Tax implications for replacing stocks with index funds in TIRA?

[BurbPlanner]

I'm not super-sophisticated about investing, but I've been asked to assist my MIL (86) who is taking over management of finances from FIL (90) due to dementia. FIL made good returns over the years actively managing a portfolio of individual stocks, but my MIL wants a hands-off approach and likes the idea of index funds (thank god). Total portfolio is 4-5m held in both traditional and Roth IRAs. No taxable brokerage accounts.

Fidelity, where they have their accounts, unsurprisingly recommended AUM services for an annual fee of 0.55%.

I think it is probably better to forgo the AUM approach and transition their portfolio to index funds, making sure they have a good estate plan and tax accountant. Seems like a simple index fund portfolio would just require periodic rebalancing and careful attention to RMDs. Is that a reasonable assumption?

However, I don't know anything about the tax implications, if any, of transitioning from stocks to index funds in the TIRA. With a tax-sheltered account, does it even matter? If it does matter, is that a reason to consider Fidelity's proposal? Or is it something that could be addressed with a one-time plan from an advice-only CFP?

[dandarc]

So long as you're not withdrawing the funds, you can trade within the IRAs without tax implications (some exceptions - notably if also selling the same index funds at a loss in taxable that you're buying within the IRAs, watch out for wash-sale rules).

Normally I'd say "cash-grab by Fidelity - you don't need that", however MIL is 86 years old, so the question is will you or your spouse be around to help keep the approach hands off if need be? If so, no need for the service. But if not, maybe. People who actually need financial advisors tend to need them for non-financial, non-investing reasons. Elderly with little to no support might fall under that. 0.55% annual fee may or may not be worth the price for y'all.

[Sandi_k]

No tax implications in the accounts, if you're selling and buying something substantially different. Going from individual stocks to mutual funds or ETFs is exactly that.

My MIL is 88, and she took over DFIL's IRA when he passed last year. She had Disney stock, and an S&P 500 mutual fund. She trusts me, and neither DH nor his brother know much about investing.

So I queried BIL's comfort on various topics; as expected, he was not supportive of foreign investments, so domestic MFs it is.

As a result, we put 45% in Vanguard Wellington, and 45% in Vanguard Wellesley. And 10% in cash, so we can transfer funds quickly, without selling and settling anything.

That gives her 45% domestic stocks, 45% domestic bonds, and 10% cash. She's at Schwab, so did pay a $75 one-time fee for the purchases, but we were OK with that.

If you wanted some international representation, Vanguard's Life Strategy Moderate Growth  fund (VSMGX) would be a good choice: its ER is .15%, and it has Domestic stocks + bonds, and Foreign stocks + bonds. You'd never need to rebalance, as they do it for you.

[MDM]

Total portfolio is 4-5m held in both traditional and Roth IRAs. No taxable brokerage accounts.

• Where have RMDs been going?
• What considerations have been given to Roth conversions?

I think it is probably better to forgo the AUM approach and transition their portfolio to index funds, making sure they have a good estate plan

So far so good!

and tax accountant.

Why?  Might be a good idea if they have "Schedule" income (e.g., Schedules C or E or K-1, etc.) but if it's just SS, pension, RMDs, interest, dividends, and capital gains, TurboTax or similar should be sufficient.

Seems like a simple index fund portfolio would just require periodic rebalancing and careful attention to RMDs. Is that a reasonable assumption?

As edited and as Sandi_k noted, yes.

Fidelity doesn't have funds that will automatically rebalance like the Vanguard ones, except for the 85/15 FFNOX.  Another option (among many) would be to hold 100% bonds in the traditional account and 100% stock in the Roth account, whatever asset allocation that delivers.  See Fidelity suggestions in Other than Vanguard, Boglehead-style.

To reiterate the point already made, selling and buying that occurs only within traditional and Roth accounts has no tax implications.

[BurbPlanner]

Thanks for the responses!

I'm not sure what exactly has been happening to the RMDs previously, other than that they were missed at least one year leading to penalties. This then led to MIL taking over the finances from FIL (see above re: dementia).

