Author Topic: untangling the knots in my mom's accounts  (Read 7537 times)

Frankies Girl

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untangling the knots in my mom's accounts
« on: April 29, 2015, 04:12:08 PM »
So I'm visiting my mom and helping her get everything figured out and consolidating all of her accounts that we can (and that she feels comfortable with). I need to run this by better minds than my own to make sure I'm not missing something or making any mistakes, so please let me know if there is anything advice-wise to consider.

She has a pension and social security that more than pays her spending - she actually makes more money than she needs off of these two alone, and thus has no need to tap any of her investments (holy crap, how awesome are pensions? So sad they're rare now). She just turned 70 and will be starting her RMDs the end of this year. She said her risk tolerance is very high - 7 or 8 on a scale of 1-10 (since she doesn't need the investments to live on at all). I'm also going to be working on her to actually use some of that hard-earned money for some splurges on herself. It is it like pulling teeth to convince her to spend anything on herself! ;)

I'm planning on putting her in:
50%  Fidelity Spartan Total Market Index Fund (FSTVX) ---- held in taxable account
10%  Spartan Real Estate Index Fund (FSRVX)   ---- held in tIRA
5%  Fidelity Spartan U.S. Bond Index Fund (FSITX) ---- held in tIRA

And as she likes international exposure:
10%  Fidelity Spartan Global ex U.S. Index Fund (FSGDX) ---- held in taxable account
(fixed numbers to equal 100% - thanks, Another Reader!)

The annuity accounts for 20% of her portfolio, so I went light on the bond allocation since it seems like having a guaranteed fixed income is interchangeable with bonds... right?

and holding the remaining 5% of her portfolio in cash for home improvements etc...

She has a 403b with General American containing an annuity. It's actually not a terrible one and was discontinued a while back. General American is a subsidiary of Met Life, and you can't even go online to view statements for this annuity because it was discontinued a while back (due to them having a minimum of the 4% earnings my mom thinks). So annuity is guaranteed to earn at least 4% or better, no surrender costs, minimal operating costs and potential for higher growth, and she'd like to leave that one "as is."  So I'm considering that a fixed income producer (similar to bonds) for her portfolio.

She has too much cash, and she realizes that - 40% of her portfolio. She has a tIRA that had 95K in cash, and had a large amount of cash in savings, and then had some health problems and forgot to go invest all of it in anything. I am moving this tIRA (with a small town credit union) and her taxable brokerage (with Valic) over to Fido (I have all Fido, and prefer them to Vanguard, and as I'm going to be managing her accounts for her, it just makes sense to me).


She currently has her Valic taxable with the following funds:

ACSYX    ER-1.57%
OIGCX    ER-1.89%
OPMCX   ER-1.86%
CGRWX  ER-0.96%  Front load-5.75%
TEMFX   ER-1.21%  Front load-5.75%
OIBCX   ER-1.75%

Her average expense ratio is 1.49% and she's been paying them around $4K a year to manage this account, which is INSANE, and to add insult to injury, they haven't even bothered to call her in YEARS to say "hi" or anything. I know I've heard of oppenheimer and templeton and such all over the place, but they don't appear to be good enough funds to justify the high expense ratios and the front loads (while I realize are sunk cost) piss me off.

But here's a complication: as I mentioned, she has to take minimum distributions now from her annuity and from the tIRA. She is in but barely below the 15% taxable bracket right now, but the distributions that must be started this year will possibly push her up over (thereby incurring cap gain/dividend tax).  And I have all of those awful C and A class funds in that taxable account that I'd like to sell for her to move her into index funds. But selling right now means she'd have to pay long term capital gains most likely. I've got to look at her cost basis on the account (thank dog they actually put that on there) but I am so sad I didn't know more about all of this stuff even 5 years ago so I could have had more time to shift things around for her and minimize her tax hit.

I think that right now, it would be best to set up an automatic distribution for the minimum distributions in a lump sum from the two accounts by December, ask them to withhold 20% for taxes, and then reinvest in her taxable - or spend it if possible.

I'm going to get her 2014 taxes to see exactly where she is falling on the taxable income and how badly selling off the taxable funds would be based off of that in TurboTax's Taxcaster, but is there anything else I should be aware of?

