Risk of Sitting on Large (Long Term) Cap Gains?

[Midpack]

What am I missing (first world problems)?

Like some/but not all here I presume, we are sitting on a relatively large chunk of capital gains in our taxable account. We haven't needed to sell anything, and we don't have any holdings with a loss, so I can't sell and use an offsetting loss. Since we pay taxes on dividends annually, they've been deposited in our checking account for many years, so all our gains are 99%+ long term appreciation (no dividend reinvestment).

I am going to continue with very large Roth conversions for the next 6 years or so, so I certainly don't want to take cap gains now. All our AGI comes from dividends, interest & conversions. We use cash to supplement dividends & interest for spending withdrawals.

There's no way to know what future cap gains tax brackets will be, presumably less favorable than today, but I plan to start withdrawing from taxable when Roth conversions are done, TIRA RMD's will be low and we'll have more than enough income from Soc Sec, dividends (taxable) and TIRA RMD's. At that point I'll be able to control exactly what we take in cap gains each year. I don't foresee a time we'll be forced to sell and take an outsized cap gains hit.

 

[RunningBum]

The two concerns I have is whether the LTCG rate will increase, and whether the step-up basis on inheritance goes away. Otherwise I see no reason to sell highly appreciated funds before other investments except for anything I can take at 0%. For now I'm also using that space for Roth conversions, and avoiding the ACA cliff. After that concerns would be IRMAA and pushing more SS into being taxed.

 

[twaddle]

I don't think you're missing anything. Unless, like me, you're starting to worry about the disconnect between fundamentals and the asset inflation we're experiencing.

I see your target allocation in your sig. If you're able to stick to that allocation (which I assume reflects your risk tolerance) without taking gains, then you're good.

Personally, I find myself chanting "minimize regret" a lot these days.

 

[nwsteve]

Another option for some of your LTCG is to in kind donation to your Charitable Trust--get deduction for full value and fund any charitable budget

 

[Midpack]

I see your target allocation in your sig. If you're able to stick to that allocation (which I assume reflects your risk tolerance) without taking gains, then you're good.

Not really, I was 100% equities until age 51, and slept like a baby including 1987, 2000 (and 2008-09). I slowly scaled back our risk between age 51 and now because ""If you've won the game, why keep playing?" as W Bernstein observed years ago. No reason to swing for the fences anymore as I did for a couple decades.

When the market seriously drops again, I'll deploy some cash, but I still won't go past 60:40 or thereabouts.

Another option for some of your LTCG is to in kind donation to your Charitable Trust--get deduction for full value and fund any charitable budget

+1, I'll look into that, thanks. We've just been using cash.

 

[twaddle]

Another option for some of your LTCG is to in kind donation to your Charitable Trust--get deduction for full value and fund any charitable budget

I like that idea. In fact, 21 years ago, that's exactly what I did in a similar investment environment. I funded a 20-year-term CRUT, which paid me annual income (you set the rate) and left the remainder to charity.

I just distributed that remainder last year, and it felt good.

 

[Done]

If you leave some assets in tax-deferred, then once you reach age 70.5 you can start Qualified Charitable Distributions. These distributions apply towards your RMD yet they aren’t counted as income in AGI, regardless of whether you itemize. In this way they are even better than donations from a taxable account, which require itemization to be deductible.

 

[Animorph]

I finished my large Roth conversions last year. We still have 10 years until RMD's and 4 years until one SS starts up. My optimizations now have me Roth converting to the top of the 10% tax bracket and filling the 0% capital gains bracket. We live off the taxable account, so we also have capital gains well into the 15% bracket. I think the closer you get to Roth withdrawals (10 years or so for us), the less value in Roth conversions at the same tax rate as RMD's, and the better 0% LTCG's look.

Beyond that I'm trying to manage LTCG's to avoid NIIT and stay at the lowest IRMAA I can. While being sure I have enough LTCG's to fill the 0% bracket for a few more years. I was able to harvest some losses during the 2020 dip, so I do have some shares with maybe "only" 30% gains and some flexibility in taking gains.

 

[jebmke]

If you leave some assets in tax-deferred, then once you reach age 70.5 you can start Qualified Charitable Distributions. These distributions apply towards your RMD yet they aren’t counted as income in AGI, regardless of whether you itemize. In this way they are even better than donations from a taxable account, which require itemization to be deductible.

Yes; although if not already started with RMDs then the RMD start date is age 72. The financial case for QCDs prior to RMD age is marginal - it really depends on whether you want/need to drain off your IRA to lower the future RMD or not.

 

[Retireby45ish]

If you don’t have much income then LTCG are taxed at very low rates up to a certain amount.

You can use this calculator below to check. It obviously depends on if you are doing Roth conversions or not. And how much dividend income you have.

