Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
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Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
First of all, thank you for taking the time to read this and give advice! My questions are at the end, first here is my portfolio information:
Emergency funds- Currently have about $10k of emergency fund and contributing $300 per month to emergency fund. Annual expenses are about $75k.
Debt:
Student Loans (ongoing)- $7000 (interest free until graduation, we plan on paying off in total upon graduation)
Mortgage- $156,000 (home value $220,000) -- 3.25% 30 year fixed
Auto Loan- $10,000 -- 2.75%
Tax Filing Status: Married Filing Jointly
Tax Rate: Last year our effective tax rate was .4% Federal, 3% State. This is the best I can figure at least looking at my tax paperwork from last year. Adjusted gross income last year was $76k if that helps.
State of Residence: Oregon
Age: 27
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 10% of stocks
Please provide a hint as to the size of your current total portfolio: just under $1 million.
Current retirement assets
Taxable
.5% cash
95.5% Single stock - Would prefer not to give stock name, as it might compromise my privacy. I can say it is a relatively low volume public stock, an average of around 25,000 shares trading per day.
Tax Preferred Accounts
His 401k at American Funds
3% Vanguard 500 Index fund (VFINX) (expense ratio .17)
Company Match? No
His Roth IRA at USAA
.7% Vanguard Int’l Equity (VEU) (expense ratio .14)
Contributions
New annual Contributions
$4000 (6% of salary) his 401k . My employer doesn’t match any funds, but they do put a bonus at year end in our 401k. This will likely be around $3000
$0 his Roth IRA I’m contributing all retirement money to the 401k now. Not sure if that Is the best option.
Questions:
So the biggest item to deal with first is the 95.5% stock asset allocation. This was a windfall for us, which is why it is so huge of a proportion of the portfolio. With regards to this stock:
1. Should I sell this to reallocate my portfolio?
2. (If yes to question 1) How can I minimize capital gains taxes? (It will be long term capital gains) It would be really nice to figure out how to keep my adjusted gross income inder $75k, so that my long term capital gains are zero. Perhaps this means maxing out my 401k, and HSA to minimize taxable income?
I admit that taxes tend to be a bit overwhelming to try to figure out the best approach, now that we are dealing with 'real' money. Any advice would be greatly appreciated. Thank you for reading.
Emergency funds- Currently have about $10k of emergency fund and contributing $300 per month to emergency fund. Annual expenses are about $75k.
Debt:
Student Loans (ongoing)- $7000 (interest free until graduation, we plan on paying off in total upon graduation)
Mortgage- $156,000 (home value $220,000) -- 3.25% 30 year fixed
Auto Loan- $10,000 -- 2.75%
Tax Filing Status: Married Filing Jointly
Tax Rate: Last year our effective tax rate was .4% Federal, 3% State. This is the best I can figure at least looking at my tax paperwork from last year. Adjusted gross income last year was $76k if that helps.
State of Residence: Oregon
Age: 27
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 10% of stocks
Please provide a hint as to the size of your current total portfolio: just under $1 million.
Current retirement assets
Taxable
.5% cash
95.5% Single stock - Would prefer not to give stock name, as it might compromise my privacy. I can say it is a relatively low volume public stock, an average of around 25,000 shares trading per day.
Tax Preferred Accounts
His 401k at American Funds
3% Vanguard 500 Index fund (VFINX) (expense ratio .17)
Company Match? No
His Roth IRA at USAA
.7% Vanguard Int’l Equity (VEU) (expense ratio .14)
Contributions
New annual Contributions
$4000 (6% of salary) his 401k . My employer doesn’t match any funds, but they do put a bonus at year end in our 401k. This will likely be around $3000
$0 his Roth IRA I’m contributing all retirement money to the 401k now. Not sure if that Is the best option.
Questions:
So the biggest item to deal with first is the 95.5% stock asset allocation. This was a windfall for us, which is why it is so huge of a proportion of the portfolio. With regards to this stock:
1. Should I sell this to reallocate my portfolio?
2. (If yes to question 1) How can I minimize capital gains taxes? (It will be long term capital gains) It would be really nice to figure out how to keep my adjusted gross income inder $75k, so that my long term capital gains are zero. Perhaps this means maxing out my 401k, and HSA to minimize taxable income?
I admit that taxes tend to be a bit overwhelming to try to figure out the best approach, now that we are dealing with 'real' money. Any advice would be greatly appreciated. Thank you for reading.
Last edited by notmyrealname on Sat Sep 05, 2015 3:56 pm, edited 3 times in total.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Was the windfall an inheritance? If so, it was probably stepped up to the value on death.
If not, what is the basis? That is what you paid for it, or what it was worth when it vested.
Most bogleheads, including me, would strongly suggest selling most or all of the stock. A lightly traded single issue can go to zero, while the broad market is not that likely to do so.
If not, what is the basis? That is what you paid for it, or what it was worth when it vested.
Most bogleheads, including me, would strongly suggest selling most or all of the stock. A lightly traded single issue can go to zero, while the broad market is not that likely to do so.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
1. Yes, sell to re-allocate and spend the money.
2. Pay off loans. Increase 401(k) contribution to $18,000 per year. 401(k) should probably be allocated 100% to fixed income since all your equities can be in your taxable account. What rate/yield is that INVESCO stable value fund?
3. Contribute to Roth IRAs next week, too.
4. How to sell to minimize capital gains taxes? No easy way. Give some shares to a donor-advised fund if you want to give to charity.
What percentage of the windfall is unrealized capital gains? Long-term or short-term? What percentage of the windfall is cost basis? Remember: return of capital is not taxed. Answer these questions and I will give you some more ideas.