So tIRA is cash, easy peasy to move hopefully. I've asked for the taxable account to move over "in kind" until we get a better idea of the sell off implications. Forms filled out and just waiting for the bank guy to call us to let us know when the medallion signature guy will be in to get the ball rolling on the tIRA and taxable account transfers. So then she'll have one annuity, and two accounts over at Fido (taxable and tIRA) that are easier to manage, and we can roll her excess cash into the taxable to invest.

Any thoughts on all of this? Pretty please?

« Last Edit: April 29, 2015, 06:58:05 PM by Frankies Girl »

MDM

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Re: untangling the knots in my mom's accounts
« Reply #1 on: April 29, 2015, 04:19:30 PM »
Any thoughts on all of this? Pretty please?
Other than it seems you have analyzed this well, are asking the right questions, and have a sound plan?  Not really.... :)

Is there any specific area where you have concerns?

beltim

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Re: untangling the knots in my mom's accounts
« Reply #2 on: April 29, 2015, 04:28:28 PM »
I'm going to get her 2014 taxes to see exactly where she is falling on the taxable income and how badly selling off the taxable funds would be based off of that in TurboTax's Taxcaster, but is there anything else I should be aware of?

Any thoughts on all of this? Pretty please?

Your plans mostly look great.  One word of caution - the last time I looked at Turbotax Taxcaster it didn't handle dividends and capital gains taxes correctly, especially at the border between 0% and 15% LTCG rates (i.e. the 15%/25% ordinary income tax bracket, i.e. the exact region you care about).  The regular Turbotax product doesn't have this flaw.

tarheeldan

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Re: untangling the knots in my mom's accounts
« Reply #3 on: April 29, 2015, 04:29:42 PM »
I cant think of anything except looking for capital losses to harvest to mitigate taxes on gains

BarkyardBQ

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Re: untangling the knots in my mom's accounts
« Reply #4 on: April 29, 2015, 04:46:57 PM »
It looks like your handling things pretty well...

I had one thought for the year where her income might jump over the 25%...

Could she gift shares or some of that cash/income to you? She can give family members up to 14K each. How your family handles that is up to you.

Or she could donate the overage to charity if she really doesn't need the income.

#MPP (is this a thing yet, mustachian people problems?)

MDM

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Re: untangling the knots in my mom's accounts
« Reply #5 on: April 29, 2015, 05:03:36 PM »
I had one thought for the year where her income might jump over the 25%...

Could she gift shares or some of that cash/income to you? She can give family members up to 14K each. How your family handles that is up to you.

Or she could donate the overage to charity if she really doesn't need the income.
Unless the OP or her family is a charitable organization, gifts to them will not reduce mom's taxable income at all.  Unless you are suggesting mom gives the high fee funds away and lets OP and family pay taxes when sold...?

Another Reader

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Re: untangling the knots in my mom's accounts
« Reply #6 on: April 29, 2015, 05:06:25 PM »
Just looking at the first Valic fund makes me nauseous.  Poor performance, high expenses, and the deferred load.  It's sad that Valic's approach to financial "service" continues to exist. 

However, as you point out, there are times where the capital gains hit means it makes more sense to keep the existing funds and not sell.  I would also just move them over to Fido.  Invest most of the cash, and work on getting her out of the other funds as it makes sense.  You will likely incur a sales charge for these funds at Fido, so if any are to be sold this year, it might make sense to sell before moving the account.

I'm in the camp that says the RMD's for a couple of years ahead should be in cash, although the annuity might substitute for some or all of that.  That keeps the bulk of the portfolio intact if there is a substantial decline.  Not sure how this annuity works, maybe that will cover all of the RMD's?  RMD's can come from any combination of qualified accounts - in her case the 403b and the tIRA.  You do not have to distribute proportional to the account values.

Bumping her income up may increase how much of her Social Security is taxable, so have a look at those numbers.

I think your percentages only add up to 95 percent.

Aren't you pleased that you now have both the knowledge and the time to sort this out for your mother?  A year or two ago you had neither, and now you can handle this with no reservations.


BarkyardBQ

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Re: untangling the knots in my mom's accounts
« Reply #7 on: April 29, 2015, 05:12:44 PM »
I had one thought for the year where her income might jump over the 25%...

Could she gift shares or some of that cash/income to you? She can give family members up to 14K each. How your family handles that is up to you.

