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

[RunningBum]

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..

What does it mean to "take the TIRA and run"?

 

[tdv2]

I'm sitting at 60% of my investable assets in taxable right now. Have been doing Roth conversions in parallel with raising cash by selling some equities in taxable to fund a large purchase....been focused on the combination of the two for tax purposes. Since the bulk of our equities are in the taxable account, I look at the partial sales there as help in keeping my asset allocation in check while raising the cash.

 

[JoeWras]

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.

I'm glad you bring up DAFs. We have new users reading all the time, so it is nice to spread the word about DAFs. I first learned about DAFs from this site, along with the idea of Roth conversions.

We've had our DAF since 2014. It is enormously useful for charitable giving, especially if you are way too young for QCDs. In my final years of w*rk, it was a great way to build up a pile for future charitable giving.

Now that we're retired, we can use it to "bunch" contributions to one year, and then spread out the actual donations evenly through the years. I take our most highly appreciated equities and contribute them to the DAF in those years. Our next year to do this will be 2022.

Bunching contributions is good for multiple reasons:
1) The donor (us) can bunch high enough to get over the standard deduction and get a tax break.
2) The charitable groups can rely on more evenly spaced out donations from us, instead of giving them in lumps.

 

[clifp]

Another vote for Donor Advised fund. Realistically you guys aren't going to spend it all before you die, and you can't take it with. I had a lot of income in 2018, and so I don't a significant amount of stock. It felt really good to be able to write a lot of checks to worthwhile charities, this year when clearly a lot of people were in need.

 

[Telly]

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'm missing something here... in a taxable account, whether you reinvest long term cap gains or take them as cash instead, the cap gains during the tax year are still a taxable event each year. Or are you running with a S&P500 fund or maybe a growth fund that throw off low/no cap gains? Or are they bond funds?

 

[TheHobbit]

Here's my take on this risk. I think if congress did tinker with LTCG rates, they move to a progressive system, where the more LTCG's you realized, the higher the taxation rate. Essentially what they've done with income taxes.

My thinking here is they would find a solution which carves out a low tax rate for the majority of modest retirees -- say realized gains up to $100-150k, and then progressively step them up from there. I find it highly unlikely they'd just raise the LTCG rate across the board -- they'd be needless stirring up a bee's nest of angry retirees, when they can achieve 80% of their goals (raising revenue) by using a progressive taxation rate.

This is definitely a risk I keep on my radar, but it's probably not in the top 5 things I worry about.

 

[Dash man]

I'm missing something here... in a taxable account, whether you reinvest long term cap gains or take them as cash instead, the cap gains during the tax year are still a taxable event each year. Or are you running with a S&P500 fund or maybe a growth fund that throw off low/no cap gains? Or are they bond funds?

Many of us have individual stocks with large gains. These gains are not taxable until the sale of the stock. I think you’re just thinking of mutual funds that distribute their capital gains to owners of the fund, which do have to have taxes paid each year. With individual stocks, we get to decide when to sell and pay taxes.

 

[RunningBum]

Many of us have individual stocks with large gains. These gains are not taxable until the sale of the stock. I think you’re just thinking of mutual funds that distribute their capital gains to owners of the fund, which do have to have taxes paid each year. With individual stocks, we get to decide when to sell and pay taxes.

I've owned VG Total Stock Index Fund for years and if there's been a CG distribution, I can't remember it. I picked up the S&P 500 index last year too and that should be the same. Many managed mutual funds have cap gains distributions, but they are rarer with index funds. Managed funds have them when managers decide to sell holdings at a gain. Index funds only have them if the fund has to sell holdings due to heavy redemptions.

 

[JoeWras]

I've owned VG Total Stock Index Fund for years and if there's been a CG distribution, I can't remember it. I picked up the S&P 500 index last year too and that should be the same. Many managed mutual funds have cap gains distributions, but they are rarer with index funds. Managed funds have them when managers decide to sell holdings at a gain. Index funds only have them if the fund has to sell holdings due to heavy redemptions.

Exactly. I've held VG Total Stock Index since 2007. No CG distributions to date.

I also have VG Balanced Index since 2007, and interestingly, they finally threw off some gains in 2019 and 2020, although they were not large.

And so on. In the recent decade, my new purchases are ETFs. CG distributions are possible, but they are even rarer.

After a few decades, the gains can really add up.

 

[Midpack]

I'm missing something here... in a taxable account, whether you reinvest long term cap gains or take them as cash instead, the cap gains during the tax year are still a taxable event each year. Or are you running with a S&P500 fund or maybe a growth fund that throw off low/no cap gains? Or are they bond funds?

None of the 9 index funds we hold in taxable throw off significant cap gains, usually none but when they do they amounts are very small relative to dividends. But yes they are taxable in that year when they occur.