2. Pay off loans. Increase 401(k) contribution to $18,000 per year. 401(k) should probably be allocated 100% to fixed income since all your equities can be in your taxable account. What rate/yield is that INVESCO stable value fund?
3. Contribute to Roth IRAs next week, too.
4. How to sell to minimize capital gains taxes? No easy way. Give some shares to a donor-advised fund if you want to give to charity.
What percentage of the windfall is unrealized capital gains? Long-term or short-term? What percentage of the windfall is cost basis? Remember: return of capital is not taxed. Answer these questions and I will give you some more ideas.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I don't have anything to contribute to this thread, other than to say that I like your username.
Gordon
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
-It was not an inheritance, it was a gift from a living family member. The basis for the stock is about $150k 20 years ago.jackholloway wrote:Was the windfall an inheritance? If so, it was probably stepped up to the value on death.
If not, what is the basis? That is what you paid for it, or what it was worth when it vested.
Most bogleheads, including me, would strongly suggest selling most or all of the stock. A lightly traded single issue can go to zero, while the broad market is not that likely to do so.
Thank you for your advice.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I would pay off all loans, including the student loans and the car and the mortgage.
Rapidly figure out what your annual expenses are going to be. You're a student; will your income rise soon? Were you planning to increase your savings rate after graduation?
Large windfalls like this can slip through your fingers if you don't have a plan and a handle on your spending. On the other hand, you should certainly feel like you can enjoy some of the gift. Your charge is to figure out what that right balance should be, and then stick with it. In addition, you need to determine what your financial goals are. Ideally those were established before the windfall so you know already how the windfall fits in your plans. Are you aiming for early retirement and now you can retire earlier? Do you want to increase charitable giving? Do you want to be richer? Do you just want to buy a nicer car?
Rapidly figure out what your annual expenses are going to be. You're a student; will your income rise soon? Were you planning to increase your savings rate after graduation?
Large windfalls like this can slip through your fingers if you don't have a plan and a handle on your spending. On the other hand, you should certainly feel like you can enjoy some of the gift. Your charge is to figure out what that right balance should be, and then stick with it. In addition, you need to determine what your financial goals are. Ideally those were established before the windfall so you know already how the windfall fits in your plans. Are you aiming for early retirement and now you can retire earlier? Do you want to increase charitable giving? Do you want to be richer? Do you just want to buy a nicer car?
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
1. That's what I was thinking, just wanted to get an outside opinion.livesoft wrote:1. Yes, sell to re-allocate and spend the money.
2. Pay off loans. Increase 401(k) contribution to $18,000 per year. 401(k) should probably be allocated 100% to fixed income since all your equities can be in your taxable account. What rate/yield is that INVESCO stable value fund?
3. Contribute to Roth IRAs next week, too.
4. How to sell to minimize capital gains taxes? No easy way. Give some shares to a donor-advised fund if you want to give to charity.
What percentage of the windfall is unrealized capital gains? Long-term or short-term? What percentage of the windfall is cost basis? Remember: return of capital is not taxed. Answer these questions and I will give you some more ideas.
2. The INVESCO fund has a .78 expense ratio, the return is 1.19% (1 year), 1.54% (5 years).
3. If I understand correctly, Roth IRA's wouldn't help with my current tax situation. However I assume you're saying it is still worth it. Do I understand your intent?
4. The cost basis was about $150k, so I suppose the unrealized capitol gains would be 85%. Long term.
Thanks for your input.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Agree with jackholloway ..... you must sell it. Single stock risk is astronomical. I would sell to the top of your 15% capital gains bracket every year. That might take 3 or 4 years? It would take forever if you try to stay in the 0%.notmyrealname wrote:-It was not an inheritance, it was a gift from a living family member. The basis for the stock is about $150k 20 years ago.jackholloway wrote:Was the windfall an inheritance? If so, it was probably stepped up to the value on death.
If not, what is the basis? That is what you paid for it, or what it was worth when it vested.
Most bogleheads, including me, would strongly suggest selling most or all of the stock. A lightly traded single issue can go to zero, while the broad market is not that likely to do so.
Thank you for your advice.
One other thing. Are you certain of the stock cost basis? If this was in some sort of dividend reinvestment plan account the cost basis would be much more than the original investment amount 20 years ago. DRIPs were quite common then.
JW
Retired at Last
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
letsgobobby wrote:I would pay off all loans, including the student loans and the car and the mortgage.
Rapidly figure out what your annual expenses are going to be. You're a student; will your income rise soon? Were you planning to increase your savings rate after graduation?
Large windfalls like this can slip through your fingers if you don't have a plan and a handle on your spending. On the other hand, you should certainly feel like you can enjoy some of the gift. Your charge is to figure out what that right balance should be, and then stick with it. In addition, you need to determine what your financial goals are. Ideally those were established before the windfall so you know already how the windfall fits in your plans. Are you aiming for early retirement and now you can retire earlier? Do you want to increase charitable giving? Do you want to be richer? Do you just want to buy a nicer car?
Thank you for the advice, I think we will invest most of the windfall for retirement. But we will probably splurge on a vacation also. We haven't taken a 'real' vacation for a long time.
Last edited by notmyrealname on Sat Sep 05, 2015 3:56 pm, edited 1 time in total.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
This is a tough one. It would have been better to sell this over the past 20 years, but what is done is done.notmyrealname wrote:2. The INVESCO fund has a .78 expense ratio, the return is 1.19% (1 year), 1.54% (5 years).