Or she could donate the overage to charity if she really doesn't need the income.
Unless the OP or her family is a charitable organization, gifts to them will not reduce mom's taxable income at all.  Unless you are suggesting mom gives the high fee funds away and lets OP and family pay taxes when sold...?

I guess I misunderstood the regs. The gift giver is still taxed but the gifted is not?

Charity still works though.

MDM

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Re: untangling the knots in my mom's accounts
« Reply #8 on: April 29, 2015, 05:16:28 PM »
The gift giver is still taxed but the gifted is not?
If over $14K/person, yes.

If under $14K/person, no tax implications whatsoever.

See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes for more details.

mxt0133

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Re: untangling the knots in my mom's accounts
« Reply #9 on: April 29, 2015, 05:29:55 PM »
With regards to the taxable accounts it might not make sense to liquidate now taking the hit on long-term capital gains just to save on 1% a year of expenses given that your mother is 70 and will probably not have a long enough time frame to justify the initial hit of liquidating.

There are other strategies that you could look into like a charitable trusts like a CRAT where you can gift the securities where you could potentially save taxes on the deduction to offset the capital gains when liquidating the expensive funds.  This is a case were an estate planner/CPA would be worth 2K to potentially save 10K in capital gains taxes.

With regard to your mother's risk tolerance, I get that she doesn't necessarily need the money to fund her lifestyle so she can take higher risk with he funds but also consider the possibility of future medical expenses and long-term care.  Imagine we enter into a bear market and she now has to pay 50K a year for long-term care.  There is a significant chance where she uses all her investments and her pension and social security cannot cover her long-term care expenses.

Again at that age it is more of capital preservation than growth because her time is limited and she might not have time to ride out the lows of a bear market.

Insurance can help offset this while allowing her to invest aggressively.

BarkyardBQ

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Re: untangling the knots in my mom's accounts
« Reply #10 on: April 29, 2015, 05:32:53 PM »
Thanks MDM

aj_yooper

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Re: untangling the knots in my mom's accounts
« Reply #11 on: April 29, 2015, 05:53:34 PM »
Frankies Girl, you are organizing your mom's investments well!  I agree with Another Reader in keeping the RMDs in cash, so your mom won't have to sell in a down time; maybe, doing those 2 years ahead.  Your index fund choices are good. 

With the Valic annuity:  Has it been turned into an annuity or is she holding the funds in a 403b?  If it is a TDA/403b, I believe she could transfer the money to Fido?  It might be worth looking into that.  I had an old Valic 403b and I was able to roll it over to Vanguard.  Also, could you have Fido do the transfer of funds and skip the bank medallion guy? 


Another Reader

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Re: untangling the knots in my mom's accounts
« Reply #12 on: April 29, 2015, 06:37:55 PM »
The annuity is not with Valic - the taxable accounts are.  The annuity is with General American/Met Life.  It might be possible to do something with that if the principal has not already been annuitized, but some of these older annuities are actually quite valuable.  The fees are low and the guaranteed return is high on this one.  It is worth reviewing the contract and talking to the insurance company to see what the options are.  Maybe talk to someone that has expertise in annuities and is unbiased (nothing to sell) to understand this one better.

aj_yooper

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Re: untangling the knots in my mom's accounts
« Reply #13 on: April 29, 2015, 07:24:10 PM »
My bad on the Valic. 

Another Reader

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Re: untangling the knots in my mom's accounts
« Reply #14 on: April 29, 2015, 07:52:30 PM »
Valic was probably a plan provider at some point in her career.  You don't get sucked into working with them otherwise.  And you raised a very good point about investigating the annuity options.  We don't know if the annuity has started or what the options are.

Frankies Girl

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Re: untangling the knots in my mom's accounts
« Reply #15 on: April 29, 2015, 10:54:01 PM »
 Y'all are all awesome. Thank you so much for all of the insights:D

The annuity has started, and it is a decent one, so at least it's a good stable income provider even if she doesn't need it at the moment.

Valic was a plan provider strongly suggested to her by her school district. I am livid at how they walk the line of being outright crooks - and teachers in general are sold such horrible investments in general (annuities and front loaded fees are pushed almost exclusively it seems).

No capital losses available. Her long term cap gains total $78K, so that would mean a tax bill of nearly $12K if we sold all of it at once with her in the 25% bracket.

