What to do with inheritance? (Favorite tax-efficient funds?)

[lurkyloo]

Warning:  this may come across as bragging.

I am anticipating an initial disbursement of cash and/or stocks of around 650K, classed as part of Dad’s estate, so no capital gains to worry about and I am free to move it around.  I will also receive ten years of RMDs from Dad’s IRA that will run about 100K pretax to start. IRA and I believe the rest of it is currently with Dad’s advisor at a well known brokerage/advice chain; more expensive than I typically like so plan to move the after tax funds and possibly roll over my portion of the IRA.  Not sure whether attorney will distribute as stocks or cash, possibly a mix.

What do I do with it?

Relevant info:  our tax bracket is ridiculous so tax efficiency is an absolute must.  2023 in particular will involve an unusual six-figure bonus for DH (maybe around 200K?) It’s possible he’ll switch to a higher-prestige but much less well paid job at some point, but unlikely within the next five years.

We already don’t spend all we earn; it is likely that most of this will pass untouched to kiddo so I plan loosely to prioritize growth over income, go with first in last out distributions, and take full advantage of the step up in capital gains when I kick it.

I have existing accounts at Fidelity, Vanguard and TIAA, would prefer to stay within those three brokerages.

I do have a target nonprofit in mind for significant donations, with a couple of backups.

What are your favorite tax-efficient investments?  

[jerseygirl]

Will be having meeting with our financial advisor re dividends. These are taxed as income even though I’ve been just having them reinvested into the stock. I’m trying to reduce taxes and advisor mentioned possibly converting dividend stocks to non dividend

Also I’m on the board of a charity and last year donated my IRA. RMD directly to the charity. Check sent from Fidelity direct to charity so wasn’t taxed on this and decreased our AGI ( and hopefully decrease the dreaded Medicare IRMAA)

[giramomma]

I have no clue about the tax efficiency portion.

How old is your kiddo?

What do you want to do with your life?

IMVHO, you've got a life changing amount coming to you.

Giving your money away is a kind thing to do.

I probably would be selfish enough to take a step back and decide my life priorities.

Working isn't the only way to find that sort of satisfaction of a job well done.  For me, actually, volunteering also can be a way to fill that need. Actually, I think volunteering can also afford me other positives. I can volunteer about things I am passionate about, rather than "having" to do it because it's a means to an end. I can try on different organizations until I find one I like. IOW, I'm not stuck, in the same way I am now, between work and the kids.

I just don't have time for doing as much as I would like, because it's not that season.

If it was that season, though, you bet I'd think about what a meaningful life looks like for me.'And I would have some serious discussions with DH about how I was going to achieve that.

So. I guess I would let the money sit for a little bit.

Figure out your life plan. Go see a personal coach.

With that kind of money, I'd work part time. I'd also start doing things with the younger kids, like summering in Europe while we could. You can't do things like summer in Europe while your kid is taking college prep classes to increase his SAT score, getting a jump on AP English reading for fall, volunteering, possibly working, and engaging in activities over the summer.

It's trite, but most people, as long as they have their basic needs met, never say "I have only dreamed of working a 40 year career! I'm glad that's what I spend my life doing" when their life is slipping away.

And then I'd probably talk to a a fee based person to help guide you, and a CPA as well.

[CCL]

Have you considered putting a portion of it into funds that generate qualified dividends and long-term capital gains? I'm guessing you'd be in the 15% rate, but top is still only 20%.

I manage our income (not nearly as high as yours!) every year so that we stay within the 0% capital gains bracket.

[minnesotapaintlady]

Well, index funds and ETFs are inherently tax efficient and have low fees to boot, that would be my choice of where to park that kind of money.  An ETF throws off very little in the way of annual income and you just pay capital gains when you sell. 

[teen persuasion]

Bogleheads has a wiki on dealing with big windfalls that you might want to look at.  I think the general advice is to do nothing immediate, do your research first before jumping into big changes.

You might post on bogleheads to get their advice on tax efficient funds; I suspect VTSAX - Total stock market would be a common suggestion. But they would be great at sifting out issues with your whole situation (they will want to see ALL your portfolio details, to have a holistic viewpoint).

