Blessed with a difficult decision

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bikechuck
Posts: 348
Joined: Sun Aug 16, 2015 9:22 pm

Blessed with a difficult decision

Post by bikechuck » Fri Feb 23, 2018 2:17 pm

Recently, after retiring, I took a total distribution from a 401K with a former employer. I funneled my investment in stock and bond funds into an IRA and I funneled some company stock into a taxable brokerage account which enables me to take advantage of NUA (net realized appreciation) rules. I will need to pay ordinary income taxes on my basis in this stock this year but will then be able to sell this company stock off incurring taxes at the capital gains tax rate.

My nice to have problem is that if I sell the stock off gradually over the next three years I can stay in the 12% tax rate bracket and therefore any capital gains tax will be zero. The problem is that I am 64.5 years old and if I sell this off gradually over three years it crowds out my ability to do Roth conversions.

My other alternative is to just sell off the entire amount of the stock this year or next and pay capital gains taxes at 15%. This gets me out of owning a stock that I no longer wish to have and enables me to do some Roth conversions over the next three years.
My portfolio is a bit out of whack in the sense that 90% of my holdings are in tax deferred accounts, 5% in a Roth and 5% in after tax cash including this one stock holding.

I would be interested in reading any opinions about the best course of action in this situation.

aristotelian
Posts: 4583
Joined: Wed Jan 11, 2017 8:05 pm

Re: Blessed with a difficult decision

Post by aristotelian » Fri Feb 23, 2018 2:31 pm

It appears you have a six of one/half dozen of the other situation. There is no good answer. You get an immediate 15% savings on realized capital gains vs a 10% differential on Roth conversions, but the Roth conversions could grow long term and protect you against RMD's even higher than 22%. If you plan to leave money to heirs, the taxable stocks will have basis stepped up. When in doubt, do some of each.

Dottie57
Posts: 4269
Joined: Thu May 19, 2016 5:43 pm

Re: Blessed with a difficult decision

Post by Dottie57 » Fri Feb 23, 2018 2:51 pm

bikechuck wrote:
Fri Feb 23, 2018 2:17 pm
Recently, after retiring, I took a total distribution from a 401K with a former employer. I funneled my investment in stock and bond funds into an IRA and I funneled some company stock into a taxable brokerage account which enables me to take advantage of NUA (net realized appreciation) rules. I will need to pay ordinary income taxes on my basis in this stock this year but will then be able to sell this company stock off incurring taxes at the capital gains tax rate.

My nice to have problem is that if I sell the stock off gradually over the next three years I can stay in the 12% tax rate bracket and therefore any capital gains tax will be zero. The problem is that I am 64.5 years old and if I sell this off gradually over three years it crowds out my ability to do Roth conversions.

My other alternative is to just sell off the entire amount of the stock this year or next and pay capital gains taxes at 15%. This gets me out of owning a stock that I no longer wish to have and enables me to do some Roth conversions over the next three years.
My portfolio is a bit out of whack in the sense that 90% of my holdings are in tax deferred accounts, 5% in a Roth and 5% in after tax cash including this one stock holding.

I would be interested in reading any opinions about the best course of action in this situation.

Can't you just keep the stock and not sell it?

bikechuck
Posts: 348
Joined: Sun Aug 16, 2015 9:22 pm

Re: Blessed with a difficult decision

Post by bikechuck » Fri Feb 23, 2018 2:59 pm

Dottie57 wrote:
Fri Feb 23, 2018 2:51 pm
bikechuck wrote:
Fri Feb 23, 2018 2:17 pm
Recently, after retiring, I took a total distribution from a 401K with a former employer. I funneled my investment in stock and bond funds into an IRA and I funneled some company stock into a taxable brokerage account which enables me to take advantage of NUA (net realized appreciation) rules. I will need to pay ordinary income taxes on my basis in this stock this year but will then be able to sell this company stock off incurring taxes at the capital gains tax rate.

My nice to have problem is that if I sell the stock off gradually over the next three years I can stay in the 12% tax rate bracket and therefore any capital gains tax will be zero. The problem is that I am 64.5 years old and if I sell this off gradually over three years it crowds out my ability to do Roth conversions.

My other alternative is to just sell off the entire amount of the stock this year or next and pay capital gains taxes at 15%. This gets me out of owning a stock that I no longer wish to have and enables me to do some Roth conversions over the next three years.
My portfolio is a bit out of whack in the sense that 90% of my holdings are in tax deferred accounts, 5% in a Roth and 5% in after tax cash including this one stock holding.

I would be interested in reading any opinions about the best course of action in this situation.

Can't you just keep the stock and not sell it?
I could, but I HATE having individual stocks. I own this one only because I worked for the company for seven years or so earlier in my career. That said the answer might be to sell off half to 2/3 of it and hold on to the rest of it. That way I would own less of something that I would rather not own at all.

ionball
Posts: 89
Joined: Wed Jan 31, 2018 12:17 pm

Re: Blessed with a difficult decision

Post by ionball » Fri Feb 23, 2018 3:13 pm

bikechuck wrote:
Fri Feb 23, 2018 2:59 pm
I could, but I HATE having individual stocks. I own this one only because I worked for the company for seven years or so earlier in my career. That said the answer might be to sell off half to 2/3 of it and hold on to the rest of it. That way I would own less of something that I would rather not own at all.
I would prioritize selling off the individual stocks first, then work on asset location later. I believe you will get more of an immediate tax advantage by taking the zero capital gains versus Roth conversions. Do the Roth conversions in the future if they still make sense and use your taxable account assets to cover the tax amounts triggered by the future Roth conversions.

The combo idea is also good, so it may be a matter of choosing your personal priorities.

MrBeaver
Posts: 200
Joined: Tue Nov 14, 2017 4:45 pm

Re: Blessed with a difficult decision

Post by MrBeaver » Fri Feb 23, 2018 3:16 pm

Option 3:
  1. Establish Donor Advised Fund (DAF) and donate stock to it in one year (how much dependent on note below).
  2. Use the large deduction from step 1 to convert even MORE traditional tax-deferred assets to Roth assets within 12% bracket than you would be able to if you didn't sell any stock. Then continue conversions up to 12% bracket until RMDs/SS distributions.
  3. Sell stock within DAF and purchase assets you're comfortable with from a risk profile perspective for your future charitable contributions, especially for the next 5 years until RMDs kick in and you can donate via qualified charitable distributions (QCD) to reduce your high RMDs.
Note:
Then the question just becomes how MUCH stock to donate to a DAF. I would suggest running some numbers to find the amount that allows you to keep giving at your target rate over the next 5 years from DAF, and in following years from QCDs, while keeping your RMDs under your target tax rate (guessing 12% from your introduction, but it could also be to a SS taxation threshold depending on your situation).

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