Selling within an IRA and taxes

[3stgs]

I’ve got a few questions about some recently inherited accounts, I just want to make sure before I make a move that I am understanding the tax ramifications correctly.

The three accounts in question are an inherited IRA, and inherited Roth IRA, and a normal brokerage account. I would like to re-balance these accounts by buying and selling within each entity. I would mainly be moving from mutual funds and stocks to ETFs, and the inherited IRA needs to be drawn down to zero in the next 10 years. There are quite a few Vanguard mutual funds mixed in these accounts, with a couple of American funds thrown in. There’s also a decent amount in individual stocks (I can tell dad‘s motivation behind all these accounts was an emphasis on dividends).

The only accounts I’ve really worked with in the past several years are my 401(k) and a TD Ameritrade rollover brokerage account (all pretax stuff), so receiving both pre and aftertax inherited funds and working with them is all new to me. I just want to know what I’m going to be liable for if I start to sell and buy equities, and re-balance these accounts on my own. Let me know if I might need to add any helpful information.

[exodusNH]

I’ve got a few questions about some recently inherited accounts, I just want to make sure before I make a move that I am understanding the tax ramifications correctly.

The three accounts in question are an inherited IRA, and inherited Roth IRA, and a normal brokerage account. I would like to re-balance these accounts by buying and selling within each entity. I would mainly be moving from mutual funds and stocks to ETFs, and the inherited IRA needs to be drawn down to zero in the next 10 years. There are quite a few Vanguard mutual funds mixed in these accounts, with a couple of American funds thrown in. There’s also a decent amount in individual stocks (I can tell dad‘s motivation behind all these accounts was an emphasis on dividends).

The only accounts I’ve really worked with in the past several years are my 401(k) and a TD Ameritrade rollover brokerage account (all pretax stuff), so receiving both pre and aftertax inherited funds and working with them is all new to me. I just want to know what I’m going to be liable for if I start to sell and buy equities, and re-balance these accounts on my own. Let me know if I might need to add any helpful information.

You can sell and buy without concern in the tax-advantaged accounts.

Your inherited IRA is best served holding as much of your fixed income as possible. Then you rebalance your other accounts. This limits the growth of your RMD while maintaining your asset allocation.

[life in slices]

You can trade in the IRAs without a tax consequence

For the brokerage account, you would pay taxes for any selling that you do (if there is a gain)
Note that for the taxable account, your basis would have been reset to the current value of those funds/stocks on the day the original account holder passed away.

[arcticpineapplecorp.]

anything you do within the inherited IRA and inherited Roth IRA have no tax impact. There's only a tax impact when you WITHDRAW from the inherited IRA (not Inherited Roth IRA).

Regarding the taxable brokerage...since you inherited that, I assume the date of the assets in that account on the date of death of the original account owner became your step up in basis. As a result anything you sell (for a gain) will result in a capital gain based on the difference between the asset's value on the sell date and the date you inherited the asset (your basis). Same goes for losses (anything you sell for a value lower than your basis will be considered a loss).

make sense?

[retiredjg]

Inherited IRA - no taxes until money is taken out of the account. You can sell and buy within the account without triggering tax.

Roth IRA - no taxes for selling and buying or for taking money out of the account. This Roth IRA must also be emptied within 10 years (but I'm not sure if it is every year or by 10 years).

Inherited taxable - it is possible to trigger taxes by any sale; however, you probably got a "step up" in basis so the gains may be small.

[CAsage]

For both the Inherited regular and Roth IRAs, there are minimum required distributions - find an RMD calculator and confirm that you are withdrawing the right amount. For the regular inherited IRA, best to draw down in any lower income years, or divide by 10 to even out the income (1/10, then 1/9, then 1/8 etc). For the inherited Roth, take only the minimum amount, and then the entire balance by the end of the 10th year. Suggest reviewing this article for "tax efficient fund placement". Good on you to be thinking about all this!

https://www.bogleheads.org/wiki/Tax-eff ... _placement

[RyeBourbon]

If you sell anything for a loss in your taxable brokerage account, make sure you don't buy the same (or substantially the same) security in an IRA. This is called a wash sale and the tax deduction for the loss is disallowed.

[clemrick]

You mention your 401K -- are you maxing out your contribution? If not, One thing to keep in mind is that you can max your contribution now and make up the difference in take-home pay by withdrawals from these inherited accounts.

[Katietsu]

Just want to make sure that you realize that the inherited Roth IRA is subject to the same RMDs and withdrawal time limits as the inherited traditional IRA. Put another way, while there are no required withdrawals for a personal Roth IRA, an inherited Roth IRA is subject to RMDs and a 10 year time frame to withdraw all funds.

