI lifestyle!  Passion, creativity, differing points of view. and frugal too!

Freeyourchains2

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Re: need some help - inherited brokerage acct
« Reply #12 on: August 09, 2013, 08:59:55 AM »
Good going on losing the adviser for your taxable account!  As you get more experience with investing, IMO, you will see that the adviser usually does not add much value to your stash.  John Bogle, Burt Malkiel, William Bernstein, and Warren Buffett also think that too!

I think you should study the Bogleheads' website to learn more of the basics to get you started.  The site is very clear and reasonable.  http://www.bogleheads.org/wiki/Bogleheads_investing_start-up_kit 

First, you need to determine your asset allocation (%stocks/%bonds) is for  your overall portfolio (all of your investments including IRAs, Roths, 401k s, and taxable accounts).  You mentioned 40/60, which is risk averse.  Asset Allocations (AA) are personal preferences on the benefits of risk versus rewards.  Vanguard (and probably Fidelity) have online questionnaires that can help you figure out your AA preference.

You need to study some more and then apply your AA to the overall portfolio (the set of all your investments-IRAs, Roth, 401k s, taxable).  So, for example, you could have your taxable account with the Total Stock Market Index only.  Your IRAs might hold REiTS and some bond funds; your 401k might hold Total International Index and some Value Index.  Bogleheads has a number of simple AA mixes.  A simple portfolio mix, per Bogleheads, might look like this:

With Fidelity, for example, you could construct a three-fund portfolio using:

Fidelity Spartan Total Market Index Fund (FSTMX)
Fidelity Spartan Global ex U.S. Index Fund (FSGDX)
Fidelity Spartan U. S. Bond Index Fund (FBIDX)

Naturally, the bond fund would go in a tax advantaged fund, like an IRA or 401k. 

Personally, none of the listed bond funds you list from your dad's account have much appeal.   

Your capital gains basis (or initial point) is the date  that you inherited your father's taxable account.   A short term capital gain or loss occurs when you sell the mutual fund(s) before a calendar year elapses for more or less than the basis; similarly, if a calendar year elapses after you inherited the account, then a long term capital gain or loss may occur when you sell the equities.  This link explains how capital gains, dividends, and qualified dividends are taxed:   http://taxes.about.com/od/capitalgains/a/CapitalGainsTax_4.htm  Selling a fund triggers the capital gains tax possibility, not taking the money in cash.  So, if you sold fund A, you may have a capital gain or loss on A even if you did not put the $ in your checking account.  Thus, a taxable fund should have a Do Not Disturb sign on it in your head.  Similarly, if the fund you choose sells a lot of stocks over the year, the turnover (turnover ratio) triggers capital gains tax possibilities.  So a low turnover rate fund is very good for a taxable account, like the Total Stock Market Index or a Total International Index.  Further, Bogleheads recommends that income generating funds (taxable bonds, dividend stocks, REiTs, etc.) not be placed in a taxable account as that means more taxes for you.

What this means is the only way to ever become financially independent before age 40 is by increasing your income to well above $85,000 a year, while keeping expenses no more then $15k/ year/ family, in order to properly asset allocate, while maxing out your 401k/IRA/HSA, and investing in Index funds only for your taxable.

No start up businesses allowed without taking massive business debt from others. No real estate investing allowed without taking massive mortgages from the banks. And definitely no long term or short term taxable account trading is recommended by the majority in investor alley. So throw your investment imagination out the window, follow them to the Tee, and keep working for another two to three decades, is what they recommend.

secondcor521

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Re: need some help - inherited brokerage acct
« Reply #13 on: August 10, 2013, 12:31:29 AM »
OP, I just want to clarify something as the way it has been discussed here so far could be a little misleading.

Your basis in the mutual funds that you inherit is the fair market value on the date of your father's death, not on the date that the shares were transferred into your account.  See the very first bullet point here:

http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Interest,-Dividends,-Other-Types-of-Income/Gifts-&-Inheritances/Gifts-&-Inheritances

It probably doesn't make much of a difference, and I agree with the other posters' sentiment about selling the funds and moving the money into what seems better investments, but you might as well get your taxes done correctly the first time.