The problem in retirement we rarely discuss [what to do with stock funds]

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simplesauce
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The problem in retirement we rarely discuss [what to do with stock funds]

Post by simplesauce » Fri Jun 21, 2019 7:13 am

Hi all. I have been searching the forum for a discussion on this topic; please send me a thread if you know of one.

Many older retirees have stock funds that they have held for 20, 30+ years. And for them, even if they wish to move into index funds, or decrease their stock allocation, it is simply unrealistic to sell due to all of the appreciation. The tax burden would be enormous.

There are so many books and articles about the Index Fund revolution and moving everything into the most broad, lowest cost index funds. While I’m 100% on board, for many, it is just not possible in their mind. They are stuck with their current funds. I know several late retirees with this problem. They are still extremely stock heavy, using their original mutual funds, and there isn’t much they can do about it due to the massive appreciation and potential tax burden.

Granted, you may say the money is not necessarily for them. It will be inheritance. But still...they are holding a portfolio which may not be ideal.

What are some solutions for people in this situation? Thank you.

levocap
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Re: The problem in retirement we rarely discuss

Post by levocap » Fri Jun 21, 2019 7:18 am

Its one of those good problems to have. Sort of like paying too much taxes because you made "too" much money.
One thing I can think of is Tax Loss Harvest whenever possible and sell gains against losses. It might take a while (or never) to wash the gains but might as well chip away at it.

finite_difference
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by finite_difference » Fri Jun 21, 2019 7:24 am

I buy a stock for $1. 30 years later I sell it for $1,000.

I have to pay an “enormous tax burden”.. $150.

Meanwhile I made $850. On $1.

I’m not seeing the problem.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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Blueskies123
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Blueskies123 » Fri Jun 21, 2019 7:24 am

I have had Fido Contrafund for 30 years in my taxable account. I will slowly sell it once I start needing the money to try and minimize the taxes. I just consider it part of my large growth portfolio.

IowaFarmBoy
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Re: The problem in retirement we rarely discuss

Post by IowaFarmBoy » Fri Jun 21, 2019 7:26 am

I'm assuming these are in taxable accounts or else it wouldn't be an issue. I was a little unclear whether these were individual stocks or mutual funds.

Here are some things that immediately come to mind:
  • The perfect is the enemy of the good. They have done well. Do what they can, relax and enjoy life.
  • Make sure any new money and dividend reinvestment is in their desired portfolio.
  • Tax loss harvest anything they can and also sell off holdings with minimal gains. If they have losses, use them offset taking some gains.
  • If they are inclined to make charitable contributions, use the most appreciated holdings to make donations. Most likely through a donor advised fund.
  • When they pass, the heirs will have a stepped up basis which will eliminate the issue for them. They can reallocate to whatever they desire.

Gill
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Gill » Fri Jun 21, 2019 7:27 am

I've chipped away at it over the years by doing two things; Selling highest basis stock funds to realize $20 - $30,000 in gains and using the lowest basis funds to fund my donor advised fund. I have no losses to offset any of this and so I've paid some tax but felt it worth it in order to reduce my equity exposure.
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HomeStretch
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Re: The problem in retirement we rarely discuss

Post by HomeStretch » Fri Jun 21, 2019 7:30 am

In retirement I will most likely pay taxes on any income stream I have but probably at lower effective rates than when I was working. I don’t see the sale of appreciated stock upon which I may owe taxes as “unrealistic”.

Whether I receive a paycheck, sell appreciated stock/MF or take a 401k/IRA distribution, I will (most likely) have to pay some taxes. The taxes on the sale of appreciated stock/MF will be lower due to basis/capital gains rates than taxes paid on ordinary income like wages and 401k/IRA distributions.

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JoMoney
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by JoMoney » Fri Jun 21, 2019 7:32 am

If the funds are lousy funds/high cost, maybe they should re-examine if it might be worth the tax hit (or at least stepping up the rate they transition the money).
If they're not high cost funds, and they follow a reasonable consistent strategy that is agreeable to the purchaser, maybe there is no reason to concern themselves with trading. There's nothing inherently wrong with a conservatively managed, low cost fund that has a manager rather than following an index - many of them get accused of "closet indexing" anyway. It's pretty hard to run a diversified large cap portfolio that isn't. In aggregate active managers will make the same indexers... they'll just be paying more in fees, and (perhaps) have a different risk profile (in some cases it may be preferable to the holder).

If it was a fund that was aggressively traded / high internal turnover, the capital gains on it may not be that high as the owner would have been paying some of that over time while they owned it.
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SGM
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by SGM » Fri Jun 21, 2019 7:49 am

I have donated some stock with large capital gains. We sell a little bit each year. The only capital losses we have are shorter term muni bond funds and foreign funds. These losses are small. So slowly we are increasing our bond funds and decreasing long held individual stocks. We would do the same with long held stock funds, but most of those are Vanguard index funds that have low ERs, so we are unlikely to sell them.

