I have inherited from my Dad, 14 Corporate Bonds approx. $25,000 each. Maturity dates range from 2006-2015. Interest rates range from 4.85 - 8.125. These bonds are in an inherited IRA from which I must take a minimum required distribution of about $1,000.00 per month. I would very much like to put at least half of these bonds into dividend paying stocks. Should I wait untill the bonds have matured and invest in stock only then or should I sell half of the bonds and invest in the stocks right away. Thanks.
"I have inherited from my Dad, 14 Corporate Bonds approx. $25,000 each. Maturity dates range from 2006-2015. Interest rates range from 4.85 - 8.125." downisland,Bonds don't have interest rates. They have coupon rates. In order to maximise your capital gains opportunities, you need to understand the difference. Charlie
What are these corporates? Issuer, rating, etc.?You can obviously wait for the bonds to mature. If you choose to sell before maturity, bear in mind that you will be getting hit for substantial trading costs, as most brokers see retail investors looking to trade bonds as sheep ready to be sheared.
I don't know the answer to your question, but here's a link to a version of the upcoming FAQ part 1. Terms are about a third of the way down.http://boards.fool.com/Message.asp?mid=23481196So far, I buy my bonds at issue and hold to redemption, so the difference between coupon and interest is moot. Those look like pretty good rates to me, though. What's the quality like? (Moody's or S&P rating?) Can you find better dividend paying stocks?VickifoolP.S. Charlie, if you woke up grumpy, just hit "next" ok?
Jeez, I kind of feel like an idiot. The bonds are: Appalachian Power, Bear Stearns, Citicorp, Con Ed, Federal Home Loan, GE, Genworth Financial, Household Finance, Kimberly Clark, McDonalds, Merrill Lynch, Morgan Stanley, Proctor and Gamble, and SBC Communications. It is a laddered portfolio of AA rated corporate bonds. It is an IRA account so I don't have to pay any taxes till I take the money out. I do feel like a sheep about to be shorn. Help. My father had this with the Ayco Company a financial management company that was bought by Goldman Sachs recently. So at this point it is a Goldman Sachs inherited IRA account. When I asked the Ayco company today about moving some (half)of this bond money into some dividend paying stocks they told me that they would rather put me into mutual funds then into individual stocks. I don't think I need all these extra layers of management, (Ayco, Goldman Sachs, Acme Mutual fund?) if I'm simply putting cash into mutual funds? So, I started thinking about actually doing this myself through a Fidelity Self Directed IRA account and maybe slowly as the bonds mature, I would buy large cap value stock mutual fund shares or some individual dividend paying stocks. I would have to have a cash account, and make sure that I keep the account in my Dad's name with me as the beneficiary. I must also be sure to take out my minimum required distribution each year. With Fidelity's help, I think I can do this. I gather from the previous comments that I should only buy stock as my bonds mature and not sell the bonds prematurely. I really do appreciate all your comments. And no, I don't know the difference between coupons and interest.
"And no, I don't know the difference between coupons and interest."The coupon is the yield the bond would pay if its value were par. Hence, a $1000 bond with an 8% coupon pays $80/yr in interest. That $80 rate is fixed for the life of the bond.But the market value of the bond moves up and down as interest rates change. So that if bonds of similar ratings and maturities are paying 6%, the market value of the bond becomes $80/0.06 = $1333.33. If rates rise, the market value can also go down by a similar calculation.Yield to call and yield to maturity are the two numbers you most often hear regarding the yield of bonds.Hence, most people monitor the yield they get based on what they paid for the bond and what they could get in interest if they reinvested the funds at current market yields. When the difference is small, you definitely should hold. When the difference is large it can be tempting. But once you get a quote from a bond dealer, you will realize how much he is charging to you take those bonds off your hands, and you will probably decide to keep them.Yes, you can have a self directed IRA account at Fidelity that will let you reinvest the interest and the proceeds from maturing bonds any way you like. Large cap stocks, blue chips, mutual funds, or even more bonds. You are in control of a self directed account. It is your choice.Good luck.
