Inherited American Funds

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Jerry1976
Posts: 3
Joined: Fri Apr 05, 2019 2:05 pm

Inherited American Funds

Post by Jerry1976 » Tue Oct 22, 2019 2:26 pm

My husband and I don't have a lot of knowledge about investing. I recently inherited about $220,000 in a TOD American Funds account that I need to get transferred to myself. It is currently being managed by an LPL Financial advisor. We have a phone call set up for tomorrow to determine what to do with the funds. About 93% of the funds are in The Income Fund of America-A (AMECX) and about 7% are in the Washington Mutual Investors Fund-A (AWSHX).

I would love to move the money to Vanguard, but I have no idea how I would invest it with Vanguard. My husband and I are in our mid-40's and have 3 kids (ages 9, 13, 17). We don't have much currently saved for retirement (only about $45,000 in a 401K and about $13,000 in Roth IRAs). We don't have any college savings for our kids either and I know that this inheritance will reduce our financial aid eligibility (which is a big concern given that our oldest should start college in a couple of years). We owe about $160,000 on our home mortgage (at 3.25% and home value of about $425,000) and my husband still has outstanding student loans (about $60,000 at 3.5%). We've been tempted to just pay off our mortgage or my husband's outstanding student loans, but they both have low interest rates so we're thinking it would probably be better to transfer the money to a Vanguard account. Any advice for us two clueless investors?

snailderby
Posts: 478
Joined: Thu Jul 26, 2018 11:30 am

Re: Inherited American Funds

Post by snailderby » Tue Oct 22, 2019 2:47 pm

Welcome to the forum!

A couple thoughts, in no particular order:

1. Assets in qualified retirement accounts (such as an IRA or 401(k)) are not counted when calculating the expected family contribution for FAFSA purposes.

2. What sort of account is the TOD account? Is it a 401(k)? IRA? Taxable account? Something else?

If you reformat your original post using this template (viewtopic.php?t=6212), you may receive more helpful responses.

b42
Posts: 337
Joined: Thu Apr 11, 2013 7:00 pm

Re: Inherited American Funds

Post by b42 » Tue Oct 22, 2019 3:03 pm

I agree with snailderby, reformatting your original post will help with determining the best use of the inherited funds.

You should also check out this wiki topic on managing a windfall: https://www.bogleheads.org/wiki/Managing_a_windfall

What I'd stress most right now is take your time. There is no need to make any immediate moves. I'd be extra careful with how the LPL Financial advisor recommends you handle the inherited funds, take a few days to think it over.

mhalley
Posts: 7686
Joined: Tue Nov 20, 2007 6:02 am

Re: Inherited American Funds

Post by mhalley » Tue Oct 22, 2019 3:07 pm

A good place to start is to read the wiki. Read the getting started, three fund portfolio, asset allocation posts in addition to the managing a windfall. Note that the financial advisor will tell you what a horrible idea it is to move the funds to vanguard, where you will get much lower returns than if you stay with him. I would cancel the call, as he has been trained to counter all your arguments for transferring the money.
https://www.bogleheads.org/wiki/Getting_started

https://www.bogleheads.org/wiki/Asset_allocation


https://www.bogleheads.org/wiki/Three-fund_portfolio

You might also check out this post on investing vs paying down loans.

https://www.whitecoatinvestor.com/stude ... investing/

NotWhoYouThink
Posts: 2755
Joined: Fri Dec 26, 2014 4:19 pm

Re: Inherited American Funds

Post by NotWhoYouThink » Tue Oct 22, 2019 3:16 pm

Cancel or postpone the call tomorrow. You may think the reason for it is to get the funds moved to your name, but the person on the other end knows that it is a sales call, and he intends to sell you on keeping the funds with him. Don't talk to him until you have decided what to do with the money, and then only talk to him if necessary to tell him what you have decided. But you may be able to get through this without even a conversation.

How are these funds to be transferred to you? Were you listed as the beneficiary on the account? If so, he will need the death certificate to initiate the transfer. If you have given him that everything else can be handled through the mail.

If these are not tax advantaged accounts, then paying off debt and paying down the mortgage will potentially help with financial aid. The bad news is that very few students are even eligible for need-based financial aid in the form of grants rather than loans. So if you want to help pay for college, it might be better to keep some of the money available for that purpose.

You say your oldest should go to college "in a couple of years." Does that mean he is a high school sophomore now? If so, be very careful about doing anything that would show up as income on your tax return, because this is the baseline year for income reporting for college freshman financial aid.

Sounds like you have a lot of homework to do before you move the money anywhere.

retired@50
Posts: 683
Joined: Tue Oct 01, 2019 2:36 pm

Re: Inherited American Funds

Post by retired@50 » Tue Oct 22, 2019 6:02 pm

I'd suggest postponing the phone call as well. Or at least if you do go through with the call, don't agree to anything that commits you for the long term. Moving the money to Vanguard will probably be a good choice, but until you make that decision, put off the adviser. The money is currently invested in two stock funds with expense ratios of .58% and .59%. While these are higher expense ratios than any Boglehead would recommend, if you take a couple of weeks or a month to make a decision, that won't be too bad. Think about trying to get things straightened out before 2020. In other words, give yourself a little time.

