Tax Strategy

[frogprin01]

HI all

I really enjoy this forum and the wealth of information. I have a question about tax strategies specifically about reducing taxes on capital gains.

Both my wife and I are retired. We both have pensions and she is taking SS. Our pensions and her SS cover all of our basic expenses. To cover extras like traveling and paying taxes I have been gradually streaming from the considerable sum I have in stock grants. My wife is 68 turns 69 this September and I turn 68 in June. I had planned to take SS at 70. We have not had to withdrawal from our IRAs and won’t until RMDs are required at 73. Because my stock grants have done very well the streaming done (usally quarterly) results in significant capital gains taxes.

Our tax accountant said I should. consider taking SS earlier (let’s say when I am 68.5 January 1st). That way I would need to stream less and reduce capital gains.

What does the community think about this strategy? Let me know if you need more details or if there has been previous post that cover this same topic.

Thanks in advance

Steve

 

[RunningBum]

Explain more about stock grants and streaming.

Are the stock grants merely the way you acquired stock that has unrealized capital gains, or are there some restrictions on them or are granted shares still being made available to you?

Is streaming merely your term for selling those stock shares, which happen to have been on a quarterly basis, or does it mean something else?

Assuming my assumptions are correct, your tax accountant may be correct. I would ask him to show 3 scenarios: 1) continue selling those shares; 2) take SS now; 3) withdraw from your IRA now. How do taxes look now and in your future, bearing in mind you will have to start taking RMDs soon, so withdrawing some now may not be a bad idea.

If you don't see spending down all of your money, those stock shares will get stepped up basis for whoever inherits, so it may not make sense for you to pay taxes since they may not ever need be taxed. This also holds true if you donate or bequeath the shares to charity. On the other hand, do those stock shares represent a high percentage of your portfolio? You may want to continue selling them off so you can diversify more. If you were 85 or 90 you might be willing to take the chance they won't collapse in your lifetime, but 68/67 and healthy enough to travel you probably have a lot of years left.

 

[pb4uski]

I think your tax accountant is a dope and I'm a retired CPA (but not a tax practitioner). Just kidding, sort of, but hard to know without knowing the reasoning.

Like a couple years is going to make a difference one way or the other. Deferring SS is like buying a COLA life annuity from the US government. It is hard to find COLAed life annuities.

 

[all4j]

Lots & lots of ways to look at this, but my guess is that the difference is smaller than you think. In the end, it probably won’t be a financial decision.

I’d start by re-thinking the objective – why reduce cap gains tax? That is, is that really the goal OR should it be to lower overall taxes? Or have most assets? Etc. Since ss doesn’t involve cap gains, it obviously would lower that, but likely increase other tax. You have a big advantage in that the financial impact is really limited & so you can quantify the difference much easier. Models are only as good as assumptions made; neither option is guaranteed & there isn’t a singular, known best answer today.

You can determine your current ss benefit & then determine after-tax (federal & state) amount of money you’d have available. Use that to approximate the number of shares of stock you’d sell to get same after-tax amount. The difference in growth rate of ss & stock AND tax treatment (especially state) may tell you what you need to know. It’s just a difference between now & when you hit 70.

But don’t overlook non-financial/tax considerations. What estate considerations are there? Stock & ss are very different. If you already have most expenses covered, do you really need the annuity aspect? Stocks give you more flexibility later. But you may have too much concentrated in that holding. How will you feel if market goes down & stays down a while?

Good luck in your decision. Timing of social security and heavy, single stock holdings are often quite emotional. I’m sure you can find strong opinions in other threads & then think thru your specifics.

 

[audreyh1]

Look at the total tax situation, not just the long-term capital gains which are overall preferentially taxed. Look at what happens to your income makeup when SS (various scenarios) and then RMDs increase the ordinary income significantly. Maybe at that point you don’t have to sell stock anymore? Maybe you are also trying to diversify a large holding which is also a consideration.

 

[Midpack]

In that you're almost 70 already, it won't make much difference. If you're convinced you'll live to be more than 81, I'd wait until 70 as planned. If you really don't expect to live to 81 due to your known health or family history, you might as well take it now.