Good choice..."Fido" will focus on the DIY investor starting with a "Corporates" port..... And don't forget to look up Vanguard....they are the "ultimate" DIY house. I use Fido myself and have an excellent track record with them.So, I started thinking about actually doing this myself through a Fidelity Self Directed IRA account and maybe slowly as the bonds mature, As for re-allocating the port as it matures, don't focus only on the large cap equities, but look at the mix of ETF's sector "funds", large & small caps sector specific, and keep a sizable component of both Cash CD's and T-Bills to be both principle secure and cash self-sufficient as minimum distributions may occure. You'll have 5 years to liquidate the FBO account fully, and you may want to take > the minimum to do that, subject to your own personal tax planning "issues".I would buy large cap value stock mutual fund shares or some individual dividend paying stocks. I would have to have a cash account, and make sure that I keep the account in my Dad's name with me as the beneficiary. I must also be sure to take out my minimum required distribution each year. Yes, you can! But always remember the secondary markets, especially for - lightly traded corporates is both ill-liquid and costly from a "trade cost" perspective.With Fidelity's help, I think I can do this. I gather from the previous comments that I should only buy stock as my bonds mature and not sell the bonds prematurely. I really do appreciate all your comments. And no, I don't know the difference between coupons and interest. BTW, don't sweat the "small stuff"; interest rates, yields, coupons, it's all the same, it's all taxable, it's all "cash in pocket".....Have fun and good luck....but talk with a couple of houses, not just one... See what each can and can not do for you.KBM (aka "The Bond BB - tm")
"You'll have 5 years to liquidate the FBO account fully, and you may want to take > the minimum to do that, subject to your own personal tax planning "issues"."I don't understand what this means. I'm not aware of any five year time limits?
If I understand this correctly, you inherited an IRA and the investments in the IRA are bonds, a carefully selected group of high quality corporate bonds. You are required to take minimum distributions. You can take these in cash, or you can get credit for withdrawal by transferring bonds to another account that is not tax-advantaged, and paying the required tax. You CAN transfer bonds in kind. This might most conveniently be done by opening an account at the same brokerage as the IRA. You honor your dad by respecting the time and trouble he took to assemble this portfolio. I'd want my heirs to let my bonds mature. Right now while the fed is in a rate-raising cycle is not a good time to be selling bonds anyway. If the bonds generate enough income to cover the required minimum distributions, you can leave them where they are for now. If they don't, and you can pay the tax from other sources, transfer no more than necessary or no more than allowed without increaing your marginal tax rate to a taxable account each year. Your broker or tax professional can help. Best wishes, Chris
I have inherited from my Dad, 14 Corporate BondsAllow me to express my sympathies on the death of your father. I'm sorry I didn't do that earlier.I notice that you don't seem to have read the FAQ I linked yet.One of the common side-effects of a parent's death is depression. When I was depressed, as I was when my FIL died, my brain didn't work very well and math went away. I went from being able to enjoy Engineering math classes to being unable to make change for a dollar. I wasn't aware of how ill I had been until I got better. I couldn't have gotten through the FAQ then either.Here are just the relevant section from the post I linked:http://boards.fool.com/Message.asp?mid=23693990“'Income?'” Isn't This, Like, What Us Plain Folk Just Call Interest?----Yup! But there is a jargon favored by the fancy folks of finance and, if you want to play with their toys, you should learn to talk their game. Here's some terminology:----“Income”: A general word for cash that gets paid out by an investment on a regular basis (stock dividends, interest on a bank account, an annuity, rents from rental properties, dividends from bonds or funds, etc.). In some cases you may choose to have income reinvested or you may not have access to the income until some specified date.----“Interest”: The colloquial word used to represent a % paid in cash on your invested principal or which you pay on money borrowed, now mostly used on the investment end on Savings and Checking Accounts.----“Dividends”: The preferred word for “interest” paid not only by bonds and bond funds (as well as stocks and stock funds), but by such basic bank instruments as CDs and Money Market accounts.----“Yield”: The rate of interest currently being paid on the principal you invested. Some investments have a fixed rate until they mature; others have a variable rate.----Here's some more terms that you need to know to understand how income gets paid from tradable bonds.----“Face value”: The principal a bond returns to the investor when it matures (or is called), which may be more or less than the amount you paid to buy the bond.