A friend is 98 years old and has 700K in a mutual growth fund (that is his entire savings). Cost basis was only 10K. He wants to withdraw it and put it in cd's. He does not touch the money (ever) but wants to leave it to heirs.

The cd thing is because he will have peace of mind as he can visit the bank etc. My take is that he can avoid a big tax hit by leaving it as and giving the untouched fund to the heirs.

What do you think?

  • Please note which country this friend lives in. It is probably not possible to answer the question as it stands. – ChrisInEdmonton Oct 27 '13 at 22:52

My take is that he can avoid a big tax hit by leaving it as and giving the untouched fund to the heirs.

100% correct. By withdrawing now he'll be subjected to the income tax on the gains. Since his gains are almost the whole value of the account, he'll actually find himself in the highest bracket, not the lowest as Joe suggests.

Not only that, but his SS income will become taxable as well. Capital gains are included in the AGI.

By leaving as is, the heirs will get stepped up basis, and the whole 700K will not be taxed (its below the estate tax threshold, and the basis for the heirs will be the value at death).

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  • Right. The gain itself will push him into the highest (cap gain) bracket, impact SS tax and AMT. +1 – JTP - Apologise to Monica Oct 27 '13 at 23:52
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    He will also have to pay premiums for Medicare at the highest rate. – Dilip Sarwate Oct 28 '13 at 1:37
  • it wasn't specifically asked, but seems like it could be addressed: the 98 year old is clearly concerned with risk. One could calculate the approx. costs associated with liquidating the mutual fund position in favor of a less risky asset ($X) and present it as "what is the likelihood this asset loses $X in value before you die?". Of course this only makes sense since his stated concern is only passing the money to his heirs. – TS Haines Oct 28 '13 at 20:37
  • @TSHaines the cost of liquidating is immediate and severe. The new investment will need to come up with 100% gain just to make even. The current fund has to be very risky for it to be worth it. – littleadv Oct 28 '13 at 20:51
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    @littleadv - very well stated. Quantifying always helps to remove emotion, which we all know is the biggest wildcard in evaluating risk. You also made a great point - if one thinks the mutual fund is too risky, what kind of investment would one move to that's less risky but would have a 100% return?? – TS Haines Oct 28 '13 at 21:05

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