81 is a good estimate of SS breakeven age, though some folks will come along to suggest it's (much) higher or lower based on some unusual assumptions that they may/not disclose...

 

[Montecfo]

I would be more concerned with diversification than taxes.

If it were me I think I would look to take the CG and enjoy a favorable tax rate (which could change in the future). I would not hold a single large position for possibly decades thinking I would save all that tax on basis step-up. Too risky.

I would keep harvesting and also use it to fund charitable giving or donor advised fund or any in-life gifting plan.

Your SS claiming strategy should be taking your entire situation into consideration.

As my first tax partner liked to say "Don't let the tax rail wag the business dog".

 

[corn18]

I would wait until 70 for SS and cash out as much of your stock grants as possible while staying in the 15% long term capital gains bracket. Once your SS and RMD's kick in, you are going to have to deal with IRMA and NIIT. Take the gains now and then reinvest in something else.

I am curious how much of your savings is in those grants. I sold all of my grants the day after they were granted. Did not feel comfortable with a large percentage of my savings in one stock.

 

[frogprin01]

Explain more about stock grants and streaming.

Are the stock grants merely the way you acquired stock that has unrealized capital gains, or are there some restrictions on them or are granted shares still being made available to you?

There are no restrictions. These are stocks acquired over my 30 years at the company that I never spent until I retired at 59.5. They also pay nice dividends

Is streaming merely your term for selling those stock shares, which happen to have been on a quarterly basis, or does it mean something else?

Yes I sell shares. And I control the timing. I do it on a quarterly basis, but also as needed for extra funds.

Assuming my assumptions are correct, your tax accountant may be correct. I would ask him to show 3 scenarios: 1) continue selling those shares; 2) take SS now; 3) withdraw from your IRA now. How do taxes look now and in your future, bearing in mind you will have to start taking RMDs soon, so withdrawing some now may not be a bad idea.

Great idea. I like this strategy.

If you don't see spending down all of your money, those stock shares will get stepped up basis for whoever inherits, so it may not make sense for you to pay taxes since they may not ever need be taxed. This also holds true if you donate or bequeath the shares to charity. On the other hand, do those stock shares represent a high percentage of your portfolio? You may want to continue selling them off so you can diversify more. If you were 85 or 90 you might be willing to take the chance they won't collapse in your lifetime, but 68/67 and healthy enough to travel you probably have a lot of years left.

They represent 25% of our net worth. We will not spend down all our money. Based on projections, a considerable amount of money will be left after we pass.
Thanks for your feedback RunningBum and great questions. See responses in red above

 

[frogprin01]

I think your tax accountant is a dope and I'm a retired CPA (but not a tax practitioner). Just kidding, sort of, but hard to know without knowing the reasoning.

Like a couple years is going to make a difference one way or the other. Deferring SS is like buying a COLA life annuity from the US government. It is hard to find COLAed life annuities.

Thanks for the reply. I know that the information included in my post was limited. I provided more detail in my answers to the post from RunningBum

 

[frogprin01]

I would wait until 70 for SS and cash out as much of your stock grants as possible while staying in the 15% long term capital gains bracket. Once your SS and RMD's kick in, you are going to have to deal with IRMA and NIIT. Take the gains now and then reinvest in something else.

I am curious how much of your savings is in those grants. I sold all of my grants the day after they were granted. Did not feel comfortable with a large percentage of my savings in one stock.

Thanks! I am currently at 18% for long term capital gains. That probably does not change your reasoning correct.

 

[Flute McG]

I'm new here. Don't get hung up about paying the lowest taxes. Take the time to make a spread sheet and compare various scenarios. See which gives you the most money at the end. What you wind up KEEPING at some selected point in the future is the important thing. This method worked for me.

Flute

 

[Closet_Gamer]

They represent 25% of our net worth.

I would keep selling down stock to diversify. No way would I be comfortable having 25% of my net worth in a single security.

My $0.02.

 

[audreyh1]

I would keep selling down stock to diversify. No way would I be comfortable having 25% of my net worth in a single security.

My $0.02.

