Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

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2 Tasty
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by 2 Tasty »

First off, congratulations on your windfall!! And great thread! Enough so to finally get me to register.

I'm going to be a bit contrarian to some of the other bogleheads here. The answer to your question comes to how well you handle risk. All bogleheads accept some level of risk in their investment choices, otherwise they would be invested in treasuries or cash. Looking at your age, your current assets (you are almost FI!!), and your planned working horizon, I don't see any reason not to take a little extra risk to guarantee a lower tax burden on your assets. My best guess for you coming out ahead using this approach is 60/40.

Could you add a few columns to your Excel spreadsheet to show us what your true tax savings are? To compare apples to apples, calculate your average effective tax rate (in addition to marginal) over the full ten years for every scenario (including years where you don't cash out any of the stock). Also, total taxes spent over that ten year period would be nice.

tl;dr: Unless you have some reason to believe this stock is going to crash tomorrow (the overall stock market would have to seriously outperform this stock in order to offset the tax losses accompanying selling it all at once), or you have major risk aversion, I would sell over a time period that at least keeps marginal capital gains rate at 15% and marginal income rate at 25% (or maybe even 28%, getting you out of the position within five years).

(By the way, if you weren't planning to already, use some of the money you cash out each year to maximize all tax-deferred contributions (401k, IRA, etc.) to further reduce the upcoming tax storm.)
sls239
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by sls239 »

There is no way I would risk $500K to save $20K on taxes.

I agree with talking to a good broker to figure out how to sell almost all of it as quickly as possible.

Max out the 401(k) until all the extra money (money you are not going to donate or "gamble" with) has been funneled into retirement accounts.

If you sell it all this year, next year you can console yourself by making a deductible IRA contribution for your spouse assuming your AGI in year two will be below about $180K. And you can continue that until she is covered by her own retirement plan.

http://www.irs.gov/Retirement-Plans/201 ... an-at-Work
inbox788
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by inbox788 »

sls239 wrote:There is no way I would risk $500K to save $20K on taxes.
That's a 4% annualized return! Everyday, folks take the possibility of a 30-50% haircut on the goal of 4% SWR. I like the risk/reward of the substantial tax savings, not to mention the possible appreciation of the individual stock.

Based on the simulations above, I like the 3 year plan. YMMV. Everyone has to evaluate their own risk tolerance and understand the risk they're taking.

I don't know what specific stock we're dealing with but with most major companies, I'd be ok with holding a large chuck for a short while. From what I gather, OP has been holding this position for over a year now, maybe longer. Divesting part today is actually reducing exposure. I'm totally in agreement with the need to divest, just looking a the cost/benefit of doing it immediately at a higher cost vs. risk/benefit of spreading it out.

It's already July 2015, and right now 1/3 can be taken off the table. In 6 months, another 1/3 can be sold. So holding less than half the position for over a year and a half longer is the biggest and longest risk to worry about. OP wasn't that worried 6 months ago, so the next 6 months should be less, not more worry IMO.
sls239
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by sls239 »

4% annualized return is not good enough IMO.

If a bank were only making a mortgage to a single person and there were no federal guarantees or bailouts, do you think they'd only charge 4%?

OP would essentially be lending this one company $500K in the hopes of making an extra $20K.
inbox788
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by inbox788 »

sls239 wrote:4% annualized return is not good enough IMO.

If a bank were only making a mortgage to a single person and there were no federal guarantees or bailouts, do you think they'd only charge 4%?

OP would essentially be lending this one company $500K in the hopes of making an extra $20K.
It's EXTRA 4%. Banks wouldn't charge just 4%, they'd get their usual market rate plus this extra risk. That's why folks with bad credit pay higher interest rates. If managed properly, there's a good return with relatively little risk.

If you offered me an extra 4% return on top of any return on Apple, I'd buy a big chunk today. I'd do it for PG, XOM, JNJ, and a good number of other SP500 stocks, probably most.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by dumbbunny »

This thread just pulled me in. It shows the complexity of taxes and its affect on our wealth. It also illustrates - "plans go wrong for lack of advice; many advisers bring success." And lastly, I can't wait for a conversation where I can use - "you could rip the band-aid off and do it all at once." I love this forum.
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notmyrealname
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by notmyrealname »

2 Tasty wrote:First off, congratulations on your windfall!! And great thread! Enough so to finally get me to register.

Thank you! We are certainly very fortunate.