They do have an accountant they trust who does their taxes, but the missed RMDs are obviously a concern. I think it was probably a sudden shift in FIL's ability to keep on top of things.

I don't know about  Roth conversions. I've seen them discussed on the forum here, but I haven't paid attention to the details. They have a healthy income from CA pension and an annuity (don't know the full income details yet). I think they are in the 24% tax bracket.

Interesting suggestion on funds that rebalance automatically. Wouldn't the asset allocation need adjusting across accounts at some point if the Roth and TIRA are holding different investments?

[MDM]

I'm not sure what exactly has been happening to the RMDs previously, other than that they were missed at least one year leading to penalties. This then led to MIL taking over the finances from FIL (see above re: dementia).

They do have an accountant they trust who does their taxes, but the missed RMDs are obviously a concern. I think it was probably a sudden shift in FIL's ability to keep on top of things.

Question about RMDs was prompted by the "No taxable brokerage accounts" sentence.  In other words, where is the RMD money going?

I don't know about  Roth conversions. I've seen them discussed on the forum here, but I haven't paid attention to the details.

Roth conversions may or may not be worthwhile.  Probably depends mostly on the situations their heirs are in.

They have a healthy income from CA pension and an annuity (don't know the full income details yet).  I think they are in the 24% tax bracket.  Interesting suggestion on funds that rebalance automatically. Wouldn't the asset allocation need adjusting across accounts at some point if the Roth and TIRA are holding different investments?

Being in the 24% federal bracket implies an AGI >$240K/yr.  Unless their living expenses are greater than that, their needed withdrawal ratio from invested funds is 0% and they have "won the game".

Two logical conclusions when one has "won the game":
1. Go 100% fixed income because you don't have to take any risk.
2. Go 100% stocks because you can afford to take that much risk.

Given that, there seems no need to worry about rebalancing. :)

Really need to understand the whole picture in order for any suggestions (including the ones above) to mean much.  See How To: Write a "Case Study" Topic and Asking Portfolio Questions for the types of information that are most helpful.

[dandarc]

Wow - 86/90 years old, great pensions and $4-5 million? Reads like in-laws are in absolutely fantastic financial shape here. There really is no losing with this brick-bunker of a financial picture. Hire out managing the portfolio, don't. There's no bad answers.

Suggestion for the RMD's (and assuming this remains a thing) - look into qualified charitable distributions. Covers the RMD and completely tax-free. Maybe only covers part of it here? large balance + age means percentage for RMD might well come out to more than $216k (MFD). And of course, helps make the world a better place.

[Sandi_k]

Wow - 86/90 years old, great pensions and $4-5 million? Reads like in-laws are in absolutely fantastic financial shape here. There really is no losing with this brick-bunker of a financial picture. Hire out managing the portfolio, don't. There's no bad answers.

Suggestion for the RMD's (and assuming this remains a thing) - look into qualified charitable distributions. Covers the RMD and completely tax-free. Maybe only covers part of it here? large balance + age means percentage for RMD might well come out to more than $216k (MFD). And of course, helps make the world a better place.

Hmm. There ARE bad answers - an annuity would be one. :)

And yes - QCDs (an RMD sent to a charity, which allows for removal from the IRA, an intemized deduction, AND not counted as income!) would be a great path, if they are so inclined. Each person is allowed to use up to $108k of their RMD as a QCD this year.

[dandarc]

Wow - 86/90 years old, great pensions and $4-5 million? Reads like in-laws are in absolutely fantastic financial shape here. There really is no losing with this brick-bunker of a financial picture. Hire out managing the portfolio, don't. There's no bad answers.

Suggestion for the RMD's (and assuming this remains a thing) - look into qualified charitable distributions. Covers the RMD and completely tax-free. Maybe only covers part of it here? large balance + age means percentage for RMD might well come out to more than $216k (MFD). And of course, helps make the world a better place.

Hmm. There ARE bad answers - an annuity would be one. :)

And yes - QCDs (an RMD sent to a charity, which allows for removal from the IRA, an intemized deduction, AND not counted as income!) would be a great path, if they are so inclined. Each person is allowed to use up to $108k of their RMJ as a QCD this year.