I had a bright idea of suspending her social security for half a year to drop her income down below the bracket ceiling but thta won't work either, as it appears that you can't suspend benefits after age 70.

So it's looking like we'll be checking into donating her RMDs to charity for this year, or alternatively leaving her in the crappy funds for a little while and sell them in pieces over the next couple of years.


ClaycordJCA

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Re: untangling the knots in my mom's accounts
« Reply #16 on: April 30, 2015, 12:54:13 AM »
If charitable donations are going to be made, rather than donating her RMDs to charity does it make sense to set up a FIDO charitable account and donate to it the high cost shares with the biggest capital gains?  If I understand correctly, Mom gets the deduction based upon the appreciated value of the donated shares and there is no capital gains since the shares are donated.

Recognize that donating shares or RMDs means that 100% of the money will be gone. It's like spending $1.00 to avoid spending $.15 with Uncle Sam.  If it's my money, unless I plan on making charitable contributions any way I think I'd rather pay capital gains and keep 85% of what I have rather than 0. 

Regardless, if possible I'd move all the existing funds to FIDO and ensure that capital gains and dividends are not reinvested but paid out and invested in index funds, used to pay taxes or spent.

aj_yooper

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Re: untangling the knots in my mom's accounts
« Reply #17 on: April 30, 2015, 04:43:05 AM »
A thought on Valic: 

If your mom is paying $4,000 in annual fees to Valic, she will pay $20k in 5 years, and way more at 10 or 20 years.  If she sold them now and took the tax, how many years would it take to break even?


Frankies Girl

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Re: untangling the knots in my mom's accounts
« Reply #18 on: April 30, 2015, 08:17:26 AM »
Good points on the charity donations not saving much of anything and losing a chunk of money besides, and the break even point on selling and getting away from Valic.

I'm just not seeing other ways to reduce income, so it appears that she has the first world problem of just having too much money.

I've been running more in-depth numbers, and while most of her funds have both deferred and back load fees (OMG, how is this even legal??) the term limits have expired on both, so she should not incur any fees for selling from the funds themselves, just for Valic's sell fees. At least, I would think it would be better to sell while still at Valic so there is no question on the cost basis as I'm not sure if shifting the funds over in kind might somehow reset the clock on that.

I need to call and find out the sell fees at Valic. I dread that, as I'm sure I'm going to get the runaround and just learning how much it will cost to get out of Valic is going to make me sick to my stomach. I'll also be calling my assigned guy at Fido to pick his brain. I pay nothing for him due to my account size, and I would think with the size of my mom's portfolio and it coming over to Fido, he'd be happy to help.

According to the boilerplate on Fido's website:
A transaction fee is similar to a brokerage fee or commission which you pay when you buy or sell a stock. For some funds available through Fidelity you are required to pay a transaction fee. However, you will not pay a sales load on Transaction Fee (TF) funds. You will only be charged a transaction fee when you buy a FundsNetwork TF fund, not when you sell one. All other fees and expenses described in a fund's prospectus still apply. You can choose to buy or sell shares directly from the fund itself or its principal underwriter or distributor without paying a transaction fee to Fidelity.

Online Transaction Fees: $49.95 for most funds. Certain funds will have a transaction fee of $75. To identify any applicable transaction fees associated with the purchase of a given fund, please refer to the "Fees and Distributions" tab.

Fidelity Automated Service Telephone (FAST): 25% off representative-assisted rates, Maximum: $187.50, Minimum:$75
Representative-Assisted: 0.75% of principal, Maximum: $250, Minimum: $100
Automatic Investment: $5 per transaction, after the initial investment.


SO I have to check to see if these fund really would be subject to no sale fee, and also if the cost basis will track after transferring to a new account (I would think so if we have proof from her old statements, but have to be 100% sure).

And technically, we could have her just use the RMDs towards her taxes, offsetting the selling off of the funds (and pay the difference for the cap gains), but when I add in using her RMD as a tax payment, and then the 78K cap gains, she's in the 28% tax rate, and she would owe a total of around 18K in taxes (her regular tax owed plus the cap gains tax) if we didn't do any donations.

