Moving from mutual funds to index funds

Hi there,
I’m 21 years old with roughly $48,000 in an Edward Jones brokerage account (Just a normal account - not an IRA or anything) diversified into four different mutual funds. I want to pull all of that money out and put it into index funds because a) the much lower fees, b) to start a Roth IRA on top of a brokerage account, and c) my account has underperformed the market since 2010, 10.7% to 13.6% (Shoutout to my awesome parents for starting an investment account for me at 10 years old!). I’m worried about the withdrawal tax hit and if there is a smarter way to make the change that I’m just unaware of. Is this something that I’m just going to have to suck it up and deal with? Is it a no-brainer anyway? Thanks in advance for providing any (much-needed) clarity!

Similar Thoughts and concerns here…

I’ve had a Roth IRA through TRowe Price since 2016 without really knowing much about it. (Thanks Grandpa) I’m just starting to do more research about what I’m investing in and seeing a .7% expense ratio… Im already thinking of switching this to a later date to be more aggressive, but I’m also thinking of switching to a Vanguard index fund with a .17% expense ratio to try and lower my costs… I’m also concerned about the change fees I plan on calling T Rowe Price’s customer service dept. Here’s what Vanguard says to do for IRA to IRA transfers: https://investor.vanguard.com/account-transfer/transfer-ira

Not directly helpful for you, but maybe a step in the right direction?

Tyson - so first off, you can only contribute cash into IRA (traditional or roth). So you would need to sell/liquidate the funds first and deal with the taxes.

Second, you can only contribute a maximum of $6k per year to an IRA (Traditional or Roth) currently. The limit may change year after year, so pay attention to the limit each year and make sure not to contribute more than the limit or you’ll be penalized. So you don’t have to liquidate all of your brokerage account this year, you can spread the tax liability throughout the years.

Third, capital gains in your brokerage account will be counted towards your year’s income. If you want to do Roth IRA, you would have to ensure your income is not above the eligible income threshold to contribute to roth. You can Google income limit for roth IRA every year to know that threshold. Traditional IRA does not have income limit, so you can contribute any time - the max contribution is still $6k this year.

Mindi, thank you!

If all my brokerage is in mutual funds and I want them in index funds as soon as possible, does it make sense to make the change all at once? My thought is to contribute the max to a Roth IRA for this year, then put the rest of it in an index fund brokerage (instead of a mutual fund brokerage with high fees).

Tyson - whether or not to sell all the mutual funds and put them into index funds now, that’s completely up to your comfortababilty. Are you ok paying all the taxes now? If you want everything to be in index funds ASAP, that’s your answer. It’s just what do you want.

I’d sell over a period of a few years. Spread out the “tax hit.”
Long term fees will get you. Why pay annual CG taxes on fund distributions.

You could sell half today and the other half on Monday.