I get a good laugh when I read we should be happy to pay a lot of taxes because it means we have been successful. We have no duty to pay more in taxes than the law requires. So we arrange things to minimize taxes when we can. I am a follower of the philosophy of former supreme court justice Learned Hand regarding paying taxes. Learned Hand has been quoted frequently by wise BHs on this site.

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vineviz
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by vineviz » Fri Jun 21, 2019 7:51 am

simplesauce wrote:
Fri Jun 21, 2019 7:13 am
What are some solutions for people in this situation? Thank you.
I'd say the only real solution is to help them realize that they are imagining a "problem" where none exists.

Successful investing means growing and protecting your wealth. Growing your wealth means having gains, and protecting your wealth means keeping your risk under control. These are not opposing goals: they are part and parcel of what investing is all about.

Failure to rebalance a portfolio because doing so might incur a tax bill is a conscious decision to take more risk merely to save a few pennies.

It's true that some investors dislike the idea of paying taxes so much that they make suboptimal decisions for themselves. There is no solution here except for them to find a way to get over it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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JoMoney
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by JoMoney » Fri Jun 21, 2019 7:58 am

SGM wrote:
Fri Jun 21, 2019 7:49 am
... I get a good laugh when I read we should be happy to pay a lot of taxes because it means we have been successful...
I doubt anyone said you "should be happy" to, they're just pointing out that's its a "good problem" to have. The consequences of having a lot of money with a tax liability is a considerably better "problem" than not having the money to begin with. These "problems" tend to lend themselves more to envy than pity, but it is something hopeful future wealthy should be thinking about.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

jebmke
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by jebmke » Fri Jun 21, 2019 8:07 am

JoMoney wrote:
Fri Jun 21, 2019 7:32 am
If the funds are lousy funds/high cost, maybe they should re-examine if it might be worth the tax hit (or at least stepping up the rate they transition the money).
It is relatively easy to calculate the ER drag vs. the up front tax hit and how many years it takes to pay back the tax hit. It may be less time than you think.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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vineviz
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by vineviz » Fri Jun 21, 2019 8:12 am

JoMoney wrote:
Fri Jun 21, 2019 7:58 am
These "problems" tend to lend themselves more to envy than pity, but it is something hopeful future wealthy should be thinking about.
I agree.

And if the "future wealthy" can identify a tendency to view rebalancing as "a problem" early in their investing lifetime, this probably indicates that a balanced fund would be preferable to investing in the component funds individually.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

MathWizard
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by MathWizard » Fri Jun 21, 2019 8:21 am

Donating the stock funds with the highest gains to charity you were already going to give to avoids the tax problem.

Assuming an estate where no federal estate tax is due (which will be my case), you let the heirs inherit the stocks, and they
get a step up in basis.

At least that is what happens for land, and I assume for stocks as well. Someone can correct me if I am incorrect on stocks.
Of course, states may have their own inheritance taxes which have lower exemptions, so this may only avoid the tax issue at
the federal level.

dbr
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by dbr » Fri Jun 21, 2019 8:25 am

This question actually is posted on the forum with great frequency. One example of search results might be this: https://www.google.com/search?sitesearc ... ted+stocks

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by jebmke » Fri Jun 21, 2019 8:31 am

MathWizard wrote:
Fri Jun 21, 2019 8:21 am
Donating the stock funds with the highest gains to charity you were already going to give to avoids the tax problem.
They can also be gifted to individuals who might be in the zero CG tax bracket who could then immediately sell them. I believe the recipient receives the holding period from the giver along with the original basis for assets with long term gains.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Dandy » Fri Jun 21, 2019 8:31 am

the normal recommendation, at least in the accumulation stage, is for taxable to contain all/mostly equities and the tax advantaged all/mostly fixed income. When retirees hit 70 and take RMDs they are depleting all/mostly fixed income. The combination of both combined with equities to outperform fixed income over the long run often leads to retirees with a tendency for a rising equity allocation and that is all/mostly in taxable accounts.

I have always had some equities and fixed income in both type of accounts. But, more heavily equities in our taxable accounts so I face a rising equity allocation as taxable equities grow and RMDs mostly deplete my fixed income heavy TIRA.

I don't reinvest my taxable distributions, moved some equities to fixed income in TIRA and in modest Roth accounts. Since I have a conservative allocation or 43/57 it presents a challenge.

