Help deciding on transfer from taxable acct

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Topic Author
bpfwt
Posts: 8
Joined: Thu Feb 01, 2018 10:12 am

Help deciding on transfer from taxable acct

Post by bpfwt » Thu Jan 10, 2019 10:52 pm

Along with my own investments, I’m managing investments for a single, recently-retired relative and we need a little advice on a decision to move money from one taxable account to another. Here’s her situation:

Emergency funds: $34k
Debt: None
Tax Filing Status: Single
Tax Rate: 12% Federal, 0% State
State of Residence: TX
Age: 68
Desired Asset allocation: 50% stocks / 50% bonds
Desired International allocation: 50% of stocks
Annual income from employer pension & Social Security: $26,568
Budgeted Annual Expenses: $33,696

Regarding investments, we are utilizing Paul Merriman’s Ultimate Buy-and-Hold portfolio and recommended “best in class” ETFs with a 50/50 stock-bond asset allocation.

Currently, she has are 4 investment accounts:
--Merrill Edge Traditional IRA (rolled over from employer-sponsored 403b in 2018): $126k
--Merrill Edge Taxable account: $161k
--Taxable account with (former) employer-sponsored plan custodian: $145k ($113k investment + $31.5k long-term capital gains)
--Variable Annuity with (former) employer-sponsored plan custodian: $29k

The total portfolio value is currently about $461k. We’ve also tried to follow the recommendations about putting the least tax-efficient holdings in tax-advantaged accounts. So, the REIT ETFs are in the IRA and there are no bond ETFs in the Merrill Taxable acct (yet).

Now, here’s the dilemma:

The funds in the employer-sponsored taxable account are invested 100% in EIITX (First Investors Tax Exempt Opportunities Fund;A) — a tax-exempt bond fund with a 1% expense ratio and some other characteristics that make it undesirable. This was done before I started helping with this portfolio, and the other investment options available in this account aren’t any better from an expense standpoint.

Now that she is retired and no new payroll contributions are being made to this account, we’ve been planning to consolidate all of that account’s money to the taxable account at Merrill where we have better options for investments. We waited until 2019, knowing this transfer would create a taxable event and hoping to take advantage of her lower tax-bracket now that her annual income (Pension + Social Security) is much lower than her former salary. No new money has been invested in this account since 2016, though dividends have been reinvesting. The 2018 Dividends totaled $4300, so I think that capital gain will be the only portion subject to income tax since she should quality for the 0% long-term capital gains tax bracket.

I’m calculating that the additional 2019 income tax burden from this transfer would only be about $520 (12% of the $4300 in short-term cap gains). It would take less than 1 year to make up for that loss just with the expense ratio savings she’d realize.

Questions:
1. Are my assumptions correct re: the tax burden that would be incurred with this transfer, or am I overlooking something that would create a greater tax burden? Are there other factors to consider before we move this money from one taxable account to another?

2. What are your thoughts about whether this transfer is “worth it” in order to access lower-cost index funds/ETFs? Is there some reason she'd be better off settling for a less-than-desirable fund with the current custodian? The “best-in-class” bond ETFs that Merriman recommends for taxable accounts have expense ratios of 0.1%, 0.24% & 0.2%.

Thanks in advance for reading all this and giving it your consideration!

-BP

User avatar
BL
Posts: 8646
Joined: Sun Mar 01, 2009 2:28 pm

Re: Help deciding on transfer from taxable acct

Post by BL » Thu Jan 10, 2019 11:51 pm

There should be either paperwork or online records that show the unrealized Capital Gains. I expect there is little or no CG here. Bonds in general have not had much CGs lately. But the records should show that or a Basis.
Here is the Morningstar page of performance:
https://www.morningstar.com/funds/xnas/ ... quote.html

It seems you may be confusing dividends with CGs. She already received the dividends last year and may not have to pay tax on that (it would be for 2018) since I think it is tax-exempt. Anything she reinvested would have little if any CGs, even if short-term and sold this year.

It is probably a good idea to sell and get away from high-ER fund. She could transfer but she could also take the money and buy a 2+ % CD or savings account at a bank or CU, especially online. I like the Vanguard Prime Money Market at 2.44% (and PenFed at 2.8% for 1 yr certificates), but don't know what she has or needs.

I am guessing the annuity is also expensive based on the other fund cost. She may be able to get some info from the policy and/or ask company for an "in-force illustration".

At 12% tax bracket, tax-exempt is usually not recommended. It may keep SS from being taxable or fully taxable, but may not be worth it.

User avatar
Earl Lemongrab
Posts: 6459
Joined: Tue Jun 10, 2014 1:14 am

Re: Help deciding on transfer from taxable acct

Post by Earl Lemongrab » Fri Jan 11, 2019 2:28 pm

As there are already accounts at Merrill Edge, I would look to move the assets there and take advantage of one of the bonus offers.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Topic Author
bpfwt
Posts: 8
Joined: Thu Feb 01, 2018 10:12 am

Re: Help deciding on transfer from taxable acct

Post by bpfwt » Sat Jan 12, 2019 10:55 am

Great advice, BL & Earl! This has helped us with our decision-making and also some bonus-earning! I appreciate you both.

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