Some questions I have: why are you getting 10 years of RMDs from Dad's IRA?  Did he never take his RMDs at all?  Or are you referring to receiving an inherited IRA from him and having to take distributions from it over the next 10 years?

Why would you want to do LIFO distributions instead of SpecId?

If you are planning charitable donations, plan wisely.  If giving from taxable funds, donate chunks of funds with a high capital gain - the charity is exempt from CG taxes, and you get the full value of the donation; don't sell first and donate the cash! Or, if you can do QCD from the inherited IRA (not sure if you can from inherited, or age restrictions) that could satisfy part of the RMD w/o taxes.

[lurkyloo]

May 10, 2023 20:04:34 GMT -5 jerseygirl said:

Will be having meeting with our financial advisor re dividends. These are taxed as income even though I’ve been just having them reinvested into the stock. I’m trying to reduce taxes and advisor mentioned possibly converting dividend stocks to non dividend

Also I’m on the board of a charity and last year donated my IRA. RMD directly to the charity. Check sent from Fidelity direct to charity so wasn’t taxed on this and decreased our AGI ( and hopefully decrease the dreaded Medicare IRMAA)

Thanks jerseygirl.  Indeed, dividends are kind of the bane of my tax season existence...I have a chunk invested in a taxable growth and income fund, dividends similarly get reinvested and I never quite know how to account for them so they don’t nudge us into underpayment penalty territory.  
Bonds are similarly right out for taxable accounts 
I will consider having a check directly sent so I don’t have to do the income but deduction dance at tax time-good advice.

[ArchietheDragon]

muni bonds?

[lurkyloo]

giramomma whoa.  That got philosophical fast 
Kiddo is 9, nearly 10.  We are nearly done setting up our trusts for him.
Yes, donating is kind but the whole point of a money board I think is to double check that things make sense logically as well as emotionally.

It’s been over a year since Dad died, over 20 since my grandparents died.  I’ve always known that there would be a significant inheritance, just not specific numbers or details.  So I’ve been thinking about this a while.  I do have a fee only planner picked out, I just want to make sure I’ve done my homework and have an idea of what I want before I set up a meeting.

As to life goals, a life coach isn’t a bad idea.  However, I’m not really interested in quitting my job.  I get a lot of intellectual stimulation and challenge from it, and a lot of satisfaction when my problem solving skills get deployed.  I work with a lot of great people and value their appreciation and usually good opinion of me.  If it helps, I probably am a tad underemployed and definitely underpaid for peer group    DH also thrives on what he does...we could retire now probably, but we don’t really want to.

Mostly what I want is to be a good steward of this money, plus some associated real estate, without screwing up.  I’m not making moves right now now now, but thinking about what moves would make sense.

I will think about taking some unpaid weeks off in the summer maybe.  Although that I do have to figure out soon for 2023 bc I already set up DS’ camp schedule and the last day to change that is about a week away...currently set to take July 4 week off.

[giramomma]

I will always vote for dividends.

We have about 40% of your initial windfall. We get 11K a year in dividends. 

I'm comfortable enough counting on them as a source of income in retirement, as in 23 years of marriage, the dividends have been stable.

My goal was to try to get 25% of our retirement income to come from dividends. We won't get there. But 15-20% is pretty reasonable.

Most of our dividend generating stock is in utilities. (Yes, we have stock. We're not selling stock to reinvest in funds. That never made any sense.)

[lurkyloo]

May 11, 2023 7:42:03 GMT -5 CCL said:

Have you considered putting a portion of it into funds that generate qualified dividends and long-term capital gains? I'm guessing you'd be in the 15% rate, but top is still only 20%.

I manage our income (not nearly as high as yours!) every year so that we stay within the 0% capital gains bracket.

I am thinking of trying to avoid even qualified dividends! Definitely long term capital gains are the goal.
The IRA distributions are likely to push us into the 20% cap gains rate for the next few years, even without DH’s windfall.

Did you have specific funds along those lines that you would recommend?

[giramomma]

May 11, 2023 9:00:05 GMT -5 lurkyloo said:

giramomma whoa.  That got philosophical fast 

Sorry. That's where my head is right now.