With a stable value fund, the e.r. is less important and the yield more important. It does not seem to have a particularly high yield, so using it may not be required. Your other fixed income funds in the 401(k) could be used. Say 50:50 stable value:intermediate-term bond fund
3. If I understand correctly, Roth IRA's wouldn't help with my current tax situation. However I assume you're saying it is still worth it. Do I understand your intent?
Yes, but your income may be too high to do a direct Roth contribution, so research "back-door Roth IRA".
4. The cost basis was about $150k, so I suppose the unrealized capitol gains would be 85%. Long term.
I would probably create a plan to sell over a few years depending on the stock (send me a PM with ticker in confidence if you like). I would sell some now up to the income that would keep the long-term capital gains tax rate at 20% (and not 23.8%) for 2015. Then in 2016, I would do the same. Unfortunately that would push your other income into the 33% or 39+% tax bracket for a few years.
OTOH, you could rip the band-aid off and do it all at once. Or perhaps there are other ways with an option to protect yourself. It will be interesting to read what others have done and what they suggest.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Thank you for the input on selling the stock. On that issue, does anyone have any input on the 'logistics' of selling this much stock over a few years? My concerns are:JW Nearly Retired wrote:Agree with jackholloway ..... you must sell it. Single stock risk is astronomical. I would sell to the top of your 15% capital gains bracket every year. That might take 3 or 4 years? It would take forever if you try to stay in the 0%.notmyrealname wrote:-It was not an inheritance, it was a gift from a living family member. The basis for the stock is about $150k 20 years ago.jackholloway wrote:Was the windfall an inheritance? If so, it was probably stepped up to the value on death.
If not, what is the basis? That is what you paid for it, or what it was worth when it vested.
Most bogleheads, including me, would strongly suggest selling most or all of the stock. A lightly traded single issue can go to zero, while the broad market is not that likely to do so.
Thank you for your advice.
One other thing. Are you certain of the stock cost basis? If this was in some sort of dividend reinvestment plan account the cost basis would be much more than the original investment amount 20 years ago. DRIPs were quite common then.
JW
1. Since this is a relatively low volume stock, my concern is selling too much at one time and decreasing the price. Is there a strategy to inform how to do this in a smart way?
2. How to actually craft the order to sell - Since I will likely be doing many sell orders over a few years, not doing it right could cost alot. Would you recommend a market order? Or one of the other types of orders?
On the cost basis issue, it was a gift of private stock that has gone public since 1995. We did not participate in a DRIP plan.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I generally avoid market orders, and would especially avoid them for a low volume stock. I would look at the bid ask spread on any given day and put my limit in between if I didn't really need to sell that day, or at the bid price if I wanted to move the shares.
De gustibus non disputandum est
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Congrats on the huge windfall. Let me start buy saying that you have almost enough money to retire at $76K a year today. If you and your spouse keep working, you will both get decent social security check. I am sure between the both of you, the checks will be at least $36K/yr. The $1 million you have saved up so far should through off about $40K/yr without you running out of money.
Now, to answer your question. If you have $850K in capital gains today you can sell off all the capital gains in about 3 years and pay only ~17% on those gains. You will have to suck it up and just do it. If the two of you are making $76K/yr, then you should be able to sell about $154K worth of capital gains and still be in the 15% long term capital gains tax bracket. Then sell another $181K at 18.8% tax. I would use the money to pay off the car loan. I know the rate is low, but I am not a big fan of paying debt on a depreciating asset. I would also max out your work 401K and if your spouse has any earned income, maximize that retirement plan as well.
Afterwords you should be left with about $830K in retirement savings. If you never add another penny to that amount, and invested in index funds that pay out 4% real (inflation adjusted,) You will have 1.8 million by the time you are 58 able to withdraw $72K/yr to live off of. If you are luckier and growth is 5% real, you will have $2.2 million at 58 and able to withdraw $88K/yr. If you add another $500/month into retirement accounts you will have. $2 million and 2.4 million at 4% and 5% growth respectively. All of that is completely ignoring social security. As you can see, you two are in great shape.
Now, to answer your question. If you have $850K in capital gains today you can sell off all the capital gains in about 3 years and pay only ~17% on those gains. You will have to suck it up and just do it. If the two of you are making $76K/yr, then you should be able to sell about $154K worth of capital gains and still be in the 15% long term capital gains tax bracket. Then sell another $181K at 18.8% tax. I would use the money to pay off the car loan. I know the rate is low, but I am not a big fan of paying debt on a depreciating asset. I would also max out your work 401K and if your spouse has any earned income, maximize that retirement plan as well.
Afterwords you should be left with about $830K in retirement savings. If you never add another penny to that amount, and invested in index funds that pay out 4% real (inflation adjusted,) You will have 1.8 million by the time you are 58 able to withdraw $72K/yr to live off of. If you are luckier and growth is 5% real, you will have $2.2 million at 58 and able to withdraw $88K/yr. If you add another $500/month into retirement accounts you will have. $2 million and 2.4 million at 4% and 5% growth respectively. All of that is completely ignoring social security. As you can see, you two are in great shape.
I would agree to avoid market orders and to make GTC (good till canceled) limit orders in the average price of the stock. What is the volume of the stock? Meaning how many shares are trading hands every day and more importantly what is the value of those trades? I agree you don't want to make too many trades in one day that is a significant portion of its volume. I would still try and get rid of as much of that stock as possible in the shortest amount of time while taking taxes into account. Way too much risk.cadreamer2015 wrote:I generally avoid market orders, and would especially avoid them for a low volume stock. I would look at the bid ask spread on any given day and put my limit in between if I didn't really need to sell that day, or at the bid price if I wanted to move the shares.
Last edited by EnjoyIt on Sun Jul 26, 2015 2:42 pm, edited 1 time in total.