I try to focus on the benefits of such a problem i.e. I avoided much taxes during the accumulation stage and now Uncle Sam is waiting for his share. I have only made one modest sale of taxable equities to trim exposure but that was before taking RMDs. So, I am hoping to either gift taxable equities to children or charity and/or hang on for children to inherit. I also try to remember that taxable equity sales result in a modest cap gain tax on only the gain not the full amount.

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Elric
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Elric » Fri Jun 21, 2019 8:33 am

jebmke wrote:
Fri Jun 21, 2019 8:07 am
It is relatively easy to calculate the ER drag vs. the up front tax hit and how many years it takes to pay back the tax hit. It may be less time than you think.
Good advice. But if the fund has been an active fund that, after fees, has outperformed the index for a couple of decades, I'm not convinced that it's best to assume it will revert to the index or worse over the next 5-10 years.
I look for tax harvesting, but most years I haven't had any losing lots to sell. I donated the highest appreciation to a DAF, I don't reinvest in these funds, and when I need to start spending principle I will likely draw from these non-index funds first. I've one fund that I need to run the calculation you suggest on, since while it's continuing to make money, with fees it may not be outperforming the index. As others have said, a nice problem to have, no complaints or worries.
One other thought: if you have any of these in an IRA and are doing Roth transfers, those non-index funds may be the place to start.
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BL
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by BL » Fri Jun 21, 2019 8:45 am

You might search for IRA conversion to Roth IRA, as in each case you are increasing your income.
For example, between retirement and starting SS at age 70, many have a lower income time when it makes sense to do either which increases income. Some will do it any time to the top of their tax bracket. Watch for income points that affect taxes, Medicare, etc.

Also Tax Gain Harvest is similar to what you want to accomplish, just not re-buying more stocks.

Be sure to turn off re-investing of div and CG distributions.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by jebmke » Fri Jun 21, 2019 8:56 am

Elric wrote:
Fri Jun 21, 2019 8:33 am
jebmke wrote:
Fri Jun 21, 2019 8:07 am
It is relatively easy to calculate the ER drag vs. the up front tax hit and how many years it takes to pay back the tax hit. It may be less time than you think.
Good advice. But if the fund has been an active fund that, after fees, has outperformed the index for a couple of decades, I'm not convinced that it's best to assume it will revert to the index or worse over the next 5-10 years.
I look for tax harvesting, but most years I haven't had any losing lots to sell. I donated the highest appreciation to a DAF, I don't reinvest in these funds, and when I need to start spending principle I will likely draw from these non-index funds first. I've one fund that I need to run the calculation you suggest on, since while it's continuing to make money, with fees it may not be outperforming the index. As others have said, a nice problem to have, no complaints or worries.
One other thought: if you have any of these in an IRA and are doing Roth transfers, those non-index funds may be the place to start.
I started with the assumption that the OP was sincere about the desire to shift to an index portfolio. If that isn't the case, then this thread is a total waste of time.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by JackoC » Fri Jun 21, 2019 9:00 am

The most realistic way to look at one's assets is a gross amount pre tax, and a liability for deferred taxes, whether on unrealized capital gains or future RMD's, and consider your NW to be the net not the gross. That liability amount is not certain due to all the complexities of the tax code (what's your rate going to be, will some assets step in basis to your heirs after you die, if you care, and if that provisions of the tax code survives in the long run, etc.), but it's rarely zero. Looking at it as 'my fund multiplied in value 10 fold, but now I just realized this terrible problem that 90% of the value is subject to cg tax, so how could I ever sell it?' is kind of ridiculous IMO.

Of course in both cases, liquidating appreciated assets in taxable, or taking RMD's, the person should manage as best they can to minimize taxes within the rules (donate the most appreciated shares, liquidate for consumption the least appreciated, use Roth were appropriate, manage income to lower tax rate on RMD, etc.) But the idea that taxes on unrealized gains is forcing anyone to have the wrong asset allocation is silly and dangerous. The person just has to get over that mentality, as an earlier post said.

Although when it comes to having a highly appreciated 'bad' fund in taxable, that you are not going to donate, yeah that might mean the best solution is to leave the money in the 'bad' fund not realize the cg to move it into a 'good' fund. Depends how 'bad'. Liquidating a reasonable cost reasonably diversified active mutual fund to go to a low cost index fund often doesn't make sense if the active fund is highly appreciated: you can't necessarily make back the acceleration of that cg just with the ER difference in a reasonable amount of time. And that almost never works if you're later in life and plan bequeath the old fund to heirs, as long as the basis step up feature of the tax code remains.
Last edited by JackoC on Fri Jun 21, 2019 9:08 am, edited 1 time in total.

dbr
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by dbr » Fri Jun 21, 2019 9:02 am

It is entirely possible that the best solution is to continue to hold the investments and pass them on the heirs with basis step-up. If this is an investment that has been held for thirty years and will be passed on in short order any hypothetical damage that is done by high costs, etc. is long since done and is water under the bridge.

