Q. My husband and I are both retired. We are tired of paying various "investment consulting firms" to lose our savings. However, I am a retired accountant, and I am afraid I do not know how I can get control of our retirement savings and invest it myself without triggering income taxes. Is there a way to set up an IRA without paying some financial firm to oversee it? I need to get the principal protected.
We would appreciate some simple directions on how to get our money away from a big brokerage firm. The firm charges us more in fees than they earn for us. We would like to do it without incurring income taxes on the event. —D. N., by email from Seattle, WA
A. You can transfer IRA and other tax-deferred accounts from one trustee to another without the risk of creating a “taxable event.” If you want to control investment costs, you need to do two things.
- First, you need to move from a traditional brokerage firm. The business model for such firms is based on extracting about 2 percentage points a year from your money, and they employ people whose compensation plans punish them for failing to meet revenue goals. A discount brokerage firm, on the other hand, has a business model that works at a much lower level of expense to you. The main choices here are Fidelity, TDAmeritrade, Schwab and Vanguard.
- Second, you’ll need to sell any proprietary products in your expensive account, if you have any. This is likely to involve transaction expenses. If the account is a taxable account, it may also involve realizing some capital gains. So there could be some tax consequences. If the account is a deferred account, however, you should be able to liquidate any holding with no tax consequences.
Moving to a low-cost account also means you’ll have to do a lot more thinking for yourself. Lots of people feel uncomfortable about doing their own investing, but all the intimidating and complex talk has yet to demonstrate that it can make anyone money, though it has worked very well for the complex talkers.
If you can fog a mirror and divide by a number from 2 to 10 with the help of a $5 electronic calculator, you can manage your own portfolio by following my Couch Potato Building Block method. Results for the portfolios are updated monthly on my website. Odds are that you will earn a higher return using simple index investing than about 70 percent of the complex talkers.
Let me give you a specific example of possible cost reduction. Charles Schwab has just introduced a family of low-cost exchange-traded funds that covers the major asset classes. While the purchase of an ETF typically involves paying a brokerage commission, the Schwab ETFs can be purchased with no commission payment. At the same time it has reduced its commission cost to $8.95 a trade for all customers, not just the ones with $1 million or more invested. So even if you invest in some funds that require paying a commission, the burden will be small.
Here’s what it would cost to establish my margarita portfolio. Made like a traditional margarita, it is equal parts domestic stock market, international stock market, and TIPS. Buy Schwab U.S. Broad Market (ticker: SCHB, expense ratio: 0.08 percent), Schwab International Equity (ticker SCHF:, expense ratio: 0.15 percent) and iShares TIPS (ticker: TIP, expense ratio: 0.20 percent), and it will cost you one $8.95 commission (for the iShares ETF) to start the portfolio and all of 0.14 percent in average annual expenses.
That means you’ll be getting the vast majority of the income and capital gain return on your portfolio. As a comparison, consider this: According to Morningstar data, the average expense ratio of all balanced mutual funds is 1.23 percent. The average income of the same group is 1.19 percent. So the managers are taking all the income.