I'm going to be a bit contrarian to some of the other bogleheads here. The answer to your question comes to how well you handle risk. All bogleheads accept some level of risk in their investment choices, otherwise they would be invested in treasuries or cash. Looking at your age, your current assets (you are almost FI!!), and your planned working horizon, I don't see any reason not to take a little extra risk to guarantee a lower tax burden on your assets. My best guess for you coming out ahead using this approach is 60/40.

A contrarian viewpoint is always good. And I like framing the decision this way. Basically risk vs reward.

Could you add a few columns to your Excel spreadsheet to show us what your true tax savings are? To compare apples to apples, calculate your average effective tax rate (in addition to marginal) over the full ten years for every scenario (including years where you don't cash out any of the stock). Also, total taxes spent over that ten year period would be nice.

Look below and you can see my revised spreadsheet. I'm not sure how to calculate my average effective tax rate...Not great with numbers, for this chart I am basically copying what taxcaster spits out. If you point me in the right direction I would be happy to add a column.

tl;dr: Unless you have some reason to believe this stock is going to crash tomorrow (the overall stock market would have to seriously outperform this stock in order to offset the tax losses accompanying selling it all at once), or you have major risk aversion, I would sell over a time period that at least keeps marginal capital gains rate at 15% and marginal income rate at 25% (or maybe even 28%, getting you out of the position within five years).

(By the way, if you weren't planning to already, use some of the money you cash out each year to maximize all tax-deferred contributions (401k, IRA, etc.) to further reduce the upcoming tax storm.)
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notmyrealname
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by notmyrealname »

Here is a revised table:

Image

The main difference is that I added my in increase in taxable wages in 2017 due to my wife starting employment. It does skew the numbers a bit because the 'total taxes paid' now reflect an increase in taxable wages in 2017 in addition to the LTCG.

It seems there is a good argument for selling it all in two years, before the increase in taxable wages.
Theoretical
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by Theoretical »

This is a serious issue that requires multiple angles.

Dumping it all immediately might just wreck the stock price, even if it's trading at $100 per share, but especially if it's closer to $10.

At a minimum, you should get a put option or fully cover your exposure by putting a collar option on the stock ASAP. That's going to harm your return a bit in the short haul (and might cause them to become ordinary dividends) but will give you breathing space if "the next crash" happens tomorrow.

When my wife and I sold some appreciated stock to buy our home, we also donated some money to charity and it offset the capital gains tax hit dramatically. Look at the most appreciated tax lots and see if you can target them for a donation in conjunction with your sales.
2 Tasty
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by 2 Tasty »

Effective tax rate is simply total taxes paid divided by total income, presented as a percent. So for your row "Sell in ten years", your effective tax rate is 12.8% (=sum(G11:I11)/F11), whereas for "Sell in one year" your effective tax rate is 20.3%.

Again, to compare apples to apples, you really should compare the full ten years for every scenario. So for "Sell in one year", it should include the one year of heavy taxes plus the nine years of minimal taxes solely from income. My guess is the column "Total Taxes Paid Over 10 years" would be highest for the first scenario and lowest for the last scenario (though I could be wrong, because as others have said if you pull off the band aid quickly, your taxes for the remaining years will be extremely low). No, this will not be the easiest Excel spreadsheet, but I think the extra work will be worth it to gain a fuller understanding of your situation.
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notmyrealname
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by notmyrealname »

2 Tasty wrote:Effective tax rate is simply total taxes paid divided by total income, presented as a percent. So for your row "Sell in ten years", your effective tax rate is 12.8% (=sum(G11:I11)/F11), whereas for "Sell in one year" your effective tax rate is 20.3%.

Again, to compare apples to apples, you really should compare the full ten years for every scenario. So for "Sell in one year", it should include the one year of heavy taxes plus the nine years of minimal taxes solely from income. My guess is the column "Total Taxes Paid Over 10 years" would be highest for the first scenario and lowest for the last scenario (though I could be wrong, because as others have said if you pull off the band aid quickly, your taxes for the remaining years will be extremely low). No, this will not be the easiest Excel spreadsheet, but I think the extra work will be worth it to gain a fuller understanding of your situation.
Makes a lot of sense to break it out that way. I'll take a pass at it tonight. Thanks.
ryman554
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by ryman554 »

2 Tasty wrote:Effective tax rate is simply total taxes paid divided by total income, presented as a percent. So for your row "Sell in ten years", your effective tax rate is 12.8% (=sum(G11:I11)/F11), whereas for "Sell in one year" your effective tax rate is 20.3%.