Check out the wiki articles cited by other posters.

Best of luck,

spencer99
Posts: 343
Joined: Thu Apr 01, 2010 5:17 pm

Re: Inherited American Funds

Post by spencer99 » Tue Oct 22, 2019 7:19 pm

Couple thoughts,

As others have mentioned, take this a little slow. Get educated about your options (and you're in the right place to do so).

Good advice by others to not deal with the salesman other than to transfer the funds. Do not be reticent about being explicit that your wishes are to limit action to transferring funds now after which you want time to consider your options and you will get back to the salesman if you need anything.

After the funds are in your name contact Vanguard about transferring funds. They will initiate the process and help you every step of the way. In all likelihood you will need to have little or no contact with the current custodian in order to complete the transfer. And again, Vanguard will guide you through the process.

Search this site for threads discussing Vanguard PAS (Personal Advisor Service). If you're unsure about the best approach to invest in the best interest of your family you may find the PAS helpful. If you do not need continuing guidance after getting your feet on the ground you may cancel PAS in the future. PAS is reasonably priced at 0.30 %.

The comments about whether the funds are tax-advantaged or taxable are important. It is unlikely that paying off loans from a tax advantaged account will be advisable. But ... that can all wait until after you do job 1 - get the funds transferred to Vanguard.

One other thing that can wait for now but you should file away for another thread: If these funds are from a taxable account, you have a good option to improve your retirement account. Again, another thread, but simply - you can spend from the taxable funds while in the same amount contribute from your wages to a tax deferred retirement account. This approach should lower your income and taxes, and you gradually move the inheritance into retirement accounts that grow tax free.

Good luck,

S

dekecarver
Posts: 406
Joined: Mon Feb 22, 2010 10:24 am

Re: Inherited American Funds

Post by dekecarver » Tue Oct 22, 2019 7:27 pm

I recently inherited American funds and simply completed the transfer of ownership process at the holding firm and then had Vanguard initiate the transfer of that account to Vanguard with no problems. Once at Vanguard, I sold and integrated into my portfolio. I did not go through anyone at the original holding firm other than walking through the transfer of ownership; I didn't make any mention of moving the funds during the process.

psteinx
Posts: 3432
Joined: Tue Mar 13, 2007 2:24 pm

Re: Inherited American Funds

Post by psteinx » Wed Oct 23, 2019 11:20 am

Any move you make, in the short term, to improve returns (by reducing fees or whatnot) might be dwarfed by college financial aid considerations.

Your oldest is 17. You've got 2 others not far behind. College is CLOSE, and BIG.

Understand the college situation first, then figure out what to do with this money in that context.

===

OK, ASSUMING that there is no real impact, one way or another, on the college aid situation, then:

* As an inheritance, from someone presumably recently deceased, you probably have a "stepped up" basis. This means that even if the deceased paid only $100K (the basis, more or less) for the funds now worth $220K, the basis should now be stepped up, and tax implications of selling are likely to be minimal. This is good - many folks realize that their investments are suboptimal, but tax considerations make it expensive to sell and reallocate.

* American Funds have a decent general reputation, as an ongoing investment. They often have front-end loads, but those loads are likely a sunk cost in your case. If the expense ratios (ERs) are 0.58-0.59%, as another poster stated, then those are reasonable for (presumably) solid, actively managed funds. That said, folks on these forums generally prefer index funds, which often have ERs below 0.10%. To put it more concretely, if you trim your ERs by 0.50% (switching from American to index funds), on $220K, that's about $1100 per year.

* The adviser may have been charging the deceased fees on top of that, often called "Assets Under Management" fees (AUM). For a ~$220K account, these would likely be on the order of 1.0-1.5%. That's quite steep, for an adviser's handholding. Most folks on this board would recommend self-managing your investments (i.e. for free), or using various much cheaper services (including Vanguard's).

* If you're debating between staying invested (either via American Funds, or a cheaper index fund) in the stock market, paying down student loans, or paying down a mortgage, keep in mind tax differentials. For most folks these days, the interest on mortgages and student loans won't be deductible. But income you'd generate via investing (dividends and, hopefully, capital gains in the stock market, or just interest on bond investments), generally WOULD be taxable. So even if you hope to get a higher return on the latter than you pay on the former, once you account for the fact that the latter would be taxable, the spread may be minimal, if anything. i.e. Consider paying down debts.

* More generally, with only $58K liquid (401K and IRAs), and ~$265K in home equity, and $60K in debts, and nothing saved for college, if you guys were/are aiming for a comfortable retirement and/or providing substantial support for your kids' college, you were rather BEHIND what one might prefer. Yes, the inheritance is a nice windfall. But perhaps you should review your overall financial situation, and figure out why you've been able to save so little, how much you need for college and retirement. With the windfall, it may seem like your problems are solved, but $220K may not go far as you might hope against expensive college bills and retirement needs.

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