I may be mistaken, but didn't Mr. Bogle respond that he still held Wellington because it would cost too much to get rid of it. Of course Wellington is not really an example of a bad fund.

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Watty
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Watty » Fri Jun 21, 2019 9:10 am

simplesauce wrote:
Fri Jun 21, 2019 7:13 am
What are some solutions for people in this situation?
A couple that have not been mentioned;

1) Structure your income so that you have some space in a tax bracket where the federal long term gains tax rate is 0%. Sometimes people get concerned about having taxable capital gains only they don't realize that even though it is technically taxable, their actual federal long term capital tax rate is 0%. (be sure to also check the state taxes and how Social Security is taxed.)

2) If you can just pay 15% capital gains on the sale that could be less than a needed IRA withdrawal that is taxed at 22% or higher. Paying the capital gains tax may be less than making an IRA withdrawal.

3) I don't understand all the details and it might vary by state but when one of them dies ths survivor may get one half the account at a stepped up cost basis in a joint account.

4) Just for brainstorming you might look into doing this. Instead of holding 100 shares of mutual fund in a joint account a couple could look into setting up two individual accounts for each spouse with 50 shares in each account. When one of them dies the survivor might get the shares at the stepped up cost basis. It would be good to verify if it actually works that way.

5) If they go into a nursing home they may have large itemized deductions and would offset any capital gains.
simplesauce wrote:
Fri Jun 21, 2019 7:13 am
But still...they are holding a portfolio which may not be ideal.
There is a saying you will often see here, "The dream of a perfect plan is the enemy of a good plan."

They only need a good portfolio, not an ideal one.
Last edited by Watty on Fri Jun 21, 2019 9:15 am, edited 1 time in total.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Sandtrap » Fri Jun 21, 2019 9:12 am

simplesauce wrote:
Fri Jun 21, 2019 7:13 am
Hi all. I have been searching the forum for a discussion on this topic; please send me a thread if you know of one.

Many older retirees have stock funds that they have held for 20, 30+ years. And for them, even if they wish to move into index funds, or decrease their stock allocation, it is simply unrealistic to sell due to all of the appreciation. The tax burden would be enormous.

There are so many books and articles about the Index Fund revolution and moving everything into the most broad, lowest cost index funds. While I’m 100% on board, for many, it is just not possible in their mind. They are stuck with their current funds. I know several late retirees with this problem. They are still extremely stock heavy, using their original mutual funds, and there isn’t much they can do about it due to the massive appreciation and potential tax burden.

Granted, you may say the money is not necessarily for them. It will be inheritance. But still...they are holding a portfolio which may not be ideal.

What are some solutions for people in this situation? Thank you.
1. Perhaps there is no problem in need of a solution. A financially secure older retiree, no matter the portfolio makeup and income stream, is where those in the accumulation phase strive to be one day.

2. I have helped "Boglify" a similar portfolio that you describe, with very substantial assets. The only real purpose in doing so was to help the future estate transition. There were over 100 single funds. All in tech. All did well.

Summary: sometimes things don't require solutions or actions, sometimes what looks like a problem is subjective and relative.

j
Wiki Bogleheads Wiki: Everything You Need to Know

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by firebirdparts » Fri Jun 21, 2019 9:17 am

I have worked for 40 years hoping to create this "problem". At this point it doesn't look like I'll make it.

MathWizard
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by MathWizard » Fri Jun 21, 2019 9:18 am

jebmke wrote:
Fri Jun 21, 2019 8:31 am
MathWizard wrote:
Fri Jun 21, 2019 8:21 am
Donating the stock funds with the highest gains to charity you were already going to give to avoids the tax problem.
They can also be gifted to individuals who might be in the zero CG tax bracket who could then immediately sell them. I believe the recipient receives the holding period from the giver along with the original basis for assets with long term gains.
Good point on the zero CG tax bracket.

The gifted appreciated stock carries your cost basis with it, but in this case they can sell and owe no CG.

My kids are single, so income just a little over $50 K puts them above the 12% bracket. A strategy for that
would be to have them max their 401k that year to drop them into the 12% bracket, and they could sell
the stock to make up the difference.

I'm afraid that by the time I am ready to do this, their income (if they stay single) will be to high for this to work.
Of course, I want them to have a good income, so I am comfortable if this is our only "problem".

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Ged » Fri Jun 21, 2019 9:36 am

simplesauce wrote:
Fri Jun 21, 2019 7:13 am

But still...they are holding a portfolio which may not be ideal.
Holding a ginormous portfolio with huge deferred taxes sounds ideal to me. I would just whittle at it a bit at a time to stay in a reasonable tax bracket. Gift some of it ahead of time if it makes sense. Set up a donor advised fund using appreciated stock.