I would think about how you want to spend time with your kiddo. You've only got a couple of good years left, when they care completely yours.

Time is still going to be the most finite of finite resources for you.

[lurkyloo]

May 11, 2023 7:53:31 GMT -5 minnesotapaintlady said:

Well, index funds and ETFs are inherently tax efficient and have low fees to boot, that would be my choice of where to park that kind of money.  An ETF throws off very little in the way of annual income and you just pay capital gains when you sell. 

The issue I am having with the taxable account Dad set up is that it throws off income even if I don’t see it, I think due to moves made by the fund managers (tiaa growth and growth & income) which raises our tax bill.  I guess I’ll look into etfs but I do want funds that are managed with a specific eye toward minimizing taxable income.  A lot of this seems counterintuitive...even s&p index funds can wind up with capital gains if say a company moves out of the index and the fund managers have to sell that one and buy a new one.

@teenpersuasion yes, been haunting the bogleheads board for sure!  Will look at their windfalls wiki.  The IRA is indeed inherited and I think the law requires substantially equal RMDs over 10 years to empty it.  Lots to think over in your post...SpecID would be fine, I do expect this to be a fairly static investment account, just there to grow.

I don’t want to go into the granularity that bogleheads forum would require so I am currently disinclined to post there.  Plus personal quirks about limiting info on social media...somehow I convinced myself ymam is okay, for no defensible reason.

Thanks all for the commentary!  Reading everything, it just may take a moment to respond individually (see:  still employed despite gira’s best logic 

[minnesotapaintlady]

May 11, 2023 10:35:48 GMT -5 lurkyloo said:

May 11, 2023 7:53:31 GMT -5 minnesotapaintlady said:

Well, index funds and ETFs are inherently tax efficient and have low fees to boot, that would be my choice of where to park that kind of money.  An ETF throws off very little in the way of annual income and you just pay capital gains when you sell. 

The issue I am having with the taxable account Dad set up is that it throws off income even if I don’t see it, I think due to moves made by the fund managers (tiaa growth and growth & income) which raises our tax bill.  I guess I’ll look into etfs but I do want funds that are managed with a specific eye toward minimizing taxable income.  A lot of this seems counterintuitive...even s&p index funds can wind up with capital gains if say a company moves out of the index and the fund managers have to sell that one and buy a new one.

@teenpersuasion yes, been haunting the bogleheads board for sure!  Will look at their windfalls wiki.  The IRA is indeed inherited and I think the law requires substantially equal RMDs over 10 years to empty it.  Lots to think over in your post...SpecID would be fine, I do expect this to be a fairly static investment account, just there to grow.

I don’t want to go into the granularity that bogleheads forum would require so I am currently disinclined to post there.  Plus personal quirks about limiting info on social media...somehow I convinced myself ymam is okay, for no defensible reason.

Thanks all for the commentary!  Reading everything, it just may take a moment to respond individually (see:  still employed despite gira’s best logic 

Yes, but it's very minimal compared to a managed fund.  I have 10K in VTI for the past 5 or 6 years and it's never thrown out more than about $130/year.  I realize you're talking a lot more money, but at that rate 650K would produce $8500/year or so?

[finnime]

It seems to me based on the information you've shared that MPL's advice as always is sound, and you would no doubt benefit from a tax expert investment advisor. My former FIL was a tax attorney who worked for Mass. Mutual helping clients minimize taxes and grow their estates. So, they're out there.

In my relatively puny investment world I'd go with bonds that fund an attractive end. I know very little, though.

[teen persuasion]

May 11, 2023 10:35:48 GMT -5 lurkyloo said:

The issue I am having with the taxable account Dad set up is that it throws off income even if I don’t see it, I think due to moves made by the fund managers (tiaa growth and growth & income) which raises our tax bill.  I guess I’ll look into etfs but I do want funds that are managed with a specific eye toward minimizing taxable income.  A lot of this seems counterintuitive...even s&p index funds can wind up with capital gains if say a company moves out of the index and the fund managers have to sell that one and buy a new one.

At the very least, turn off div reinvestment in taxable in any managed funds. No sense buying MORE of those. Buy into index funds or ETFs with those dividends or forced CG going forward. But those pesky managed funds could be targets to donate if you are inclined ...

