Ginny: An IRA online savings account will probably earn you more than a money market right now with no additional risk. I'm not sure what would be the right fit for you longer term. Generally speaking safer investments like savings accounts and CDs keep your principal safe but have a higher risk of not keeping up with inflation. Investments that have tended to exceed inflation over the long term generally are more volatile and your principal is usually somewhat at risk. Retirement can be really long so most clients adopt some kind of mixture based on their own ability to tolerate these risks to balance the pros and cons of these 2 ends of the spectrum. You may want to hire a planner to help you figure out what kind of mixture makes sense for you specifically.
Don, It's true that mutual funds are required to pass along their gains and losses, dividends and income to investors. That's why a lot of people choose to invest in broad-based index funds where there is not a lot of buying and selling, so you don't receive that tax hit that you do with actively managed funds. Whether or not you switch completely out of mutual funds is your choice, but remember that a foundation of a broad-based index fund will give you great diversification (like the Vanguard Total Stock Market Index) with very low fees.
Thanks for being here, WTerry.
Don - A couple of points. First, Mutual Funds offer diversification that is hard to replicate on your own using individuals stocks, and this cannot be discounted. Second, and admittedly this may be a bit of a stretch since I do not know the particulars, but the fund you are in may be generating many capital gains because it is actively managed. You may avoid some of the issues you are experiencing by investing in a more passively managed mutual fund. Also, there are a few tax-managed mutual funds, but tread carefully because you should also review their performance and expenses.
Mft, One way to keep them completely 'seperate' is to open another ROLLOVER IRA account with your custodian and rollover your 401K funds to that account. That is perhaps the simplest and the easy do-it-yourself option.
Mft - You will want to keep non-deductible assets separate form deductible assets in your IRAs to simplify record keeping. You are supposed to record and report annually your basis in the IRA with non-deductible assets so that you won't be taxed on that money when it comes out.
Hi Mft - I hope your accountant has filed an 8606 form for each of your non-deductible contributions. This will ensure that when these funds are distributed, they receive more favorable tax treatment
Mft - you can roll it into another IRA, but if you do a Roth IRA conversion or future withdrawals you'll need to look at all your IRA accounts together to determine what the basis is in your IRA. Before you roll the other 401k into a new IRA you may want to look into a Roth IRA conversion assuming you don't have other IRA assets. You would be taxed on the gain above basis, but would eliminate the need to keep all the basis info in the future. I'd recommend working with a financial or tax professional to see if this makes sense.
Don: In addition to what's been said, remember that if you sell anything you will be realizing any capital gains or losses based on how much you invested vs. what you sold it for. So remember that changing things now will probably come with a tax bill. And depending on your overall tax situation you might not want that to happen all in one tax year if you can avoid it.
Maybe consider looking into ETFs or low cost index funds with a low "turnover rate" (how much they buy and sell holdings) as a middle ground. I'm worried that if you shift into stock you won't be as diversified & your risk level might be higher than you might realize.
Karen and Nicole you are both up shortly. Thank you for your questions!
Wow. Time flies when you're having fun. Thank you to all of the NAPFA advisers who have been with us for the last two hours.
Joining us now are Mark Wilson, Michael Gibney and Russell Hall. Welcome!
Hi Karen - If there was absolutely no withholding, it does not surprise me that she owed money. I would ask her to ask her accountant how much she should be withholding. If withholding it not an option, then she may have to begin paying quarterly estimated taxes.
Hey Nicole - If these funds are all in what is known as a "qualified account", that is, an IRA or 401k then you can feel comfortable doing all at once. If they are not in a qualified account, then it is vital that you consider any tax implications of selling funds before rebalancing and you may want to do so over time to reduce capital gains taxes, if any.
Hi Nicole, I'm assuming from what you said that these transfers will move a lot from bonds or cash to stocks? If that's the case, yes you may want to stretch the purchases out over time (we call this "dollar cost averaging") so there's less risk buying a lot of stocks just before a market drop.