A time to EVALUATE your jitters: |
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
sorry, double post
A time to EVALUATE your jitters: |
viewtopic.php?p=1139732#p1139732
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Since this was a gift, you the donee do not get a stepped up basis. Your basis is the same as your donors. So depending on the current value of the stock you probably have a very significant income tax problem. If you don't have a CPA or a very competent tax person you probably need the advice of one now. About the only thing that comes to mind is spreading the stock sales over this year and next. Good Luck - Larry Y
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
[quote="notmyrealname"
-It was not an inheritance, it was a gift from a living family member. The basis for the stock is about $150k 20 years ago.
[/quote]
Nice gift.
So at least it's LTCG. You're likely to pay 15% on this no matter what (I think) Do a quick test to see if there are any nefarious AMT stuff going on -- so do a quick tax estimator on any of the prime sites -- , but I'd still sell it immediately AND keep 15% back to pay the taxes on in a savings account or something.
Depending if you are in a safe-harbor for underpayment of taxes, you may need to up your current withholding to ensure you are withholding more taxes than you paid last year.
There is one other thing to take into account: if selling said stock would adversely affect your relationship with your living relative. Did you discuss this with them?
-It was not an inheritance, it was a gift from a living family member. The basis for the stock is about $150k 20 years ago.
[/quote]
Nice gift.
So at least it's LTCG. You're likely to pay 15% on this no matter what (I think) Do a quick test to see if there are any nefarious AMT stuff going on -- so do a quick tax estimator on any of the prime sites -- , but I'd still sell it immediately AND keep 15% back to pay the taxes on in a savings account or something.
Depending if you are in a safe-harbor for underpayment of taxes, you may need to up your current withholding to ensure you are withholding more taxes than you paid last year.
There is one other thing to take into account: if selling said stock would adversely affect your relationship with your living relative. Did you discuss this with them?
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
A few questions to clarify things: I assume this was a gift given in 2015 and not in an earlier year. The donor (giver) is still alive. Is that true?
If given in a previous year, but you were not told about it (it happens often enough), did the stock pay any dividends that you should have declared on your previous tax returns? Does the stock pay any dividends?
As for selling big chunks of a low-volume stock, Rick Ferri has mentioned that getting help from a brokerage trading desk is worth while. They may even find a buyer behind the scenes. From books I have read, places like Goldman Sachs do this kind of placement all the time. I'm not so sure about discount brokers such as WellsFargo, TDAmeritrade, Vanguard, and Fidelity.
If given in a previous year, but you were not told about it (it happens often enough), did the stock pay any dividends that you should have declared on your previous tax returns? Does the stock pay any dividends?
As for selling big chunks of a low-volume stock, Rick Ferri has mentioned that getting help from a brokerage trading desk is worth while. They may even find a buyer behind the scenes. From books I have read, places like Goldman Sachs do this kind of placement all the time. I'm not so sure about discount brokers such as WellsFargo, TDAmeritrade, Vanguard, and Fidelity.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Probably not a market order.... However, you said the volume averages 25,000 shares/day. How much is that in dollars? Clearly you want to sell only a small fraction of the daily volume and a small fraction of your annual stock sales in any given day. If you sell say 500 or 1000 shares on that 25,000 share day, even with a market order, it's hard to see how that would cause a really big move in the price. But I don't have any useful experience as to how small is harmless.notmyrealname wrote:
Thank you for the input on selling the stock. On that issue, does anyone have any input on the 'logistics' of selling this much stock over a few years? My concerns are:
1. Since this is a relatively low volume stock, my concern is selling too much at one time and decreasing the price. Is there a strategy to inform how to do this in a smart way?
2. How to actually craft the order to sell - Since I will likely be doing many sell orders over a few years, not doing it right could cost alot. Would you recommend a market order? Or one of the other types of orders?
Maybe you can find some brokerage who can advise and do this. I think some Boglehead here must have done something like this DIY as well. Maybe they will notice this thread and speak up. If not, I guess you could sell some test quantities of market and limit orders of the stock to get a feel for what happens.
Interesting good problem to have! Good luck.
JW
Retired at Last
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
EnjoyIt wrote:... What is the volume of the stock? Meaning how many shares are trading hands every day and more importantly what is the value of those trades? I agree you don't want to make too many trades in one day that is a significant portion of its volume. I would still try and get rid of as much of that stock as possible in the shortest amount of time while taking taxes into account. Way too much risk.
Thanks for your input. The volume is about 25k shares a day average. I'm not sure to figure out the value of those trades, is that just the volume times the stock price?
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Thank you. I am planning on hiring a CPA soon, even though I have done our taxes myself in the past. I think with this situation, a CPA would earn their fee several times over.Larry Y wrote:Since this was a gift, you the donee do not get a stepped up basis. Your basis is the same as your donors. So depending on the current value of the stock you probably have a very significant income tax problem. If you don't have a CPA or a very competent tax person you probably need the advice of one now. About the only thing that comes to mind is spreading the stock sales over this year and next. Good Luck - Larry Y
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I'm going to have to disagree. What does a CPA know about unloading a large single-stock asset? What should they know? For a tax return, selling $1000 worth of stock is the same as selling $10,000 worth, $100,000 and even $1,000,000 worth as far as Schedule D goes. Even TurboTax can calculate the tax on all those.notmyrealname wrote:Thank you. I am planning on hiring a CPA soon, even though I have done our taxes myself in the past. I think with this situation, a CPA would earn their fee several times over.
What one needs is a strategy to unload the shares of this single stock over time and advice on how much time to take.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
"You're likely to pay 15% on this no matter what"ryman554 wrote: Nice gift.
