My two fund portfolio

[Bobo]

It looks like the portfolio that I'm about to inherit consists almost entirely of Franklin Income Fund Class C (open end fund) and Oppenheimer Active Allocation Fund (class A, open end fund). I think it's about 20% more invested in Oppenheimer. Any thoughts?

[PFInterest]

where are these located?

[mhalley]

Since you are inheriting these funds, that means you get a step up in value if they are in taxable, and if they are in tax deferred taxes don't matter, so you will want to sell them and look into getting into a low cost portfolio. At the minimum, turn of reinvesting dividends while you decide what to do.
The Franklin Class c carries a 1.11% er. The oppo has an er of 1.18.
Check out this vanguard paper on the effect of fees.
https://investor.vanguard.com/investing ... t-of-costs
Check out the wiki on managing a windfall.
https://www.bogleheads.org/wiki/Managing_a_windfall

[brad.clarkston]

I would do a "in kind" transfer to Vanguard or Fidelity to a rollover IRA and then liquidate them into something better.
That way there is no tax issues. Setup the VG or FID account first and then have them do the transfer all you will have to do is a bit of paperwork.

[Bobo]

I would do a "in kind" transfer to Vanguard or Fidelity to a rollover IRA and then liquidate them into something better.
That way there is no tax issues. Setup the VG or FID account first and then have them do the transfer all you will have to do is a bit of paperwork.

This complicates things. I know nothing about this. This FAQ says:

What is a Rollover IRA?
A Rollover IRA is a Traditional IRA that is often used by those who have changed jobs or retired and have assets accumulated in their employer-sponsored retirement plan, such as a 401(k).

I just saw those two funds as mutual funds. I didn't know they're eligible retirement plans that I can do this with. I know nothing about IRAs. I was going to just going to liquidate part or all of the two mutual funds into a bank account then buy some combination of CDs, bonds, mutual funds, and maybe open some other bank accounts. I feel like I have to do a bunch of research on IRAs now.

[delamer]

I would do a "in kind" transfer to Vanguard or Fidelity to a rollover IRA and then liquidate them into something better.
That way there is no tax issues. Setup the VG or FID account first and then have them do the transfer all you will have to do is a bit of paperwork.

This complicates things. I know nothing about this. This FAQ says:

What is a Rollover IRA?
A Rollover IRA is a Traditional IRA that is often used by those who have changed jobs or retired and have assets accumulated in their employer-sponsored retirement plan, such as a 401(k).

I just saw those two funds as mutual funds. I didn't know they're eligible retirement plans that I can do this with. I know nothing about IRAs. I was going to just going to liquidate part or all of the two mutual funds into a bank account then buy some combination of CDs, bonds, mutual funds, and maybe open some other bank accounts. I feel like I have to do a bunch of research on IRAs now.

It seems that brad.clarkston made an assumption that you are inheriting an IRA, even though you did not indicate that in your initial post.

So the first thing to determine is whether you are inheriting an IRA or a taxable account. If it is a taxable account, then you need to determine if you are going to receive a step-up in the cost basis. (The step-up does not apply when the assets are held in a credit bypass trust.)

Once you have that information, the Bogleheads can give you better advice.

[Bobo]

OK, I think the assumption was good. My father's account statements are addressed to "IRA FBO [name]".

[Bobo]

where are these located?

With my father's tax prep/investment guy. "Securities offered through Royal Alliance, Inc. Member FINRA/SIPC."

[delamer]

OK, I think the assumption was good. My father's account statements are addressed to "IRA FBO [name]".

This should help you: https://www.bogleheads.org/wiki/Inheriting_an_IRA

The amount in the IRA and your other income (not to mention your age) will impact whether it makes sense to liquidate it or set up an Inherited IRA.

[aristotelian]

Sorry for you loss.

OK, I think the assumption was good. My father's account statements are addressed to "IRA FBO [name]".

That is good. You should be able to transfer it directly into a Vanguard Inherited IRA and invest it without any immediate tax consequences.

You definitely want to do some research on IRAs if you have never had one. You do not want to liquidate it all at once, if possible, because the income will push you into a higher tax bracket. Usually you can liquidate it over 5 years, or take minimum distributions every year based on your life expectancy for the rest of your life but you will have to commit to one or the other.

I would let the money sit until you have talked to Vanguard, developed a plan, and gotten everything set up.

[delamer]

Sorry for you loss.

OK, I think the assumption was good. My father's account statements are addressed to "IRA FBO [name]".

That is good. You should be able to transfer it directly into a Vanguard Inherited IRA and invest it without any immediate tax consequences.

