which shares do you sell?

[perinova]

Was this topic already covered?

Ok so you rebalance your portfolio on a regular basis and take out your choice of SWR as living expense.

Which shares do you sell first?
- The 1st you have put in?
- The last?
- Pick the low cost shares?
- Pick the high cost shares?
- Use the average method and don't worry?

Up to now I always have used the average cost method however if I will withdraw on a regular basis there might be advantage of picking the high cost shares first to limit cap-gain taxes? But would that bring very high cap gains much later?

 

[Nords]

Was this topic already covered?

Has that ever made a difference on this board? Even if it has this topic is worth repeating.

Up to now I always have used the average cost method however if I will withdraw on a regular basis there might be advantage of picking the high cost shares first to limit cap-gain taxes? But would that bring very high cap gains much later?

Selling specific shares is a real PITA at tax time, as much as I love typing dozens of transactions into a five-page Schedule D. And some sellers are quite concerned about ensuring that they cover their legal asse(t)s regarding the specific-share instructions to your broker/fund company. (I've never been queried about it, nor have I ever heard of anyone being audited on that basis, but the rule is on the books.) And once you start withdrawing shares from a fund using the specific-share method, you're obligated to do so for ALL the shares of that fund. Once you start selling shares from that fund you can't change the method.

Having said that, we've been selling the highest-basis shares first to minimize the cap gains. Someday we may face a higher cap-gains tax bill if we sell the lower-basis shares, but another option would be to withdraw spending money from our Roths (tax-free). If we don't need to use the low-cost shares then we could gift them to our kid, donate them to charity, or just leave them for a stepped-up inheritance basis.

IIRC cap gains drop again in 2008. If those low-basis shares are needed for expenses then that might be a great time to sell.

 

[Gone4Good]

Up to now I always have used the average cost method however if I will withdraw on a regular basis there might be advantage of picking the high cost shares first  to limit cap-gain taxes? But would that bring very high cap gains much later? 

Selling your high basis shares first will maximize your tax deferral and increase the after tax return on your investments (all else being equal*) at the expense of significantly complicating your record keeping (as mentioned by Nords).

*This assumes you sell the same after-tax dollar amount of investments and not the same number of shares (i.e. you need to sell fewer high basis shares to generate the same after-tax proceeds because of the lower current tax burden). The "all else being equal" assumption also assumes the same tax treatment in future years, which may be a lousy assumption. The favorable tax treatment currently afforded capital gains is unlikely to last and future tax rates are likely to be higher.

 

[perinova]

Nords, 3yrstogo
Thank you for your very good inputs.

There seem to be a consensus:
High-basis shares sold first, will mean more money in the account for further gains. Which in turn may compensate for the higher taxes when using low basis shares.
If managed correctly using Roths at a later stage will mean lower tax bracket at that time.