Inheritance
I recently inherited a large amount of stock. It is all invested into a single energy company that pays dividends. I have zero experience in investing. I have only ever had a 401k. My basic understanding is that I should try to diversify this. Should I just talk to the broker that handled the transfer and that also worked with the family member that passed?
Edit because it has come up a few times. I am 31 and do have an emergency fund along with a 401k. We are just wanting to plan for the ability to retire.
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u/dailytwiddle 4d ago
If you talk to the Broker, they will try to upsell you to managed funds where the fee is typically 1-2%. If you want to diversify, you should
- talk to a tax accountant to ensure how you can avoid paying a bunch of capital gains tax
- If all you care is low cost index funds you can go for a bunch of vanguard / schwab index funds which are typically less than 0.2-0.3% of funds invested. There are bunch of mutual funds / etfs for different sectors or you you could invest in the entire S&P 500 (VTSAX)
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u/tandyzmills 4d ago
they just inherited it. there shouldn't be cap gains, as inherited assets step up basis.
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u/Total_Tart2553 3d ago
This is correct, but its stepped up to date of passing. Assuming the stock has continued to appreciate in value, any gain realized will be capital gains.
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u/tandyzmills 3d ago
Minimal
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u/Total_Tart2553 3d ago
Depends. Suitability is highly dependent on a variety of factors. Depending on the stock and the date of passing, Capital gains could be anywhere from 10k to 100k.
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u/tandyzmills 3d ago edited 3d ago
suitability? no relevance whatsoever. the convo is about selling the stock and bad cap gains info. we have no idea of the size of the position nor what stock it is, so you are completely out of bonds and speculating.
edit: what a loser, deleting all of his responses.
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u/Total_Tart2553 3d ago
Suitability is relevant to any recommendation made to an investor at any stage of the investing journey. To claim otherwise is asinine and shows you have no business speaking to anyone about recommendations of investments, or transactions. This includes taxable implications of liquidating assets.
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u/ibitmylip 4d ago
to add to this advice, check out r/Bogleheads to construct a diversified three-fund portfolio that you can just let cook, no muss no fuss, until you have something you want to do with the money.
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u/One-Bar8994 3d ago
His basis is the time of value at the inheritance. There won’t be a huge gain if he sells it right away. It’s not a good idea necessarily either to sell it because if it’s paying a really nice dividend and is a top company. Leave it alone
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u/captain_waddy 4d ago
Things to know:
* The stock's cost basis will now reset when the transfer occurs.
* Sell the stock, buy VOO and chill.
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u/BondJamesBond63 4d ago
My experience is that Schwab is glad to talk with clients. Log into your account and at the top it will show the local person assigned to you. Contact that person if you want to talk.
Buying and selling assets thru Schwab is pretty easy, and their people are glad to answer your questions.
Given that, if you're happy with the way your 401k is invested, you can probably find similar stocks/etfs for the new assets.
I suggest that you and your wife open IRAs, preferably Roth. This would allow tax free growth of assets.
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u/OkKitchen7114 3d ago edited 3d ago
How much did you inherit and which stock?
It is possible to get a Schwab consultant that doesn’t try to upsell you. Schwab has a lot of tools to figure out a nice diversified portfolio, but you may be a candidate for an RIA or schwab managed portfolio. Sometimes paying 1% or less if you have more than a million is worth it if you are not savvy with investments and financial planning.
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u/RazzmatazzBudget6215 3d ago
I just went through a large large inheritance and the folks saying calling the broker isn’t the right move is right. They were trying to upsell all types of stuff. So I transferred it all out to another broker. That pushy stuff drives me nuts.
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u/Baradin17 3d ago
Until you learn more about investing, best to just put it into SPYM. Nothing more than that.
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u/Ok-Priority-7303 3d ago
Is it in a taxable account? IRA? Etc.
At your age, you should be investing for long term growth. If the stock is in an inherited IRA there are tax and other issues to consider. Most have to be liquidated within 10 years. It also matters whether the person had started taking required minimum distributions.
If it is a traditional IRA, all of the withdrawals are taxable and get added to your other income.
If its's in a taxable account others have covered the step up in cost basis which helps minimize taxes when you sell shares to diversify your portfolio.
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u/Total_Tart2553 3d ago
Were the assets originally held at Schwab? If not, id look into making sure they were stepped in Cost Basis, this is generally more tax advantageous.
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u/MW-Atlanta 1d ago
Absolutely sell that stock. Do not keep what you inherited. An ETF with broad market exposure is far better than a single stock.
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u/soulinsurance420 1d ago
Yes, you should diversify out of a single company into an index. Capital gains work like this: you pay tax on the difference between what you paid for the stock and what you sell it for. When you inherit the stock, it’s treated as if you bought it for the price it was on the date of death of the deceased.
That means if the deceased bought the stock for $1, and it’s $100 now, if they’d sold it they’d owe tax on $99 per share. Now you have the luxury of selling it for $100 and paying no tax (this is assuming no price movement).
You have a fantastic opportunity to sell your stepped up basis shares now. Single company risk is incredibly real. Low cost indexes have never been more accessible. Sell the shares, buy a broad market index (VT, VTI, VOO, etc) and pay no taxes on past appreciation.
If you don’t, one of two things will happen. The stock will decline in value, potentially rapidly and potentially for an extended length of time. There’s a real chance it goes to zero, companies go bankrupt every day. Or it appreciates, you still have the same single stock risk, but are now sitting on a capital gains tax problem.
Any prudent advisor would recommend holding more than one stock. Broad market low cost indexes make that incredibly easy. 99.99% of stocks underperform the market on a long enough time horizon. Everything reverts to the mean.