Again, to compare apples to apples, you really should compare the full ten years for every scenario. So for "Sell in one year", it should include the one year of heavy taxes plus the nine years of minimal taxes solely from income.
I'd look at it the other way -- total taxes attributable to selling the stock (and then some estimate of the growth/dividends of said income!) which would take out all fo hte other "wage income". But it is true, the effect of wages should be somehow extracted from this.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by itstoomuch »

You only have sell enough to where you are comfortable with your total portfolio.
The excess could be optioned to control risk in the stock.
Besides the normal options is also borrowing on the stock to purchase stabilizing options or AA products. [see thread on, borrowing to buy balanced portfolio (?)]

IMO, anything that want to do to deRisk, will cost something either in taxes, opportunity, or insurance. Congrats.
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JW-Retired
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by JW-Retired »

notmyrealname wrote:
2 Tasty wrote:Effective tax rate is simply total taxes paid divided by total income, presented as a percent. So for your row "Sell in ten years", your effective tax rate is 12.8% (=sum(G11:I11)/F11), whereas for "Sell in one year" your effective tax rate is 20.3%.

Again, to compare apples to apples, you really should compare the full ten years for every scenario. So for "Sell in one year", it should include the one year of heavy taxes plus the nine years of minimal taxes solely from income. My guess is the column "Total Taxes Paid Over 10 years" would be highest for the first scenario and lowest for the last scenario (though I could be wrong, because as others have said if you pull off the band aid quickly, your taxes for the remaining years will be extremely low). No, this will not be the easiest Excel spreadsheet, but I think the extra work will be worth it to gain a fuller understanding of your situation.
Makes a lot of sense to break it out that way. I'll take a pass at it tonight. Thanks.
Might be interesting but I think you already have your answer. Do it in two tax years. That minimizes taxes and is a pretty low risk duration. It could all be done in the next 6 or 8 months.
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EnjoyIt
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by EnjoyIt »

notmyrealname wrote:Using my income and deductions from 2014 plus the hypothetical capital gains scenarios I ran my tax data through taxcaster, then input it to Excel:


Image


Just for fun I ran it all the way out to ten years. Strangely, the total taxes paid decreases from 1-5 years, then increases again from 5-10 years. I am not sure why that would be or if I made an error.

Interesting to see the (hypothetical) data laid out. I think the advice is good to liquidate sooner rather than later.
I would try and get this over with within the next 1.5 years. Sell some now. Sell some in January 2016, sell the rest in January 2017. I would consider purchase options in January 2016. I would also set the dates you plan on selling in writing. Last thing you want to do is start second guessing yourself and trying to time the market.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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notmyrealname
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by notmyrealname »

EnjoyIt wrote:
notmyrealname wrote:Using my income and deductions from 2014 plus the hypothetical capital gains scenarios I ran my tax data through taxcaster, then input it to Excel:


Image


Just for fun I ran it all the way out to ten years. Strangely, the total taxes paid decreases from 1-5 years, then increases again from 5-10 years. I am not sure why that would be or if I made an error.

Interesting to see the (hypothetical) data laid out. I think the advice is good to liquidate sooner rather than later.
I would try and get this over with within the next 1.5 years. Sell some now. Sell some in January 2016, sell the rest in January 2017. I would consider purchase options in January 2016. I would also set the dates you plan on selling in writing. Last thing you want to do is start second guessing yourself and trying to time the market.
Yes, it will be very tempting to try to time the market.

Also, I think part of the hesitation to selling soon is that I believe the company is very well ran. But that doesn't mean that we should take this much risk.
lack_ey
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by lack_ey »

notmyrealname wrote:Yes, it will be very tempting to try to time the market.

Also, I think part of the hesitation to selling soon is that I believe the company is very well ran. But that doesn't mean that we should take this much risk.
You don't have to unload the whole position. Maybe 40% now, 40% in January 2015, and keep 20% for as long as you like.

Rationally, you should probably only plan to keep this long term if you'd want to buy in of your own volition, but when you get a large gift like this, maybe it's worth having a bit around as a reminder of the one who passed and gave you this opportunity, among other things.

