How To Transfer Assets In Volatile Markets
Have a high-fee or high-risk brokerage account that you’ve been avoiding transferring due to potential tax consequences?
Recent market volatility due to COVID-19, otherwise known as coronavirus, has caused investors to feel like they are riding an emotional rollercoaster. While our advice is usually to stay the course during times of market volatility, there are a few things you can do right now to help control your investment outcomes.
Here’s Why Taxes Matter
Recent volatility could potentially reduce the amount of potential capital gains you would realize when making a switch. This is especially important when transferring taxable investment accounts, since there aren’t any tax consequences when you transfer tax-sheltered retirement accounts.
One of the biggest barriers to moving taxable brokerage accounts is that the transfer may require you to sell certain investments you own, either prior to initiating the transfer or, as soon as the transferred assets are received in-kind. This is because your new provider may invest in a portfolio that has different assets in it than your old provider.
For example, at Betterment we invest our customers’ assets into a diversified portfolios of low-cost ETFs. When possible, we will transfer assets in-kind via ACATS—but sometimes assets must be sold if ACATS isn’t an option for a given situation.
If the investments you need to sell are trading at a large gain—way above what you originally bought them for—then there may be significant tax implications of making the switch. With markets currently down, the gains on your investments may not be as large as they previously were, which could lower or even eliminate the amount of taxes you’ll owe.
Three Reasons To Consider Moving Your Investments
We speak to prospective customers every single day who have good reasons to move their investments to Betterment. Here are the three most common situations where it’s worth considering a transfer, regardless of how the markets are behaving.
1) You Have Accounts With High Fees
There are several fees you could run into when investing. Some of the most common are advisory fees and fund-specific costs, like expense ratios and mutual fund loads. While you can’t control how the market performs or what the tax laws say, fees are something that you actually can control.
If you are invested in funds with high expense ratios or, you have an advisor that charges a high advisory fee—or even both—consider how much you could save by transferring.
- Even if you will incur taxes, consider running a break-even analysis to see how long it would take for what you’re saving on fees to outweigh the tax cost to switch. We have a calculator you can use to help you with your analysis. We recommend that you consult with a CPA or tax advisor if you have questions about your specific tax impact.
- Sync your other financial accounts to your Betterment account and we’ll uncover high fees for you. You can even sign up and try this out without ever having to fund your account—because we think it’s important for you to know this information.
2) Your Allocation Isn’t Quite Right
We find that customers can be apprehensive about transitioning a stock-heavy portfolio. This is most likely because the portfolio has performed well over time, so the investor could realize large capital gains to divest out of large stock positions. While we always want to be mindful of taxes, our experts believe that prioritizing appropriate portfolio risk is more important than saving on taxes.
If you have accounts that are more aggressive than what’s recommended for your goals, or you have high concentrations of single-stock, consider transferring to a portfolio that’s set to the appropriate risk level for you.
At Betterment, we will worry about this so that you don’t have to. When you set up each of your investment goals, we’ll give you advice on what amount of risk is appropriate for your specific investment objective(s) and we’ll make sure you’re globally diversified.
- Sync your other financial accounts to your Betterment account, so that we can analyze them. You can review how your current portfolio’s allocation and risk level compares to what we would recommend for you here at Betterment.
- If you hold individual stocks, our advice is to limit your investment in any one individual stock to no more than 10% of your overall investable assets. For example, if you hold $500,000 across all of your accounts and portfolios, you should have no more than $50,000 invested in any one individual stock.
3) You Own Mutual Funds That Pay Capital Gain Distributions
Individual investors realize capital gains when selling shares at a higher price than what they were purchased for. However, there is another type of capital gain that you should be wary of when dealing with actively managed mutual funds—it’s called a capital gain distribution.
Here’s how they work. Mutual funds invest in individual stocks and bonds. When a mutual fund manager sells underlying investments in the fund, they may realize capital gains, which are then passed on to individual shareholders—people like you and me.
These distributions are taxable to shareholders. What’s even worse is that mutual funds can pay out capital gain distributions even if the fund’s overall performance is down for a year. This is just one of the many reasons why we invest in ETFs and not mutual funds here at Betterment.
- Capital gain distributions are typically paid out at the end of the year. You can get estimates on these distributions from the mutual fund company directly, and compare it to your own cost basis in the investment. If the taxes you would realize from selling the investments are lower than the taxes you would pay on the capital gain distribution from the fund, then consider making the decision to sell your shares before the distribution is paid out.
Making Lemonade Out Of Lemons
While this recent market volatility may be hard to stomach, you may be able to use it to your advantage by making strategic investment decisions—like transitioning your investments into a lower-cost, properly diversified portfolio.
Taxable account transfers are typically more complex than transferring IRAs, but we hope that this overview provides clarity and direction as you review your current investment strategies and consider making adjustments.
Further, we’re here to help. If your taxable portfolio holds more than $250,000 in assets, stop stressing and simply reach out to our licensed transfer specialists at firstname.lastname@example.org. The service is complimentary and the team can review the specifics of your portfolio and provide you with a recommendation on how to best move—or not move—your assets to Betterment.
Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.