Adding in 10K in donations only drops her tax liability by a few hundred, so I'm wondering if it's best to just bite the bullet and pay the 18K in taxes (which would be for her 2015 tax year) to get everything sorted out now and have her in index funds going forward, and hold on making donations to offset taxes. She still donates every year, and she has a nice bequest in her will for her favorite charities, but I can't see donating tens of thousands right this minute to save almost nothing... doesn't make much sense to me.

We've also discussed that she'd be able to leave her accounts to her heirs with stepped up basis applying as well, which while morbid to think about, is also a factor in whether it is more prudent to sell now or wait. She isn't in great health, and she's comfortable talking about mortality, but it makes me feel sad/bad. I'm trying to be logical on all of this, but it's still an uncomfortable subject.

So what would you do in this situation?

Sell off and pay 18K in taxes total plus sell charges to wipe the slate clean and get a streamlined portfolio, or just keep the funds "as is," since they technically are showing moderate growth despite the horrible expense ratio/fees? Transfer over, and sell off portions over time to lessen the tax hit?

None of these are the obvious choice, and while I know if it was me, I'd lean to just selling now to get it over with and paying the tax, is that the best move for my mother's situation? And are these the only moves we really have available?



« Last Edit: April 30, 2015, 08:22:15 AM by Frankies Girl »

Another Reader

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Re: untangling the knots in my mom's accounts
« Reply #19 on: April 30, 2015, 09:30:46 AM »
In your shoes, I would get all the information in hand about selling the Valic funds before making a decision.  That includes the selling fees and whatever account closing fees they charge, as well as the tax impact.  If the total amount of accounts being transferred is large enough, Fido might cover the fees.  They did when I consolidated all of my father's many mutual fund and brokerage accounts there.  Never hurts to ask.

I would be inclined not to take the tax hit in one year.  Ripping the bandage off slowly is more painful, but not as expensive as liquidating everything at once. 

I might put everything in a spreadsheet along with a list of pros and cons and then see what your mom's opinion is.  It's her money, and ultimately her decision.

GregO

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Re: untangling the knots in my mom's accounts
« Reply #20 on: April 30, 2015, 10:10:01 AM »
While you are very knowledgeable about all of this, I still think it's clear that you should seek professional help from someone who knows how to limit taxes on portfolios for retirees.  You have enough knowledge with all of this that it probably wouldn't take long for someone to discuss some good potential options for you and your mother.

And I think it's best to just transfer the funds in kind to Fido and avoid the capital gains hit.  You are considering paying 25%+ in taxes in order to save 1% in operating expenses.  I know we all hate high expense ratios, but this seems penny-wise and pound-foolish.  Same logic applies to avoiding a potential $50-$100 sell fee and paying thousands in taxes.

Lastly, I actually think you should consider donating to charity now if that is something your mom wants to do at some point anyway, especially if it can get her into the 15% tax bracket.  If she plans on donating at some point, donating appreciated assets now can make a lot of sense.  You haven't given enough $s to run the numbers, but if she donated appreciated assets, that could potentially fulfill the RMD requirement, possibly get her under the 25% tax bracket, and allow you to convert the rest of the funds into index funds.  It's only going to get harder to get under that 25% tax bracket as she gets older and the accounts likely grow and the RMD increases.

beltim

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Re: untangling the knots in my mom's accounts
« Reply #21 on: April 30, 2015, 10:20:26 AM »
And I think it's best to just transfer the funds in kind to Fido and avoid the capital gains hit.  You are considering paying 25%+ in taxes in order to save 1% in operating expenses.  I know we all hate high expense ratios, but this seems penny-wise and pound-foolish.  Same logic applies to avoiding a potential $50-$100 sell fee and paying thousands in taxes.

If she's going to use the money at some point, the comparison isn't 25% in taxes versus 1% in annual expenses.  These are capital gains, not income, so she can wait until the gains become long-term capital gains, at which point it's:

15% in taxes NOW (on capital gains) and ~1.5% expenses EVERY YEAR (on the entire balance) vs:
~0.2% expenses every year and 15% in taxes when sold.

That's a pretty obviously a big no-brainer.

Your point on charity using appreciated funds is a good one, though.

