How to dump your broker and invest your own money

Fed Chairman Jerome Powell appears on a video screen at the New York Stock Exchange

Oct. 1, 2023 3 AM PT

Dear Liz: I have a mutual fund and a Roth IRA that are actively managed by a broker. The accounts have not done well. I would like to withdraw them from the broker and reinvest them on my own. How do I safely and securely withdraw them from the broker? What paperwork and fees should I expect?

Answer: Look through your records to find the agreement you signed with the brokerage when these accounts were opened. The agreement may include the steps for closing the account along with any fees. You also could try searching for the name of the brokerage and “account closure fees” to see what, if anything, you might owe.

The brokerage may give you the option to manage the account on your own, or you may want to set up accounts at a new, less expensive discount brokerage. Once the accounts have been opened, your new brokerage will help with the transfers. If any of your money is invested in “proprietary funds” — that is, investments offered only at the old brokerage — those investments probably would have to be sold first. Such a sale wouldn’t incur any tax consequences with your Roth IRA. If your mutual fund is proprietary, though, its sale may incur capital gains taxes.

Dear Liz: I am a teacher getting ready to retire. I have been collecting a spousal benefit from my husband’s Social Security. My understanding is that once I start collecting my pension, I will be subject to the windfall elimination provision. Is there a way to continue to collect against my husband’s Social Security, which is greater than my own Social Security benefit?

Answer: Because you will be receiving a pension from a job that didn’t pay into Social Security, you’re subject to two provisions: the windfall elimination provision, which can reduce but not eliminate your own Social Security benefit, and the government pension offset, which can reduce or eliminate any spousal or survivor benefit.

If the GPO wipes out your spousal benefit, you may still get at least a portion of your own benefit. Claiming strategy sites such as Maximize My Social Security and Social Security Solutions could help you estimate the effect of those provisions.

Paying a grandchild’s student loans

Dear Liz: Regarding the grandparent who would like to pay off a grandchild’s student loans.

You wrote that paying off the loans would be considered a gift. However, if the grandparent paid the funds to the institution that originated the student loan, would it then not be a gift? This would exempt the grandparent from filing the gift tax return.

Answer: You may be thinking of the unlimited exception for a family member’s medical expenses or education. Unfortunately, payments made to a student lender aren’t included in this exception.

Normally, any gift that’s larger than the annual gift exclusion limit — which is currently $17,000 per recipient — would require filing a gift tax return. Gift taxes aren’t due, however, until the amount given away over the annual limits exceeds the lifetime gift and estate exemption limit (which is currently $12.92 million). Clearly, someone has to be quite wealthy, and quite generous, before gift taxes are a concern.

But even the necessity to file a gift tax return can be avoided for larger gifts if you’re paying someone else’s education or medical expenses. The unlimited exception for these expenses, however, applies only to tuition payments made directly to the educational institution and payments for medical care made directly to a healthcare provider. Payments to other parties, such as lenders or insurance companies, aren’t included in this exception.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.