You definitely want to do some research on IRAs if you have never had one. You do not want to liquidate it all at once, if possible, because the income will push you into a higher tax bracket. Usually you can liquidate it over 5 years, or take minimum distributions every year based on your life expectancy for the rest of your life but you will have to commit to one or the other.

I would let the money sit until you have talked to Vanguard, developed a plan, and gotten everything set up.

I agree with the last line above.

However, I would not assume that liquidating will put you into another tax bracket.

A $10,000 IRA is completely different than a $1 million IRA in terms of the potential impact on taxes.

[Bobo]

"If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA."

I don't even know whether I'm technically "inheriting" it now. I know my name is on it in some way and that I just have to show ID and the death certificate and it's mine because the guy managing it told me. The part that says "you cannot roll over any amounts into or out of the inherited IRA" makes it sound like I can't do a transfer to a rollover IRA.

...I'll do some more research on this before tomorrow's appointment. I'm afraid if I ask the investment guy any questions when he turns things over to me he'll charge me.

[Duckie]

I don't even know whether I'm technically "inheriting" it now. I know my name is on it in some way and that I just have to show ID and the death certificate and it's mine because the guy managing it told me. The part that says "you cannot roll over any amounts into or out of the inherited IRA" makes it sound like I can't do a transfer to a rollover IRA.

You are inheriting it now. This will always be an "inherited" IRA. Since you inherited it from your father you will not be the owner and cannot treat it as your other IRAs. See here and here. You cannot transfer it to a Rollover IRA but you can change custodians. You can move it from Royal Alliance to Vanguard or another IRA custodian.

[aristotelian]

"If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA."

I don't even know whether I'm technically "inheriting" it now. I know my name is on it in some way and that I just have to show ID and the death certificate and it's mine because the guy managing it told me. The part that says "you cannot roll over any amounts into or out of the inherited IRA" makes it sound like I can't do a transfer to a rollover IRA.

...I'll do some more research on this before tomorrow's appointment. I'm afraid if I ask the investment guy any questions when he turns things over to me he'll charge me.

It's saying that an inherited IRA is different than a "normal" IRA. You cannot contribute to it and get more tax deductions. However, it now belongs to you and as long as money is in the IRA you do not have to pay taxes on it. You pay taxes as the money is withdrawn.

I just went through this process myself. One thing to think about before you meet with the advisor is whether you will want a lump sum (pay all taxes immediately), five installments over five years, or required minimum distributions (RMDs) over your lifetime. When I went through this, some of the forms required you to make a choice in the transfer process, so you should have an idea of what you want to do now, before you sign anything.

You are also right to suspect that the investment guy may want to earn a commission on the transfer. I would talk to Vanguard before your meeting to see if you can have the funds transferred directly to them. Definitely do not sign anything if you are at all uncomfortable.

[Bobo]

One thing to think about before you meet with the advisor is whether you will want a lump sum (pay all taxes immediately), five installments over five years, or required minimum distributions (RMDs) over your lifetime.

It's kind of short notice to do this kind of research but offhand 5 years seems good. I don't know all the forces that may have an effect on this tax but...well, I don't think I'm allowed to speculate in this area.

You are also right to suspect that the investment guy may want to earn a commission on the transfer. I would talk to Vanguard before your meeting to see if you can have the funds transferred directly to them.

I just did some research on Vanguard vs. Fidelity. So now I know why this forum is a fan of Vanguard but with all the theories I'd like to check out eventually, Fidelity's tools may come in handy. As for which is more successful, the page I read wasn't clear on that, but I think I'm a Fidelity kind of guy. It seems easier to mimic an index fund with non-index funds than vice versa.

Anyway, I feel more prepared now. Thanks for everyone's help! I can't wait to get tomorrow over with. I'll still feel like a first year student telling a teacher that I don't need him, but I've been through worse.

[aristotelian]

One thing to think about before you meet with the advisor is whether you will want a lump sum (pay all taxes immediately), five installments over five years, or required minimum distributions (RMDs) over your lifetime.

It's kind of short notice to do this kind of research but offhand 5 years seems good. I don't know all the forces that may have an effect on this tax but...well, I don't think I'm allowed to speculate in this area.

Take a look at a tax bracket chart. What would each plan do to your tax bracket? If it is a small amount of money, lump sum or 5-year plan may not affect you, but a larger amount
https://taxfoundation.org/2016-tax-brackets

Also ask yourself if you need the money for anything now or do you want to save it for the long term? If you can save it for the long term, you will save on taxes on both your income and the inheritance by leaving it where it is with tax deferred growth for as long as possible.

I did not mean Vanguard specifically. Fidelity would also be a fine choice. Either way, give them a call and see if there is anything they want you to ask the financial guy.