I've got the impression that Vanguard has some secret sauce formula that minimizes CG in index funds like VTSAX/VTI even when forced to make changes - offsetting exchanges? IDK all the details, but very tax efficient compared to managed funds.

I think gira was talking about using dividends as income, for spending. You are trying to avoid more income, for tax purposes anyway.

[MN-Investor]

May 10, 2023 20:04:34 GMT -5 jerseygirl said:

Also I’m on the board of a charity and last year donated my IRA. RMD directly to the charity. Check sent from Fidelity direct to charity so wasn’t taxed on this and decreased our AGI ( and hopefully decrease the dreaded Medicare IRMAA)

Distributions directly from an IRA to a charity only work if you are 70½. If you are younger with an inherited IRA, it's not an option.

[tskeeter]

May 10, 2023 18:00:44 GMT -5 lurkyloo said:

Warning:  this may come across as bragging.

I am anticipating an initial disbursement of cash and/or stocks of around 650K, classed as part of Dad’s estate, so no capital gains to worry about and I am free to move it around.  I will also receive ten years of RMDs from Dad’s IRA that will run about 100K pretax to start. IRA and I believe the rest of it is currently with Dad’s advisor at a well known brokerage/advice chain; more expensive than I typically like so plan to move the after tax funds and possibly roll over my portion of the IRA.  Not sure whether attorney will distribute as stocks or cash, possibly a mix.

What do I do with it?

Relevant info:  our tax bracket is ridiculous so tax efficiency is an absolute must.  2023 in particular will involve an unusual six-figure bonus for DH (maybe around 200K?) It’s possible he’ll switch to a higher-prestige but much less well paid job at some point, but unlikely within the next five years.

We already don’t spend all we earn; it is likely that most of this will pass untouched to kiddo so I plan loosely to prioritize growth over income, go with first in last out distributions, and take full advantage of the step up in capital gains when I kick it.

I have existing accounts at Fidelity, Vanguard and TIAA, would prefer to stay within those three brokerages.

I do have a target nonprofit in mind for significant donations, with a couple of backups.

What are your favorite tax-efficient investments?  

Christine Benz wrote an article for Morningstar in mid March called “25 Top Picks for Tax-Efficient ETF’s and Mutual Funds”.  I found it by searching for tax efficient index funds.  Should be a good source for ideas.

[CCL]

May 11, 2023 9:11:50 GMT -5 lurkyloo said:

May 11, 2023 7:42:03 GMT -5 CCL said:

Have you considered putting a portion of it into funds that generate qualified dividends and long-term capital gains? I'm guessing you'd be in the 15% rate, but top is still only 20%.

I manage our income (not nearly as high as yours!) every year so that we stay within the 0% capital gains bracket.

I am thinking of trying to avoid even qualified dividends! Definitely long term capital gains are the goal.
The IRA distributions are likely to push us into the 20% cap gains rate for the next few years, even without DH’s windfall.

Did you have specific funds along those lines that you would recommend?

Keep in mind what works for me, may not work for you. A few I like are QQQ - Nasdaq 100 etf, FCNTX - Fidelity Contra Fund, FXAIX - Fidelity 500 Index. I have other funds, but they pay more in dividends.

What about individual stocks? There are plenty of good ones that pay few to no dividends.

I guess I'm not really clear on what your goals for these $$$ are. Are you trying to grow principal, preserve principal, create an income stream, spend a portion, or something else?

[lurkyloo]

May 11, 2023 8:52:19 GMT -5 ArchietheDragon said:

muni bonds?

What kind and where?  

Those are issued by state and local authorities, federal tax free, and slightly worse interest rates than you can get elsewhere, correct?  Do you buy them individually or in a bond fund?

[lurkyloo]

May 11, 2023 10:59:45 GMT -5 minnesotapaintlady said:

May 11, 2023 10:35:48 GMT -5 lurkyloo said:

The issue I am having with the taxable account Dad set up is that it throws off income even if I don’t see it, I think due to moves made by the fund managers (tiaa growth and growth & income) which raises our tax bill.  I guess I’ll look into etfs but I do want funds that are managed with a specific eye toward minimizing taxable income.  A lot of this seems counterintuitive...even s&p index funds can wind up with capital gains if say a company moves out of the index and the fund managers have to sell that one and buy a new one.