Anything left over would pass on to heirs with a gross-up. They would be very appreciative I am sure.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Nowizard » Fri Jun 21, 2019 9:50 am

As others have said, it is a great problem to have since you are a successful investor. One solution is to continue to hold the funds if you are able to do so and have other income streams from retirement accounts, SS or pensions. Your heirs will get a stepped-up basis, and the tax issue will be resolved. You can also sell some shares as needed, creating a smaller tax burden. Further, you can also discontinue reinvestment of distributions and receive them directly so you can pay taxes on smaller amounts that can be spent or reinvested in non-taxable assets depending on other income sources.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by nisiprius » Fri Jun 21, 2019 9:52 am

Take the money out as you need it and pay the taxes on it. What other plan could there possibly be? What other plan could there possibly ever have been?

If the "problem" is "I don't want to pay any taxes, ever," there is no solution.
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by cherijoh » Fri Jun 21, 2019 9:55 am

simplesauce wrote:
Fri Jun 21, 2019 7:13 am
Many older retirees have stock funds that they have held for 20, 30+ years. And for them, even if they wish to move into index funds, or decrease their stock allocation, it is simply unrealistic to sell due to all of the appreciation. The tax burden would be enormous.
I assume you mean actively-managed mutual funds in a taxable account.

First, let's verify that you understand how to accurately determine your cost basis. Actively-managed funds are notorious for throwing off large capital gains distributions. If you have been reinvesting dividends and capital gains distributions, they count as new purchases with their own cost basis. You will need your purchase records to determine how much of your money you have invested. It is NOT as simple as saying I invested $100/mo for 10 years, therefore my cost basis is $100 x 120 = $12K. Your cost basis may be much higher and your capital gains may be lower than you think.

Second, since you are retired, hopefully you are now taking your dividends and capital gains in cash and not continuing to reinvest them. If you don't need the money for expenses, you can reinvest it elsewhere.

I ditched all my active mutual funds back during the Great Recession. I sold them and replaced them with index funds that matched the type of fund that I was selling. Prices were down, so I paid less capital gains and the index funds recovered nicely as the stock market recovered.

You can also selectively sell higher-priced shares to minimize capital gains. That's what I'm doing now that I'm retired. Just make sure you haven't previously sold any shares of that fund using "average cost basis". I also set up a donor advised fund (DAF) at Fidelity and contributed highly appreciated shares. I put enough in to cover several years of charitable giving. The DAF gives me credit for the entire value of the donated shares and bypasses paying capital gains altogether.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by jebmke » Fri Jun 21, 2019 10:06 am

nisiprius wrote:
Fri Jun 21, 2019 9:52 am
Take the money out as you need it and pay the taxes on it. What other plan could there possibly be? What other plan could there possibly ever have been?

If the "problem" is "I don't want to pay any taxes, ever," there is no solution.
Die; heirs get stepped up basis. Or give it all away to charity (preferred over death, IMO).
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by MotoTrojan » Fri Jun 21, 2019 10:31 am

finite_difference wrote:
Fri Jun 21, 2019 7:24 am
I buy a stock for $1. 30 years later I sell it for $1,000.

I have to pay an “enormous tax burden”.. $150.

Meanwhile I made $850. On $1.

I’m not seeing the problem.
This. If the after tax return dwarfs the pretax return of the S&P500 I wouldn’t be opposed to selling a sizable chunk to preserve the wealth and diversify. Great problem to have.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by dodecahedron » Fri Jun 21, 2019 11:11 am

jebmke wrote:
Fri Jun 21, 2019 8:31 am
MathWizard wrote:
Fri Jun 21, 2019 8:21 am
Donating the stock funds with the highest gains to charity you were already going to give to avoids the tax problem.
They can also be gifted to individuals who might be in the zero CG tax bracket who could then immediately sell them. I believe the recipient receives the holding period from the giver along with the original basis for assets with long term gains.
Yes, but be careful! Just because the recipient´s CG tax rate might be 0% according to the LTCG rate schedule does not mean that the effective marginal rate on realized capital gains is zero.

There are many individuals in the zero CG tax bracket who might have a significant tax (or other) issue due to the induced increase in AGI. (E.g., giving appreciated shares to older person on Medicare/SS might create IRMAA Medicare issues or destroy their senior citizen property tax break or push them into the notorious SS ¨tax hump¨, giving appreciated shares to young low income working family might devastate their Earned Income Tax Credit, giving appreciated shares to someone with ACA exchange insurance might force them to pay back thousands of dollars in premium tax credits, someone with a kid in college on financial aid might find their FAFSA computation EFC goes way up and scholarships/grant aid goes down, someone else might lose eligibility for the Savers Credit.)