So at least it's LTCG. You're likely to pay 15% on this no matter what (I think) Do a quick test to see if there are any nefarious AMT stuff going on -- so do a quick tax estimator on any of the prime sites -- , but I'd still sell it immediately AND keep 15% back to pay the taxes on in a savings account or something.
Depending if you are in a safe-harbor for underpayment of taxes, you may need to up your current withholding to ensure you are withholding more taxes than you paid last year.
There is one other thing to take into account: if selling said stock would adversely affect your relationship with your living relative. Did you discuss this with them?
I guess I was trying to reduce our taxable income as much as possible (by contributing to 401k/HSA etc) to get in under the $75k bracket to get 0% capitol gains. However, I think that the amount of stock we are looking at selling, that would take way too long to try to keep it all under $75k.
Last edited by notmyrealname on Sat Sep 05, 2015 3:59 pm, edited 1 time in total.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
You might also look into the possibility of buying options on the stock, as a form of insurance against price drops.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Yes, the value of those trades is volume (shares) times price_per_share.notmyrealname wrote:Thanks for your input. The volume is about 25k shares a day average. I'm not sure to figure out the value of those trades, is that just the volume times the stock price?
For example, take a look at the ticker RZV. It is an ETF that used to be a darling on the forum. It had a reported volume of 20,167 last Friday and closed at $59.11. Not every share on Friday traded at $59.11, but if so then 20,167 x $59.11 = $1,192,071.37. Note though that Friday was a high volume day for RZV since the volume was almost double the average volume over the past 3 months.
I would probably not trade more than 5% of the average daily volume on any given day and I would submit orders of no more than 100 or 200 shares at a time. So 5% of 25,000 shares is 1250 shares. That would mean 6 to 12 separate orders. I don't pay commissions and you shouldn't either. You could even put these shares in a brokerage account at TDAmeritrade and get 500 free trades (or free trades for 90 days) and a cash bonus of $2500.
In any event you should not have to pay any commissions to sell these shares nor to buy whatever you do with the money.
Last edited by livesoft on Sun Jul 26, 2015 10:17 pm, edited 1 time in total.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
livesoft wrote:A few questions to clarify things: I assume this was a gift given in 2015 and not in an earlier year. The donor (giver) is still alive. Is that true?
No, the donor is deceased.
If given in a previous year, but you were not told about it (it happens often enough), did the stock pay any dividends that you should have declared on your previous tax returns? Does the stock pay any dividends?
The stock has and does pay dividends. We have declared them all in past years.
As for selling big chunks of a low-volume stock, Rick Ferri has mentioned that getting help from a brokerage trading desk is worth while. They may even find a buyer behind the scenes. From books I have read, places like Goldman Sachs do this kind of placement all the time. I'm not so sure about discount brokers such as WellsFargo, TDAmeritrade, Vanguard, and Fidelity.
Thanks, I will look into this. This is an interesting angle to unloading the shares.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
That's more intriguing. So you have owned these shares for at least two tax years, but never wanted to sell them until this year. Does the death of your benefactor have anything to do with your decision?notmyrealname wrote: The stock has and does pay dividends. We have declared them all in past years.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I suppose I was thinking a good CPA would be able to give advice on how to liquidate the stock and minimize taxes. Perhaps that is in the realm of a financial planner instead.livesoft wrote:I'm going to have to disagree. What does a CPA know about unloading a large single-stock asset? What should they know? For a tax return, selling $1000 worth of stock is the same as selling $10,000 worth, $100,000 and even $1,000,000 worth as far as Schedule D goes. Even TurboTax can calculate the tax on all those.notmyrealname wrote:Thank you. I am planning on hiring a CPA soon, even though I have done our taxes myself in the past. I think with this situation, a CPA would earn their fee several times over.
What one needs is a strategy to unload the shares of this single stock over time and advice on how much time to take.
I would just figure it all out myself, however when dealing with this amount of money, it seems any mistake/misstep will cost me a lot more than the cost of a financial planner or CPA. I admit it seems overwhelming to figure out how to minimize taxes but maybe I'm making it more complex than it needs to be.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
As suggested earlier, I would strongly consider using options (e.g. a collar: long a put for protection and short a call to earn the cost of the put back) to hedge the risk here while unloading the position.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
A CPA knowledgable about US income taxes (not all of them are) should be able to tell you what amount of capital gains and your other income will cause you to pay 0%, 15%, 20%, or 23.8% or even higher tax rate on the realized capital gains. You could also figure this out yourself pretty easily. Then you could decide which tax rate you wanted to pay. Clearly, the trade off is number of years to unload versus tax rate you pay.
You can play a little bit with the free online tax calculator Taxcaster to see how it might work.
As for the options play suggested by lack_ey, you haven't used any options while owning the stock over the years that you have owned it, so while it is not a bad idea, is it really necessary?
You can play a little bit with the free online tax calculator Taxcaster to see how it might work.
As for the options play suggested by lack_ey, you haven't used any options while owning the stock over the years that you have owned it, so while it is not a bad idea, is it really necessary?
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Sorry, but I am being intentionally vague to try to keep our privacy. I would be happy to have a PM conversation. I really value all the input that has been given. There is a ton of knowledge I have to gain about these things.livesoft wrote:That's more intriguing. So you have owned these shares for at least two tax years, but never wanted to sell them until this year. Does the death of your benefactor have anything to do with your decision?notmyrealname wrote: The stock has and does pay dividends. We have declared them all in past years.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
IMHO "I don't have it and haven't been burned yet" is not a great argument for not getting insurance in general. We always (should) think about asset allocation in terms of what's the best going forward, not being too biased by what was done in the past and inertia.livesoft wrote:A CPA knowledgable about US income taxes (not all of them are) should be able to tell you what amount of capital gains and your other income will cause you to pay 0%, 15%, 20%, or 23.8% or even higher tax rate on the realized capital gains. You could also figure this out yourself pretty easily. Then you could decide which tax rate you wanted to pay. Clearly, the trade off is number of years to unload versus tax rate you pay.