One thing to ask yourself now is if you believe that the market thinks the company is well run. You said the volatility has been low. That's usually a sign of fairly stable earnings and low surprises, which is probably more likely to happen under management the market perceives to be good.
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notmyrealname
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by notmyrealname »

So I created 10 separate tables that show different stock sale scenarios, and calculate the total taxes paid after 10 years. For example scenario 1 would be where I sell all in the first year, then have 'normal' taxes to pay years for hte next 9 years.

This shows the takeaway:

Image

Pretty linear, as you would assume.

Thanks again for all the input! I am much more knowledgeable in regards to taxes now than I was a week ago.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by abuss368 »

gkaplan wrote:I don't have anything to contribute to this thread, other than to say that I like your username.
Hi Gordon,

Do you still invest in individual stocks?

Best.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by abuss368 »

Will you bump up to the next tax rate?
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Wagnerjb
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by Wagnerjb »

notmyrealname wrote:So I created 10 separate tables that show different stock sale scenarios, and calculate the total taxes paid after 10 years. For example scenario 1 would be where I sell all in the first year, then have 'normal' taxes to pay years for hte next 9 years.

This shows the takeaway:

Image

Pretty linear, as you would assume.

Thanks again for all the input! I am much more knowledgeable in regards to taxes now than I was a week ago.
Here is what I might suggest. The 7-year plan gives you a guaranteed tax savings of $75,000 and that would be tempting to me. Yes, there is risk that the stock will fall in the meantime.

If you follow a 7-year disposal plan, I would sell the first year's allocation right now. That might be $130k. I would then donate another amount to an Donor Advised Fund - right after selling. That might be $25k. (The Donor Advised Fund will be selling the shares on the open market, so don't donate first and allow them to depress the stock while you are selling it). In January 2016 sell the next allocation of $130k and then donate another $25k right away.

Those moves will result in a very quick 33% reduction in your exposure to this stock.

At the same time, I would encourage you to max out your deferred compensation contributions. Today, you may not feel that you can max out your tax-deferred savings plans without running out of spending money. But with selling these shares, you will have ample cash for spending money. Obviously, you don't change your spending habits, but this strategy effectively moves some of this individual stock money to your tax-deferred savings plans (including IRAs).

The donations to the DAF and the jump in your tax-deferred savings will also impact your taxes. It may even turn out that you can sell more shares in the early years due to these other tax impacts.

Best wishes.
Andy
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by livesoft »

That's an interesting point about donating to a DAF in that it may give one an idea how the trading desk of the DAF dumps the stock. One may have to kind of watch in real-time the action of the stock in the days after the donation --- or at least screen capture the intraday (1-day or 5-day) charts plus a few screen captures of Level 2 real-time quotes (see this thread for some idea of screen captures: viewtopic.php?t=165732). The trading desk may find buyers privately, too.
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2 Tasty
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by 2 Tasty »

If you feel the company is well run, here's what I would do:

Pick the tax bracket you feel comfortable giving up out of your paycheck to Uncle Sam that gets you out of the position as quickly as possible (and avoiding all other ancillary taxes), and cash out just enough of your stock to fall right below the cap of that tax bracket each year. The current marginal tax rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. 15% of course would be ideal, as you then wouldn't be paying any taxes on your capital gains; however, if you do the math on how many years this would take, you will keep a sizeable position in the company forever (therefore not ideal). From your earlier tables, it seemed 28% would be a good compromise, in that you would completely get out of the position within 6 or 7 years, while not withering your paycheck to some miniscule amount due to taxes (between federal, state, OASDI, etc.).

Another thing to keep in mind is that above a certain magi limit, you will not be able to contribute to a traditional or Roth IRA (they have different limits). You could potentially cut yourself off from using these tools to grow your money tax-deferred if you sell too much stock in a given year. (Though I think there are workarounds? I've heard of a backdoor Roth IRA, but not looked much into it.) IRS limits are below:

http://www.irs.gov/Retirement-Plans/IRA ... ion-Limits

http://www.irs.gov/Retirement-Plans/Amo ... e-For-2015
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by ryman554 »

Wagnerjb wrote: Here is what I might suggest. The 7-year plan gives you a guaranteed tax savings of $75,000 and that would be tempting to me. Yes, there is risk that the stock will fall in the meantime.
Risk is that the stock does not fall 7.5% over 7 years, otherwise comes out even.
That's ~1% per year. It drops more than 1% per annum and the OP is behind.

What is the probability of this occurring?