GregO

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Re: untangling the knots in my mom's accounts
« Reply #22 on: April 30, 2015, 10:35:04 AM »
You are right, it is 15% in taxes now on the CGs instead of 25% (my bad), but it's not necessarily 15% on CG in the future as the opposing option.  There are many situations where the CG tax could be 0%.  Donating the funds, having a significant medical expense that allows her to have a large deduction on her taxes that pushes her below the 25% tax bracket, etc.  The OP also talked about the 'step-up', which would apply to these funds and avoid the taxes.  And lastly, every year that you defer taxes is another year that the money gets to be invested in the market and grow.  Deferring taxes is one of the pillars of tax strategy.

But it is true that I don't know what the balances of the funds are to compare the 1%+ in operating expenses versus the $78k in CGs.  I just assumed that she has been invested in these funds for a long time and the CGs make up a significant percentage of the overall value.

beltim

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Re: untangling the knots in my mom's accounts
« Reply #23 on: April 30, 2015, 10:57:55 AM »
You are right, it is 15% in taxes now on the CGs instead of 25% (my bad), but it's not necessarily 15% on CG in the future as the opposing option.  There are many situations where the CG tax could be 0%.  Donating the funds, having a significant medical expense that allows her to have a large deduction on her taxes that pushes her below the 25% tax bracket, etc.  The OP also talked about the 'step-up', which would apply to these funds and avoid the taxes.  And lastly, every year that you defer taxes is another year that the money gets to be invested in the market and grow.  Deferring taxes is one of the pillars of tax strategy.

But it is true that I don't know what the balances of the funds are to compare the 1%+ in operating expenses versus the $78k in CGs.  I just assumed that she has been invested in these funds for a long time and the CGs make up a significant percentage of the overall value.

Right, that's why I prefaced my comment with "if she's going to use the money at some point."  There are scenarios that it makes sense not to sell the funds – but a straight comparison of taxes to expense ratio describes none of them.

Frankies Girl

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Re: untangling the knots in my mom's accounts
« Reply #24 on: April 30, 2015, 03:19:48 PM »
I've spoken with Valic and there are no fees to sell or close or transfer. Same for if we decided to wait to sell at Fido; no fees at all.

Will be discussing tomorrow with my personal adviser at Fido all of the possible moves and tax ramifications. We are currently thinking it may prove best to transfer in kind, and then hold the funds and sell off in small amounts in the future to keep the cap gains tax lower.

All of the commentary so far has been very helpful - thank you so much, all of you!

Frankies Girl

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Re: untangling the knots in my mom's accounts
« Reply #25 on: May 01, 2015, 02:44:26 PM »
So talked with my Fido guy and he agreed with everything we've discussed. Pretty much stuck on the cap gains with three moves:

1. sell off everything in one year and just take the big tax hit
2. sell off over a multi-year time period to spread out the tax hit
3. hope for a market crash as it might wipe out some of the cap gains themselves (we all laughed about that one)
4. hold in kind the crap funds indefinitely

We're leaning towards #4 for now, and implementing #2 in about one year to make sure that all funds have aged out of the deferred/back load fees (as my mom had everything reinvesting unfortunately).

Once the funds move over, we'll set the dividend to stop reinvesting and use the dividends to for buying the index funds.




Another Reader

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Re: untangling the knots in my mom's accounts
« Reply #26 on: May 01, 2015, 04:45:58 PM »
I think that's a sensible approach.  It's what I would do in your shoes.

Have you and/or your mom discussed any of this with your sister?  It might be helpful to let her know what the plan is, so she doesn't think things are being done behind her back.

Frankies Girl

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Re: untangling the knots in my mom's accounts
« Reply #27 on: May 01, 2015, 07:40:28 PM »
I think that's a sensible approach.  It's what I would do in your shoes.

Have you and/or your mom discussed any of this with your sister?  It might be helpful to let her know what the plan is, so she doesn't think things are being done behind her back.

We've mentioned we are working on mom's finances, but my sister has little interest in it. I can barely get eye contact (constantly playing with her smart phone) when I was trying to explain about basic investing (she's paying ungodly amounts of money for supervisory services) and she told me she hates that her rep calls her once a quarter to check in, as she has nothing to say to them (and got snippy that they even do that).

I have tried to talk to her about index investing and how she could stop paying so much in management fees and probably see better overall growth, and she says she is interested, but then I can't get her to sit down with me at all to go over things. It's not because she doesn't want to share info, it's because she really doesn't care enough to change the status quo.