What to sell advice?

ecowtent

Recycles dryer sheets
Joined
Mar 25, 2016
Messages
86
We are looking at our accounts and deciding what to sell for tax advantage and also best for the kids inheritance. Roughly $1m 401K can’t access for 2 years, $1.5m Vanguard stocks, 300K IRA. 1/2 of the budget is covered by pension. Another 1/4 will be SS but not for several years. Also had a call from employer 401K discussing what to do. He stated that my plan allows me to break out some of my 401K and move to an IRA. I have never heard of this before. Anyone else? Selling off Vanguard funds 1st makes the most sense. I don’t want to pay an advisor and don’t think we will go that route, but do want to make good tax decisions based on current tax environment. We don’t need access to the 401K funds yet and don’t feel the need to move over to Vanguard. Any reason I should consider moving now?

In Vanguard we mostly have VTSAX, VINIX and VFIAX. I sold off mostly bonds we had at a loss last year. Any suggestions for what to sell going forward. Between these accounts is there any real difference for tax purposes?

Thx,
M
 
It's quite common for early retirees to rollover their entire 401k to an IRA once they leave their employer. Generally, IRAs offer more investment options that have lower expenses. Typically, the only reasons to stay in a 402k is if you have access to a good stable value fund, which you can't get in an IRA or if you need to make penalty free withdrawals under the rule of 55.

Commonly, the 401k will send you a check made out to where your IRA is, so for example, made out to "[brokerage firm] FBO ecowtent". FBO is for the benefit of. Then you deposit the check into your IRA and use the proceeds to buy whatever in investments that you want. The rollover is NOT a taxable event because the money is a transfer between two different types of tax deferred accounts.

In terms of what to sell or keep, you need to decide what you want your target AA to be and perhaps develop an IPS (investment policy statement) and then follow that guidance.

This period of time between ER and when pensions or SS begin you are often in a lower tax bracket than you will be later in life and depending on your circumstances you may be able to do some low tax cost Roth conversions, which is moving money from an IRA to a Roth IRA which is a taxable event and pay the taxes.
 
The rollover is NOT a taxable event because the money is a transfer between two different types of tax deferred accounts.
Just a heads up, because I know someone who had an issue because of this, make sure you get the check deposited within 60 days, or it becomes a taxable withdrawal, with all of the associated penalties. It shouldn't be an issue, but the person I know of had a death in the family at the same time they received the check, and just flat out forgot about it.
 
At my last transfer, it was possible to make in service rollovers to an IRA after reaching age 59 1/2. I had a custodian to custodian transfer, i.e. I reached out to the brokerage first for instructions, and submitted the paperwork to allow for a direct custodian to custodian transfer - which in my case was electronic.

Rolling over is is not a taxable event - as opposed to taking a distribution, which is.

For the kiddos, the most favorable inheritance might be a Roth wherein the taxes have been paid, followed by assets in a brokerage, wherein they would get a "step-up" in basis, followed by a the traditional IRA which would be ordinary income.

As noted in #2 above, you may want to consider including some Roth conversions while you are in a lower tax bracket prior to taking SS - but this depends upon your overall situation.
 
Just a heads up, because I know someone who had an issue because of this, make sure you get the check deposited within 60 days, or it becomes a taxable withdrawal, with all of the associated penalties. It shouldn't be an issue, but the person I know of had a death in the family at the same time they received the check, and just flat out forgot about it.
Interesting point that I had not thought of, though I wonder how it can be a taxable withdrawal if it isn't made out to the account holder and wasn't deposited it was out of the 401k but in limbo and not in a taxable account or a tax-deferred account.
 
...For the kiddos, the most favorable inheritance might be a Roth wherein the taxes have been paid, followed by assets in a brokerage, wherein they would get a "step-up" in basis, followed by a the traditional IRA which would be ordinary income. ...
IMO it depends. On what your tax cost would be on making Roth conversions compared to what the beneficiaries tax bracket is expected to be when they inherit the IRA and need to withdraw the money or make required minimum distributions.

For us, my DD/DSIL have a good income so a Roth would be better for them... meanwhile DS is in a low tax bracket so for any voluntary Roth money he would pay less in taxes if he received it tax-deferred that I would pay to make it tax free Roth money.
 