Nicole - I'm glad you are reviewing and making allocation changes. If you are concerned about the timing, you may consider "averging in" your changes over a few months. In other words, instead of moving 50% today - move 20%/15%/15% over the next three months.
Karen - This depends on her income level. If she uses an accountant, they would be the best person to ask. If she prepares her own taxes, then look at the tax tables available on line and choose a percentage that closely matches her income.
Hi Gary Z., thanks for the question, but I think you would need to consult with a tax professional (which we are not here). Sorry!
Nicole - There is an argument within our industry about the benefits of dollar cost averaging vs. fully funding a well-diversified portfolio (wade vs. plunge.) If you will be investing in a very well - diversified portfolio, then doing so all at once may make sense. If you are not so diversified, then dollar cost averaging over a period may benefit you.
Nicole, this movement appears in your retirement accounts and has no tax consequence. In addition, you mentioned this is as per recommendation. I am assuming you are following a professional financial advice. I hope I am right on that. If so, what is the 'risk' you are worried about? Sorry I am missing on that
Nicole, my opinion is that you are thinking about it correctly. If it were me, I would probably plan to move it in over 6 months (so about $24,000 per month, or over 10% of your portfolio). If we get a big market drop and you are comfortable taking the risk, you could always speed up the schedule or put in a bigger chunk.
Elaine - FICA taxes are due on payments from non-qualified retirement plans. Some companies take care of these taxes when the money is deferred (which is usually better tax wise for you), some allow you to pay these taxes when you get the payments. I'd contact the company or deferred compensation provider to find out how they've handled this plan. You obviously don't want to pay these taxes twice.
I have a stock portfolio -- NAV say $200,000 -- no sale or purchases in five years.
Ginny: An IRA online savings account will probably earn you more than a money market right now with no additional risk. I'm not sure what would be the right fit for you longer term. Generally speaking safer investments like savings accounts and CDs keep your principal safe but have a higher risk of not keeping up with inflation. Investments that have tended to exceed inflation over the long term generally are more volatile and your principal is usually somewhat at risk. Retirement can be really long so most clients adopt some kind of mixture based on their own ability to tolerate these risks to balance the pros and cons of these 2 ends of the spectrum. You may want to hire a planner to help you figure out what kind of mixture makes sense for you specifically.
For anyone wanting to get into mutual funds:
Don, It's true that mutual funds are required to pass along their gains and losses, dividends and income to investors. That's why a lot of people choose to invest in broad-based index funds where there is not a lot of buying and selling, so you don't receive that tax hit that you do with actively managed funds. Whether or not you switch completely out of mutual funds is your choice, but remember that a foundation of a broad-based index fund will give you great diversification (like the Vanguard Total Stock Market Index) with very low fees.
Don - A couple of points. First, Mutual Funds offer diversification that is hard to replicate on your own using individuals stocks, and this cannot be discounted. Second, and admittedly this may be a bit of a stretch since I do not know the particulars, but the fund you are in may be generating many capital gains because it is actively managed. You may avoid some of the issues you are experiencing by investing in a more passively managed mutual fund. Also, there are a few tax-managed mutual funds, but tread carefully because you should also review their performance and expenses.
Mft - You will want to keep non-deductible assets separate form deductible assets in your IRAs to simplify record keeping. You are supposed to record and report annually your basis in the IRA with non-deductible assets so that you won't be taxed on that money when it comes out.
Mft - you can roll it into another IRA, but if you do a Roth IRA conversion or future withdrawals you'll need to look at all your IRA accounts together to determine what the basis is in your IRA. Before you roll the other 401k into a new IRA you may want to look into a Roth IRA conversion assuming you don't have other IRA assets. You would be taxed on the gain above basis, but would eliminate the need to keep all the basis info in the future. I'd recommend working with a financial or tax professional to see if this makes sense.
Hi Nicole, I'm assuming from what you said that these transfers will move a lot from bonds or cash to stocks? If that's the case, yes you may want to stretch the purchases out over time (we call this "dollar cost averaging") so there's less risk buying a lot of stocks just before a market drop.