It's a *huge* single stock risk, which is why folks are saying to dump it immediately. If there were no single stock risk, then we'd all be in single stocks. But there is.

So looking at the tax savings in absence of probability of daily / yearly fluctuations missed the point entirely.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by Wagnerjb »

ryman554 wrote:
Wagnerjb wrote: Here is what I might suggest. The 7-year plan gives you a guaranteed tax savings of $75,000 and that would be tempting to me. Yes, there is risk that the stock will fall in the meantime.
Risk is that the stock does not fall 7.5% over 7 years, otherwise comes out even.
That's ~1% per year. It drops more than 1% per annum and the OP is behind.

What is the probability of this occurring?

It's a *huge* single stock risk, which is why folks are saying to dump it immediately. If there were no single stock risk, then we'd all be in single stocks. But there is.

So looking at the tax savings in absence of probability of daily / yearly fluctuations missed the point entirely.
I would do the analysis differently. The stock needs to underperform the broad market by $75,000 in order for the OP to come out even. That underperformance can be in a down market or in an up market.

Within 5 months, the OP has taken 33% of the stock off the table. So, the remaining 67% needs to underperform by $75,000 to break even. That would be an underperformance of maybe 10-15%.

But the OP is selling every year, so the underperformance must be either a) immediate or b) more substantial in the later years when there is less exposure.

With some well-reasoned analysis, the OP can make an intelligent decision for himself whether he wants to accept this risk....or whether he wants to sell down faster. I have an opinion and so do others (and we can differ), but we all should be able to agree on how to assess the risk.

Best wishes.
Andy
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by itstoomuch »

Not understanding the tax issue/basis date???

OP received stock, 2015 .
Donor gave this stock this year 2015. DONOR is declaring this a gift and is paying the appropriate taxes.
OP basis is value on date received. 2015
If OP sells stock, less than 1 year, Short term capital gains/losses.
If OP sells +1 year, LTCG/losses apply
:dollar :confused
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rgs92
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by rgs92 »

Sell it all tomorrow morning. Simplify your life. I'm reading between the lines that there is some emotional connection to this particular security that has something to to with the gift-nature of it and the person who gave it to you.

This prevents you from doing what is logical, like putting it all in VBIAX say. (Vang. bal. index advantage).
Or if you are more conservative, 75% in there and 25% in VUBFX (Vang. Ultra Short Term Bond), just to be on the very safe side with a cushion.
(In fact, do this at first to cover whatever taxes you might owe.) An alternative to VUBFX is an Ally 1% savings acct, just as good.

For heaven's sake, please get real, as you don't have a lot of money, and you can't afford to let your emotions sway you to the dark side.
All these spreadsheets and worry about taxes is just a distraction, or noise. Come tax time, you'll easily figure the taxes you owe, it won't be that hard.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by ryman554 »

Wagnerjb wrote: I would do the analysis differently. The stock needs to underperform the broad market by $75,000 in order for the OP to come out even. That underperformance can be in a down market or in an up market.

Within 5 months, the OP has taken 33% of the stock off the table. So, the remaining 67% needs to underperform by $75,000 to break even. That would be an underperformance of maybe 10-15%.

But the OP is selling every year, so the underperformance must be either a) immediate or b) more substantial in the later years when there is less exposure.
.
I like the way you use "underperformance" of the market as a whole. That is a much better way of doing things.

I did the calculations using your methods, and you have to underperform ~3% per year over 5 years to eliminate the tax windfall. Yes, there is a sequence of returns thing, but that works out both ways.

What is the median underperformance of a given stock? What is the range?

Don't know. Could be convinced to sell for the tax breaks. This is a good thread.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by itstoomuch »

itstoomuch wrote:Not understanding the tax issue/basis date???

OP received stock, 2015 .
Donor gave this stock this year 2015. DONOR is declaring this a gift and is paying the appropriate taxes.
OP basis is value on date received. 2015
If OP sells stock, less than 1 year, Short term capital gains/losses.
If OP sells +1 year, LTCG/losses apply
:dollar :confused
I was corrected on the tax ramifications. OPs tax basis is the original purchase cost of donor. :oops:
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated

Post by EnjoyIt »

ryman554 wrote: This is a good thread.
Agreed, I am enjoying the math behind it all. As well as how complex this really is. Since we are not only considering a single stock risk, but the possible market underperformance in general of this single stock. What's interesting this company could also over perform the market over the next 1.5-7.5 year selling period.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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