Money management for the unsophisticated investor.
August 31, 2023 12:10 PM Subscribe
How do I move my savings away from a wealth manager without getting a big tax bill?
I have a bit of savings currently being managed by a fiduciary "wealth management" group. I'd like to move the money away from them and into some sort of saving bonds or accounts. I'm quite ignorant when it comes to money management and am not inclined to spend much time researching. I just want to stop paying these people every month to lose money for me. I'm more interested in low risk than high profit and am wondering how to do the move without getting hit with much of a tax bill.
I have a bit of savings currently being managed by a fiduciary "wealth management" group. I'd like to move the money away from them and into some sort of saving bonds or accounts. I'm quite ignorant when it comes to money management and am not inclined to spend much time researching. I just want to stop paying these people every month to lose money for me. I'm more interested in low risk than high profit and am wondering how to do the move without getting hit with much of a tax bill.
Other important questions:
Are these assets in a taxable account or a tax-advantaged account like an IRA?
If they're in a taxable account,
- How long have you owned the assets (more or less than a year)?
- Have they increased or decreased in value since you bought them?
- What's your long-term capital gains tax rate (for a lot of people it's 0%)?
Do you really want to liquidate your investments or do you just want to get away from this wealth management firm? (You can often though not always do an in-kind transfer where, rather than liquidate your holdings, you just transfer them to a low-cost custodian like Vanguard or Fidelity.)
posted by mskyle at 12:24 PM on August 31, 2023
Are these assets in a taxable account or a tax-advantaged account like an IRA?
If they're in a taxable account,
- How long have you owned the assets (more or less than a year)?
- Have they increased or decreased in value since you bought them?
- What's your long-term capital gains tax rate (for a lot of people it's 0%)?
Do you really want to liquidate your investments or do you just want to get away from this wealth management firm? (You can often though not always do an in-kind transfer where, rather than liquidate your holdings, you just transfer them to a low-cost custodian like Vanguard or Fidelity.)
posted by mskyle at 12:24 PM on August 31, 2023
Your money is in a bucket. Right now, the wealth management firm is holding your bucket. If all you are doing is having your wealth management firm hand your bucket to another firm and ask them to hold it, there is no taxable event. You are only taxed if you reach into the bucket and take money out.
The easiest way to do this is to contact whichever investment firm you want to use next and ask them to initiate the account transfer for you. Most will do this, and do so without any fee.
posted by NotMyselfRightNow at 12:28 PM on August 31, 2023 [2 favorites]
The easiest way to do this is to contact whichever investment firm you want to use next and ask them to initiate the account transfer for you. Most will do this, and do so without any fee.
posted by NotMyselfRightNow at 12:28 PM on August 31, 2023 [2 favorites]
Response by poster: The bucket analogy is apt for my situation. I am looking for a cheaper bucket. As indicated, I am hands off. Several years ago I came into a bit of money and was recommended this group. They did not do well for me, costing me a good portion of my investment so I do not want to continue with them. I will check out Fidelity and Vanguard. Thanks!
posted by Carlo at 12:38 PM on August 31, 2023
posted by Carlo at 12:38 PM on August 31, 2023
The assets are probably already in custody at Fidelity or Schwab or similar. Most advisors do not self-custody. If you call Fidelity or Schwab or Vanguard they can very likely walk you through how to fire the current advisor and transfer the assets without incurring taxes or doing much else. They do this every day.
posted by Mid at 12:47 PM on August 31, 2023 [10 favorites]
posted by Mid at 12:47 PM on August 31, 2023 [10 favorites]
To follow up on the earlier comments: "did not do well for me, costing me a good portion of my investment" could mean any (or some combination) of the following:
1) They charged very high fees,
2) The investments they chose were inappropriate (e.g., individual stocks or hedge funds rather than index funds)
3) They selected a perfectly good portfolio that did not match your preferences (e.g., 80 percent stock index funds and 20 percent bonds, where you'd prefer a 60/40 split.)