 

[audreyh1]

Unless your cap gains distributions from your mutual funds are large, I wouldn’t worry about it. I assume you are mostly in Vanguard index funds, so your cap gains distributions are going to be quite small. You can use your Roth conversions and the Roth later to rebalance, so it seems like you can leave the cap gains unrealized.

Anticipating possible future tax law changes - seems like a no win situation and you can drive yourself crazy with the effort.

 

[audreyh1]

I'm missing something here... in a taxable account, whether you reinvest long term cap gains or take them as cash instead, the cap gains during the tax year are still a taxable event each year. Or are you running with a S&P500 fund or maybe a growth fund that throw off low/no cap gains? Or are they bond funds?

What you are missing is.....

Check out how low cap gains distributions are on index funds - particularly the Vanguard funds. It’s the actively managed mutual funds that often pay large cap gains distributions.

 

[Telly]

What you are missing is.....

Check out how low cap gains distributions are on index funds - particularly the Vanguard funds. It’s the actively managed mutual funds that often pay large cap gains distributions.

Yes, like Wellington... and a (managed) growth fund that we have had for I think more than 25 years. In keeping with this threads topic, we were hit hard with LTCGs in December, which limits the size of Roth conversions we can do, without driving hard into IRMAA. But to limit LTCGs, so we can do larger conversions, means selling some/all of the large LTCG "offenders". Which by selling them, drives us up the tax/IRMAA curve. Arg!

 

[GoodWishes]

We also highly recommend a Donor Advised Fund. We also have ours at Schwab, easy to setup, easy to transfer assets, easy to make donations.

 

[Ready]

Is it possible that you simply are not spending enough money? If you are living on dividends and capital gains but never selling any shares of your equities, you may be setting yourself up to die with millions of dollars left over. It’s not the worst problem you could have but it’s something to think about before it’s too late.

We are in the same situation actually. We spend far less than Firecalc says we could. And we have no kids. So we do need to find something else to spend money on to require us to eventually sell some long held shares of equities. But for now capital gains and dividends more than cover our expenses.

 

[RunningBum]

Is it possible that you simply are not spending enough money? If you are living on dividends and capital gains but never selling any shares of your equities, you may be setting yourself up to die with millions of dollars left over. It’s not the worst problem you could have but it’s something to think about before it’s too late.

We are in the same situation actually. We spend far less than Firecalc says we could. And we have no kids. So we do need to find something else to spend money on to require us to eventually sell some long held shares of equities. But for now capital gains and dividends more than cover our expenses.

That's a good message. I can't speak for anyone else but I doubt I'm the only one who's more than a little obsessive with tax management. I try to keep that apart from my spending habits though. If I can/need to/want to spend more, I will, and deal with that revised tax situation as best I can. As I think about the tax cost if/when I do sell some of those high CG shares, it's really not that bad.

 

[JoeWras]

I don't think it is too obsessive to take advantage of the 0% cap gain bracket, or the 12% income bracket (for IRA conversions). These rates are unlikely to go lower. Beyond that, it becomes more complicated.

 

[RunningBum]

I don't think it is too obsessive to take advantage of the 0% cap gain bracket, or the 12% income bracket (for IRA conversions). These rates are unlikely to go lower. Beyond that, it becomes more complicated.

Sure. The issue is that at every age I have these income points to watch out for. Don't go over the ACA cliff. Don't push more QDivs into being taxed (12+15% rate). Watch out for IRMAA. Don't push more SS into being taxed. If blowing past an income limit, avoid NIIT.

It's compounded by the fact that I can live comfortably without hitting any of those things, or maybe blowing by a limit once every few years to sock away some spending money.

It helps that the ACA cliff looks like it's going away. I'll be able to knock out a little more of my Roth conversion.

This morning I'm working out at when it's less of an impact to take LTCGs vs. drawing down HSA and Roth with no taxes. Maybe documenting the tax hit as not too bad will help frame my mind that those income limit points aren't barriers, just things to be aware of.

 

[RunningBum]

This morning I'm working out at when it's less of an impact to take LTCGs vs. drawing down HSA and Roth with no taxes. Maybe documenting the tax hit as not too bad will help frame my mind that those income limit points aren't barriers, just things to be aware of.

That seemed like a worthwhile exercise. As long as I get my tIRA fully converted, or at least to where I'd use QCDs instead of withdrawals for my RMDs, my regular income should stay in the 12% bracket. Adding more income via LTCGs ranges from a short 0% window to 15-27% depending on whether I'm in the SS hump, hitting IRMAA, or just taking the straight LTCG tax. Extra if I hit NIIT, then the 20% LTCG rate. So it's really not that big of a hit to take LTCG gains.

I'll still probably use my HSA and Roth after I'm beyond 0% LTCGs, as long as tax laws stay the same. But watch them take away the stepped up inheritance bases, and make LTCGs regular income to spoil my planning.