[delamer]

You can trade in the IRAs without a tax consequence

For the brokerage account, you would pay taxes for any selling that you do (if there is a gain)
Note that for the taxable account, your basis would have been reset to the current value of those funds/stocks on the day the original account holder passed away.

It is not always the case that the basis in a taxable account is reset at the death of the account owner.

Assets held in certain types of trusts do not have their basis reset. They retain the basis from when the trust was created. Credit shelter trusts are an example.

So it is important that the OP determine the correct basis for the inherited assets before selling anything in the taxable account. It is correct that taxes may be due on the difference between the basis and the selling price, depending on tax bracket.

[BlizzardPearl]

Regarding the taxable brokerage...since you inherited that, I assume the date of the assets in that account on the date of death of the original account owner became your step up in basis. As a result anything you sell (for a gain) will result in a capital gain based on the difference between the asset's value on the sell date and the date you inherited the asset (your basis). Same goes for losses (anything you sell for a value lower than your basis will be considered a loss).

+1

Also, I do believe the sale of inherited capital assets is automatically considered long-term.

[arcticpineapplecorp.]

Just want to make sure that you realize that the inherited Roth IRA is subject to the same RMDs and withdrawal time limits as the inherited traditional IRA. Put another way, while there are no required withdrawals for a personal Roth IRA, an inherited Roth IRA is subject to RMDs and a 10 year time frame to withdraw all funds.

I don't think this is correct. This post says:

RMDs are required if the original IRA owner reached their required beginning date (RBD). Because there is no RBD for a Roth IRA, then a non-EDB would have no RMDs for an inherited Roth IRA. They just to have empty the inherited RMD within 10-years. Though if one inherits an already inherited Roth IRA, then RMDs are applicable. At least as I understand it.

source: viewtopic.php?p=7449703#p7449703

There are no RMDs for Inherited IRAs, but the Inherited Roth IRA does need to be closed out by December 31 of the 10th year following the year in which the original Roth IRA owner died. I.E. if the original Roth IRA dies in 2023 you have until 12/31/2033 to close out the Inherited Roth IRA. And there is no requirement to take RMDs between years 1-9.

also read this:
viewtopic.php?t=396683

and here:

With the passage of the SECURE Act, [Roth] IRA distributions to a nonspouse must be completed within 10 years following the death of the account owner. Executors have until December 31 of the year following the death of the decedent owner to properly title and distribute the IRA to the beneficiaries.

source: https://www.bogleheads.org/wiki/Inheriting_a_Roth_IRA

[3stgs]

Thanks for all the replies, I believe I’m on the right track. My dad’s hobby after he retired was to sit in front of CNBC and research stock and mutual funds (this was before the era of ETFs). He was a banker by profession, and knew how to squeeze a nickel. Very frugal, but also extremely smart when it came to investing. The mix of stocks / funds / bonds he left mom was very diversified and well thought out, it’s only now that I’m starting a bit of clean up and rebalancing, but it really doesn’t need much help.

The one area I’m concentrating on is the mutual fund mix, most are Vanguard and initially it looks like a good mix, but the stand out are 3 American funds which hold a substantial amount of the total funds. CAIBX, AMECX, and ABALX. I know when these were purchased, there was a crazy front-in load fee, and the ongoing expenses seem very high for mutual funds. Would I be well served to liquidate these funds in favor of lower expense ETFs? And what type of expenses am I looking at annually for holding the American funds? These are mainly held in a inherited after-tax IRA, with not much if any gain since inheriting.

[exodusNH]

Thanks for all the replies, I believe I’m on the right track. My dad’s hobby after he retired was to sit in front of CNBC and research stock and mutual funds (this was before the era of ETFs). He was a banker by profession, and knew how to squeeze a nickel. Very frugal, but also extremely smart when it came to investing. The mix of stocks / funds / bonds he left mom was very diversified and well thought out, it’s only now that I’m starting a bit of clean up and rebalancing, but it really doesn’t need much help.

The one area I’m concentrating on is the mutual fund mix, most are Vanguard and initially it looks like a good mix, but the stand out are 3 American funds which hold a substantial amount of the total funds. CAIBX, AMECX, and ABALX. I know when these were purchased, there was a crazy front-in load fee, and the ongoing expenses seem very high for mutual funds. Would I be well served to liquidate these funds in favor of lower expense ETFs? And what type of expenses am I looking at annually for holding the American funds? These are mainly held in a inherited after-tax IRA, with not much if any gain since inheriting.