If 1, you should just be able to shift the assets to another firm, but there's no guarantee.
If 2, you probably want to change brokers and sell the assets. If the asset values actually decreased, you will probably save on taxes when you sell, because you will be able to claim the losses.
If 3, you should also be able to shift the assets, but unless you expect to need the money soon, I recommend reconsidering your wish for low risk. It's counterintuitive, but even though stocks go up or down more on an annual basis, they historically have significantly and quite consistently outperformed bonds over longer periods.
posted by Mr.Know-it-some at 12:51 PM on August 31, 2023 [1 favorite]
1) They charged very high fees,
2) The investments they chose were inappropriate (e.g., individual stocks or hedge funds rather than index funds)
3) They selected a perfectly good portfolio that did not match your preferences (e.g., 80 percent stock index funds and 20 percent bonds, where you'd prefer a 60/40 split.)
If 1, you should just be able to shift the assets to another firm, but there's no guarantee.
If 2, you probably want to change brokers and sell the assets. If the asset values actually decreased, you will probably save on taxes when you sell, because you will be able to claim the losses.
If 3, you should also be able to shift the assets, but unless you expect to need the money soon, I recommend reconsidering your wish for low risk. It's counterintuitive, but even though stocks go up or down more on an annual basis, they historically have significantly and quite consistently outperformed bonds over longer periods.
posted by Mr.Know-it-some at 12:51 PM on August 31, 2023 [1 favorite]
If you really want to buy savings bonds or put the money into a savings account, that will involve taking your money out of the bucket, regardless of who is currently holding the bucket. If you sell the mutual funds or stocks or whatever you're invested in you are potentially creating a taxable event.
posted by mskyle at 1:02 PM on August 31, 2023
posted by mskyle at 1:02 PM on August 31, 2023
I've transferred holdings between providers a bunch of times, and the providers have always been ASTONISHINGLY helpful and efficient at sorting it all out for me. (Not really surprising, since they want my business!). When I had investments that Vanguard couldn't transfer directly, they got in touch first to check that I was OK with the tax implications.
The one thing they won't do unless you pay separately is provide financial advice. If you're thinking of changing up your investments then you should seriously consider paying a one off fixed fee for advice beforehand.
Something that the advisor should tell you is that "low risk, low return" investments are really "low volatility, low return". There is still a risk that your investments don't perform well enough (because low return! also high inflation!) and then you could end up without enough money for your needs - for example, you might not be able to retire when you want or need to. A financial advisor should be able to run the numbers for you and tell you whether that's a problem in your specific case.
It's quite likely that you can move the investments as-is, first, if you want, and then take your time deciding what to do next.
posted by quacks like a duck at 1:11 PM on August 31, 2023 [1 favorite]
The one thing they won't do unless you pay separately is provide financial advice. If you're thinking of changing up your investments then you should seriously consider paying a one off fixed fee for advice beforehand.
Something that the advisor should tell you is that "low risk, low return" investments are really "low volatility, low return". There is still a risk that your investments don't perform well enough (because low return! also high inflation!) and then you could end up without enough money for your needs - for example, you might not be able to retire when you want or need to. A financial advisor should be able to run the numbers for you and tell you whether that's a problem in your specific case.
It's quite likely that you can move the investments as-is, first, if you want, and then take your time deciding what to do next.
posted by quacks like a duck at 1:11 PM on August 31, 2023 [1 favorite]
Response by poster: If it matters, this is not "now I can retire" money, this is "now I can buy a new car" money.
When I initially met with the advisor, I told him I felt the stock market was unrealistically inflated and was long overdue for a downward correction (based on some internet crap I had read). When the pandemic hit and the Dow dropped 37%, imagine my surprise when my portfolio also dropped 37%. Now it's "recovered" to only down 30%. Yay?
