Selling investments: get hit by market declines or by taxes?

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Topic Author
barefootjan
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Location: New England

Selling investments: get hit by market declines or by taxes?

Post by barefootjan » Mon Jun 22, 2020 2:19 am

My husband & I are in our mid 60's, both on SS and not working. We have 20 years left on our 4.75% interest mortgage.

After much discussion, we ultimately decided that it makes more sense to pay off the mortgage than to try to re-finance it. Well, my husband decided, and I relented. :P

Part of the reason for my foot-dragging is that we'll have to sell some investments to pay off the balance.

For example, we currently have around $100K in VWIAX that, If sold today, would generate approx $8,800 in long term capital gain. Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know. Which is why I wanted to keep things simple and just wait until I'm no longer covered under the Affordable Care Act before we start selling stuff.

The recent market volatility has me thinking that might not be such a good idea. If we wait to sell, and the market takes another hit, there goes some of the money we need for the loan pay-off.

I don't want to make a rushed decision, but I also don't want to look back in regret later. Please help me think this through. Thank you.

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Selling investments: get hit by market declines or by taxes?

Post by FiveK » Mon Jun 22, 2020 4:46 am

barefootjan wrote:
Mon Jun 22, 2020 2:19 am
Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know.
There are ways to find out.

E.g., see Tax Calculator With ACA/Obamacare Health Insurance Subsidy. The article title says 2019 but the approach will work for 2020.

afan
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Joined: Sun Jul 25, 2010 4:01 pm

Re: Selling investments: get hit by market declines or by taxes?

Post by afan » Mon Jun 22, 2020 11:32 am

Assuming you have the income to support it, you should be able to refinance to a much lower interest rate. Hold that until it is optimal to pay off the mortgage. Depending on your other cash flows, you could start accumulating cash. Or figure you may be better off after tax by leaving money invested and accepting the capital gains taxes when you sell.
A half measure would be to limit your taxable gains so that you do not lose some of your subsidy.
I don't see a solution that makes continuing a high rate mortgage a good idea.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

delamer
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Re: Selling investments: get hit by market declines or by taxes?

Post by delamer » Mon Jun 22, 2020 11:48 am

Use these instructions to figure out how/if $8,800 in capital gains would affect your MAGI and see if it is really a problem for ACA: https://www.investopedia.com/terms/m/magi.asp

There is no reason that you can’t figure that out, rather than wondering.

Topic Author
barefootjan
Posts: 394
Joined: Mon Feb 19, 2007 6:45 pm
Location: New England

Re: Selling investments: get hit by market declines or by taxes?

Post by barefootjan » Mon Jun 22, 2020 8:40 pm

FiveK wrote:
Mon Jun 22, 2020 4:46 am
barefootjan wrote:
Mon Jun 22, 2020 2:19 am
Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know.
There are ways to find out.

E.g., see Tax Calculator With ACA/Obamacare Health Insurance Subsidy. The article title says 2019 but the approach will work for 2020.
delamer wrote:
Mon Jun 22, 2020 11:48 am
Use these instructions to figure out how/if $8,800 in capital gains would affect your MAGI and see if it is really a problem for ACA: https://www.investopedia.com/terms/m/magi.asp

There is no reason that you can’t figure that out, rather than wondering.
Thank you both for sharing those links. As far as I can tell, I'm only missing one of the data points: I don't know the 2020 premium of the "second lowest cost silver plan." I have the amount from last year's Form 1095a, but I'm not sure it's wise to plug that figure in, given that health insurance rates have been all over the place in recent years.
FiveK wrote:
Mon Jun 22, 2020 4:46 am
barefootjan wrote:
Mon Jun 22, 2020 2:19 am
Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know.
There are ways to find out.

E.g., see Tax Calculator With ACA/Obamacare Health Insurance Subsidy. The article title says 2019 but the approach will work for 2020.
afan wrote:
Mon Jun 22, 2020 11:32 am
Assuming you have the income to support it, you should be able to refinance to a much lower interest rate. Hold that until it is optimal to pay off the mortgage. Depending on your other cash flows, you could start accumulating cash. Or figure you may be better off after tax by leaving money invested and accepting the capital gains taxes when you sell.
A half measure would be to limit your taxable gains so that you do not lose some of your subsidy.
I don't see a solution that makes continuing a high rate mortgage a good idea.
Thank you.

I agree with your last statement 100%. This is something I've been wrestling with for several years.

