Mutual fund fee
Hi all! Years ago I was set up with my parents financial planners and I didn’t know anything so they put my money in a bunch of mutual funds. Eventually I stopped using them and took some of the money away from those funds but kept the high performing, lower fee ones active. As I learn more and more, I think I need to move them all out but I don’t wanna to anything abrupt without doing my due diligence! Nothing is over 1% expense ratio but a few are .6-.9% so they’re considerably higher than the very low cost index funds (I have those too). The returns have been solid so I haven’t made any moves but I really want to hit FIRE as soon as possible so I will move them if I should! I’m trying to figure out the tax loss harvesting thing (in general and for this instance) but since these aren’t at a loss I don’t believe that works. Any guidance would be appreciated!
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I see in the comments this is an IRA and not a taxable account. Tax loss harvesting (TLH) applies only to taxable accounts. Here's a good step-by-step guide from White Coat Investor if you want to read more about TLH.
Inside retirement accounts (401k, 403b, IRA, etc.) selling shares is not a taxable event. Only distributions out of a retirement account are taxable events. So you can sell what you want inside your IRA without incurring taxes. As long as the money never leaves the IRA, you won't be taxed.
Ah thank you!! I have a taxable brokerage but my other retirement accounts are much longer so I just always think of those and forget that there are differences lol.
Just confirming, as long as not in taxable account (IRA, Roth, 401k, 403b…) no taxes for selling funds. So get rid of those high fee mutual funds and find yourself low coast broad based index funds.
Be mindful that mutual funds sell at the end of the day (not live) and will then be available next day to purchase new. Also you’ll probably want to purchase ETFs (think VTI, VOO) and not mutual funds. For instance if you’re at Fidelity there will be a fee for buying a vanguard or Schwab mutual fund.
Thanks!! I’ve been listening to these podcasts all day at work so I guess I got mixed up lol
Sold off a bunch and got some 0% fidelity index funds now!
I switched over from Edward Jones so simple self managed Fidelity. If you switch over to in kind accounts (IRA to IRA) no penalties or taxable events. I had the exact scenario with just going through who my parents had used. I’ve invested in FXAIX and FZROX very very low fidelity index funds!!! Like .015% or FREE! I learned that Edward Jones has lots of proprietary high cost funds that they use that are yes 1% and above! Plus one percent advisory fees and that’s over 2% over the lifetime of my investments! Very happy to have educated myself and made this move.
Yes! I put into those as well as FNILX and FZILX which are also 0! Seems crazy less than a percent can make a difference but it all adds up!
I keep thinking about this and that maybe the high performing aspect of the managed funds may just be because of how well the market overall has been. It's been harder to help coworkers see the fees when the market has been friendly. Thank you for posting this.
Exactly. I’ve had this for over ten years at this point but they were my highest performers so I just kept them but there are too many with zero or almost zero fees and similar returns so I started to ditch them! It’s hard to see if you’re not really trying to learn. People see the gains and are happy with that so they don’t see the full picture.
The first step is to ensure DRIP is turned off so you aren't buying any more of these terrible funds. The second step is to check whether you can move the account to Fidelity, Schwab or Vanguard without liquidating and shares you already own (assuming this is a taxable account). If you don't have any losses (check the lot-level info), it may be best to leave them as-is and just use the dividends to buy more of your index funds.
Great discussion! I'm in the same boat but in taxable brokerage accounts. Does anyone have any tips or best practices for how they sold higher fee mutual funds to low cost ETFs in a taxable account?
I stopped working with the financial advisor years ago, but still have lots of high fee funds in my portfolio!
I had the same situation and I was set up with the same advisor as my parents and I was in high fees funds. After I found FIRE and learned more and more about low cost index fund investing I moved everything into a Vanguard account.
0.6% - 0.9% is very high still, that will make a big difference over decades. My Vanguard funds are under 0.1%.
Since I moved out I did the calculations using the expense ratio of my parents funds. Turns out my parents were paying over $4,000 a year in fess that they didn't know about! This is the tactic of financial advisors, they never truly explain the fees and how they work. And this was a friend of my parents.
After I did the calculations I encouraged them to hire a fiduciary who has the legal obligation to act in their best interest. After some time and consideration they have also switched over. This is much better for them in the long run and the hourly fee they pay to the fiduciary is much less than the high expense ratio fees. They are very pleased with the switch.
When people really learn and understand how fees work they will end up in low cost index funds. I really hope more people learn about FIRE so they can educate themselves and have a better financial future.
It’s crazy how sneaky it can be! The funds I sold off years ago were over 1% and I had read somewhere that anything over 1% was too high so I offloaded those. But now the more I study FIRE even under 1% could be too high lol. So what would you suggest? Just sell them at the gains and see if there’s other ones at a loss to offset an if not just take the tax hit now but still better in the long run?
It all depends on your individual situation. But essentially, it breaks down to the math of what will cost more: the tax trigger of switching everything over now, or the cost of continuing to pay fees and spreading the tax triggers over multiple years as you gradually draw down. Selling all at once could potentially push you into higher tax brackets, so you could end up paying higher levels of either ordinary income tax rates (for short-term gains) or long-term capital gains rates (typically 0%, 15%, or 20%) on each additional gain. It sounds like most of your assets would be long term capital gains, which is favorable, but it still might cost a lot.
Note, if your mutual funds are in retirement accounts (IRAs, 401k’s, TSPs, etc.), you can sell and purchase as many funds/stocks as you’d like. As long as you don’t pull the money out of the "retirement account" itself, there is no tax implication at all.
Oh! See these are the little nuances I’m still nailing down lol so tax loss harvesting is for taxable brokerage only? And I can ditch my high expense ratio funds and just reinvest in something else with no issue as long as I keep it in the IRA? I was worried about the tax but it sounds like that’s only upon withdrawal, do I have that right ?
Tax loss harvesting only applies in taxable brokerage accounts, correct.
Yes, if you have undesired stocks or funds in an IRA or other retirement account, you can trade them as much as you’d like without triggering taxes. You generally don’t pay taxes unless you withdraw money (traditional accounts are taxed on withdrawal, while Roth accounts can be tax-free if rules are met).