You can play a little bit with the free online tax calculator Taxcaster to see how it might work.
As for the options play suggested by lack_ey, you haven't used any options while owning the stock over the years that you have owned it, so while it is not a bad idea, is it really necessary?
It really depends on what notmyrealname is looking for, though.
Personally, I would be all kinds of mad to see this huge windfall shrink 80% or so. At least with a stock index it's probably going back up again. With a single stock, you never know.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
That's very difficult to do, given the size of the sale you are going to have to make.notmyrealname wrote: "You're likely to pay 15% on this no matter what"
I guess I was trying to reduce our taxable income as much as possible (by contributing to 401k/HSA etc) to get in under the $75k bracket to get 0% capitol gains. However, I think that the amount of stock we are looking at selling, that would take way too long to try to keep it all under $75k.
You only get to be 0% to the extent that your LTCG does not bring you over the 15% threshold.
So, say for example, you got to 60k AGI on all but the sale of your stock, and sold 50k of it.
You full up to the 15% bracket for tke 60k. 0% for the first 15k of LTCG, and 15% of the latter 35k of LTCG. It seems like you know this, reading your post again.
As I see it, you would have to break it down to at least 4-5 years (if not more!) to get no CG tax. How many years (realistically) would you have to spread this out? How volatile is this stock historically, especially given its low volume? What is the dividend yield?
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
1. get a good CPA and ask him/ her about taxesnotmyrealname wrote:Sorry, but I am being intentionally vague to try to keep our privacy. I would be happy to have a PM conversation. I really value all the input that has been given. There is a ton of knowledge I have to gain about these things.livesoft wrote:That's more intriguing. So you have owned these shares for at least two tax years, but never wanted to sell them until this year. Does the death of your benefactor have anything to do with your decision?notmyrealname wrote: The stock has and does pay dividends. We have declared them all in past years.
2. get out of as much of this stuff as fast as you can *Even* if it means paying (some) more tax. Right now you don't have wealth, you have a zero diversification asset. I would not count any of this money as money until realized.
3. the threat to lower the stock price is quite real*. What I would do is find a private client broker and work with him/ her on a selling strategy. If you pay commission on it (which might be say 2%) that's a big loss of value, but might be worth it in terms of having an incentivized person looking after your position.
* assuming your sales would be a significant percentage of 25,000 shares per day.
Once you have the money, I would pay off your mortgage. That is a 100% certain return that you can achieve.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I don't see much reason to not try to accomplish this sale all in the rest of this year. It will put the OP in the highest tax bracket and the LTCG will be taxed at 23.9% while the rest of their income will get taxed quite a lot, too.
If they spread the sales over two years, that won't save them any in LTCG taxes because the amount if split evenly will still be taxed at 23.9%, but their other income will get another year of being taxed at about 40%.
So if they can do it in one year, then the next year, they should drop back down to a reasonable tax bracket. A million dollars invested tax efficiently will throw off about $20,000 in qualified dividends, but perhaps they already are used to this since it was reported that they already get dividends from the stock.
I suppose these are scenarios that a tax person can run, but one can run these scenarios pretty trivally themselves with TaxCaster or TurboTax or other tax software.
If they spread the sales over two years, that won't save them any in LTCG taxes because the amount if split evenly will still be taxed at 23.9%, but their other income will get another year of being taxed at about 40%.
So if they can do it in one year, then the next year, they should drop back down to a reasonable tax bracket. A million dollars invested tax efficiently will throw off about $20,000 in qualified dividends, but perhaps they already are used to this since it was reported that they already get dividends from the stock.
I suppose these are scenarios that a tax person can run, but one can run these scenarios pretty trivally themselves with TaxCaster or TurboTax or other tax software.
- House Blend
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
No. Their first dollar of LTCG would be taxed at 0%, the last at 23.8%, so there are savings to be had by spreading out the sale over more than one year. Of course this has to be balanced against risk, and in that regard, I agree with your rip-the-band-aid-off approach.livesoft wrote:If they spread the sales over two years, that won't save them any in LTCG taxes because the amount if split evenly will still be taxed at 23.9%, but their other income will get another year of being taxed at about 40%.
I fiddled with taxcaster with these fixed assumptions: MFJ, 2 exemptions, 0 children, Standard Deduction, $70K taxable wage income, and $10K in Qualified dividends.
With these numbers, you need about $175K in LTCG before the 3.8% ACA surtax kicks in. No AMT. Tax bill of about $30K. Marginal rate on the last few dollars of LTCG is 18.8%.
So in rough terms, if the OP has $700K in unrealized cap gains and (miraculously) the stock price remains flat, that means getting out over 4 years with $120K in Federal income tax.
Or, ripping the band-aid: $157K of tax in year 1 (including AMT), followed by 3 years of ~$6K/year "tiny" income tax.
So with these fictional numbers and blind faith in taxcaster, the high-risk-do-it-slow-over-four-years scenario saves about $55K in income tax ($175K vs. $120K).
I would either rip the band-aid off all at once, or at most, spread the selling over 2015 and the first month or two of 2016, enough so that you get a second opportunity to fill more of the 15%-on-LTCG bracket. (But not enough to put you in AMT for 2016.)