But for example a married joint couple with 30k of dividends as your only income you can take 75k of LTCG for zero additional tax. With a 50/50 breakdown of cost basis and gains that means you can free up 150k of your investments and rebuy (similar funds) at a lower basis…or use it as part of your yearly spending.

I think I’ve got that right. When I retire, if this is still the case, I’m definitely going to take advantage.

https://www.dinkytown.net/java/1040-tax-calculator.html

 

[dmpi]

I was (and still am) in your situation. I sat on my capital gains since 2008 but I finally started realizing them last year. What motivated me to start is:

1. A purposed 9% WA state capital gains tax above 50,000 for married couples.

2. Avoiding the dreaded IRMAA surcharge.
3. The general thinking that capital gains taxes are going up.

4. Making sure there are enough years left to hit your target long-term capital gain tax bracket. Don't wait until you have so much you have to pay the 20% bracket.

 

[Geld ist Freiheit]

If you don’t have much income then LTCG are taxed at very low rates up to a certain amount.

You can use this calculator below to check. It obviously depends on if you are doing Roth conversions or not. And how much dividend income you have.

...

https://www.dinkytown.net/java/1040-tax-calculator.html

Thank you for this link! I’ve been wanting to do some tax gain harvesting to help out with some oversized gains in my taxable account.

I’ve been noodling on this for the past 6 months or so. I made a spreadsheet that calculates how much income (and freed up principle) I can generate and still pay $0 tax on capital gains. Between varying dividends, a ballooning inherited IRA, and various gains/principle ratios in the taxable account, this link will provide more focus to get the number right.

I feel a little bit like the guy that built a plane in his living room and now can’t get it out the door. Good problems to have, right?

 

[DrRoy]

Not missing anything. I'm in the same boat. Also close to your investment figures. 57% equities, went nuts last year with WR 3% to fund some house projects and add 6 months cash cushion. Had to sell some ETF to do that, and just saw the cap gains tax result in Turbotax yesterday.

 

[firewhen]

Stepped up basis

My hope is that this remains and we never sell much out of the taxable accounts. This way we never pay any LTCG tax any still enjoy the use of the dividends. If we do sell a piece of some mutual funds, our gains are about half of the current value so selling $100k for example would generate a $50k gain and $7.5k tax at 15%. This presumes we have moved to a state without income tax by then or else there would be about $3k in state income tax as well. If your math is similar, to free up $100k at a cost of $7.5k in tax is not too bad.

 

[The Cosmic Avenger]

I'm still trying to figure this out myself for when we're ready; we have a lot (over 2/3) in tax-advantaged accounts, but we also have about 10% of our money in a taxable account, and as soon as we retire, I was thinking we'd sell that off up to the 0% LTCG limit. But if we do Roth conversions instead, where will our spending come from? I might have to work a few months longer than planned to make it to 55, so I can start taking withdrawals from my 401(k) without penalty, according to my plan documents.

 

[Midpack]

Like a few others here, I probably won’t have to sell any of our equity holdings, so if I sell any of it, it will be at the cap gains rate I choose. Between taxable dividends, Soc Sec, Roth $ and cash we’ll have more than we spend annually - for the foreseeable future. We don’t have kids, so maximizing residual portfolio for heirs is a consideration, but not as critical.

 

[JDARNELL]

I was (and still am) in your situation. I sat on my capital gains since 2008 but I finally started realizing them last year. What motivated me to start is:

2. Avoiding the dreaded IRMAA surcharge.
3. The general thinking that capital gains taxes are going up.

I to am setting on a lot of long term capital gains with a very low cost basis. . I am gonna pull some funds in a couple of weeks for a large purchase. For me my LTG rate is 15%

I am in the process of trying to do a 1031 on a property but had my CPA run the implications if I pay the tax instead. It is brutal. And when I did what a IRMAA scenario would like if I was in that boat it is even worse. I can see the tax tail wagging the dog.

So for me this has prompted me to really think about how I am going to fine tune my tax planning the next few years with even considering doing Roth Conversions up to the top of the 22% bracket. Anything I can't get done I will earmark for QCDs down the road.

 

[Closet_Gamer]

Another option for some of your LTCG is to in kind donation to your Charitable Trust--get deduction for full value and fund any charitable budget

For sure look into this.

We use a "donor advised" charitable fund structure at Schwab. Its awesome.

When you got to donate appreciated assets, you select a position and the system automaticall shows you all of your purchase history (provided it was with schwab) where you can easily select the most appreciated shares.

Most of what I donated this year was 50%+ comprised of capital gains.

Just ensure you wait 30 days to avoid getting tripped up on wash sale rules, and then use the cash you would have given to charity to backfill whatever securities you donated.