 

[pb4uski]

.... 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....

or the boat that Leroy Jethro Gibbs is working on in his basement.

 

[2177V]

mmm..I must be missing something.

Here are the tax rate for LTCG that I copied and pasted from Kiplinger.com:

2021 Capital Gains Tax Rate Income Thresholds

Taxable Income (Married Filing Jointly)
0% LTCG Up to $80,800

15% LTCG $80,801 to $501,600

I have been paying either 0% LTCG or 15% LTCG based on my taxible income above. Paying 0% or 15% does not appear to be a problem in my specific case.

Paying LTCG was indeed a problem BEFORE the congress recently changed the LTCG tax rate. If there is a time to pay LTCG then it is NOW before the tax law changes again. You can verify this with TurboTax by typing in and reporting $100,000 LTCG to determine if your taxes increase by zero or 15% taxible income for married filing Jointly based on your taxible income. For single, look at the LTCG tax at Kiplinger or other sites by searching LTCG on google for tax year 2020.

 

[atmsmshr]

DW and I have been implementing a low tax capital gains strategy since retirement in 2019.

• Since I had income in 2019 due to mid year retirement, remainder year expenses were from cash savings.
• January 2020 was a 401k distribution with most of company stock to brokerage and balance to IRA. Since there were several account sections for company stock - rolled the newest (least capital appreciation) into IRA, and the rolled the oldest accounts into like for like brokerage.
• Net Unrealized Appreciation - With 33 years at megacorp, the cost basis of the brokerage was shockingly low - and had to pay ordinary income tax on that cost basis for 2020. Living expenses were paid from brokerage, and highest tax margin did not exceed 15% (QDiv and CGs) and stayed below NIIT.
• To minimize some of the risk of being highly concentrated in one stock at the outset of retirement, implemented a rising glidepath for equity allocation.
• Now having headroom with the married standard deduction starting in 2021, plan is to fill up this space with IRA to Roth conversions from 60-65.
• Live off of brokerage account and pay CGs and QDiv tax in this time frame if possible.
• If the megacorp stock is up in January, sell full year expenses plus 20% before valentines day. If not, sell a little, or consider switching to IRA withdrawl for income that year.
• Turn on pension at 66 and stop IRA-Roth conversions. Expenses come from from anything left in brokerage and IRA.
• Claim SS at 67.
• Keep majority of Roth invested in stocks and let appreciate. Use it to trim out high tax margin years when needed.
• Having a healthy chunk of savings in a tax advantaged IRA will be useful for the inevitable self insured LTC of one or both of us.

A recent article by Michael Kitces summaries a complex topic for Roth and Capital Gains/Qualified Dividends.

https://www.kitces.com/blog/navigat...-0-capital-gains-vs-partial-roth-conversions/

 

[RunningBum]

mmm..I must be missing something.

Yes, you are missing a few things that have been mentioned. Your capital gains might be pushing more of your social security into being taxable. They could be triggering IRMAA. If you are getting an ACA subsidy it definitely reduces the amount of subsidy you get, and could push you over the cliff to eliminate the subsidy. It could take you into NIIT. It's not always just a simple 0%, 15% or 20%.

 

[2177V]

Yes, you are missing a few things that have been mentioned. Your capital gains might be pushing more of your social security into being taxable. They could be triggering IRMAA. If you are getting an ACA subsidy it definitely reduces the amount of subsidy you get, and could push you over the cliff to eliminate the subsidy. It could take you into NIIT. It's not always just a simple 0%, 15% or 20%.

OK thanks for the info. In my specific case, 85% of my SS was taxed but I was getting only about $18K a year so only $15.3K was taxable income. Paying tax on $15.5K income was not a big deal to me since my income is comfortable.

I also do not have medicare since I am a retired government employee with medical benefits. IRMAA and ACA subsidy does not apply to me in my specific case.

NIIT is triggered when the MAGI is over $250K for a married couple so NITT does not apply to me in my specific case. My retirement income is comfortable but not that comfortable!

I gladly pay 0% or 15% of my LTCG because my IRA is taxed as ordinary income which is more than 15%. I used Turbo Tax to run a scenario of $100K capital gain increments and I found that the tax was acceptable to me at 0% or 15% plus some extra SS tax. However, I do understand that some retirees may be struggling so it does make sense to look for loopholes. I found that using TurboTax to create future situations...allows me to make more intelligent decisions regarding LTCG.

 

[RobLJ]

I sometimes keep CNBC on in the background for an hour in the morning or afternoon, and today I happened to hear a comment by an economist (paraphrasing Milton Friedman) to the effect that increases in M2, if not spent in consumption or capital investment by firms, tends to go into assets.

I looked it up--old M2 is no longer reported by the Fed but they do have a new measure. I doubt this is the full explanation of the market during the pandemic, but it may be part of the picture.
https://fred.stlouisfed.org/series/M2SL

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.