When we bought our home we were paying around 6% interest, then 18 months later we refinanced to the current 4.75%. That was considered "below historical norms" at the time! haha!

When rates went even lower, I looking into re-financing again. That's when I learned that it can be quite difficult for retirees to get approved. https://www.aarp.org/money/credit-loans ... irees.html. It turns out this is especially true for those with relatively small mortgages (ours is now about $150K).

I feel like the good deals - like the ones with no fees! - are geared towards working people with $300K+ loans. But even if that's not the case, we have an additional hurdle to clear: our home is in need of some major TLC. If the lender has to send someone to look around, among other things they're going to find that the boiler is 20 years old, and the exterior paint and roof haven't been replaced in at least 15 years.

Anyway, one way or another, re-financing will cost us time, money, stress, or all of the above - and in the end we'd still have a mortgage payment. :oops: Under the circumstances, paying off the loan almost seems like a no-brainer. (We'd still need to fix the house up, but we could do the work at our own pace.)

Thanks again for the replies. If I find out anything that might be helpful to others, I'll come back & post it.

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FiveK
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Re: Selling investments: get hit by market declines or by taxes?

Post by FiveK » Mon Jun 22, 2020 8:46 pm

barefootjan wrote:
Mon Jun 22, 2020 8:40 pm
Thank you both for sharing those links. As far as I can tell, I'm only missing one of the data points: I don't know the 2020 premium of the "second lowest cost silver plan."
You could get a 2020 estimate at Premium Tax Credit Change Estimator.

palanzo
Posts: 764
Joined: Thu Oct 10, 2019 4:28 pm

Re: Selling investments: get hit by market declines or by taxes?

Post by palanzo » Mon Jun 22, 2020 9:15 pm

barefootjan wrote:
Mon Jun 22, 2020 8:40 pm
FiveK wrote:
Mon Jun 22, 2020 4:46 am
barefootjan wrote:
Mon Jun 22, 2020 2:19 am
Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know.
There are ways to find out.

E.g., see Tax Calculator With ACA/Obamacare Health Insurance Subsidy. The article title says 2019 but the approach will work for 2020.
delamer wrote:
Mon Jun 22, 2020 11:48 am
Use these instructions to figure out how/if $8,800 in capital gains would affect your MAGI and see if it is really a problem for ACA: https://www.investopedia.com/terms/m/magi.asp

There is no reason that you can’t figure that out, rather than wondering.
Thank you both for sharing those links. As far as I can tell, I'm only missing one of the data points: I don't know the 2020 premium of the "second lowest cost silver plan." I have the amount from last year's Form 1095a, but I'm not sure it's wise to plug that figure in, given that health insurance rates have been all over the place in recent years.
FiveK wrote:
Mon Jun 22, 2020 4:46 am
barefootjan wrote:
Mon Jun 22, 2020 2:19 am
Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know.
There are ways to find out.

E.g., see Tax Calculator With ACA/Obamacare Health Insurance Subsidy. The article title says 2019 but the approach will work for 2020.
afan wrote:
Mon Jun 22, 2020 11:32 am
Assuming you have the income to support it, you should be able to refinance to a much lower interest rate. Hold that until it is optimal to pay off the mortgage. Depending on your other cash flows, you could start accumulating cash. Or figure you may be better off after tax by leaving money invested and accepting the capital gains taxes when you sell.
A half measure would be to limit your taxable gains so that you do not lose some of your subsidy.
I don't see a solution that makes continuing a high rate mortgage a good idea.
Thank you.

I agree with your last statement 100%. This is something I've been wrestling with for several years.

When we bought our home we were paying around 6% interest, then 18 months later we refinanced to the current 4.75%. That was considered "below historical norms" at the time! haha!

When rates went even lower, I looking into re-financing again. That's when I learned that it can be quite difficult for retirees to get approved. https://www.aarp.org/money/credit-loans ... irees.html. It turns out this is especially true for those with relatively small mortgages (ours is now about $150K).

I feel like the good deals - like the ones with no fees! - are geared towards working people with $300K+ loans. But even if that's not the case, we have an additional hurdle to clear: our home is in need of some major TLC. If the lender has to send someone to look around, among other things they're going to find that the boiler is 20 years old, and the exterior paint and roof haven't been replaced in at least 15 years.

Anyway, one way or another, re-financing will cost us time, money, stress, or all of the above - and in the end we'd still have a mortgage payment. :oops: Under the circumstances, paying off the loan almost seems like a no-brainer. (We'd still need to fix the house up, but we could do the work at our own pace.)