----“Par”: Buying a bond at its face value.----“Premium”: Paying more for a bond than its face value (also used for closed-end funds relative to the net asset values of their holdings).----“Discount”: Buying a bond for less than its face value (also for closed-end funds)----“Maturity”: The time left until a bond “matures” (i.e., when the issuer has to pay back the face value of the bond).----“Call Date”: A date which the issuer of a bond has the right to pay back the face value (sometimes slightly more or less) of the bond, which may be long before the Maturity date. Bonds will typically get called if interest rates go down, because the issuer can then issue new bonds at a lower rate. Some bonds have more than one call date.----“Coupon”: The interest rate a tradable bond pays based on its “face-value”—if you buy the bond on the open market for more or less than its face-value, your actual yield (the interest rate you get for the amount of principal you invested) will be more or less than the bond's coupon rate. If you buy at par, which usually only happens at a Treasury auction, you get the coupon rate.Sometimes part of the process is asking questions until you figure out just what it is you need to learn, and how to phrase it to get the answers you are looking for.Hope this helps.VickifoolP.S. The classic dividend stock is Altria-used to be called Phillip Morris. Since you have quit smoking, I thought you'd appreciate that.;-)
I read the FAQ link thanks Vicki
"I have inherited from my Dad, 14 Corporate Bonds approx. $25,000 each. Maturity dates range from 2006-2015. Interest rates range from 4.85 - 8.125. These bonds are in an inherited IRA from which I must take a minimum required distribution of about $1,000.00 per month. I would very much like to put at least half of these bonds into dividend paying stocks. Should I wait untill the bonds have matured and invest in stock only then or should I sell half of the bonds and invest in the stocks right away."Sorry, but I got lost in the discussion (actually just plain lost and brain dead), so let me go back to the original question.First, on RMDs: looks like about $350,000 in assets generating $15,000 plus in dividends (my guess is Dad did this on purpose), enough to take out the RMDs without selling the bonds, and the laddering should allow this anyway. So the option of holding to maturity and then rolling over maturing bonds into dividend stocks is there.None of us can give advice about whether gradually putting the money into stocks or selling and putting it in now will prove best (we can tell you in 2015). You would have to check the specific bonds for current price, but AA bonds on the 4.85% range, even short term, are likely to need to be sold at a loss. 8.125% would probably get a gain, but it is also a nice yield to hold onto. If it were me, I'd just let them mature.Unless these are hard to sell bonds, you shouldn't be too scared about commissions and markup, if you use a straight forward brokerage: Vanguard charges $25 plus $2 per bond, which (assuming each bond is $1000), you're looking at $75 for each $25,000 package of bonds. It sounds like you want to move the account somewhere else, anyway.There are dividend stock funds: Vanguard has several (especially if you include something like Windsor II) and they are planning a dividend index fund soon.
Downisland, its great that you are asking questions and starting to learn what you have, and even think about what the best next move is.But we are trying hard to tell you not to hurry. Let the bond ladder continue to do its thing while you do your homework. If you make changes too quickly, you can easily fall prey to some of the sharks out there and make some costly mistakes.So be cool. Don't hurry. Learn before you act.
Downisland, my condolences on the loss of your Dad. As Vicki so astutely (and compassionately) observed, depression is a frequent sequel to losing a parent. Please don't rush into anything.I had a similar situation to yours, when my mother died, in 2001. Let me share a few tips, on an inherited IRA. You may already know this, but it can't hurt to review.1. If you paid an estate tax on your Dad's estate, the same percentage of your MRDs (Minimum Required Distributions) will be exempted from taxation, as long as you live. For example, my Mom's estate tax was 55%. Every year, at tax time, I report the full value of the MRD. Then, I deduct 55% of the amount, as a "Deduction not subject to the 2% floor," describing it as "income in respect of a decedent (IRD)," on Schedule A, Line 27.2. You benefit most, by taking distributions based on your own age. Fidelity will calculate this for you. It's most convenient to request that Fidelity automatically distribute the MRD every year (I chose Dec. 1, to give time to correct any errors, before the year end).Wendy
<"You'll have 5 years to liquidate the FBO account fully, and you may want to take > the minimum to do that, subject to your own personal tax planning "issues"."I don't understand what this means. I'm not aware of any five year time limits? >If you establish the inherited IRA account correctly -- and you seem to have done this, fortunately -- you do NOT have to liquidate the inherited IRA in 5 years. I have an inherited IRA. You should request that the brokerage company distribute the Minimum Required Distributions (MRDs) based on YOUR age. If the growth in the investments are higher than the MRDs, your inherited IRA can grow, for the rest of your life. Like your Dad, my mother also invested with a full-service brokerage. I can't emphasize how much I hate these guys (in her case, Prudential). They exist to fleece you. You can transfer all your investments, in kind, to Fidelity. You don't have to sell the bonds, to do this. Then, take your time, and learn as much as you can about investing. At Fidelity, you are totally in control of your investments.Wendy
I love this place. Thank you all for all of your help. My Dad actually died in 2002. I have been holding the status quo and trying to learn all this time. I read constantly, the Wall Street Journal,Barrons, Kiplingers,Fortune,Forbes,Money,Business Week,I have read books like The Intelligent Investor, How to Read a Financial Statement, Buffett, the Making of an American Capitalist, Poor Charlie's Almanack, Socially Responsible Investing, I subscribe to the Motley Fool's Hidden Gems Newsletter,Morningtstar Stock Investor Newsletter, American Association of Individual Investors Newsletter,Luis Rukeyser's Newsletter Etc. After all this reading about investing I have finally decided to ease my way into some dividend paying stocks. In 2003, on Sept. 11th, on the anniversary of the attack on the World Trade Center, in order to be patriotic and because I trusted Warren Buffett, I bought one A share of Berkshire Hathaway with some of the money that I inherited. My Dad had always admired Warren Buffett and that decision just felt right for me. That one share which I bought for $75,000 is now worth about $90,000. Not a great rate of return but I think that Berkshire Hathaway is undervalued and I want to hold it for the long haul. I am a patient investor. All of my own personal IRA money is in Vanguard Index Funds.There is no doubt that bonds are a beautiful thing. I was the executor of my Dad's estate. He died on May 19, 2002. His assetts were split in half 50% Bonds and 50% Stocks. The stock market totally tanked that summer. We were all quite concerned (five other siblings) as we watched Dad's stocks decline in value. But lo and behold, the bonds saved us. The bonds didn't decline in fact they went up. I see the value of holding bonds to offset stock losses. Now however, with myself being 54, I need to put at least half of this bond money into something that can grow. Because of the MRD and because, my research has led me to believe that over time dividend payers frequently outperform the market, I figured that dividend paying stocks wouldn't be a bad idea. It is a small world of stocks for me to research and the researching might be fun. You have all have convinced me to go slowly, and to wait till the bonds mature and then buy the stocks as I go along and to do it all in a self directed Fidelity account.Although I am now only paying 1/2% to my Dad's old management firm as their management fee for this bond portfolio, they told me that if I bought any stock the fee would be changed to 1.35% On $400,000 that is $5,400 per year! Since I'm not interested in trading and my stock will most likely be blue chip dividend payers, just sitting there,I'm happy to try to save this money and do it myself. Thanks a lot for the encouragement and support.
That's the "answer" to the question not "known" and the reason for my "alert".....If you establish the inherited IRA account correctly -- and you seem to have done this, fortunately -- you do NOT have to liquidate the inherited IRA in 5 years. Thx for the added clarity Wendy......;o)KBM (Beneficiary IRA's carry a number of such "tax traps")
Although I am now only paying 1/2% to my Dad's old management firm as their management fee for this bond portfolio, they told me that if I bought any stock the fee would be changed to 1.35% ________________*,*___________________OK - now I am scared. You are paying 1/2% a year? for some one to hold your bonds? Have you though about moving them.DrTarr
I'm sorry Dr. but that's the going rate (50-150 bpt) on a "managed" bonds portfolio.....(key word here - managed cause there's considerable "liability" on the part of the firm that must be managed out of the way, and onto your shoulders....hehe)Now if there is no activity other then "rollovers" or maturities, then there's a prime example of a DIY'er.....and Vanguard's expense ratio on a bond port is about 40 bpts iirc? That's a "hold port" only, not an actively managed one.I see this stuff all the time, from many different "trustees" or fiduiciary's. Rates (for management) can go as high as 295 bpts, plus trade expenses, but these guys are in it for the money, and not for the "service" of the small investor. I call them ALL "Asset Agragators"...cause they are accumulating your assets, and taking a fee off the top side to do it.Some folks call-em "hedge funds".......LOLKBM (Had a good client the other day that had a managed fund with a large regional bank-brokerage and a expense fee (deductible) last year of about $11k on a fund that "div'd" $9k and earned $12k realized and appreciated unrealized only $7k. No bonds, just equities, and the client "knows his stuff", so I just let it "slide"....his business, not mine....I charge the same for his tax return as anyone else.)PS: I won't "bad mouth" the bank-brokerage, as many folks use-em...but I do "wonder somedays...just what goes through folks heads?PSS: Client's port is < $1 mil so so the expense ratio is about average, from what I see.PSS: Another client with > $1 mil port is with Vanguard (not managed - he's a DIY'er).....he's pretty happy with his ratio which is runing about 35 bpts YTD.PSSS: Takes all kinds....;o)
but that's the going rate (50-150 bpt) on a "managed" bonds portfolio.....(key word here - managed cause there's considerable "liability" on the part of the firm that must be managed out of the way, and onto your shoulders....hehe)______________*,*________________-That is the key - Managed!!! And for all the management, and all the liability GS is taking on here they are well compensated.PS: I won't "bad mouth" the bank-brokerage, as many folks use-em...but I do "wonder somedays...just what goes through folks heads?Things that make you go, UM?DrTarr
"Another client with > $1 mil port is with Vanguard (not managed - he's a DIY'er).....he's pretty happy with his ratio which is runing about 35 bpts YTD."Not sure why this guy has 35 basis points with Vanguard. Now we know that .5% managment fee (50 basis points) is going to cost $1750/year on a $350,000 portfolio (14 bonds holdings at $25,000 each). But if you're laddering and buying 1-2 bond holdings per year at $25 $1000 bonds each, if I understand Vanguard's costs right, that's a commission of $75 or $150 per year, and no other fees if you have that kind of money. Even you were laddering 70 $5000 holdings (5 $1000 bonds per), that would cost $35 per holding times 7 per year, which is $$245.
The answers given have been great so I'll try not to duplicate.The simple break down is that you can choose to take whatever matures + coupon distributions and slowly build your individual stock portfolio. Keep in mind most of the big houses are also creating dividend emphasized index funds which may provide a similar return. One advantage of doing this is that you don't feel pressured to deploy 1/2 of this money in a short period of time. You will also know well in advance how much money you will have to deploy and when it will be available. This gives you ample time to select a stock or three with well thought out price targets. For some the idea of plunking down 175k across 3-10 dividend payers in a short period is intimidating. They don't feel up to the task of finding enough good companies and this leads to unease. Some folks have no problem doing this. I don't know where in this spectrum you fall but its something to consider.If you are up to the challenge and have the time to perform Due Dillegence(DD) then the process of screaning, researching and selecting individual stocks can be a great deal of fun. This assume that you already have a investing philosophy and a plan shaped by that philosophy that governs how you manage your long term money. jack
jackcrow added to your favorite fools list.
Yeah Lok.....but this guy's an old Wharton School finance guy. Knows the in's & outs of a ladder. What he's done is set up dual ladders in "large denominations" of Treasury's, Corporates and jumbo CD's for about 60% roughly of the agg port. Has a "tranch" (on each of the 3 sector funds) maturing only once a year, and merely rolls or spreads it into another issue or bond or CD issue, depending on his mood. He's only 62 so he can go this way a very long time. He's taking distributions from this IRA "rollover acct", as cash is available from a maturiting issue, but he's not trading nor re-allocating outside of his setup maturity schedules. He won't "do" ill-liquid issues, and stay's out of "tax exempt's" as he won't deal with AMT. Besides he's got me watching out for that....LOLSo his "fee" expense is as close to $0 as you can get as a DIY'er. Frankly, he was bitching the other day over his 35 bpt's ratio....LOL I told him to "shut up" and consider himself lucky, as the rest of us aren't so "blessed".....heheI'm on top of 1/2 mill managed and I'm paying 55 bpts so there you go...@ "Fido".....but I can't knock their service and been with-em since 78 when we picked up our first few 30's.KBM (aka "The Bond BB - tm")
Watch it Dr......LOL!Things that make you go, UM?DrTarrThat's University of Michigan.....in my "world".....heheKBM (U of M 1967)
Wow Michigan actually had a University that far back?????<gg>
If I can p*ss them off enough to shock them into not rushing into a bad decision, I'm more happy to eat whatever sh*t anyone wants the throw my way. I don't give a f*ck about winning any popularity contests. But I am passionate about ensuring, as best as I can, that that people don't do stupid things with their money, espcially money that their parents (presumbly) worked hard to save and then prudently invest.Wow. And, to me, this OP was asking so he wouldn't make mistakes. This seems to be part of his homework.jmc
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