ETFs? General opinions about this type of investment?

ETFs…just looking for opinions. There are some savvy investors on VMB and many who claim to be I’m soon to be 69 and 95% of my holdings are in low fee, stock/bond mutual funds. Think Vanguard and Fidelity, some I’ve held for over 30 years, so substantial cap gains involved if traded. Everything I read these days is touting EFTs. Kiplinger, Money Watch etc.

I’m a planner and in three years I will have to start RMDs and I will have excess cash to reinvest.

So, EFTs, what say you? I'm not looking for fund recommendations, just thoughts about EFTs in general.

I just read another article that said 32% of millennials use EFTs as their main investment choice.

 

ETFs are traded all day on an exchange as opposed to the old mutual funds that are traded at close of business (one price a day). This is similar to closed end mutual funds that have been around for decades that trade on the exchanges and have a set number of shares,as opposed to open ended mutual funds, which keep issuing shares as investment money comes in.

They are usually credited to track a specific index (even if the issuer makes up a new index), so they are not actively manged (unless/until the index is changed). Since they are not actively managed, management fees are usually lower.

Your main concern, is what the ETF is investing in-there are thousands of different ones

 

I just presumed you meant ETF, (exchange traded fund) not EFT (electronic fund transfer)

 

When you take the RMDs; they will not be taxed as a capital gain, the amount you take out will be taxed as ordinary income.

If you do not need the cash, you should be able to "transfer in kind" those mutual fund shares to a non-retirement account, and pay the taxes out of other income.

 

ETFs eliminate the problem of what I call "phantom capital gains" which plague mutual funds. Many times over the years I've had to pay capital gains taxes on funds that actually lost value over the course of the year. It adds to my cost basis, but that's not much consolation. I'll be looking at investing in them when I have to start taking RMDs (I think that's 72 now). Problem in the meantime is I'd have to cash out of long-held mutual funds and pay substantial capital gains to do so.

 

Yes, the problem with mutual funds held in a taxable account is the taxation of distributions (dividends) that end up being reinvested in shares of the mutual fund. I myself do not hold any mutual funds, except in an inherited IRA.

You need to be aware of how distributions from your ETFs are going to be treated as well, but they are usually more tax efficient (sometimes treated as return of capital reducing cost basis and not taxed until sold or when basis goes below $0) and can be taken as cash,

 

Oops, got it right in the subject line, but not in the post. Corrected, thanks!

 

Right, but the end result is the same if I cash it out or transfer to a taxable investment. I still pay income tax on the RMD at whatever my taxable income level is.

 

Any transfers WITHIN an IRA is still not not taxable. Only taxable when cashed out- right?

 

If you're just a "buy and hold" type of person I don't think you really need to mess with ETFs over mutual funds. If you're a more active investor they might have some advantages for you.

 

Don't RMDs apply to tax-advantaged accounts like IRAs? I don't think capital gains tax would be an issue, since you can buy and sell inside an IRA without worrying about capital gains tax.
I have known people who use ETFs instead of mutual funds but they have never given me a good explanation of why they use them instead of the underlying mutual fund. I suppose if you are managing an institutional fund on behalf of a large number of investors, you might use them in some kind of hedging strategy. Or if you want to day trade the S&P 500 it would make sense. But my feeling is: if you want to invest, invest. If you want to gamble, gamble. If I were investing, I would want something simple and long-term, like a few index mutual funds. And if I were gambling, I'd prefer something that is higher risk / higher reward than the market as a whole, like an individual stock or a bet on a football game.

 

Index and sector ETFs are fine, although if you have a choice of two in the same sector and their holdings are similar, it's generally better to pick the larger one (in terms of total assets) just because the liquidity will be better. Between the biggest ETF runners, the SPYders, Ishares, and even Vanguard runs some, you should be able to find pretty much whatever you want.

You should be able to find ETFs that are close to whatever mutual fund(s) you're coming out of. And an ETF is gonna be preferable in a taxable account because they don't have annual distributions of cap gains like mutual funds. And you can transact at any point during the day instead of getting priced at the end of the day.

I worked for mutual funds (on the service side) for the first 15 years I worked and I would never buy one today, ETFs held in a brokerage account just have too many advantages over them. So push comes to shove, personally I would take the RMDs in cash instead of in kind, and then buy an ETF(s) with the cash you don't end up needing to spend.

That said, the remaining money (after RMDs) you have in mutual funds in tax-deferred accounts, if you've been happy with the performance, I wouldn't necessarily sell those just to re-buy similar ETFs. The annual cap gains distributions don't hurt you in a retirement account. It would be the advisory fees and end-of-day pricing that would be the motivation to switch (for me).

 

Right, as long as it remains within a regular IRA, or Roth IRA. But not traded between the two.

 

Yes, just didn't want you to make your plans thinking that you would be taxed at the lower capital gains rate and if you are happy with the mutual fund ,no need to change.

I also want to mention that you do not have to wait until RMD age to start taking distributions/transferring to taxable account-depending on the value of the account, it may pay to start paying taxes now to:

1) reduce the account value to lower the amounts of the eventual RMD
2) pay tax at current rate-all indications are that rates will be increased

I still have years to go (I'm only going to be 53) and will be retiring at 55 (2023).

During the years before I can apply for SS I plan to convert my 401k equivalent account to Roth; then begin doing the same to my regular IRA.

 

I don't think anyone mentioned it but with ETFs you can also do options trading.

 

Re: My comment about "phantom" capital gains. Yes, that is only a problem outside of IRAs, 401ks, and other tax-advantaged accounts. I was referring to mutual funds I hold outside these, in taxable accounts. Within IRAs and 401ks I'd say the decision has as much to do with expense ratios as anything. Mutual funds often have higher expense ratios than comparable ETFs, though figuring out the latter can sometimes be a bit of a challenge.

 

I’ve been doing the max Roth conversion for 5 years now but I have to be mindful and not bump myself into the next Medicare bracket.

 

ETFs are a good place to park your cash after selling something, while you do your research/due-diligence on your next investment of those dollars.
In addition to their being traded intra-day, there is also no minimum investment required. This allows you to spread your cash across multiple ETFs instead of just one or two. A quick search will help you identify several ETFs that meet whatever your short-term criteria are.
Long term though? I would stick with high-dividend stock-based mutual-funds.