Thanks again for the replies. If I find out anything that might be helpful to others, I'll come back & post it.
I don't think a 20 yo boiler will prevent you from getting a mortgage. The lending institution is more concerned with loan to value ratio.

Topic Author
barefootjan
Posts: 394
Joined: Mon Feb 19, 2007 6:45 pm
Location: New England

Re: Selling investments: get hit by market declines or by taxes?

Post by barefootjan » Mon Jun 29, 2020 4:16 pm

FiveK wrote:
Mon Jun 22, 2020 8:46 pm
barefootjan wrote:
Mon Jun 22, 2020 8:40 pm
Thank you both for sharing those links. As far as I can tell, I'm only missing one of the data points: I don't know the 2020 premium of the "second lowest cost silver plan."
You could get a 2020 estimate at Premium Tax Credit Change Estimator.
Five K I can't thank you enough for that link. The calculator is easy to use and appears to be well thought out, right down to using the state & county you live in the determine the second lowest cost Silver plan. I checked my past tax returns, and noted that their estimate was comparable to the past few years' SLCSP premiums. Very reassuring.

For anyone making this kind of calculation, it seems the worst case scenario of an increased MAGI (due to the sale of a taxable investment, for example) is to be bumped off the subsidies altogether and get hit with the full amount of the premiums.

For me, the full premium is only $8,400 for the entire year (I picked a much lower-cost plan than I remembered). The sale of our taxable holdings would put me nowhere near being bumped off of the subsidies. In fact, according to the calculator, my advanced premium pay back would increase by only $1K or so.

Between now and January 2021, though, our $100K in VWIAX could conceivably lose something like $16K - far more than $1K in taxes and nearly double the full cost of my insurance.

So if we're sure about paying off the mortgage relatively soon, selling the taxable holding makes sense based not only on the generally-accepted rule of not investing money you'll need within 10 years :wink: but also based on our specific tax situation.

You might notice I said "if" we're sure about paying off the mortgage. After seeing all the different moving parts in this decision, and the inherent uncertainty, even my husband is on the fence now. :oops:

Thanks again guys for the calculators and the input. Stay safe!
Jan

Carefreeap
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Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Selling investments: get hit by market declines or by taxes?

Post by Carefreeap » Mon Jun 29, 2020 5:02 pm

palanzo wrote:
Mon Jun 22, 2020 9:15 pm
barefootjan wrote:
Mon Jun 22, 2020 8:40 pm
FiveK wrote:
Mon Jun 22, 2020 4:46 am
barefootjan wrote:
Mon Jun 22, 2020 2:19 am
Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know.
There are ways to find out.

E.g., see Tax Calculator With ACA/Obamacare Health Insurance Subsidy. The article title says 2019 but the approach will work for 2020.
delamer wrote:
Mon Jun 22, 2020 11:48 am
Use these instructions to figure out how/if $8,800 in capital gains would affect your MAGI and see if it is really a problem for ACA: https://www.investopedia.com/terms/m/magi.asp

There is no reason that you can’t figure that out, rather than wondering.
Thank you both for sharing those links. As far as I can tell, I'm only missing one of the data points: I don't know the 2020 premium of the "second lowest cost silver plan." I have the amount from last year's Form 1095a, but I'm not sure it's wise to plug that figure in, given that health insurance rates have been all over the place in recent years.
FiveK wrote:
Mon Jun 22, 2020 4:46 am
barefootjan wrote:
Mon Jun 22, 2020 2:19 am
Based on our income, we'd pay no tax on that gain. BUT, it would raise our MAGI, and that could be a problem. How much of a problem, I don't know.
There are ways to find out.

E.g., see Tax Calculator With ACA/Obamacare Health Insurance Subsidy. The article title says 2019 but the approach will work for 2020.
afan wrote:
Mon Jun 22, 2020 11:32 am
Assuming you have the income to support it, you should be able to refinance to a much lower interest rate. Hold that until it is optimal to pay off the mortgage. Depending on your other cash flows, you could start accumulating cash. Or figure you may be better off after tax by leaving money invested and accepting the capital gains taxes when you sell.
A half measure would be to limit your taxable gains so that you do not lose some of your subsidy.
I don't see a solution that makes continuing a high rate mortgage a good idea.
Thank you.

I agree with your last statement 100%. This is something I've been wrestling with for several years.

