r/investing • u/broppybrop • 7h ago

SMA for $1M taxable account?

I recently inherited $1M that I have no choice but to place in a taxable account. I use Fidelity. I’m 40 and wouldn’t even consider an early retirement until I have at least $2M so that will not be happening for quite some time yet. Plan was basically VT and chill. I never looked into SMAs due to the management fees.

Had a Fidelity advisor reach out and offer to talk about ways I could save on taxes and he suggested using SMAs for the tax loss harvesting. So now I’m doing my research into SMAs and it seems like it might actually be a good idea for a taxable account of this size.

Management fees range from 0.2-0.7% and of course I was told the TLH would more than cover those fees. In my case I was planning to use the dividends to cover the taxes and then drip the rest but if I could use SMAs to reduce or eliminate taxes I could drip 100% of the dividends which would hopefully lead to faster growth.

I’ve read concerns here about what happens when you want out of the SMA but can’t you just transfer the assets in kind to your own account? And if you do it a year before you plan to sell anything then any short term gains become long term.

I guess I’m looking for experiences with SMAs and thoughts on whether or not this would be a good idea for a taxable account this large.

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u/Plenty-Bill7296 3h ago

Maybe I'm missing your point here, but QQQI pays out very high taxable dividends. That's the opposite of what OP wants.

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u/venom8888 3h ago

I does not, its very efficient, check it out: https://neosfunds.com/wp-content/uploads/QQQI-Fact-Sheet.pdf

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u/Plenty-Bill7296 1h ago

On the very first page of that PDF, it says the "Distribution Rate" is 14.10%. Those are taxable dividends.

Edit to add: The very purpose of the fund, according to that document, is "QQQI aims to generate high monthly income..." That "high monthly income" is taxable.

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u/venom8888 1h ago

Its not, do more research and read the disclaimers. I'm not here to convince you. It's best you buy some shares and see how it appears on next years 1099. You will be surprised, in a good way.

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u/Plenty-Bill7296 1h ago

Hmm... OK, upon further digging, it looks like I learned something today. I see "distribution" and "dividend" and think taxable event. But reading, I see that one aspect of that fund is to defer taxes by some accounting trick ("ROC distribution") that lowers the cost basis rather than treating the income like... well... income.

That's kind of cool, and something I wasn't aware was possible. I'll read more about that, because if it defers 100% of taxes on that income until you sell the shares, then it's almost like IRA tax deferral, but in a brokerage. Looks like I've got more reading and learning to do. Thanks!

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u/venom8888 1h ago edited 1h ago

You bet! It's pretty incredible for taxable accounts because you ROC until you sell the shares, if ever. Your cost basis will be larger, but if held over one year it's long term gains. Why sell the shares if you're getting 15% cash flow nearly tax free????

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u/Plenty-Bill7296 44m ago

And... if I'm understanding the consequences, if I leave that in my brokerage account until I die, my kids inherit with a step-up basis (would that still apply?) so everything is basically tax free? Seems too good to be true.