FYI once you have left the company, you can do a tax free transfer to a rollover IRA at any age. You can sell the funds and transfer the money, but many IRA providers will accept an in-kind transfer of funds. For example if you had 123 shares of VTSAX, you can transfer these shares to Fidelity where your newly created Rollover IRA is.

If you retired at 55 or later, you can sell these shares without penalty from a 401K (with 20% federal tax withholding). But once you transfer them to a Rollover IRA, you can’t sell them without a penalty until you are 59 1/2.
 
WADR, @ecowtent, maybe I'm slow but it is not clear to me what problem you are trying to solve.

You speak of tax strategy yet buying and selling in your tax sheltered 401k and IRA has no tax effects. For tax loss harvesting in your cash account, you'll have to identify where you have losses and also consider using average cost as your basis or selling specific lots.

You speak of kids' inheritance; estate planning involves much more than just looking at investable assets.

I'd suggest step one be to take Warren Buffett's advice: "Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell." ... "Lethargy, bordering on sloth should remain the cornerstone of an investment style." IOW don't rush into this.

A good step 2 IMO would be to find an FA that charges by the hour or by the task and have him help you look at your overall financial picture including SS planning, college planning if that's in the picture, and other "lumpy" future obligations. This will probably cost you a few thousand dollars but may save you far more. In the same vein, I'd suggest finding a specialist estate and elderlaw attorney and beginning to develop an overall strategy into which your investment decisions can fit.

Re Roths, as @PB4 inkles, things are not simple. Basically this is a tax rate arbitrage game considering your net tax cost now (including IRMAA, etc.) vs the likely tax rates of your beneficiaries. Your hired gun FA can help you understand the tradeoffs here.
 
Interesting point that I had not thought of, though I wonder how it can be a taxable withdrawal if it isn't made out to the account holder and wasn't deposited it was out of the 401k but in limbo and not in a taxable account or a tax-deferred account.
I think the check was made out to him, as opposed to the new brokerage. It was a big screw-up all around. This was a long time ago, and as MarieIG points out, there's really no reason to do the physical check route anymore.
 
Ah, if it was made out to him rather than the new brokerage then that is clearer.

I think checks are still common as I helped a friend rollover his company 401k to a brokerage IRA a couple years ago and the 401k plan mailed him an FBO check which we then deposited to his brokerage IRA.
 
Are we to assume you’re 57ish and the vanguard funds are in a non-retirement brokerage account?

If brokerage -The tax would be capital gains based upon cost basis. Capital gains tax rate can be as low as zero, depending on overall income.
 
Are you retired now or still working? What is your age now? You imply being able to access your 401k in 2 years. Is that using the rule of 55? Or your age becoming 59.5? Since you have a pretty good amount in the 401k, and your IRA, it makes some sense to draw that down keeping in mind tax rates. Speaking of tax rates, Roth conversion will add to your income at tax time, even though you are keeping the money in retirement type accounts; your conversion amount is what is taxable, going from tax deferred to after tax. There is always the RMD tax torpedo potential, so drawing down the 4012k and IRA tax deferred can be good strategy if you can leverage lower tax rates. It is a tax rate arbitrage question with no direct answer. You are also risking future tax rates vs current, will future be the same as now?

As others suggested, there are a lot of variables as to your age, your kid's age and expected careers, your pension and SS effect on tax rates, and your budget including big expenses.
 
Just a heads up, because I know someone who had an issue because of this, make sure you get the check deposited within 60 days, or it becomes a taxable withdrawal, with all of the associated penalties. It shouldn't be an issue, but the person I know of had a death in the family at the same time they received the check, and just flat out forgot about it.
FYI, that’s 60 days from the date on the check. Not the day you received the check. I understand that the Feds are very fussy about that date.
 
So as to the "what to sell" question, I presume you're asking because you need a little extra income to make up for the half of your budget not covered by pension? In your breakdown, your only real choice for selling for immediate income is the Vanguard funds, unless you do as AI18 says above -- "If you retired at 55 or later, you can sell ... shares without penalty from a 401K (with 20% federal tax withholding)," which would mean *not* rolling over your 401K to an IRA yet -- or unless you invoke 72t, which is a whole other complicated kettle of fish (which I'm considering to help get me and DW through age 59.5).
 
Back
Top Bottom