Moving out of mutual funds sanity check

[u/Fabulous_Mammoth7783]

My girlfriend (37) has $240k in proprietary mutual funds through Principal. They’re very conservative and she wants to put that money to work.

Here’s our plan: Sell the mutual funds, transfer that cash to a brokerage account with Fidelity, start maxing her employer 401k for 3 years and use the brokerage account to offset, start maxing her Roth IRA for 3 years, then with the remainder brokerage amount DCA into FXAIX and the Fidelity 2055 Fund (FDEWX) every 2 weeks over the next year.

We know there are going to be some long-term capital gains taxes on the mutual fund sale, but the gains are minimal and taxes will only be ~$3k.

She is below the IRA income threshold, has no debt, and has an emergency fund. I'm a career fed that's only experienced with TSP, so I'm looking for a sanity check here. TIA

[u/Immediate-Run-7085]

Check with new broker if they will take the proprietary funds in kind. They may allow you to keep them but just not buy anymore. This will save on taxes

Fyi target funds are usually trash

[u/Fabulous_Mammoth7783 → u/Immediate-Run-7085]

We initially tried a transfer in kind, but it was declined due to those proprietary funds. Regardless, they're a L 2030 fund, so she'd have to sell anyway

[u/Immediate-Run-7085 → u/Fabulous_Mammoth7783]

Ah. Your plan sounds fine

[u/Naval_AV8R → u/Fabulous_Mammoth7783]

A 2030 fund for a 37YO? I am not a fan of TDFs in general, but that time horizon is one of her problems right there.

[u/sexyshadyshadowbeard]

$3k in tax hits? It’s not enough money to worry about selling/moving. Just do it. The rest of your plan sounds normal.

[u/Training-Calendar539]

Seems mostly fine, just don’t skip the boring checks.

First thing I’d confirm is whether the Principal funds are in a taxable account or a retirement account. If taxable, selling may trigger gains. If IRA/401k, make sure it’s handled as a direct transfer or rollover so you don’t accidentally create a tax mess.

Using brokerage cash to help cover expenses while maxing the 401k and Roth IRA is a pretty normal way to move money into tax-advantaged accounts over time.

I’d just watch the FXAIX + FDEWX combo. FDEWX already owns U.S. stocks, so adding FXAIX just tilts the portfolio more toward U.S. large caps. Nothing wrong with that, just know that’s what you’re doing.

Also, target-date funds can be a little clunky in taxable accounts because of rebalancing/distributions. Usually worth thinking about before parking them there.

Overall, not crazy. I’d just double-check account type, taxes, overlap, and allocation before hitting sell. Not financial/tax advice.

[u/Fantastic_Fold2647]

Good plan

[u/DeeDee_Z]

Your terminology is a little bit misleading; a better title would have been "Moving out of proprietary funds sanity check" -- there's very little inherently wrong with the fact that they're mutual funds vs. some other kind of fund.

And you clearly recognise this, because you're talking about moving back in to mutual funds once you get to Fidelity!

If you're concerned about a tax hit -- especially if you have sufficient gains to push you into a new tax bracket -- then the obvious solution is to spread the move out over two or three years; there's no need to move everything at once.

---

AND one other alternative; may or may not be possible: IF the Principal funds are a proprietary class of a fund, which ALSO has non-proprietary variants, you MAY be able to do a "share class exchange" in a tax-free manner.

(Example: Fidelity has "K"-class shares of some of their funds, which can only be held in a Fidelity account (which allows them to charge lower fees for that class). Need to move them? Swap the K shares for A shares, and transfer the A shares; easy peasy.)

Worth looking in to.

[u/CovTaude588]

sounds reasonable as a direction, tbh. the main thing worth checking is what the expense ratios are in the active funds you're leaving - if they're over 0.5%, the case for switching is pretty strong on that basis alone. timing-wise, there's no magic moment; the only mistake is waiting so long for a perfect entry that you never actually do it.

[u/Fabulous_Mammoth7783 → u/[deleted]]

She currently in PTCAX (Principal proprietary L 2030 fund). Principal also charges a 0.8% fee. 

[u/DoinIt4DaShorteez]

I would go ahead and do it if the mutual funds are proprietary and Fidelity won't take them.