I'm not attached to any form of future investment beyond not wanting to see it all disappear. I'm aware that the market has "historically significantly and consistently outperformed bonds". Perhaps I am being overly influenced by the recent turmoil, however we are not exactly living in ordinary times and I can't help feeling "fool me once shame on me, fool me twice, duh, won't get fooled again." To complicate things a little bit, my advisor is "transitioning" from Ameritrade to Schwab support over the holiday weekend.
posted by Carlo at 1:21 PM on August 31, 2023
When I initially met with the advisor, I told him I felt the stock market was unrealistically inflated and was long overdue for a downward correction (based on some internet crap I had read). When the pandemic hit and the Dow dropped 37%, imagine my surprise when my portfolio also dropped 37%. Now it's "recovered" to only down 30%. Yay?
I'm not attached to any form of future investment beyond not wanting to see it all disappear. I'm aware that the market has "historically significantly and consistently outperformed bonds". Perhaps I am being overly influenced by the recent turmoil, however we are not exactly living in ordinary times and I can't help feeling "fool me once shame on me, fool me twice, duh, won't get fooled again." To complicate things a little bit, my advisor is "transitioning" from Ameritrade to Schwab support over the holiday weekend.
posted by Carlo at 1:21 PM on August 31, 2023
Now it's "recovered" to only down 30%
If your holdings are down across the board, you might be in a scenario where you have a loss rather than a gain, and nothing to worry about tax-wise. When you log into your account, there should be a view of your individual holdings that includes the gain and loss on each one. (They may split it out into short-term and long-term gains). If I were in your shoes, I would pull that into Excel and figure out what my overall gain/loss looked like.
Once the Ameritrade to Schwab move is completed, like others said, you should be able to move your money to another custodian, or to a self-managed Schwab account, and then start making decisions about what to liquidate and where to put it.
Short version: call Schwab and they can help you. You could probably even call now for information, since the Ameritrade-to-Schwab conversion is part of Schwab's acquisition of TD Ameritrade, not something your specific advisor is initiating!
(Some "wealth management" groups have a reasonable-ish fee but a high required minimum, and if "new car" money is below that amount, they'll charge you the percent fee on the minimum, not your actual account value. My brother's friend got hit with that and discovered that the x% fee was a minimum x% of $1,000,000, and the "special exception" they'd made to manages his less-than-a-million assets was not actual a good thing!)
posted by Blue Jello Elf at 1:44 PM on August 31, 2023 [1 favorite]
If your holdings are down across the board, you might be in a scenario where you have a loss rather than a gain, and nothing to worry about tax-wise. When you log into your account, there should be a view of your individual holdings that includes the gain and loss on each one. (They may split it out into short-term and long-term gains). If I were in your shoes, I would pull that into Excel and figure out what my overall gain/loss looked like.
Once the Ameritrade to Schwab move is completed, like others said, you should be able to move your money to another custodian, or to a self-managed Schwab account, and then start making decisions about what to liquidate and where to put it.
Short version: call Schwab and they can help you. You could probably even call now for information, since the Ameritrade-to-Schwab conversion is part of Schwab's acquisition of TD Ameritrade, not something your specific advisor is initiating!
(Some "wealth management" groups have a reasonable-ish fee but a high required minimum, and if "new car" money is below that amount, they'll charge you the percent fee on the minimum, not your actual account value. My brother's friend got hit with that and discovered that the x% fee was a minimum x% of $1,000,000, and the "special exception" they'd made to manages his less-than-a-million assets was not actual a good thing!)
posted by Blue Jello Elf at 1:44 PM on August 31, 2023 [1 favorite]
The stock market is up quite a bit this year - between 13-20%. It was up most of the pandemic too - only down in 2022, but a lot at 20%. So yeah, your investments are also bad. 2nd recommend a financial advisor or to just buy VTSMX - Vanguard Total Stock Market fund or the equivalent at whatever company you choose.
posted by The_Vegetables at 2:22 PM on August 31, 2023 [1 favorite]
posted by The_Vegetables at 2:22 PM on August 31, 2023 [1 favorite]
Also depending on your income ( and if you've taken a loss) you should look into converting into a 'bucket' that is a ROTH IRA, via a process called a 'backdoor ROTH IRA'. That way you will not pay taxes on this money once you reach a certain age.
posted by The_Vegetables at 2:28 PM on August 31, 2023
posted by The_Vegetables at 2:28 PM on August 31, 2023
If your investments have just recently tanked, that's another reason to be cautious about selling them until you get advice. Investments are just like... antiques (or anything), in that you want to buy when they are cheap and sell when they are expensive. Right now yours are cheap, so if you sell you're locking in a massive loss.