@teenpersuasion yes, been haunting the bogleheads board for sure!  Will look at their windfalls wiki.  The IRA is indeed inherited and I think the law requires substantially equal RMDs over 10 years to empty it.  Lots to think over in your post...SpecID would be fine, I do expect this to be a fairly static investment account, just there to grow.

I don’t want to go into the granularity that bogleheads forum would require so I am currently disinclined to post there.  Plus personal quirks about limiting info on social media...somehow I convinced myself ymam is okay, for no defensible reason.

Thanks all for the commentary!  Reading everything, it just may take a moment to respond individually (see:  still employed despite gira’s best logic 

Yes, but it's very minimal compared to a managed fund.  I have 10K in VTI for the past 5 or 6 years and it's never thrown out more than about $130/year.  I realize you're talking a lot more money, but at that rate 650K would produce $8500/year or so?

Fair enough!  Thanks for the hard data.  

[debthaven]

My apologies, because I don't know the details, nor the tax implications. And I've never had to deal with that kind of money.

My BFF and her (ex DH) ended up with what was "silly money" to them at one point in their lives when their two boys were very little.  

They ended up buying each little boy a house near where they lived (CT). The parents turned those houses over to the boys when they were young adults (but not at 18, more like early 20s). 

I am not sure what the (now adult) boys did with their houses, but I thought that was an interesting idea. I *THINK* one sold his to pay for med school. Not sure what the other did with his.

I know you and your DH already have enough on your plate, you certainly don't need a real estate empire. But maybe just one asset in your son's name?

Just a thought. 

[lurkyloo]

May 11, 2023 12:33:43 GMT -5 teen persuasion said:

May 11, 2023 10:35:48 GMT -5 lurkyloo said:

The issue I am having with the taxable account Dad set up is that it throws off income even if I don’t see it, I think due to moves made by the fund managers (tiaa growth and growth & income) which raises our tax bill.  I guess I’ll look into etfs but I do want funds that are managed with a specific eye toward minimizing taxable income.  A lot of this seems counterintuitive...even s&p index funds can wind up with capital gains if say a company moves out of the index and the fund managers have to sell that one and buy a new one.

At the very least, turn off div reinvestment in taxable in any managed funds. No sense buying MORE of those. Buy into index funds or ETFs with those dividends or forced CG going forward. But those pesky managed funds could be targets to donate if you are inclined ...

I've got the impression that Vanguard has some secret sauce formula that minimizes CG in index funds like VTSAX/VTI even when forced to make changes - offsetting exchanges? IDK all the details, but very tax efficient compared to managed funds.

I think gira was talking about using dividends as income, for spending. You are trying to avoid more income, for tax purposes anyway.

Exactly.  To answer @ccl as well, I don’t really have a goal for this money other than to keep it growing and relatively safe (including from inflation) and to not increase tax burden unnecessarily in the process.  We don’t anticipate needing it either to live on or in retirement.  So...I suppose my goal is to pass it on to my kid?  I guess I could foresee using some of it to contribute whatever was necessary in the case that we needed to pay for care for Mom.

Turning off dividend reinvestment and redirecting it to growth fund is an excellent suggestion.  I need to set up online access to tiaa.  Thanks also for the point about donating investments directly, that’s an important point.

I found a spreadsheet on bogleheads that evaluated tax efficiency of various funds as well and it looked like vanguard large cap growth were some of the best...although I need to download it and plug in my tax brackets to be sure.

My situation is just kind of weird.  I went to the bogleheads windfall wiki and not sure it applies all that much...we didn’t change our lifestyle when w2 income went up, not planning to here either.  Might have snorted a bit at the suggestion to put aside 6-12 months’ expenses.  Phil would have a heart attack if he looked at DH’s savings/checking balance.

I also feel super guilty trying to work out my first world problems here.  Sorry, all.

[CCL]

Don't feel guilty. It's a money board, after all. Even though these amounts are out of my league, it's still very interesting to me. I'm always trying to learn more.