Taxcaster:
https://turbotax.intuit.com/tax-tools/c ... taxcaster/
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
And projections between those two "ends"? For instance, sell half this year and half early next year? And sell over 3 years?
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I'll look into options, thanks for the suggestion.lack_ey wrote:As suggested earlier, I would strongly consider using options (e.g. a collar: long a put for protection and short a call to earn the cost of the put back) to hedge the risk here while unloading the position.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
ryman554 wrote:That's very difficult to do, given the size of the sale you are going to have to make.notmyrealname wrote: "You're likely to pay 15% on this no matter what"
I guess I was trying to reduce our taxable income as much as possible (by contributing to 401k/HSA etc) to get in under the $75k bracket to get 0% capitol gains. However, I think that the amount of stock we are looking at selling, that would take way too long to try to keep it all under $75k.
You only get to be 0% to the extent that your LTCG does not bring you over the 15% threshold.
So, say for example, you got to 60k AGI on all but the sale of your stock, and sold 50k of it.
You full up to the 15% bracket for tke 60k. 0% for the first 15k of LTCG, and 15% of the latter 35k of LTCG. It seems like you know this, reading your post again.
As I see it, you would have to break it down to at least 4-5 years (if not more!) to get no CG tax. How many years (realistically) would you have to spread this out? How volatile is this stock historically, especially given its low volume? What is the dividend yield?
"How volatile is this stock historically, especially given its low volume?"
Not very volatile.
"What is the dividend yield? "
The dividend yield is 1.07% per share.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Valuethinker wrote:1. get a good CPA and ask him/ her about taxesnotmyrealname wrote:Sorry, but I am being intentionally vague to try to keep our privacy. I would be happy to have a PM conversation. I really value all the input that has been given. There is a ton of knowledge I have to gain about these things.livesoft wrote:That's more intriguing. So you have owned these shares for at least two tax years, but never wanted to sell them until this year. Does the death of your benefactor have anything to do with your decision?notmyrealname wrote: The stock has and does pay dividends. We have declared them all in past years.
2. get out of as much of this stuff as fast as you can *Even* if it means paying (some) more tax. Right now you don't have wealth, you have a zero diversification asset. I would not count any of this money as money until realized.
Good point, thanks.
3. the threat to lower the stock price is quite real*. What I would do is find a private client broker and work with him/ her on a selling strategy. If you pay commission on it (which might be say 2%) that's a big loss of value, but might be worth it in terms of having an incentivized person looking after your position.
I am going to look into this. I'll probably start with the "premium" advisor Fidelity assigned me, then look into other avenues.
* assuming your sales would be a significant percentage of 25,000 shares per day.
Once you have the money, I would pay off your mortgage. That is a 100% certain return that you can achieve.
Makes sense.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Interesting take on it that I hadn't considered. I'll run some more scenarios through taxcaster. Thanks.livesoft wrote:I don't see much reason to not try to accomplish this sale all in the rest of this year. It will put the OP in the highest tax bracket and the LTCG will be taxed at 23.9% while the rest of their income will get taxed quite a lot, too.
If they spread the sales over two years, that won't save them any in LTCG taxes because the amount if split evenly will still be taxed at 23.9%, but their other income will get another year of being taxed at about 40%.
So if they can do it in one year, then the next year, they should drop back down to a reasonable tax bracket. A million dollars invested tax efficiently will throw off about $20,000 in qualified dividends, but perhaps they already are used to this since it was reported that they already get dividends from the stock.
I suppose these are scenarios that a tax person can run, but one can run these scenarios pretty trivally themselves with TaxCaster or TurboTax or other tax software.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I know this is not a popular option on this board but I would hire a financial advisor. This is a tricky enough situation that the money spent for a informed second opinion. The information you are going to get on this board is going to be good but it will not help you devise a trading strategy.
Furthermore, there are probably better ways then just selling off your stock. Remainder funds. Completion portfolios. etc. I say probably but I can't gauge your risk tolerance or your goals on this board. If you held onto this for 2 years I am going to guess you have at least an average risk tolerance.
Finding a good financial advisor is hard. I would start by looking for a fee only CFP. CFP because of the technical rigor of the tests. Fee only to reduce conflict of interests.
By the way, what is the average trading volume of this security for the past 30 days in dollars? As other people have pointed out the number of shares is not going to help us.
Furthermore, there are probably better ways then just selling off your stock. Remainder funds. Completion portfolios. etc. I say probably but I can't gauge your risk tolerance or your goals on this board. If you held onto this for 2 years I am going to guess you have at least an average risk tolerance.
Finding a good financial advisor is hard. I would start by looking for a fee only CFP. CFP because of the technical rigor of the tests. Fee only to reduce conflict of interests.
By the way, what is the average trading volume of this security for the past 30 days in dollars? As other people have pointed out the number of shares is not going to help us.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Wow, thanks for running some numbers. I am not in a big hurry to liquidate, meaning I would be ok with taking a few years to sell so saving about $55k over four years sound attractive.House Blend wrote:No. Their first dollar of LTCG would be taxed at 0%, the last at 23.8%, so there are savings to be had by spreading out the sale over more than one year. Of course this has to be balanced against risk, and in that regard, I agree with your rip-the-band-aid-off approach.livesoft wrote:If they spread the sales over two years, that won't save them any in LTCG taxes because the amount if split evenly will still be taxed at 23.9%, but their other income will get another year of being taxed at about 40%.
I fiddled with taxcaster with these fixed assumptions: MFJ, 2 exemptions, 0 children, Standard Deduction, $70K taxable wage income, and $10K in Qualified dividends.