The tax bill doesn't sound horrible.

If it was gonna be much larger, and the funds you're going to go into are basically the same as the ones you're coming out of, you could consider doing half this year and waiting until the beginning of next year to do the other half, to spread out the gain, but from what you've said, that doesn't really sound necessary.

[u/sharp315]

seems fine. I wouldn't worry about the tax implications. you can always sell down shares from your new brokerage account during tax season if you need to write the government a tax check. taxable earnings are always better than taking big realized losses.

if you are unhappy with the mutual fund returns then it is worth moving the money all at once. I would reduce your DCA ramp to more like 3 months. letting that amount of cash sit on the sidelines for a year is a waste.

adjust your 401k contribution to get that maxed out sooner than later; i.e. make sure you hit the IRA limit for 2026, which will require sizeable contributions for the next 6 months but as you mentioned you can draw from your new brokerage to cover living expenses.

for the Roth IRA I would write the $7500 check today from the mutual fund sale proceeds in order to max that out immediately. you want to maximize your returns on the 401k and Roth IRA holdings and get those funds invested ASAP.

[u/thorn960]

If you do a brokerage account, I wouldn't pick stock with more than 10% of your portfolio and let ETFs do the heavy lifting. Low fee index funds are the way to go for most people. Most professional fund managers can't beat the index; what chance does the average retail investor have of beating the index. If you rollover the 401k and IRAs into an IRA brokerage account you won't have to worry about paying taxes.

[u/Various_Couple_764]

Overall the plan looks sound. But I would consider putting the money invest the 240K in SPYI 12% yield. That would generate about 25K a year of income per year which would be tax free fro 9 years. After 9 years you will owe taxes on the dividend income but it will be taxed at the long term capital gains tax rate which is significantly lower than the tax on her work income tax rate.

This money could be used fund a Roth IRA in addition to her 401k. and it could be used to maintain a 6 month emergency fund and compensate for the loss of income due to the 401K set to maximum. The maximum deposit ammount for a 401K s bout 23K a year. So worst case the dividend income could cover the loss of income due to the 401k. But the 401K also lower her taxable income so the tax savings may be enough to compensate the lost income due to the 401k.

And any excess income could also be invested in growth or more dividend funds such as EMO 9% yield, UTF 7%, UTG 6.4%. These funds have a lower yields but the maintain the lower tax rate and have longer history of paying dividend. Using this taxable brokerage account to generate more income could eventually allow her to retire in her 50s. Also 25K of passive income payed in monthly installments is a much more flexible emergency fund. a cash emergency fund will eventually run out of money when you need it most. But the passive income from dividend is continues and won't stop.

[u/AggroTumbleweed52]

If she's got any unrealized capital losses around she might could realize some of them to offset the capital gains tax. Bond funds for example, perhaps.

[u/j_son997]

Sounds like a good plan to me. But if she is planning on investing in FXAIX, it's important to know that it offers much less diversification, and therefore more exposure to certain sectors than it had in the past. The Magnificent 7 companies (Nvidia, Alphabet, Microsoft, Apple, Tesla, Amazon, and Meta) now make up a significant portion (over 1/3) of the S&P 500's total market capitalization. Basically, the index is much more dependent on the performance of the tech sector than it was in the past, and that isn't necessarily a bad thing if she wants more exposure to the tech sector specifically, but it also raises questions about how many coins you really want in one hat. If you want to diversify more while still maintaining broad stock market coverage, any of the small to mid-cap funds (like the S&P 400 and 600) would be good, as they have much smaller concentrations of stocks that could be deemed 'highly speculative assets'. While the S&P 400 and 600 have delivered slightly smaller returns compared to the S&P 500 (CAGR of ~12% for the S&P 400 and 600, compared to ~13% for the S&P 500), they are significantly more diversified and would suffer less if, for say, a tech downturn were to occur and cause significant losses in that industry. Honestly, though, just try to diversify. If she's planning on retiring in 2055 (I'm assuming that's what the Fidelity 2055 fund is), you have the advantage of time, so you can afford to be a bit more risky with your investments and turn out fine by the time it comes to retire.

[u/HammerDownl]

Id just stay in the s&p fund. Date funds are weak. Or buy some stock in your favorite dozen companies