[Bobo]

I set up an account and I got an email confirmation saying "Your new rollover IRA has been successfully opened."

You cannot transfer it to a Rollover IRA but you can change custodians. You can move it from Royal Alliance to Vanguard or another IRA custodian.

The top of the Fidelity page I'm on now says ROLLOVER IRA with my account number under it, and these are the options I'm presented with. Did I set it up right so far? What do I select from below? I may have to call Fidelity to ask.

It's easy to add money to your account. Start by choosing which way works best for you.

* Roll over a 401(k), 403(b), or governmental 457(b) from Fidelity
* Roll over a 401(k), 403(b), or governmental 457(b) from another firm
* Transfer IRA assets from another financial institution
* Mail a personal check

(The good news is that the investment manager called to say his car broke down. I think he's changed the majority of appointments when he was working with my father and now he's doing it with me. The appointment is changed to tomorrow. It makes me feel better about telling him I'm taking control of everything.)

[Bobo]

OK, I got an email reply from Fidelity and I found a link to open an inherited IRA. I had to use the search box to find it because it wasn't listed among the IRA accounts that are available. I think I'm all set up.

[Bobo]

I initiated the transfer-to-my-name process. I just have to wait for a statement, then the money could go into my CORE position with Fidelity (the Fidelity Government Money Market Fund). This was the only CORE option, though the page said there are possibly other options if I call and ask.

It turns out part of my father's investments was in an IRA and the other part wasn't. And the guy told me that I have to take out some money from the IRA periodically. I'll be looking for written details about that eventually.

So, I guess I'll have an inherited IRA account which I all ready set up, plus some other account appropriate for the non-IRA money that I have to look into.

[aristotelian]

I initiated the transfer-to-my-name process. I just have to wait for a statement, then the money could go into my CORE position with Fidelity (the Fidelity Government Money Market Fund). This was the only CORE option, though the page said there are possibly other options if I call and ask.

It turns out part of my father's investments was in an IRA and the other part wasn't. And the guy told me that I have to take out some money from the IRA periodically. I'll be looking for written details about that eventually.

So, I guess I'll have an inherited IRA account which I all ready set up, plus some other account appropriate for the non-IRA money that I have to look into.

Yes, that is what is called a Required Minimum Distribution. Your father never paid taxes on that money, so this is the government's way of making sure those taxes get paid. You should now call Fidelity and get that set up.

I am not sure what you mean by CORE, but once the money is with Fidelity, you should be able to invest it in whatever you want. You don't want it to be in a money market account forever!

What are you doing with the taxable (non-IRA) portion of the portfolio? What is it invested in?

[Bobo]

What are you doing with the taxable (non-IRA) portion of the portfolio? What is it invested in?

I think it will take a few days for it to end up in my name and for now it's still in Franklin Income Fund Class C (FCISX). My choices when I transfer it, before actually investing it, seem to be:

Brokerage Account – The Fidelity Account®
Our full-featured, low-cost brokerage account with online trading of stocks, exchange-traded funds (ETFs), mutual funds, bonds, and options, along with tools and research for investors. Offering more commission-free iShares® ETFs than any other major online brokerage firm—70 in all.1 In addition, purchase 6 Fidelity Factor ETFs, 11 Fidelity Sector ETFs and the Fidelity NASDAQ Composite Index Tracking Stock Fund (ONEQ) online commission free.

and/or

Cash Management Account – Fidelity® Cash Management Account
As a alternative to traditional checking, the Fidelity® Cash Management Account is a convenient way to save, spend, and manage your cash. With all ATM fees reimbursed4 and deposits eligible for FDIC insurance coverage,5 it has all the features you need from a checking account, without the bank.

I guess I should invest the Brokerage Account balance before the Inherited IRA balance since the Inherited IRA balance will be tax free? I'm pretty clueless on how to treat both accounts differently when they're both investable. I'll be buying treasury bonds and opening cash accounts, but I think the bulk of the money should be in something else that I'll be thinking about.

[aristotelian]

I would get the brokerage. That would allow you to invest in whatever you want.

I would get out of FCISX. Vanguard's Wellesley fund is similar type of fund with better performance and lower fees (0.23% vs 1%), or FFANX (0.55%).

If you post details of your whole portfolio you can get more specific advice.

[Bobo]

I would get out of FCISX. Vanguard's Wellesley fund is similar type of fund with better performance and lower fees (0.23% vs 1%), or FFANX (0.55%).

Yeah, I checked the U.S. News & World Report scorecard for those three funds (I've been using that as a major part of my fund picking procedure) and those two you mentioned are much stronger "buys". The performance graphs for them are scarier though.

If you post details of your whole portfolio you can get more specific advice.

I'm going to hold back on that for now.