The 15% or 20% that an upper middle class (or above) household might face in tax on realized long term capital gains can actually pale next to the total cost for a lower income household on those same gains.

UpperNwGuy
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by UpperNwGuy » Fri Jun 21, 2019 11:19 am

nisiprius wrote:
Fri Jun 21, 2019 9:52 am
Take the money out as you need it and pay the taxes on it. What other plan could there possibly be? What other plan could there possibly ever have been?

If the "problem" is "I don't want to pay any taxes, ever," there is no solution.
Well stated!

privateID
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by privateID » Fri Jun 21, 2019 12:00 pm

I had a similar situation when I started managing my mother-in-law's money after her husband passed away. I did many things mentioned above. A few comments:

1) They also had bond funds that had high capital gains. In that case we did bite the bullet, sell them and pay capital gains tax. The income being thrown every year made that the better decision. Within a few years we made back the cost of the capital gains through savings on income. We invested the proceeds in munis.

2) Tax loss harvest - curious to hear what others mean exactly. I understand the part about selling losers. But usually tax loss harvesting means buying the same security back in 30 days (or even immediately buying a similar security). Is that what people are suggesting? Or are they saying sell the losers and then buy index funds? In that case, it is not so clear that is such a good strategy. It always felt to me like you are just locking in loses.

3) Offset losses by selling stocks with gains - Never understood the wisdom here. If you carry over the loss, you can offset $3,000 against income every year, which is more valuable. Maybe if you have alot of losses it makes sense.

GrowthSeeker
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by GrowthSeeker » Fri Jun 21, 2019 12:03 pm

finite_difference wrote:
Fri Jun 21, 2019 7:24 am
I buy a stock for $1. 30 years later I sell it for $1,000.

I have to pay an “enormous tax burden”.. $150.

Meanwhile I made $850. On $1.

I’m not seeing the problem.
Exactly right.
The problem is thinking that this stock is worth $1,000. It's not. It's worth $850, even though on the brokerage statement it says $1,000. (unless you can tax gain harvest)
Until after you die; THEN it's worth $1,000.
Just because you're paranoid doesn't mean they're NOT out to get you.

JackoC
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by JackoC » Fri Jun 21, 2019 1:20 pm

GrowthSeeker wrote:
Fri Jun 21, 2019 12:03 pm
finite_difference wrote:
Fri Jun 21, 2019 7:24 am
I buy a stock for $1. 30 years later I sell it for $1,000.

I have to pay an “enormous tax burden”.. $150.

Meanwhile I made $850. On $1.

I’m not seeing the problem.
Exactly right.
The problem is thinking that this stock is worth $1,000. It's not. It's worth $850, even though on the brokerage statement it says $1,000. (unless you can tax gain harvest)
Until after you die; THEN it's worth $1,000.
Exactly, or that's the concept exactly. Again same as with RMD's, a lot of people don't want to hear this, and how that tends to manifest itself is pushing back about the idea that you know the tax rate. But again I agree conceptually and 15% is just an example. It's likely to be more including state tax, unless you can maneuver to the 0% federal cg bracket, but as dodecahedron just pointed out, there's loads of tax landmines (whether directly income tax or not) at the income level where that's theoretically possible. Or the rate could be 20% federal, or like you say zero via basis step to heirs. And all could change in the future.

But the uncertainty of the rate (for some, our cg rate, without future tax law changes, is quite predictable) shouldn't obscure the fact that assets with unrealized capital gains, as well as tIRA accounts, are not worth the gross value, to us, due to taxes. It's kidding oneself to ignore that.

Carol88888
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Carol88888 » Fri Jun 21, 2019 2:18 pm

jebmke wrote:
Fri Jun 21, 2019 8:07 am
JoMoney wrote:
Fri Jun 21, 2019 7:32 am
If the funds are lousy funds/high cost, maybe they should re-examine if it might be worth the tax hit (or at least stepping up the rate they transition the money).
It is relatively easy to calculate the ER drag vs. the up front tax hit and how many years it takes to pay back the tax hit. It may be less time than you think.
I was thinking that if these suboptimal funds have been held for a very long time the harm has already occurred. Kind of like closing the barn door after the horses have left.