It sounds like you may have had a pretty sketchy wealth manager, if they looked at someone who doesn't like risk, and who has a car-buying amount of money, presumably on a car-buying timescale, and then they put your investments into something could tank so badly when the broader market is doing fine. That sounds wildly inappropriate on many levels. I'm thinking that you have grounds to complain to the company, if not some regulatory board (sorry I'm not familiar with US regulations).
There's no point complaining about badly performing investments, but you could complain about unsuitable investments, if the risk was not explained to you. If you make a noisy fuss they might be inclined to compensate you.
posted by quacks like a duck at 3:19 PM on August 31, 2023
It sounds like you may have had a pretty sketchy wealth manager, if they looked at someone who doesn't like risk, and who has a car-buying amount of money, presumably on a car-buying timescale, and then they put your investments into something could tank so badly when the broader market is doing fine. That sounds wildly inappropriate on many levels. I'm thinking that you have grounds to complain to the company, if not some regulatory board (sorry I'm not familiar with US regulations).
There's no point complaining about badly performing investments, but you could complain about unsuitable investments, if the risk was not explained to you. If you make a noisy fuss they might be inclined to compensate you.
posted by quacks like a duck at 3:19 PM on August 31, 2023
Also depending on your income ( and if you've taken a loss) you should look into converting into a 'bucket' that is a ROTH IRA, via a process called a 'backdoor ROTH IRA'. That way you will not pay taxes on this money once you reach a certain age.
This is terrible advice(1) and wildly inappropriate(2) for their circumstances, given the constraints OP provided in the post.
(1) A backdoor Roth conversion can only take place if the funds are in a traditional IRA. Given that this is money that OP came into, and because they did not mention taking annual RMDs as would be required of a non-spousal inherated IRA, it's very unlikely to be in a tIRA and more likely to be in a brokerage account. Furthermore, this can only be done if the individual converts ALL their tIRA funds in a single year, otherwise they run afoul of the pro rata rule - so if they have any other tIRA accounts, they'd be screwed.
(2) OP said they did not want to incur a taxable event. Backdoor Roth conversions are completely taxed at OPs highest tax rate. Furthermore, because of the up-front taxable event, backdoor Roth conversions have a pay-back period - uniquely to each individual based on the amount converted, taxed paid, and years to retirement - that needs to be taken into consideration. Conversions are not smart moves for many people as a result.
posted by NotMyselfRightNow at 3:59 PM on August 31, 2023 [1 favorite]
This is terrible advice(1) and wildly inappropriate(2) for their circumstances, given the constraints OP provided in the post.
(1) A backdoor Roth conversion can only take place if the funds are in a traditional IRA. Given that this is money that OP came into, and because they did not mention taking annual RMDs as would be required of a non-spousal inherated IRA, it's very unlikely to be in a tIRA and more likely to be in a brokerage account. Furthermore, this can only be done if the individual converts ALL their tIRA funds in a single year, otherwise they run afoul of the pro rata rule - so if they have any other tIRA accounts, they'd be screwed.