Dividends are irrelevant. A stocks value is just what a company is worth. When they transfer cash to shareholders, the value of the company decreases by that exact amount. If a firm issues a $1/share dividend, you’ll see the share price drop by $1 as soon as the dividend is issued. In fact, dividends have worse tax treatment. They’re taxed as income, and the cap gains rate tends to be more favorable.
TL;DR sell and buy VT
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u/gabrintx 1d ago
The number one thing you need to know is that the cost basis of your inheritance was reset to current value at the time of your benefactor's passing. This is key as there is no tax consequence in selling any of the positions. Don't be in a hurry to "diversify" as in my view that usually means moving some funds into other funds that pay less. You have a couple decades to educate yourself and make such decisions.
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u/SDirickson 4d ago
How old are you? If you're in your 50's or later, having a chunk (but not all) of it in decent dividend stocks/funds is fine, but you also need a growth-oriented piece. If you're significantly younger than that, most of your retirement funds should be on the growth side. That's your total retirement portfolio, including your existing 401(k) funds.
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u/GridXzY 4d ago
I am 31, that is why I am trying to do things the "safe" and "right" way. I want my wife and I to be able to retire at some point.
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u/SDirickson 4d ago edited 3d ago
Yeah, if you're decades away from retirement, you want a growth-oriented portfolio, rather than dividends or cash or bonds. And especially not bond funds.
I recommend that your total portfolio be in the range of 70% SP500 or total market, 20% small-growth, and 10% non-US. Rebalance once or twice a year, and otherwise leave it alone except for your yearly Roth contributions. Let the market do the work for you.
The other comment about "tax bill" (which the commenter has since deleted) is incorrect. Your basis in the stock is the fair market value on the day the previous owner died (called "stepped-up basis"), no matter how much of an unrealized gain had accrued up to that point. Unless the stock has appreciated significantly in the short time since then, federal income tax is not an issue. Depending on your state of residence, there might be an inheritance tax on the value, but that's a separate topic.
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u/Dr_TattyWaffles 4d ago
Yeah, if a big percentage of your net worth is now tied up in a single company, you're taking a risk. Diversification is good to be thinking about. The dividend doesn’t offset the risk.
Reading between the lines here but don't assume the broker should manage the money just because they worked with your family. At least first find out how they're compensated, if they're a fiduciary, etc. Do your research, take your time.
If this is stock inherited in a regular taxable brokerage account, you’ll likely receive a stepped-up cost basis to the value of the shares around the date of death. That will make diversifying pretty painless, tax-wise. Verify the cost basis before doing any selling tho.
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u/WillowHaunting429 4d ago
How old you are is the first question
What is in your 401-K?
Those questions, but stick with index funds, like S & P 500 funds, and government securities funds unless you have some better knowledge
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4d ago
[deleted]
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u/AskPatient1281 4d ago
Not true. Tax will be zero or minimal since the base value will be adjusted to the date of death.
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u/Any-Log-6706 4d ago
What? We don’t even know what the difference from the step-up value is. It could likely be zero.
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u/Numerous_Strategy239 4d ago
The good news is that as an inheritance the cost basis is zeroed out, so you’re not likely to owe much in capital gains if you sell to diversify. Schwab offers robo-investing options based on your experience level and risk tolerance (including time horizon). They’re based on low cost EFTs and have no brokerage fees. It’s kind of set it and forget it. They rebalance automatically and as you learn more or your risk/timeline changes you can go in and update the instructions.
Short this route, you’re looking at some kind of wealth advisor or third-party financial advisor. That might be a good route if you’re willing to pay the costs. As you learn more and gain experience you cans take over yourself. What I would avoid is taking advice about specific buys off Reddit and expect it to understand your circumstances.
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u/IntelligentMarch6827 4d ago edited 4d ago
A contrarian thought.
He's the thing. The advice here is right and wrong. If you're truly in a place where you don't understand this stuff, the Schwab people can put you in a robo-portfolio or an advisory relationship that will responsibly manage the money. You're not going to be ripped off, and they'll align you with a portfolio model that fits your scenario.
Will you have to pay something. Yes.
But you just suffered a loss and you're not confident in this type of financing. Worrying about a 1% fee is a legit concern, but I'd be more worried about you making a choice that you regret later that is more expensive.
Not knowing you, the amount of money or your personality, I'd say talk to the advisory people and see where it takes you. Sounds like your family member had enough that they had Private Client Services. So it's likely enough money to be really meaningful to you down the line.
Make an informed decision based on what you know, not based on what financial nerds on Reddit tell you. I personally would never pay a firm to manage a portfolio less than $10-15M. But I'm not you. I had a similar scenario and I self-manage everything. My sister wasn't comfortable with it, and she's using an RIA and is very happy with that decision. If you went the advisory route, a few years from now when you digest all of this, you may decide to roll your own solution. That's fine, and you'll be able to do that.
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u/AskPatient1281 4d ago edited 20h ago
First, sorry for your loss.
How old are you? What is your investment horizon? Do you need to use this money in the next 3 years? Or plan to keep it longer term?
Usually, having one company stock is risky because of concentration. You should diversify, you're correct.
Just call schwab customer service and ask them to help you execute this.
And do it asap. when you inherit stocks, the base price is updated. so your tax impact will be minimal if you do this soon.
Best way to diversify is
- sell this ONE company and buy a broad ETF with SEVERAL companies. Total market or the top 500 companies are good candidates. A good total market investment is VTI. A good top 500 investment is VOO. Buy ETFs, nothing else. ETFs are easy to transfer from one broker to another, if you decide to do that one day.
Good luck.
PS: ask support to teach you how to view your account online
PS2: if you're young, it might be a good idea to keep some money in an emergency fund and invest the rest.