Especially if the funds get left to heirs who get the stepped up basis. Then they can easily sell.

renue74
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by renue74 » Fri Jun 21, 2019 2:24 pm

I see all the posts about..."we make $100,000 and pay no taxes."

viewtopic.php?t=212723

That's what I thought every boglehead retiree does....pay no taxes and let the working stiffs pay.

delamer
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by delamer » Fri Jun 21, 2019 2:35 pm

privateID wrote:
Fri Jun 21, 2019 12:00 pm
I had a similar situation when I started managing my mother-in-law's money after her husband passed away. I did many things mentioned above. A few comments:

1) They also had bond funds that had high capital gains. In that case we did bite the bullet, sell them and pay capital gains tax. The income being thrown every year made that the better decision. Within a few years we made back the cost of the capital gains through savings on income. We invested the proceeds in munis.

2) Tax loss harvest - curious to hear what others mean exactly. I understand the part about selling losers. But usually tax loss harvesting means buying the same security back in 30 days (or even immediately buying a similar security). Is that what people are suggesting? Or are they saying sell the losers and then buy index funds? In that case, it is not so clear that is such a good strategy. It always felt to me like you are just locking in loses.

3) Offset losses by selling stocks with gains - Never understood the wisdom here. If you carry over the loss, you can offset $3,000 against income every year, which is more valuable. Maybe if you have alot of losses it makes sense.
Regarding #2, say you have an actively managed small cap fund with losses due to an overall market decline. You sell it and buy a small cap index fund that has had a similar decline. You aren’t locking in losses — you have sold low and bought low.

Regarding #3, that’s exactly what a lot of us did at the end of 2018. I had some funds with losses (that were fairly new purchases) and some with gains that I’d inherited (with no step up in basis). If memory serves, the offsets were in the range of $25,000. This was a perfect opportunity to get rid of some inherited investments with gains offset by the losses due to the end-of-year market decline.

privateID
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by privateID » Fri Jun 21, 2019 2:43 pm

delamer wrote:
Fri Jun 21, 2019 2:35 pm
privateID wrote:
Fri Jun 21, 2019 12:00 pm
I had a similar situation when I started managing my mother-in-law's money after her husband passed away. I did many things mentioned above. A few comments:

1) They also had bond funds that had high capital gains. In that case we did bite the bullet, sell them and pay capital gains tax. The income being thrown every year made that the better decision. Within a few years we made back the cost of the capital gains through savings on income. We invested the proceeds in munis.

2) Tax loss harvest - curious to hear what others mean exactly. I understand the part about selling losers. But usually tax loss harvesting means buying the same security back in 30 days (or even immediately buying a similar security). Is that what people are suggesting? Or are they saying sell the losers and then buy index funds? In that case, it is not so clear that is such a good strategy. It always felt to me like you are just locking in loses.

3) Offset losses by selling stocks with gains - Never understood the wisdom here. If you carry over the loss, you can offset $3,000 against income every year, which is more valuable. Maybe if you have alot of losses it makes sense.
Regarding #2, say you have an actively managed small cap fund with losses due to an overall market decline. You sell it and buy a small cap index fund that has had a similar decline. You aren’t locking in losses — you have sold low and bought low.

Regarding #3, that’s exactly what a lot of us did at the end of 2018. I had some funds with losses (that were fairly new purchases) and some with gains that I’d inherited (with no step up in basis). If memory serves, the offsets were in the range of $25,000. This was a perfect opportunity to get rid of some inherited investments with gains offset by the losses due to the end-of-year market decline.
Regarding #2 - I just looked at the OP original post. I thought the OP was talking about individual stocks that have been held for a long time. Sure, if it's a fund and there is a similar index fund, I understand. My comment was more about selling individual stocks for a loss.

Regarding 3 - My point is capital gains are taxed less than ordinary income, so it may be better (at least for a few years) to carry over the loss and use it to offset ordinary income.

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MN-Investor
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by MN-Investor » Fri Jun 21, 2019 3:00 pm

Reminder... when the assets are held in joint name in a taxable account and one spouse passes away, the other spouse inherits the one-half account owned by the deceased spouse and gets a stepped up basis of those shares.

For me, that meant that my 1/2 of a specific stock we owned remained with a $2/share basis while my husband's half (he passed away in April 2018) got a stepped up basis of $60/share. Today those shares are selling for almost $70/share.

[By the way, my sweetie knew he wasn't supposed to die (he was 63 and it was totally unexpected) because, as a Boglehead, he knew that I would end up paying income taxes at a single taxpayer rate for which I would not forgive him.]
The key to success - Save early, save often, invest well.

MnD
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by MnD » Fri Jun 21, 2019 3:14 pm

A portion of our retirement income is from taxable accounts containing all significantly appreciated funds. We pick the least favorite funds to sell first (index funds but typically first generation with higher expenses and less robust construction) and get a very favorable tax rate LTCG versus tax-deferred retirement accounts. What's the "problem" exactly?