By the way, I'm very sorry for the loss of your father.

[tallguy]

I had the same issue where I don't want anything that throws off dividends and maybe creates an issue tax-wise.  I'm considering switching much of my taxable brokerage account to Berkshire Hathaway stock to make it easy, but have an issue with the current unrealized capital gains on the existing holdings.  Still, having a traditionally strong holding that is diverse in itself, does not at least to this point pay dividends (and won't as long as Warren is around), and also tends to outperform especially in down markets has an appeal.      

[jerseygirl]

Buy individual municipal bonds not a bond fund. To get really tax free buy bonds from your state if you have state income tax.
At one point I had a lot of corporate and municipal individual bonds. But interest rates kept decreasing and sold them as they matured. I had only bonds less than 10 yrs to maturity. Just have a few now paying 4-5%

[lurkyloo]

May 11, 2023 17:24:21 GMT -5 debthaven said:

My apologies, because I don't know the details, nor the tax implications. And I've never had to deal with that kind of money.

My BFF and her (ex DH) ended up with what was "silly money" to them at one point in their lives when their two boys were very little.  

They ended up buying each little boy a house near where they lived (CT). The parents turned those houses over to the boys when they were young adults (but not at 18, more like early 20s). 

I am not sure what the (now adult) boys did with their houses, but I thought that was an interesting idea. I *THINK* one sold his to pay for med school. Not sure what the other did with his.

I know you and your DH already have enough on your plate, you certainly don't need a real estate empire. But maybe just one asset in your son's name?

Just a thought. 

Basically it’s all going to him anyway, so something to think about.

But, that’s another wrinkle: Dad left DS $25K as well and I have no idea what to do with it.  (He already has 4 years of prepaid in state tuition plus maybe 60-70K in a 529, not inclined to stick it there.)

[lurkyloo]

May 11, 2023 18:30:58 GMT -5 CCL said:

Don't feel guilty. It's a money board, after all. Even though these amounts are out of my league, it's still very interesting to me. I'm always trying to learn more.

By the way, I'm very sorry for the loss of your father. [img src="https://i239.photobucket.com/albums/ff155/JiminiChristmas/ymamsmiles/sad.png" alt="" class="smile" src="//storage.proboards.com/forum/images/smiley/sad.png"]

The inheritance is definitely not worth the price 

[lurkyloo]

May 11, 2023 18:31:05 GMT -5 tallguy said:

I had the same issue where I don't want anything that throws off dividends and maybe creates an issue tax-wise.  I'm considering switching much of my taxable brokerage account to Berkshire Hathaway stock to make it easy, but have an issue with the current unrealized capital gains on the existing holdings.  Still, having a traditionally strong holding that is diverse in itself, does not at least to this point pay dividends (and won't as long as Warren is around), and also tends to outperform especially in down markets has an appeal.      

I was eyeing berkshire hathaway for sure (didn’t find it on fidelity but looked like you could buy it through vanguard).  Would you go with partial A shares, or B shares?
I am a little concerned about Warren’s longevity, though, given he’s in his 90s.  So maybe a chunk but not the whole thing.

[tallguy]

May 11, 2023 18:50:10 GMT -5 lurkyloo said:

May 11, 2023 18:31:05 GMT -5 tallguy said:

I had the same issue where I don't want anything that throws off dividends and maybe creates an issue tax-wise.  I'm considering switching much of my taxable brokerage account to Berkshire Hathaway stock to make it easy, but have an issue with the current unrealized capital gains on the existing holdings.  Still, having a traditionally strong holding that is diverse in itself, does not at least to this point pay dividends (and won't as long as Warren is around), and also tends to outperform especially in down markets has an appeal.      

I was eyeing berkshire hathaway for sure (didn’t find it on fidelity but looked like you could buy it through vanguard).  Would you go with partial A shares, or B shares?
I am a little concerned about Warren’s longevity, though, given he’s in his 90s.  So maybe a chunk but not the whole thing.

To the best of my knowledge you can't buy partial A shares.  B shares were created to allow people to buy Berkshire without paying so much for one share.  A shares can be converted to B, but B cannot be converted to A, to the best of my recollection.  A share of B is 1/1500 of an A share.