Ask Liz Weston

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Investing

Q&A: Clearing up some confusion over those proprietary funds

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Dear Liz: Your recent column about proprietary funds confused me. You mentioned that selling these funds can trigger capital gains tax. Is it not true we can move investments directly from one money manager to another and not take a capital gain as long as the funds remain invested?

Answer: If you can move a fund from one investment company to another, then it likely is not a proprietary fund. For example, Schwab, Fidelity, Vanguard and many other firms create funds that bear their names, but these investments can be bought and sold at other brokerages.

Proprietary funds, by contrast, typically lock customers into investments that can’t be transferred to another firm. To get your money out, you have to sell the fund, which can trigger a tax bill. This is a significant downside and one investors should understand before committing their money to this type of fund.

Q&A: After a windfall, questions on what to do with the cash

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Dear Liz: After selling my house and downsizing at age 84, I am cash rich for the first time in my life. My goal now is not so much to grow the money substantially, but to avoid paying taxes on my investments, as I would have to do with certificates of deposit. Are tax-free municipal bonds my best option, or what would you suggest?

Answer: If you’re in a high tax bracket — roughly 32% or higher — the lower interest rates paid on municipal bonds can still give you a good-enough return to make buying them worthwhile. If you’re in a low tax bracket, the math doesn’t work so well.

Also, municipal bonds aren’t covered by FDIC insurance the way a certificate of deposit would be. Investing in bonds involves some risk. The chances of default are minimal if you choose highly-rated bonds, but your bonds could lose value if interest rates rise.

Consider using some of your cash to consult a fiduciary, fee-only planner who can help you figure out a strategy that reflects all aspects of your financial situation, not just your tax bill.

Q&A: When temptation to spend an inheritance strikes, what’s the right move?

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Dear Liz: My brother is 54 and has always worked low-wage jobs. He owns a condo thanks to the help of our parents, and his monthly expenses are very low. He’s in a stable position. He does not have any retirement savings or really any other savings to speak of. Recently, he came into an inheritance of $62,000. He has asked my sister and I to help him make that grow and be secure until he retires and chooses to draw on it. What is the best way to help him grow this money in a safe way? We’d like it to be somewhat secured as we all are aware that the temptation to spend it now is strong.

Answer: The first step in investing is understanding your goal for the money and your timeline (how long until you may need the cash).

Your brother likely has at least two goals: an emergency fund and retirement savings.

Financial planners typically recommend an emergency fund equal to three to six months of expenses. A smaller amount can work for people with a lot of other resources, such as stocks they can sell, lines of credit they can borrow against or generous relatives who are willing to help. A larger amount might be smart for people with fewer resources or who might be out of work for extended periods.

Emergency funds need to be accessible, so the money should be in a safe, liquid place such as a bank account. To make the cash less tempting, your brother could consider opening a savings account with an online bank. These banks typically have no minimums and no fees, plus they pay a higher interest rate than their brick-and-mortar kin. Transferring the money to his checking account would typically take a few days, making it less easy to spend on impulse. Another option is to buy certificates of deposit to tie the money up for a set period of time. He can break into the CDs in an emergency but would have to forfeit some interest.

He can take more risk with his retirement funds, as he is likely at least a decade away from retirement. One option is to invest in a low-cost target date retirement fund, which gradually gets more conservative as the retirement date approaches.

Your brother can contribute up to $7,000 this year to an IRA or a Roth IRA. A Roth IRA may be the better option, since he’s unlikely to get much tax benefit from an IRA’s deductible contribution and Roth IRAs don’t have minimum distribution requirements.

He doesn’t have to limit his retirement savings to that annual contribution, however. He could consider investing more with a regular brokerage account and just mentally earmarking it for retirement.

This week’s money news

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This week’s top story: Smart Money Podcast on unlocking financial opportunities for women. In other news: How the next generation will use credit cards, weekly mortgage rates decline, following the rate of inflation, and grocery prices tick back up in lates inflation report.

Smart Money Podcast: Unlock Financial Opportunities for Women: Jean Chatzky on Investing, Negotiating, and More
Learn about salary negotiation and investing strategies and how they can be especially helpful for women facing unique personal finance challenges.

How the Next Generation Will Use Credit Cards
The classic wallet will be as outdated tomorrow as typewriters are today.

Weekly Mortgage Rates Decline, Following the Rate of Inflation
Mortgage rates fell in the week ending July 11, with fixed rates seeing their largest week-over-week drop since May.

Grocery Prices Tick Back Up in Latest Inflation Report
Grocery prices are up 0.1% in June, according to the consumer price index.

Q&A: Missing the paperwork on your IRAs? All is not lost

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Dear Liz: I have four daughters, now in their late 30s and early 40s. When they were very young, I started investing for them. As they began to earn their own money, I started Roth IRAs for them as well.

A decade ago, due to an unexpected divorce, a 30-day escrow and a move, I lost the paperwork for their accounts. After the investment company was acquired by another in 2015, I forwarded the new company’s contact information to my daughters. One transferred her account to another investment company, while her sisters left theirs in place.

Recently I found the old investment paperwork. The company has changed hands again, but the new company says it has no information about my three other daughters’ accounts. Can anything be done?

Answer: Since the latest company can’t find the accounts, your daughters should contact the escheat office of the state where you lived before your move.

Perhaps you didn’t update your address with the original company when you moved and the account statements or other mail were returned as undeliverable. If the company and its successor couldn’t find you — and some companies don’t look very hard — the accounts would be considered unclaimed and would have to be turned over to the state.

Links to state escheat offices can be found online at unclaimed.org, the website for the National Assn.
of Unclaimed Property Administrators.

The good news is that there’s no time limit for claiming previously unclaimed property.

The bad news is that some states will liquidate stocks and other investments after escheatment. If that’s the case, then the three daughters who didn’t move their accounts will have missed out on nearly a decade of investment returns.