It's hard to get all worked up over the "problems" of those that over-saved, underspent and now have little or no utility for the "retirement" portfolio they amassed. If the can't bring themselves to do anything useful with it while alive, heirs and charities will put to good use after they are dead.

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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Hockey10 » Fri Jun 21, 2019 3:14 pm

renue74 wrote:
Fri Jun 21, 2019 2:24 pm
I see all the posts about..."we make $100,000 and pay no taxes."

viewtopic.php?t=212723

That's what I thought every boglehead retiree does....pay no taxes and let the working stiffs pay.
Most retired Bogleheads were working stiffs for a good 30 - 40 years and paid a small fortune in taxes. They also invested wisely and lived frugally for those same 30 - 40 years.

jebmke
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by jebmke » Fri Jun 21, 2019 3:16 pm

Carol88888 wrote:
Fri Jun 21, 2019 2:18 pm
jebmke wrote:
Fri Jun 21, 2019 8:07 am
JoMoney wrote:
Fri Jun 21, 2019 7:32 am
If the funds are lousy funds/high cost, maybe they should re-examine if it might be worth the tax hit (or at least stepping up the rate they transition the money).
It is relatively easy to calculate the ER drag vs. the up front tax hit and how many years it takes to pay back the tax hit. It may be less time than you think.
I was thinking that if these suboptimal funds have been held for a very long time the harm has already occurred. Kind of like closing the barn door after the horses have left.

Especially if the funds get left to heirs who get the stepped up basis. Then they can easily sell.
Possibly. But it is easy to calculate how many years it takes to break even. If you expect to live significantly longer, it might still make sense.
When you discover that you are riding a dead horse, the best strategy is to dismount.

cherijoh
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by cherijoh » Fri Jun 21, 2019 4:19 pm

Carol88888 wrote:
Fri Jun 21, 2019 2:18 pm
jebmke wrote:
Fri Jun 21, 2019 8:07 am
JoMoney wrote:
Fri Jun 21, 2019 7:32 am
If the funds are lousy funds/high cost, maybe they should re-examine if it might be worth the tax hit (or at least stepping up the rate they transition the money).
It is relatively easy to calculate the ER drag vs. the up front tax hit and how many years it takes to pay back the tax hit. It may be less time than you think.
I was thinking that if these suboptimal funds have been held for a very long time the harm has already occurred. Kind of like closing the barn door after the horses have left.

Especially if the funds get left to heirs who get the stepped up basis. Then they can easily sell.
It depends on why the fund is "suboptimal". High expense ratios don't go away, they just keep eating away at your return year after year. A change in manager can take a mutual fund in a different direction that may not meet your risk tolerance. Some actively managed funds are not tax efficient and can generate huge capital gains distributions when you least expect them. This could be a landmine for someone trying to control their AGI to get an ACA subsidy or avoid a higher IRMAA tier.

Kicking the can down the road is not always the best solution. Don't let the tail (taxes) wag the dog (good financial decision making).

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willthrill81
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by willthrill81 » Fri Jun 21, 2019 7:23 pm

cherijoh wrote:
Fri Jun 21, 2019 4:19 pm
Kicking the can down the road is not always the best solution. Don't let the tail (taxes) wag the dog (good financial decision making).
+1

There are far worse things to do than pay up to 20% LTCG once in order to switch from funds with a 1% ER to those with an ER of nearly zero for the rest of one's life. Of course, if you're 90 and in poor health, that's probably sub-optimal, but if you're 60, it may be wise.

But in all honesty, I wouldn't lose sleep in retirement with highly appreciated mutual funds with an ER of .5%. To be honest, I can see how hanging around here could make someone think that such a fund is so terrible, but it's far from the biggest threat to your finances.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Lee_WSP
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by Lee_WSP » Fri Jun 21, 2019 8:04 pm

I don't see the issue. It's like not wanting to pay taxes on lottery winnings.

ncbill
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by ncbill » Sat Jun 22, 2019 7:08 am

They'll just sell as needed to supplement their SS & pension (if any)

E.g., my grandparents (born before WWI) simply sold individual stock shares as needed to supplement their SS & very modest pensions.

Were they alive today all those stock sales would pay 0% LTCG (federal) taxes, ~5% state.

IMHO this is where retiring in a LCOL/MCOL area shines by keeping down one's required expenses.

gd
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Re: The problem in retirement we rarely discuss [what to do with stock funds]

Post by gd » Sat Jun 22, 2019 7:53 am

Pile-on with a little curiosity thrown in: the mildly-controversial est training (Erhard Sensitivity Training, google it) fad of the late 70s was quite good at manipulation by language to make their points about breaking free-- or at least being aware of-- of psychological conditioning. This would be a classic: "nothing they can do" is not the same as "nothing they want to do". Get the words right, and circumstances often become clearer.

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