(2) OP said they did not want to incur a taxable event. Backdoor Roth conversions are completely taxed at OPs highest tax rate. Furthermore, because of the up-front taxable event, backdoor Roth conversions have a pay-back period - uniquely to each individual based on the amount converted, taxed paid, and years to retirement - that needs to be taken into consideration. Conversions are not smart moves for many people as a result.
posted by NotMyselfRightNow at 3:59 PM on August 31, 2023 [1 favorite]
You could put all the money into a traditional IRA (which slightly lowers your taxes), and then into a backdoor ROTH IRA. I didn't imply it all had to take place in year 0. Also, since they wouldn't have had it for very long, (maybe 5 years, depending on the car money) they wouldn't pay much tax, because they probably wouldn't have that much in gains.
Not only that, if it's currently in a brokerage (and not a retirement type account), they are possibly already paying taxes on dividends. Probably not much, but they should be getting a 1099 every year.
posted by The_Vegetables at 8:02 AM on September 1, 2023
Not only that, if it's currently in a brokerage (and not a retirement type account), they are possibly already paying taxes on dividends. Probably not much, but they should be getting a 1099 every year.
posted by The_Vegetables at 8:02 AM on September 1, 2023
@Carlo, once you have all this sorted out, can I address your unhappiness with your investment management? There is no such thing as a "good investment", there are only investments that are more or less likely to achieve your goals. Did you share your goals, timeline, and risk tolerance with the money manager?
That said, as others have noted, it is pretty hard to lose that much money when the overall stock market is up considerably. On the other hand, it is also pretty common to feel like your investment advisor is ripping you off when ones investments are down, even if the advisor didn't do anything wrong. Hard to tell without knowing more.
Some bond investments depend heavily on interest rates and are down over that time period, since interest rates are up so much (bond prices fall with rising interest rates because buyers want to be compensated for buying your old, lower rate bond rather than a newer one with a higher rate). One of the things that apparently is not well understood by the public (and not well commmunicated by professionals) is that bond funds are not really the same thing as owning bonds. A stock fund is, pretty much, like owning a slice of many stocks. You buy it for the price of the underlying stocks, and basically sell it back the same way. A bond fund is not that much like owning the underlying bonds. Yes, you get paid the interest on a slice of many bonds, but the bonds themselves are constantly turning over. Old bonds mature and the fund re-invests the money in new bonds at the current market rate. The fund is at the mercy of the value of the bonds, and can lose a fair amount of money if interest rates rise sharply. But if you buy an actual Treasury bond and hold it to maturity, you simply can't lose money. You'll always get your principal back at the end. Perhaps that would be a more suitable investment for you.
Long story short, hopefully this experience hasn't put you off investing altogether, and you've learned something about your risk tolerance and how to choose an investment advisor.
posted by wnissen at 5:12 PM on September 1, 2023
That said, as others have noted, it is pretty hard to lose that much money when the overall stock market is up considerably. On the other hand, it is also pretty common to feel like your investment advisor is ripping you off when ones investments are down, even if the advisor didn't do anything wrong. Hard to tell without knowing more.
Some bond investments depend heavily on interest rates and are down over that time period, since interest rates are up so much (bond prices fall with rising interest rates because buyers want to be compensated for buying your old, lower rate bond rather than a newer one with a higher rate). One of the things that apparently is not well understood by the public (and not well commmunicated by professionals) is that bond funds are not really the same thing as owning bonds. A stock fund is, pretty much, like owning a slice of many stocks. You buy it for the price of the underlying stocks, and basically sell it back the same way. A bond fund is not that much like owning the underlying bonds. Yes, you get paid the interest on a slice of many bonds, but the bonds themselves are constantly turning over. Old bonds mature and the fund re-invests the money in new bonds at the current market rate. The fund is at the mercy of the value of the bonds, and can lose a fair amount of money if interest rates rise sharply. But if you buy an actual Treasury bond and hold it to maturity, you simply can't lose money. You'll always get your principal back at the end. Perhaps that would be a more suitable investment for you.
Long story short, hopefully this experience hasn't put you off investing altogether, and you've learned something about your risk tolerance and how to choose an investment advisor.
posted by wnissen at 5:12 PM on September 1, 2023
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What kinds of assets are they?
posted by praemunire at 12:13 PM on August 31, 2023