When we bought our home we were paying around 6% interest, then 18 months later we refinanced to the current 4.75%. That was considered "below historical norms" at the time! haha!

When rates went even lower, I looking into re-financing again. That's when I learned that it can be quite difficult for retirees to get approved. https://www.aarp.org/money/credit-loans ... irees.html. It turns out this is especially true for those with relatively small mortgages (ours is now about $150K).

I feel like the good deals - like the ones with no fees! - are geared towards working people with $300K+ loans. But even if that's not the case, we have an additional hurdle to clear: our home is in need of some major TLC. If the lender has to send someone to look around, among other things they're going to find that the boiler is 20 years old, and the exterior paint and roof haven't been replaced in at least 15 years.

Anyway, one way or another, re-financing will cost us time, money, stress, or all of the above - and in the end we'd still have a mortgage payment. :oops: Under the circumstances, paying off the loan almost seems like a no-brainer. (We'd still need to fix the house up, but we could do the work at our own pace.)

Thanks again for the replies. If I find out anything that might be helpful to others, I'll come back & post it.
I don't think a 20 yo boiler will prevent you from getting a mortgage. The lending institution is more concerned with loan to value ratio.
+1

What do you think the value is of the home? I'd think I would want to preserve cash to do repairs.

You also might check to see if your loan is owned by FNMA or Freddie Mac and see if there's a streamlined refi process. We did this back in 2013. Only had to show we had some income, we were current on our mortgage and no appraisal.
Every day I can hike is a good day.

Topic Author
barefootjan
Posts: 394
Joined: Mon Feb 19, 2007 6:45 pm
Location: New England

Re: Selling investments: get hit by market declines or by taxes?

Post by barefootjan » Wed Jul 01, 2020 10:59 pm

I don't think a 20 yo boiler will prevent you from getting a mortgage. The lending institution is more concerned with loan to value ratio.
+1

What do you think the value is of the home? I'd think I would want to preserve cash to do repairs.

You also might check to see if your loan is owned by FNMA or Freddie Mac and see if there's a streamlined refi process. We did this back in 2013. Only had to show we had some income, we were current on our mortgage and no appraisal.
To (sort of) answer both you guy's question, based on assessed value (not appraisal) our LTV is less than 60%. With an actual appraisal I think it would still come in under 80%.

Carefree, I think I remember that deal. You had to stay with your current lender, though, right?

Your point about paying for the repairs is well taken. As I've tried to come up with a timeline and a budget for the repairs, I've been frustrated by the fact that our cash flow could seemingly be quite a bit better now that mortgage rates are so much lower than 4.75%. But re-financing is such a PITA, and I worry that if I do the math wrong, we'll end up not actually saving any money.

So maybe my husband knows what he's talking about when he says to just pay it off and be done with it...?

A lot of people seem to be struggling with similar issues lately. In fact The Washington Post today had a really good article on re-financing your mortgage https://www.washingtonpost.com/business ... refinance/.

But it was another [older] article on paying off your mortgage * that really caught my eye.
Quoting the second article:
"We understand why you might prefer to pay off the loan all at once. After all, there’s nothing better than not having a monthly mortgage payment (although you would still have to pay property taxes and maintenance). But the problem with paying off the whole note is that we prefer seniors not use up all their cash or plow it into relatively illiquid investments, which is what your home equity is: It’s hard to sell a home the moment you decide you no longer want to be a homeowner."

I'm pretty frugal, but that really resonates me.

(*full article here: https://www.washingtonpost.com/news/whe ... -mortgage/ Even If you are not a subscriber, it's the first of the month, and you can usually view a few articles a month for free.)

suemarkp
Posts: 320
Joined: Sun Nov 12, 2017 8:18 pm
Location: Kent, WA

Re: Selling investments: get hit by market declines or by taxes?

Post by suemarkp » Wed Jul 01, 2020 11:23 pm

If you find you are crossing some limit, you could just make a large principal payment that's big enough to make a good dent but keep you under ACA or other limits (e.g. the 15% cap gain threshold). Do it again next year and again until its gone. You'll save interest by paying down principal.

Also look at how your cost basis is setup and switch to Spec ID if it isn't already that. Then, you can pick and choose which shares to sell and perhaps lower your Capital gains. Won't help if you bought all the shares at one time or if you're cashing them all out though.

A refi is a hassle and will probably have costs associated with it.
Mark | Kent, WA

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