The quoted ERs are all-inclusive.

Depending on how much your father has invested, the front-end load (which is a sunk cost) would have been 3%ish-5.75%ish.

American Funds seem to have become closet index funds over the years or they've selected inappropriate benchmarks. E.g., one fund they seem as "international" and benchmark against an international index contains 40% US stocks. Of course, given international vs US over the last decade, it's crushed it's benchmark. When you compare it to a more suitable mix, it did about the same.

Since you're in an IRA, I'd tend toward moving those funds to cheaper alternatives.

[retiredjg]

The one area I’m concentrating on is the mutual fund mix, most are Vanguard and initially it looks like a good mix, but the stand out are 3 American funds which hold a substantial amount of the total funds. CAIBX, AMECX, and ABALX. I know when these were purchased, there was a crazy front-in load fee, and the ongoing expenses seem very high for mutual funds. Would I be well served to liquidate these funds in favor of lower expense ETFs?

I would immediately get rid of anything that is in an IRA and replace it with something you want.

And what type of expenses am I looking at annually for holding the American funds? These are mainly held in a inherited after-tax IRA, with not much if any gain since inheriting.

Gain since inheriting is irrelevant inside an IRA. There should be no expenses in selling and replacing these higher cost funds with a lower cost fund.

[3stgs]

I actually misspoke before, about 90% of the American funds are in a brokerage account, a decent 6-figure amount. That may change my mind on selling in favor of less expensive similar ETFs.

[grabiner]

I actually misspoke before, about 90% of the American funds are in a brokerage account, a decent 6-figure amount. That may change my mind on selling in favor of less expensive similar ETFs.

It is probably still worth selling them; see Paying a tax cost to switch funds on the wiki. If you sell the funds, you will pay a capital-gains tax. But if you don't sell the funds, you will pay higher taxes every year as these funds regularly distribute capital gains, as well as the expenses on the funds; it doesn't take long for the extra taxes and expenses to make up for the immediate tax cost.

[exodusNH]

I actually misspoke before, about 90% of the American funds are in a brokerage account, a decent 6-figure amount. That may change my mind on selling in favor of less expensive similar ETFs.

If you inherited them in a taxable account, the basis would have been stepped up to their value at the time of death. You'd only have the gains subsequent to that.

At the very least, turn off dividend reinvestment.

[3stgs]

I did turn off dividend reinvesting on all the American funds, there’s also an Invesco ORNAX bond fund in the brokerage account, so the American and Invesco funds make up about 10% of my total investments. Those make up almost all of my bond exposure, as the rest are individual stocks and Vanguard mutual funds (which have some redundancy). I’ve always leaned to aggressive growth, so it’s tough for me to hold a bond fund with a 5% return annually. Granted, I’m not by any means a financial wizard but know I need to have a value and bond mix in my portfolio. I appreciate all of your input.

[retiredjg]

Actively managed bond funds are close to the last thing I would want in a taxable account. Especially funds with high ERs.

If all these are recently inherited, you probably have a stepped up basis...which means you could sell with little taxable gains.

[retiredjg]

However, if you are talking about a jointly owned taxable account that is now owned by your mother (not you) i'm not sure there is a step up.

[grabiner]

Actively managed bond funds are close to the last thing I would want in a taxable account. Especially funds with high ERs.

For a bond fund, the active management isn't really relevant. Actively managed stock funds generate more capital gains than index funds, so they should be held only in an IRA. But bond funds don't have large capital gains or losses when they sell bonds, and even bond index funds have to sell bonds as they mature, are called, or become too short for the index.

But taxable bond funds of any kind are not usually good for a taxable account, and high-expense bond funds are not good for any account.

And the fact that bond funds do not generate large capital gains means that the tax cost of switching to a different bond fund is very low. If you are in a high tax bracket, switch to a low-cost muni fund; if you are in a low tax bracket and have some need to hold bonds in a taxable account, switch to a low-cost taxable bond fund. Treasuries are often good for bond holdings in a taxable account, as they are exempt from state tax, and the low risk means that they have relatively low yields and thus lower federal tax than corporate bonds.

[3stgs]

I’m now getting ready to do a little trading to take the first steps toward a simplified balanced portfolio after sitting on the accounts while other estate and personal matters were being handled, and after doing a little digging on each holding I find out probably 70% of the cost basis figures were never loaded in the transfer from Ed Jones. The transfer was done about 8 months ago. I’d like to know who dropped the ball, but I’m leaning towards the apathetic EJ office. Glad I caught it before I sold anything. But also, no one from Schwab caught it (not that it’s their responsibility).