I did for many years, gradually diversifying at peaks. I did it over a period of about 15 years after retiring. It was a calculated risk. Worked out for me.

 

[Flute McG]

Closet Gamer brings up a good point. We appear to be in the dawn of volatile times and selling down stocks might be the safer way to go - even though a spread sheet might tell you that you'd make more if you didn't. Just make sure you end up with enough.

Flute

 

[pb4uski]

.They represent 25% of our net worth.

I'd be concerned about concentration risk. Lots of once blue chip companies are no longer around. How lucky do you feel?

Or somehow hedge the concentration risk.

 

[frogprin01]

I did for many years, gradually diversifying at peaks. I did it over a period of about 15 years after retiring. It was a calculated risk. Worked out for me.

Great point! Thanks

 

[frogprin01]

I would keep selling down stock to diversify. No way would I be comfortable having 25% of my net worth in a single security.

My $0.02.

Thanks!

 

[frogprin01]

Lots & lots of ways to look at this, but my guess is that the difference is smaller than you think. In the end, it probably won’t be a financial decision.

I’d start by re-thinking the objective – why reduce cap gains tax? That is, is that really the goal OR should it be to lower overall taxes? Or have most assets? Etc. Since ss doesn’t involve cap gains, it obviously would lower that, but likely increase other tax. You have a big advantage in that the financial impact is really limited & so you can quantify the difference much easier. Models are only as good as assumptions made; neither option is guaranteed & there isn’t a singular, known best answer today.

You can determine your current ss benefit & then determine after-tax (federal & state) amount of money you’d have available. Use that to approximate the number of shares of stock you’d sell to get same after-tax amount. The difference in growth rate of ss & stock AND tax treatment (especially state) may tell you what you need to know. It’s just a difference between now & when you hit 70.

But don’t overlook non-financial/tax considerations. What estate considerations are there? Stock & ss are very different. If you already have most expenses covered, do you really need the annuity aspect? Stocks give you more flexibility later. But you may have too much concentrated in that holding. How will you feel if market goes down & stays down a while?

Good luck in your decision. Timing of social security and heavy, single stock holdings are often quite emotional. I’m sure you can find strong opinions in other threads & then think thru your specifics.

Excellent points!! Thanks!

 

[frogprin01]

I'm new here. Don't get hung up about paying the lowest taxes. Take the time to make a spread sheet and compare various scenarios. See which gives you the most money at the end. What you wind up KEEPING at some selected point in the future is the important thing. This method worked for me.

Flute

Good point. Similar to Allinj

I'm new here. Don't get hung up about paying the lowest taxes. Take the time to make a spread sheet and compare various scenarios. See which gives you the most money at the end. What you wind up KEEPING at some selected point in the future is the important thing. This method worked for me.

Flute

Thanks! Similar to all4j approach. Of course, I would have to make assumptions on future capital gains, which will vary. Overall, the responses are trending towards waiting until 70 to take Social Security as initially planned.

 

[pb4uski]

....Overall, the responses are trending towards waiting until 70 to take Social Security as initially planned.

 

[target2019]

With a spouse still living, I prioritized waiting until 70, to maximize what the survivor gets.

Since you're 2 years from 70, stick with your strategy. I'm thinking your tax accountant is not your investment adviser.

I have a 10-year cheat sheet that helps me understand the possible impact of multiple factors now, and later. Something like that may help.

 

[frogprin01]

Thanks!! And you are correct we have a separate financial advisor from our tax accountant and they have a full understanding of all our investments. They have always advised waiting to 70. We were just brainstorming with our tax accountant.

 

[TickTock]

Or somehow hedge the concentration risk.

Interesting thought. Buy put options for some of the stock. The cost could be considered insurance premiums to control the downside risk.

 

[SecondCor521]

Like most of the others, I think the single stock risk is the overriding factor and in your shoes I would diversify away from it at some pace you feel comfortable with.

The other tax point that I wanted to make and that your tax person didn't consider is that starting SS now and probably continuing some capital gains would mean that more of your SS would become taxable. Take a look at the worksheet behind Form 1040 line 6b, or ask your tax guy about it and he should be able to explain the basic idea and do some example math for you.