You can also use this as we rebalancing vehicle. Donate appreciated shares of asset class A and use cash to buy asset class B.

I haven't tracked it, but I've pull a lot of unrealized capital gains off of my balance sheet this way.

 

[RunningBum]

Most of what I donated this year was 50%+ comprised of capital gains.

Just ensure you wait 30 days to avoid getting tripped up on wash sale rules, and then use the cash you would have given to charity to backfill whatever securities you donated.

You only have to worry about wash sales if you sell at a loss.

 

[Montecfo]

I have for many years made annual charitable contributions with highly appreciated common stock positions. For that reason and the fact that I'm only about 20% in taxable accounts, I do not have this problem presently.

You can definitely look at it as an opportunity to load up your donor advised fund if you have one. Or to start one if you don't. And then disperse the money from the DAF over several years, depending your annual budget for contributions.

Beyond that, my only observation is I don't think capital gain tax rates will ever be lower than they are now. So I certainly wouldn't hold onto appreciated positions that I was nervous about because of taxes. But that's just me.

"Don't let the tax tail wag the investment dog."

 

[Montecfo]

For sure look into this.

We use a "donor advised" charitable fund structure at Schwab...

Just ensure you wait 30 days to avoid getting tripped up on wash sale rules, and then use the cash you would have given to charity to backfill whatever securities you donated.

Wash sale rules do not come and play with respect to contributions to a DAF, or with charitable contributions of property in general.

You may buy identical securities the day before or the day after you donate, with no adverse tax repercussions.

But I think what you said seems to be a common misconception, I believe I've read it here a few times.

 

[Closet_Gamer]

Wash sale rules do not come and play with respect to contributions to a DAF, or with charitable contributions of property in general.

You may buy identical securities the day before or the day after you donate, with no adverse tax repercussions.

But I think what you said seems to be a common misconception, I believe I've read it here a few times.

Thanks to both you and Runningbum for sharing that. Super helpful!

 

[JoeWras]

Tax time is always an interesting time to assess these issues. Looks like Midpack and I were doing something similar during this tax season.

Since I had to calculate some cap gains, I decided to look at my entire cap gain situation. And I have a lot of outstanding gains! Last year I simplified my assets and ate a few losses to balance gains. I left the high gain equities in place.

So, here's my plan: monitor the political situation and take some gains if changes are proposed for 2022. Otherwise, continue with Roth conversions.

If I take gains, I'll be scrubbing the most recent lots with the lowest gains and preserving the high gain lots for future charitable contributions.

We don't know where politics will lead this year. I know Joe said "Only over $400k". However, I can also see the current capital gains situation being declared a "loophole," and hence changed while the lawmakers in charge still claim no tax increase. I also expect nothing to be retroactive to Jan 1 this year, because it would be seen next April 15, before elections.

So, it just bears watching this year and being flexible with the plan.

 

[Dash man]

We also have large amounts of appreciated stock in our brokerage account. We’re on the second year of using a donor advised fund and it’s a piece of cake to use with Schwab. We’re still in the same boat as many are here trying to balance Roth conversions with capital gains and dividend income in a tax friendly way. I’m not sure it’s possible without taking some major tax hit.

 

[kgtest]

What am I missing (first world problems)?

Like some/but not all here I presume, we are sitting on a relatively large chunk of capital gains in our taxable account. We haven't needed to sell anything, and we don't have any holdings with a loss, so I can't sell and use an offsetting loss. Since we pay taxes on dividends annually, they've been deposited in our checking account for many years, so all our gains are 99%+ long term appreciation (no dividend reinvestment).

I am going to continue with very large Roth conversions for the next 6 years or so, so I certainly don't want to take cap gains now. All our AGI comes from dividends, interest & conversions. We use cash to supplement dividends & interest for spending withdrawals.

There's no way to know what future cap gains tax brackets will be, presumably less favorable than today, but I plan to start withdrawing from taxable when Roth conversions are done, TIRA RMD's will be low and we'll have more than enough income from Soc Sec, dividends (taxable) and TIRA RMD's. At that point I'll be able to control exactly what we take in cap gains each year. I don't foresee a time we'll be forced to sell and take an outsized cap gains hit.

I've considered this implication as well, or pondered it or whatever. My ER journey will be the same with a slight difference that cash comes from RE rentals. So that provides me with some shelter when offsetting losses, but a separate step-up basis with AGI unless I reset it beforehand.

With RE aside, I ponder...when if at all should I just take the TIRA and run. One in the hand IS worth more than Two in the bush? I will likely land somewhere in the middle in 25 years when I actually have to think about this problem lol..

In the meantime I need to put more emphasis on roth contributions. Right now just one rung short of doing the full contribution...still not maxing 401k...as I have a large mortgage payment on 15yr...just lots of variables really. Interesting to read others opinions.