With these numbers, you need about $175K in LTCG before the 3.8% ACA surtax kicks in. No AMT. Tax bill of about $30K. Marginal rate on the last few dollars of LTCG is 18.8%.
So in rough terms, if the OP has $700K in unrealized cap gains and (miraculously) the stock price remains flat, that means getting out over 4 years with $120K in Federal income tax.
Or, ripping the band-aid: $157K of tax in year 1 (including AMT), followed by 3 years of ~$6K/year "tiny" income tax.
So with these fictional numbers and blind faith in taxcaster, the high-risk-do-it-slow-over-four-years scenario saves about $55K in income tax ($175K vs. $120K).
I would either rip the band-aid off all at once, or at most, spread the selling over 2015 and the first month or two of 2016, enough so that you get a second opportunity to fill more of the 15%-on-LTCG bracket. (But not enough to put you in AMT for 2016.)
Taxcaster:
https://turbotax.intuit.com/tax-tools/c ... taxcaster/
I do see the point of getting rid of the stock as soon as possible though. That is definitely the lowest risk strategy.
I will run some more numbers through taxcaster and post if it's worthwhile.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
+1 Lack-ey
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
You mention that your wife is in school and will start working in a couple years. I would try to take a good portion of the capital gains before your wife begins to work. Because her first year of work will likely be a partial year, plan on a lot of capital gains over the next three years.
Do you do any gifting to charities? If you do I would set up a donor advised account and use the appreciated stock to donate 5-10 years worth of charitable giving over the next couple of years. From the donor advised account you can then contribute your normal annual amount for a number of years.
Do you do any gifting to charities? If you do I would set up a donor advised account and use the appreciated stock to donate 5-10 years worth of charitable giving over the next couple of years. From the donor advised account you can then contribute your normal annual amount for a number of years.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
Yes, definite cash out much or most of it as soon as you can tax efficiently and price efficiently can. Retiring higher interest debt is a good use of the cash.Valuethinker wrote:2. get out of as much of this stuff as fast as you can *Even* if it means paying (some) more tax. Right now you don't have wealth, you have a zero diversification asset. I would not count any of this money as money until realized.
3. the threat to lower the stock price is quite real*. What I would do is find a private client broker and work with him/ her on a selling strategy. If you pay commission on it (which might be say 2%) that's a big loss of value, but might be worth it in terms of having an incentivized person looking after your position.
* assuming your sales would be a significant percentage of 25,000 shares per day.
Once you have the money, I would pay off your mortgage. That is a 100% certain return that you can achieve.
I wouldn't stress over the liquidation. Just spread out your trades over many days. Don't dump 25,000 share in one day and you'll be alright. Do less than 5% daily volume and you'll be done in about 20 days. You could do this selling once or twice a month. But you may hold a significant portion over next several years for tax reasons, which means even less frequent trading.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
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:
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.
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.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I wrote this about a donor-advised fund yesterday to save on taxes:
The family may like to donate something since this is a windfall and it would save quite a bit in taxes.livesoft wrote:If one is inclined to make charitable donations, then can this stock be donated to one's Donor-Advised Fund or other charities? Such a donation would mean no capital gains taxes and a deduction of the donation on Schedule A if one itemizes. If one used a DAF, then one could make donations from that to several charities or extend the giving over several years as needed.
Or can one give some shares to their non-working children who then get the cost basis and sell. In their tax-bracket, capital gains may be tax-free.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
This is a nice chart, even if the numbers in row 2 are not correct. You need to have 425k of LCTG, not 450k.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:
It actually matters, because that to me brings your 2-yearly taxes down to ~145k -- close to the sell in 3-4 years.
To me, the only choices are: sell in 1, 2 or 3 years.
And the tax is computed incorrectly for the 2 year case.
If we assume the total taxes paid for 2 years is something like 150k instead of 165k, you could survive a drop in 10% in your investment and still come out ahead after tax.
Personally, I'd sell over 2 years because the tax benefit is substantial. I would not do over 3 + years, because the "marginal" gain is outweighed by single stock risk. I call it "close enough".
Regardless, this is a very illustrative exercise.
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Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
I'd throw 100% of my 401K contribution into Vanguard 500 Index Fund Admiral --VFIAX--.05 Expense Ratio.
Then open a Roth IRA with Vanguard and contribute to:
Vanguard Extended Market (VEXAX) - This will give you small/mid caps which pair nicely to the 500 index fund in your 401K
Vanguard Total International Stock (VTIAX) - This will give you international stock exposure
Vanguard Total Bond (VBMFX) - There are your bonds
With a 70/30 AA, I'd do something like...
401K Vanguard 500: 30%
Roth IRA VEXAX:20%
Roth IRA VTIAX: 20%
Roth IRA VBMFX: 30%
Obviously with nothing in the Roth it will take time to balance everything.
Then open a Roth IRA with Vanguard and contribute to:
Vanguard Extended Market (VEXAX) - This will give you small/mid caps which pair nicely to the 500 index fund in your 401K
Vanguard Total International Stock (VTIAX) - This will give you international stock exposure
Vanguard Total Bond (VBMFX) - There are your bonds
With a 70/30 AA, I'd do something like...
401K Vanguard 500: 30%
Roth IRA VEXAX:20%
Roth IRA VTIAX: 20%
Roth IRA VBMFX: 30%
Obviously with nothing in the Roth it will take time to balance everything.
Re: Recent windfall - Currently 95% of assets in single stock - Tax and asset allocation advice appreciated
+1JW Nearly Retired wrote: I would sell to the top of your 15% capital gains bracket every year.
What he said. You will likely never be in a tax bracket much less than 15%.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius